Such was the case during Winter Warm-Up when team president Bill DeWitt III handled a series of subjects relating to club and MLB finances. The focus of this installment is DeWitt III's view of how clubs like the Cardinals can compete in today's unequal economic environment across baseball. His direct remarks follow in quotes.
DeWitt III explained three avenues used by MLB to help. The first is the luxury tax.
"You have a competitive payroll tax, called a luxury tax, which in the new agreement starts at about $175 million, approximately. $10 (million) of that is embedded in some other things. When you think about or read about payroll, the Cardinals are about $110 (million) this year. The number above which you start paying the payroll tax threshold is about $165 (million). So we are not anywhere near that.
"The two or three markets - Boston and the Yankees and I think the Angels are getting there – you have to think twice now. That tax acts as a governor on their payrolls, hopefully. And the money that they pay in tax on the salary amounts above that threshold goes into the revenue sharing pool. It hurts them a couple of ways. One, it is money out of their pocket and two, it helps the teams below them compete better."
The second governor MLB places on clubs is revenue sharing.
"The second thing we've done to work around the no cap issue is overall revenue sharing. What happens is all the teams report their revenues to a central accounting firm that works for baseball. I am telling you, these guys are as diligent as if you were getting audited by the IRS. Worse than the IRS.
"The owners want to make sure each other is being honest about it all. You report your revenues and then you sort of work through all the details and then you get some expense deductions. After those deductions, that is your number and it gets thrown into a pool and it gets divvied up.
"It's not a complete level playing field by any means but there is a lot of transferring down from half of the clubs above the midpoint down to the clubs below the midpoint. The people who are the receivers are at the lower end of the totem pole and the big payers are the Yankees and Red Sox and the others on the high end.
"Generally speaking, the Cardinals are more around the middle, a little above the midpoint. So we are writing a check into the revenue sharing system but we're not writing a gigantic one, as big of one as years ago before it evolved into some of these other teams getting new stadiums and stuff.
"That is the second way we deal with that we can't have a salary cap so we create competitive balance with the tax and revenue sharing."
The third of three ways MLB helps team compete is via the debt service rule.
"The third thing is something we call the DSR rules or the debt service rules. Without getting into too much detail because it gets kind of arcane finance… Essentially, the rule says that if a club has too much debt on its books, it can't keep losing money and overpaying in creating too much payroll and losing money. You've got to have some income to service that debt, is what the rule says.
"You would think, for most people, it's like Business 101. If you have too much debt, you had better have some income to pay the debt. Why does there need to be a rule for that in Major League Baseball?
"It is because in this kind of warped economy, people that own teams – not in our case, not in many cases, but in several cases - you've got billionaires who just all they want is to do is win for their city. They don't care about losing $50 million or whatever it may be. They have so much money.
"The problem is – it would be great to be that kind of owner; it would be fun to be that kind of owner – but what happens is, that gets old. Even the owners that do that, to try to create that, it is like a sugar high. They try to get that one winning team and win the World Series or whatever it is. But it gets old. I don't care how much money you have, if you are losing $50 million a year operating a team, even though you can afford it, you kind of go to yourself, ‘Gosh, I could have written a check to charity for $50 million.' It just gets old.
"It creates financial instability, franchise instability and creates problems for the other teams that are trying to compete in a way that doesn't milk the fans for huge profits, which not many teams do. For those that just pour everything back in like we do and use all the resources available to the Cardinals and pour back into the product, it is kind of hard to compete with somebody who is doing what I was describing.
"So, there is that debt service rule, the third governor on the way teams operate."
Other articles in this series:
A Look Inside St. Louis Cardinals Revenues
St. Louis Cardinals Player Insurance and Analytics (coming)
Cardinals Season Tickets and Dynamic Pricing (coming)
Brian Walton can be reached via email at firstname.lastname@example.org. Also catch his Cardinals commentary daily at The Cardinal Nation blog. Look for his weekly minor league column during the season at FOXSportsMidwest.com. Follow Brian on Twitter.
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