MLB may change debt rule

At the end of last season I wrote about how MLB’s lightly-enforced debt rule might impact the A’s in the future. Now that the Mets have been practically sunk by the Madoff scandal and the Dodgers handcuffed by the McCourts’ divorce proceedings, Bud Selig may be looking to actually monitor the situation more closely and even act on violations.

The NY Post kicked off today’s news by indicating that a change to the existing debt rule may be in order. The article cites the now obsolete 60:40 rule, which was mothballed in favor of a multiplier-based system in which debt couldn’t be more than 10x operating income, or 15x if a new stadium were in operation. The kicker is that MLB is looking to include holding company debt in the calculation, which has potentially enormous implications. For ownership groups that were heavily leveraged to buy TV networks and radio stations, enforcement could have crippling effects on how much they can spend in the future, whether it’s on players or anything else. MLBPA may be pushing in favor of such a plan since it would provide a more honest assessment of each club’s financial stability and risk.

A source who represents players said, “I think it [a rule change] is positive,” even if it could have a negative impact on salaries.

That kind of agreement is nowhere to be found among the NFL, NBA and their unions. Craig Calcaterra has a short take on the rule change as well.

Where I’m not clear on the impact is whether or not additional teams and their debt in other sports is applicable. After all, Tom Hicks overreached to buy Liverpool F.C. and lost both the soccer team and the Texas Rangers because of it. While that’s clearly an outlier case, crazier things have happened. Ask Fred Wilpon, John Moores, or Frank McCourt.

The upshot of this is that while the A’s appear to be clean at the moment, things will get a more stringent in the next CBA and with the building of a new ballpark. MLB will look at any stadium deal and the A’s ability to make it work very, very closely. And while Selig may be supporting his friends Wilpon and McCourt right now, it wouldn’t surprise me for Selig to make an example out of one of them in the future, and to use the A’s or Rays as an example of how to properly run a lower-revenue franchise.

To further explain this, let’s take a look at operating income for the A’s as reported by Forbes for the last three seasons:

  • 2009 – $26 million
  • 2010 – $22 million
  • 2011 – $23 million

The average of those is $23.7 million. With a 10x multiplier, the A’s debt ceiling is $236.7 million. They’re nowhere near that point right now. Once they add a ballpark, that number will shoot up considerably. The ceiling will be $355 million, though that’s not enough to fully cover construction costs (and outstanding debt). The stadium cost number may go down by MLB’s definition if more corporates are locked in early and long term, I suppose that’s at the league’s discretion. Just as important, the debt number will be as high or perhaps even higher than the franchise value. Whether the debt rule stays the same, just with greater enforcement, or evolves to include holding companies, it’ll be interesting to see how individual teams respond in terms of fiscal restraint. That a debt rule change is on the table would also reinforce the idea that the A’s stadium resolution may not come until after CBA talks are complete. Will that happen before or after the season ends? We’ll find out soon enough.

3 thoughts on “MLB may change debt rule

  1. “MLB will look at any stadium deal and the A’s ability to make it work very, very closely.”
    “The stadium cost number may go down by MLB’s definition if more corporates are locked in early and long term…” Cisco Field/$an Jo$e/$ilicon Valley corporate support anyone? R.M., could the A’s franchise value go higher with a new yard and loads of $ilicon Valley corporate support?

  2. With Cisco already pledging $120M there is no way the A’s hit that ceiling. With luxury box, premium seating, and advertising sales…This couple with the fact the A’s have at least $100M sitting in the bank from revenue sharing over the years this will be a moot point.

    I will say though that the A’s will be in debt once the San Jose ballpark is built and they will have to put a winning product on the field in order to make the debt service payments plus turn a profit.

    The Giants were winning incredibly from 2000-2004 when the ballpark first opened and only from 2005-2008 did they put up losing seasons and yet the still did OK fiscally speaking.

    If Selig threatens contraction I can see the players taking a hard stance on that and forcing MLB to move the A’s to San Jose to save jobs. The Rays on the other hand maybe relocated to San Antonio if need be and play in the Alamodome until a new ballpark is built….This is just my theory.

  3. Sid,
    Selig will not threaten to contract his good friends team, especially since he personally invited him into “The Lodge” in the first place.
    Moving the A’s to SJ and making the team a revenue contributor is a thousand times easier than contraction.

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