The Big Squeeze: Fielding Pension Tactics
Schap, Keith, Modern Trader
Caught in a squeeze between high salaries and dwindling revenues, major league baseball could have some big innings by adopting some of the money management tactics pension managers use.
The big squeeze play in major league baseball has nothing to do with batters bunting to score runners from third but everything to do with the money management skills of the teams' treasury departments.
Baseball cash flows resemble short-term pension funds. As with pension funds, the teams collect money, with contributions heavier at times, and hold it for eventual payment to the players. So it makes sense that they should, also like pension managers, use it in the interim. There, pension and other money managers have expertise whatever their baseball credentials.
Futures created a fictional team operating statement and invited three money managers to make suggestions - a rotisserie league for baseball treasurers.
Paul Beeston, president of the Toronto Blue Jays Baseball Club, has summarized the problem: Attendance at most parks has plateaued. Television networks, unhappy about their contracts with major league baseball, will likely pay less for the next contract. And player salaries only rise.
With income and salaries colliding, the teams have been hung out to dry financially just as the baserunner heading home when the batter fails to lay down the bunt.
Baseball as big business?
Whether major league teams have given thought to cash management is hard to say. Privately held, they disclose little. But the interest income line on the table "Where the money comes from - where it goes" suggests not.
So does Gerald W Scully, University of Texas, Dallas, management professor and author of The Business of Major League Baseball.
Still, it's wrong to conclude the owners are not big league business people. Wondering whether ticket prices were rational, Scully studied them in terms of team performance and presence of star players and says: "Ticket pricing is consistent with revenue maximization."
And besides a midget pinch hitter and exploding scoreboards, Bill Veeck was the first owner to treat player contracts as depreciable intangible assets at tax time.
But it's fun to dream - of big innings and higher yields.
The rotisserie from which investors worked figures in "Where the money comes from - where it goes" (see table) and a few assumptions.
[TABULAR DATA OMITTED]
The column for 1991 takes recently published revenue, player salary and operating income figures for each major league team, averages them, then extrapolates details using Scully's percentages.
Scully says 52% of a team's revenue comes from ticket sales, something less than half of that from season sales. That income arrives in a block before opening day.
Another 31% of revenue comes from broadcast fees, 55% of that from networks paying in August.
Player salaries are the biggest cost. The major league minimum salary is $100,000. The current average is $1 million (up from about $370,000 as recently as 1985).
A few players negotiate deferred payments, but salaries usually are paid bi-monthly during the season.
Those numbers create a partial cash flow picture. Among its key features are the $12.03 minion season ticket proceeds and the $9.86 million from the TV networks. Assuming a 28-week season, the other income elements generate inflows of about $1.28 minion a week.
Concerning the $26.19 million player payroll, the assumption is three players get $5 million a year each and each has negotiated to get $1 million the first year in the normal bi-monthly payments and to defer the other $4 million over four years in monthly installments. That removes $12 million from the cash flows of the first year.
With a remaining annual payroll of $14.19 million, the team pays $1. …