Debt service, and MLB’s obfuscation racket

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Major League Baseball is concerned that the COVID-19 pandemic, and the drop in revenues that will come with a shortened 2020 season, is going to make it more difficult for teams to pay off their debt. You might be familiar with the debt service rule in MLB: it arose from the collective bargaining of 2002, and was an attempt to make sure that teams actually had the money to pay their bills by limiting their debt to 10 times their annual earnings. You might also not be familiar with it at all, because it’s barely ever mentioned by the teams or the media, and even now it being brought up is more a negotiating ploy than a real thing to be concerned about.

Keeping in line with the debt service rule isn’t something that’s going to get teams in trouble with some financial authority like a bank: it’s just an internal MLB thing that’s meant to keep teams from promising to be able to pay more than they’ll be able to. And yet, despite the institution of this rule in 2002, nine clubs were in violation of the debt service rule in 2011. MLB didn’t go after most of those teams: they did go after the Dodgers for violating the debt service rule, though, that was because everyone wanted Frank McCourt to get kicked out of the league. The Mets were in violation at the same time, thanks to the Wilpons’ involvement with Bernie Madoff, but they were allowed to keep their team, because then-commissioner Bud Selig and the rest of the owners didn’t despise the Wilpons like they did McCourt.

And the league seemed to have good reason to dislike McCourt, considering the claim that they used $100 million in Dodgers’ revenue for their personal lifestyle: the pocketing of team funds was a little too obvious there. That’s supposed to be done more discreetly, guys!

Anyway. Commissioner Rob Manfred, like Selig before him, has a lot of freedom in applying punishments or restrictions on clubs — or in not doing those things — when it comes to violations of the debt service rule. Handling the unprecedented 2020 situation could be as simple as saying teams don’t have to worry about the debt incurred this year as it relates to their violations of debt service, but no, teams are going to use it as a bargaining tactic against the Players Association as the clubs attempt to push even more of the financial risk of restarting the season onto the players themselves. Ken Rosenthal and Evan Drellich reported on debt service as a concern earlier this week:

Coming off a season of record revenues, the league forecast a grim economic picture even before the pandemic struck, initially projecting a net cash loss of $95 million in 2020. Another section of the document says team debt will increase from $5.2 billion in 2019 to $7.3 billion, stating, “the inability of most clubs to comply with the debt service rule shows the magnitude of the financial distress caused by the crisis.”

The work has already been done to show you that MLB’s concerns about debt rising like that are bunk. Rob Mains over at Baseball Prospectus and Craig Edward at FanGraphs did the heavy lifting there, which is great, because capitalist math makes my head hurt. Sure, teams might lose some money if a season is played and the postseason is not due to a second wave of coronavirus, but MLB’s suggestion of foisting all of that risk off onto the players is obviously a non-starter with the union, to the point that the league still hasn’t actually submitted their voted-upon proposal for revenue-sharing with the players in 2020.

Reading that Rosenthal and Drellich piece also helps illuminate how shady MLB’s math is here, but here’s a quick excerpt if you’re strapped for time:

Following last week’s digital meeting, the union made more than 30 requests from the league for financial documents. A source with knowledge of the league’s thinking says MLB cannot respond to such a large number of requests, some dating to 2016, within a time frame of approximately two weeks. One possibility is that the league will ask the union to narrow its inquiry before responding.

With 160 players set to be selected in a reduced, five-round draft, teams will pay out a maximum of $16 million in 2020 for all combined draftees. The rest of the bonuses can be paid over the next two years: half in 2021, and the other half in ’22. But the league, reluctant to add to its debt, counts the entire $440 million as a 2020 expense.

Just last week, I wrote that there was little chance the league would open up its books to the union and potentially ruin a good thing — that thing being them lying about revenues and finances in order to continue to hold leverage over the players during economic talks — for a single season’s worth of savings. Those instincts appeared to be on point, as Rosenthal’s and Drellich’s reporting confirms that MLB’s response to the union’s inquiries is basically, “Can you stop asking us so many questions,” because the questions are about things like, “Why are you counting $16 million as $440 million, and how is doing that supposed to make the players trust that you would actually split earned revenue like you say you will?”

The Royals were somewhat singled out in this, as they’re claiming they’ll lose $113 million should the season be played without fans. The Royals, whose payroll was just $83 million even before the season was potentially cut in half, are claiming they’ll lose nearly three times what the payroll will cost them simply by agreeing to start the season. But that’s why the league accepted new owner John Sherman, you know: he knows how to play the game from his time as a minority owner in Cleveland, and this isn’t even the first time he’s cried poor as owner despite the team not actually having played a season during his reign. If the league is that concerned about debt service, maybe they should stop focusing exclusively on selling teams to rich guys who have to leverage such a huge percentage of their assets in order to buy a pro team, hmm?

The owners are unified in their stance that they’ll lose money by paying the players even a prorated salary, and according to Rosenthal and Drellich, are now in a stalemate with the union over this. The league is leaking report after report to the media about financial issues and the greed of players, but they can’t seem to produce any documents for the players to prove any of this, and the reports they’ve produced for mass consumption are, again, bunk.

Jon Heyman tweeted that the league has given the union two options: propose a non-prorated payment arrangement to the league to help MLB out with their concerns about losing money, or wait for coronavirus to clear up so games can have fans in attendance. The first is unnecessary: as the players see it, prorated salaries were already agreed to, so if MLB has a problem with that arrangement, they need to propose a different one. That’s how bargaining works: the sides take turns. Having the MLBPA propose a new financial arrangement when they’re already convinced they’ve agreed to one is just asking them to negotiate against themselves. If MLB thinks that pay isn’t a closed issue, then they need to take the initiative and propose a new arrangement… one backed up by the figures the union keeps asking them for.

The second option, waiting for coronavirus to clear up, feels like MLB waiting for a chance to pounce on the players as the reason you don’t have baseball on your television yet. The players shouldn’t take the bait on either option: just keep asking for documents to prove the league’s claims, and remind the media that you’re waiting on MLB here, not the other way around. This debt service thing isn’t as big of a deal as it will be made out to be: like with the various leaks, like with the contraction plans nearly 20 years ago and the Blue Ribbon Panel that recommended them, this is all just some accounting bullshit meant to get the players to concede and absorb more of the risk of the league’s existence. The good news is that the players seem to know this, and so, stalemate.

  • My latest for Baseball Prospectus went up on Wednesday, and is on the importance of the players staying unified against the owners when it comes to health and safety issues. The lockdown could give the league a preview into what a lockout could look like, and there’s no reason to harm solidarity in the present or give the league any more incentive to lock the gates in 2022.

  • Man, Rosenthal and Drellich are doing work: here’s the two of them with an exclusive look at MLB’s proposal on those safety protocols.

  • As many have noted, this all sounds like a hard-to-implement nightmare.

  • The Angels are the latest to have firmed up plans for furloughing non-player personnel.

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