What were some of the steps you took?
I like to describe that era leading up to the 2002 Collective Bargaining Agreement as a time when we were financing player compensation and whatever growth we were realizing through debt. There was a lot of available debt, very cheaply priced. We put in place the most critical element of that CBA, a debt-service rule. The debt rule said that what used to be balance sheet, ratio-based debt would become EBITDA-based debt. It also said the debt cannot exceed more than ten times EBITDA.
Most people say, “ten times EBITDA, that’s a pretty big leverage factor.” But not if you consider that most clubs didn’t even have positive EBITDA. We had a lot of work to do. But putting that rule in place basically forced clubs to focus on earnings and, as a result, slowed the pace of payroll growth. Payroll has still gone up every year for the most part, but the pace of growth is more in line with revenue growth.
We also put in place expanded revenue sharing. Smaller-market clubs like Pittsburgh and Kansas City are going to benefit greatly from the new revenue-sharing plan. In fact, Milwaukee went to the playoffs last year and that’s an example of how it really made a difference—not only in terms of increasing the club’s financial footing but also making them more competitive on the field.
The last thing we put in place was a luxury tax, which created what I call a speed bump. We don’t have a salary cap like football, basketball, and hockey; you can spend over the threshold that is set each year under the collective bargaining agreement. But if you spend over that amount, you will pay a surcharge, or surtax, on the amount that you exceed it. When we put the plan in place in 2002 we thought there would be as many as six clubs that would surpass that threshold and would have to pay the luxury tax. It turns out that only one club has consistently passed that threshold. I’m not going to say which one it is.
What headwinds is Major League Baseball facing, and how have you factored them into your budgeting plan?
We face the same headwinds most companies face. I will honestly say that some of our clubs are just now starting to realize that there truly are headwinds. Every year since we put in the new CBA in 2002, we require every club in December to submit to us a three-year projection of their performance. So in December of last year, we had clubs give us a 2009 projection, one for 2010, and one for 2011. We asked them to include with that not just a P&L, but a balance sheet and a statement of cash flow.
Before that, it was easy for clubs to say, “Next year I’m going to cut payroll and increase attendance.” Which all sounds great, except if, with your higher payroll, you don’t play well and attract people. And more importantly, how are you going to finance it? And that’s where the balance sheet and the P&L and the cash-flow statement came into play.