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Financial records show Pirates win while losing

August 22, 2010

Don't feel too sorry for the cellar-dwelling Pittsburgh Pirates. Losing has been profitable.

The Pirates, the Major League parent club of the Indianapolis Indians, made nearly $29.4 million in 2007 and 2008, according to team financial documents, years that were part of a streak of futility that has now reached 18 straight losing seasons. The team's ownership also paid its partners $20.4 million in 2008.

The documents offer a rare peek inside a team that made money by getting slightly less than half its income (about $70 million) from MLB sources — including revenue sharing, network TV, major league merchandise sales and MLB's website. The team also held down costs, keeping player salaries near the bottom of the National League, shedding pricier talent and hoping that untested prospects would blossom.

The club's earnings were included in nearly 40 pages of statements that the Pirates submitted to Major League Baseball and were recently obtained by The Associated Press. Team officials briefed local reporters on portions of the material Sunday. The AP wasn't invited to the session, which owner Bob Nutting said was "aimed at the recent leak."

"The numbers indicate why people are suspecting they're taking money from baseball and keeping it — they don't spend it on the players," said David Berri, president of the North American Association of Sports Economists and the author of two books detailing the relationship between finances and winning. "Teams have a choice. They can seek to maximize winning, what the Yankees do, or you can be the Pirates and make as much money as you can in your market. The Pirates aren't trying to win."

Club executives vehemently disagreed with that assessment. Yet the numbers show Pittsburgh hasn't spent as much as its opponents — and hasn't won.

By 2010, the Pirates had baseball's lowest opening-day payroll — $34.9 million or just $2 million more than in 1992, the club's last winning season. The Pirates run of consecutive losing seasons is now the worst in the history of major American pro sports teams. They lost their 83rd game of the year Saturday to the Mets.

Pirate officials say they are trying to field a competitive team, and that there is nothing nefarious in the team's financial dealings. MLB backs them up, saying Pittsburgh has complied with the rules for revenue sharing, which are supposed to help less well off clubs compete with likes of the New York Yankees and the Boston Red Sox.

Still, Pittsburgh fans have long complained that the club's various owners have been more interested in profits than performance, and top sports economists who reviewed highlights of the team's statements wondered if it now makes more money losing than it could by winning.

"If they won and were forced to increase their payroll from $34 million to $75 million or $80 million ... how profitable would they be?" Berri said. "There's a ceiling in terms of gate revenues."

Economist Roger Noll, a Stanford University economist, said: "Probably the Pirates would be less profitable if they tried to improve the team substantially."

Pirates president Frank Coonelly said the team spends its revenue-sharing money in several ways designed to create a winner: scouting; amateur draft choices; a new Dominican Republic academy that cost more than $5 million; player development; and, an expensive new computer system used in player evaluation.

According to the documents, the Pirates spent $23.2 million in 2008 and $21.2 million in 2007 for player development, in line with other clubs.

The Pirates' strategy of building with prospects rather than with proven players was illustrated this month when they paid nearly $12 million for amateur draft picks, putting them at or near the top of baseball, and raising their draft expenditures to $31 million for the last three years.

They also spent another $2.6 million for 16-year-old Mexican pitching prospect Luis Heredia, the highest price they've paid for an international prospect. General manager Neal Huntington, who was hired three years ago, said the team has a plan for the future and is in the middle of executing it.

Coonnelly said in an interview with the AP last week that Pittsburgh, one of baseball's smaller markets, still will need help after it climbs in the standings.

"Even when we're winning, we will be a revenue-sharing recipient ... and in much better position to generate revenue and, depending on how we control other expenses, to generate additional income," he said. "But you can win without an $80 million payroll. We're seeing it this year."

Indeed, San Diego had the second-lowest opening day payroll and the Padres are leading the NL West. Tampa Bay went to the World Series in 2008 with a relatively low budget.

Revenue-sharing funds come from each team's local revenues — every team is charged 34 percent — and are redistributed among the lower-revenue teams. The only stipulation is that the money should be spent on making the team competitive. There is no set amount for payroll.

