[UPDATE: Much of the discussion and analysis below was subsequently supplanted by an extensive, deeply-reported article on the Cubs finances. I’d recommend that piece, rather than the post below.]
In light of yesterday’s extensive financial discussion, which emanated from uncomfortable comments made by President of Baseball Operations Theo Epstein about the baseball ops budget (and payroll being maxed out), I’ve spent the better part of the last 24 hours thinking about the Cubs’ financial situation. I’ve changed my thinking on one particular issue, and that change is going to guide some of my over-arching thoughts going forward. So I’d like to spell it all out for you.
Now, before we dig into that, there are some necessary preambles, because this is some seriously nuanced stuff. Among those preambles, I always feel the need to caveat: I know very little about the actual financial documents involved. There is always a chance that every conclusion I draw, however well intentioned, could be dead wrong upon a review of the private financial data. I’m here only to do the best I can with the information I have available to me.
You’ll recall that the genesis of this new wave of financial discussions was an investigative piece by Gordon Wittenmyer, published on Opening Day, in which he reported – among other things – that the Cubs’ payroll has been dropping like a rock under the Ricketts Family’s ownership because of the debt burden the family took on to purchase the Cubs and the associated debt instruments, which include all kinds of restrictive elements. Prior to Wittenmyer’s report, there was a casual and widespread belief that, although the Ricketts Family had taken on substantial debt to purchase the Cubs, that was merely a condition of the sale, which allowed the Tribune Company and Sam Zell to avoid substantial capital gains tax associated with the sale. Thus, there was no reason to be concerned about the debt or the related obligations interfering with the finances of the Cubs, because the Ricketts Family had plenty of money to pay cash for the team if they’d been able to. Wittenmyer’s report gave that belief some pause, but I remained skeptical, as I wrote at the time.
Separately, but relatedly, Theo Epstein’s comments this week about the baseball budget – comments which were arguably incompatible with things we’d heard previously from the front office – raised some concerns about the amount of Cubs revenues being made available to the baseball side, versus the amount being used, for example, to service the Ricketts Family’s debt. In that way, these issues are related: more debt = higher service payments = less money available for baseball operations.
So, harmonizing everything, there are two subtly separate but related financial questions out there: (1) Is the Ricketts Family crushed by a huge amount of debt they took on to purchase the Cubs, and that debt is governed by complicated instruments that prohibit the Cubs from spending freely for a considerable length of time? (2) Is the Ricketts Family using Cubs revenues to service their debt, thus reducing the money available to the Cubs organization?
In a recent Dave Kaplan piece, he actually touches on each question. To the first, he quotes an anonymous former purchase candidate about the purchase process:
Minimizing tax liability with debt financing was the No. 1 goal of Tribune Company management and Sam Zell in selling this asset. That alone made it a tough deal for many of the interested parties to handle. Add in the fact that the world markets were on fire so financing was very difficult to obtain at that time. Whoever was going to buy the Cubs — from Mark Cuban, to John Canning, to any of the other interested parties — was going to have to play under those rules. That narrowed the playing field quickly. Plus, do you really think that [MLB commissioner] Bud Selig, who is one of the smartest guys around, would have allowed the Cubs, a premier franchise, to be operating under a risky structure? No way.
That’s that, and largely dispenses with the first question. Whatever the crazy structure of the purchase, it wasn’t because the Ricketts Family couldn’t afford the purchase without so much debt. (More on that in Kaplan’s article.) And, whatever the crazy structure of the purchase, MLB is on board with it – and MLB has no interest in seeing the Cubs’ ability to be competitive crushed under the weight of a bad deal. So I have no worries about that.
As to the second question – whether debt service payments are coming out of Cubs revenue – Kaplan seems to offer an answer: “It also appears that the large debt service payments that the Cubs are responsible for have maxed out the money available for the rebuilding process that Epstein and Hoyer are in.” In other words, whether you characterize the debt as the Ricketts’ or the Cubs’, the financial burden of that debt is falling on the Cubs. That’s a real bummer.
