Attention, sports fans: (Pittsburgh) Pirate crimes

Several baseball teams have seen their financials leaked to deadspin.com and the Associated Press, creating embarrassing times, particularly for the Pittsburgh Pirates. The same week the franchise set a U.S. sports record by locking in its 18th consecutive losing season, financial records indicate the company made $29.5 million in 2007 and 2008.

So what does this have to do with insurance? Cue the New York Times:

……..Major League Baseball was focusing its investigation on insurance companies that do business with clubs, said two baseball executives who were not authorized to speak publicly.

The companies under investigation sell liability insurance for top-level team executives and directors, not players. One of the executives said, on the condition of anonymity, “A couple of teams are very unhappy because the feeling is M.L.B. didn’t have to provide detailed, individual team financials for this type of insurance.”

So the prime suspects appear to be D&O writers. This makes sense, because D&O insurers like to see an insured’s financials. A financially troubled company is far more likely to be sued by unhappy investors.

But enough of that.

I’ve been interested in the financial reports of sports teams since I saw the 10-K of the Boston Celtics limited partnership. About 20 years ago, the Celtics limited partners spun off about 10% of the team, dumping a bunch of debt in there and figuring that fans would overvalue the stock. I can’t find it online anymore, and I assume it was bought out by new owners. The only thing I remember is that it had a negative net worth, which would be memorable for any company, even one without a parquet floor.

Much has been made of the Pirates’ 2007 and 2008 earnings, and those are pretty good years, which imply a return on equity of 16% and 19%, respectively. On Monday, the Pirates indicated they did worse in 2009, making only $5.4 million – worse, but still not bad for the depths of the Great Recession.

And you know, I started writing this post to show things the Pirates’ way. It’s true the owners got a meaty return on a lousy product, but that’s before taxes. And the team depends heavily on league-wide revenues; in 2008, 40% of revenues came from the league (including network TV contracts). It looks unlikely that the club could add enough payroll to win and turn a profit.

But I kind of hate liars:

INDIANAPOLIS — The Pirates have made less than $11 million in profit over the past two years, and all of that was channeled back into baseball, team president Frank Coonelly told the Post-Gazette.

Coonelly, eager to dispel mounting charges that the franchise puts big profits above winning, broke from the team’s long-standing policy of not discussing finances to disclose in a series of interviews last week that the Pirates put all their profit in that span toward $11 million in baseball-related capital investments and, even then, needed to incur additional debt to cover the rest of the amount.

Those capital investments included a $5.4 million baseball academy in the Dominican Republic, $2 million toward the renovation of the Pirate City complex in Bradenton, Fla., and the recent purchase of a new Class A affiliate to play in Bradenton.

That was a December 2009 interview, and Coonelly was talking about 2008 and 2009, and the deadspin documents are 2007 and 2008. But the club made $14.4 million in 2008 and has just fessed up to $5.4 million profits last year. You don’t have to be an actuary ……..
And the last part about using the profits for capital operations – that’s just hand-waving, as far as I can tell. Those operations are funded out of revenues, not out of capital. You are using your capital if the enterprise loses money, or it the funds come out of the capital account.
The main use of capital in 2007 and 2008 was a $20 million disbursement to owners – half to pay back a loan from Pirates Chairman Bob Nutting and the other half to pay income taxes for the profits the partners made in 2006 and 2007, according to the latest report.
Well, if the company had to cough up $10 million to cover taxes in 2006 and 2007, that implies profits for those two years total, conservatively, $30 million. (I’m assuming a 33% tax rate.) We know the company made $15 million in 2007. Now we can estimate that 2006 profits were around $15 million as well.

There are a couple of faces that should be red, at least retroactively:

Asked if the Pirates’ ownership, led by chairman Bob Nutting, was making money in that range, [baseball commissioner Bud] Selig raised his voice in replying, “Absolutely not. Unequivocally not. I’m telling you, they’re not pocketing it. I mean, it’s just an economic myth.”

Selig said, as the Pirates have, that any profit is being channeled back into the team. He said he would know if any of it was being paid in ownership dividends.

That was Bud in 2009. This week, a statue of Selig was unveiled at Milwaukee’s Miller Park. No reports on whether its nose was growing.

In the end, this accountant’s perspective is close to mine:

…….. I continue to contend that the owners aren’t concerned about profits as long as their team can cash flow itself each year and maybe have to borrow a little to fund operations.  Because of the way the value of sports franchises generally appreciates each year in the marketplace, each owner is in it for the holy grail and that is to sell the team eventually when they realize very nice capital gains.

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