"The Pirates have fully complied with the Basic Agreement requirements for the use of revenue-sharing proceeds," Rob Manfred, MLB's executive vice president for labor relations, told the AP in an e-mail. The Basic Agreement is the labor contract between the MLB's 30 clubs and the players union.

The Pirates issued a statement Sunday, saying it was wrong for the financial statements to have been released to the AP.

"Someone with access to the Club's financial statements has breached his/her fiduciary obligation to the Club by providing a copy of the Club's audited financial statements for the 2007 and 2008 seasons to the Associated Press," the statement read. "The Club is a private company that has no obligation to publicly report its financial results and, like most private companies, has consistently declined to do so."

The statement also said "the revenues generated by the club are being reinvested back into the club in both long-term and short-term investments needed to completely overhaul and rebuild this baseball team."

"The Club has paid no dividends to its partners. Moreover, while it is quite common for a Chairman of the Board of Directors of a partnership to draw a salary, (owner since 2007) Bob Nutting has never received any salary."

Apart from the financial statements, the AP obtained a check stub of a payment made from a Pirates account to settle a bill with Seven Springs ski resort, which is owned by the Nutting family. The check bore a Pirates logo, which at first look suggests a financial transaction between the two operations, but the team says it came from a since-closed joint advertising account.

"I can tell you for certain there has not been a dime that has left the Pirates organization to fund any other business of any of the partners of the Pirates," Coonelly said.

The $20.4 million payment to partners two years ago wasn't for dividends, Coonelly said, but to cover the owners' taxes on the Pirates' profits and to pay a partner who loaned the team money seven years ago when the Pirates' credit was so bad it couldn't obtain bank financing. While such tax payments are common in a partnership, they're unavailable to the common investor.

Coonelly, previously an attorney for MLB, defended the Pirates' right to make a profit, but said he would not stay with the team if he suspected any Pirates funds were being channeled to ownership.

"I would not have left the commissioner's office if I wasn't convinced that Bob Nutting was committed to putting a winning product on the field," he said. "I would not have left the commissioner's office and I wouldn't remain at the Pirates if the Pirates were simply generating resources to fund other businesses."

Still, fans and critics ask how a team that won five World Series from 1909-1979 and nine division titles from 1969-92 can be so bad.

"I think it's very important for smaller markets teams to be careful about spending payroll, but there's a reason to be skeptical and cynical about what's going on (in Pittsburgh)," Andrew Zimbalist, a Smith College economist, said.

To cut payroll, the Pirates have shed former All-Stars Jason Bay, Freddy Sanchez, Nate McLouth and Jack Wilson in trades, along with nearly every other player who was arbitration eligible — or close to it — or free agency: Tom Gorzelanny, Ian Snell, John Grabow, Xavier Nady, Adam LaRoche, Damaso Marte, Nyjer Morgan, Ronny Paulino and Sean Burnett.

They also dealt slugger Jose Bautista to Toronto for a backup catcher who has since left their system, and cut NL All-Star closer Matt Capps without getting anything in return because he sought a $500,000 raise.

The team says it needs money to have the flexibility to make better investments going forward.

So while fans wait for $6 million draft pick Jameson Taillon and $2 million draft pick Stetson Allie to develop — both right-handers throw nearly 100 mph — they're not exactly flocking to PNC Park.

The gem of a stadium opened in 2001 at a cost of $262 million, with the Pirates covering $44 million, after the team long lobbied for a baseball-only venue that would maximize revenues. Attendance peaked during the inagura1 season at 2.4 million, but declined to a low of about 1.6 million last year. During the two years covered by the documents, gate receipts (more than $66 million) barely were enough to cover the expenses for ballpark and game operations, public relations, marketing and administration costs, much less payroll.

Still, the club is profitable, taking in $15,008,032 in 2007 and $14,408,249 in 2008. Coonelly said Sunday the Pirates made $5.4 million in 2009.

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