It has been reported, and is generally accepted, that the loans to the Ricketts Family to purchase the Cubs came from a variety of sources, including banks, private investors, and a Ricketts Family Trust. We don’t know the amount of loans from each source, and, although I’m going to focus on the Family Trust, these points are generally applicable to any debt the Ricketts Family took on in order to purchase the Cubs. The Ricketts Family – not the Cubs – benefited from that debt because they (the Ricketts) now own the asset (the Cubs).
If it is true that the Ricketts Family Trust loaned the Ricketts Family some money to purchase the Cubs, and if that loan came with an interest rate attached, then I have some concerns. If the Ricketts are using Cubs revenues to service that particular debt (i.e., to make the required interest payments), they are merely taking Cubs revenues and making “interest payments” to themselves with it. Yes, technically, in this setup only “the Ricketts Family Trust” is receiving the Cubs revenues, but is that really a distinction worth making? The Ricketts Family, in this setup, is transferring Cubs revenues into their own pockets under the guise of “debt service.”
Now I want to be crystal clear about something: I do not have a problem with the Ricketts Family making money off of the Cubs. I am not saying that any of this setup – if I even understand it correctly, and there’s a pretty fair chance that I don’t (these things are complicated) – is wrong. It sounds creative, and I award two points for creativity.
The issue I have, and it’s the only issue I’ve ever had with this financial stuff, is the repeated statements that every dollar the Cubs bring in the door is being put back into the Cubs organization. If I understand the debt service payments correctly, I don’t think it’s fair for the Ricketts Family to, on the one hand, pocket these service payments from the Cubs, and, on the other hand, generate goodwill by saying things like, “Every dollar the Cubs make is put back into the organization.” Because whether or not that statement is technically true, based on a complicated series of transactions and entities, it is not genuine.
Again: I don’t blame/hate/curse/whatever the Ricketts Family for making some money off of their business. God bless, and Go America. I have to emphasize this as boldly as possible (twice), because this is a point on which I receive a lot of flak. Me not say Ricketts bad.
I just would like a little more transparency about this issue. Is every single dollar of Cubs revenue – after taxes – going back into the Cubs organization? Or is every single dollar of Cubs revenue – after taxes, Ricketts Family debt service, and whatever else – going back into the Cubs organization? Those are two very different things, and I just want to know what I’m looking at.*
I probably don’t have that right, and we might never know. But I’ve always thought of professional sports teams as a kind of public trust. Yes, you can make money off of the teams, but you also have to realize that you are doing so on the backs of a base of fanatics who desperately want to believe their teams are always moving in the right direction. It’s easier to believe that if we have faith in the ownership. And it’s easier to have faith in the ownership if we feel connected to them through transparency, openness, and shared passion.
In the end, I’m not mad at the Ricketts, and I don’t think they’ve really done anything wrong. But I’m disappointed that it’s taken this long to get to a place where I finally think I understand what it means to “put every dollar back in the organization.” It’s not what I thought it meant, but maybe that was my fault.
Pending a correction or clarification from the Ricketts Family, the weight of authority on this issue (including Epstein’s comments this week) leads me to the conclusion that, until the Ricketts Family debt is completely paid off, the amount of money available to the Cubs’ organization is going to be reduced by the amount of the debt service payments each year. Depending on your source, the debt service payments range from as low as $20 million to as much as $40 million annually. That’s a healthy chunk of change that the Cubs could otherwise be spending on, for example, a banner free agent.
Like I said. It’s a bummer. Then again, if this issue goes away as soon as the Cubs emerge from their rebuild – whether because revenues increase or because the Ricketts Family starts paying the debt service on their own – it’s not really a huge bummer. After all, not having that $20 to $40 million available right now is only an issue if there were free agents that Theo Epstein and Jed Hoyer wanted whom they could not sign. Maybe there weren’t any. And maybe when there are, the debt service issue will vanish. Here’s hoping.
*Subject to the caveat that MLB owners are prohibited by the league from making certain financial disclosures public. I’m certainly not asking for the Ricketts to turn over their books, nor do I think they should have to.