Prior to the ratification of the 2006 Collective Bargaining Agreement, all major league teams had to abide by the 60/40 rule; that is, 60 percent of the teams assets couldn’t eclipse more than 40 percent of its liabilities (team debt). The new CBA signed in 2006 changed that rule from the previous 60/40 provision to debt being capped based on club earnings before interest, taxes, etc.
The rule stated verbatim:
DEBT SERVICE RULE
Section 1. The Rule. No Club may maintain more Total Club Debt than can reasonably be supported by its EBITDA. A Club’s Total Club Debt cannot reasonably be supported by its EBITDA if Total Club Debt exceeds the product of the average of that Club’s EBITDA over the most recent two years multiplied by the Cash Flow Multiplier applicable to that Club; provided, however, that a Club may elect, on or before April 1, 2007, to utilize, in both 2007 and 2008, the average of its EBITDA over the most recent three years.
What does this mean? Let’s use Forbes franchise estimations for the Phils team value to determine what their debt cap is. Remember, all of these numbers are estimates by Forbes. But, for this purpose I think they will give us the closest actually to what the team is up too.
Figuring Out Operating Cost Over the Last Two Seasons
Let’s average the Phillies operating costs from 2010 and 2009 and multiply by 10. We would get the Phillies debt ceiling for this year.
$14.5 (mil) (2010) + $16.3 (mil) (2009) = 30.8 million
2009-2010 values X 10 = $308 (mil).
The Phillies have an operating cost of $308 (mil) for the 2011 season.
Applying Team Debt and League Exemptions
The team carried over an applicable debt of 35 percent of its value into the 2011 season.The esitmated value of the club by Forbes is 537 million dollars.
$537 (mil) X 35% = $187.95 (mil)
Every MLB club gets a $36.5 (mil).
$187.95 (mil) – $36.5 (mil) tax exemption = $151.45 (mil)
The Phillies have $151.45 (mil) in debt.
Factoring It All In
$308 (mil) operating costs – $151.45 (mil) in debt = $156.56 (mil) under their debt cap.
Conclusion
Using all available data the Phillies are under the debt cap by 156.56 million dollars. Like most businesses, it is naive to believe the team doesn’t also have unreported income via borrowing from banks, lenders, etc. Despite that, the charges are the Phillies not only have spent $156 million, but they have also exceeded that amount by an unknown quantity.
MLB listed the following things that can be considered team debt:
Anything borrowed that is to be paid at a later date. This includes loans from other teams, partially or wholly owned regional sports networks (CSN, for example), third parties such as banks, non-player deferred compensation, stadium debt, and all debts except for player compensation and the $36.5 million tax deduction from the league.
The consequences that could be brought down on the Phillies range from limits to future borrowing, fines or limits on future player contracts.
I am particularly concerned about what the Phillies are – a) borrowing against and b) what are the buying? As we’ve seen with the Dodgers and Rangers recently, borrowing against the team to cover economic shortfalls is the beginning of the end for ownership. It’s most certainly a panic measure up there with duck and cover and pouring salt water on critical nuclear reactors.
There is no reason to believe the Phillies are McCourting the team. I can’t help but feel there has been dishonesty and recklessness in their spending if its true that they borrowed and spent at least 33 percent of the teams’ worth. It is even worse if they did so without regard to breaking the league’s rules.
The Phillies need to come clean about these accusations. Not only to reclaim the high merits of their business practices but also to regain the good will of the fan base.
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