Spending The Rest
Felix’s extension is awesome on its own, but it also comes with a side benefit – because part of his 2010 payout is accounted for as a signing bonus, Hernandez will only take up a little more than $7 million of the payroll next year, or about $3 million less than the $10 million figure that we’d speculated on as his potential arbitration award. So, in the wake of the great news that Felix is sticking around is more good news – the team has a little more financial flexibility than previously assumed.
Now, again, I want to remind everyone about that last word – assumed. No one really has any firm grasp on what the team’s budget is. The M’s won’t say publicly, so we’ll all figure out what it is once they announce they’re done spending for the winter. Pretty much everyone who covers the team is assuming that it will be something similar to last year, but we don’t really know. We’re guessing. We could be wrong. But it’s the best guess we’ve got.
If you want to see the numbers, check out this spreadsheet from Cot’s Contracts, this post from Jeff Sullivan, or this post from Geoff Baker. They all do a good job of summing everything up, though I doubt any of them get it exactly right. Baker says that the payouts on Silva’s deal on Cot’s are flipped, with the M’s sending less this year than next year – I’d trust him on that. But he’s got Ackley’s salary at $1.5M per season, when it’s actually $1.5M over the five years, so he’s about $1M too high on Ackley for 2010. These are mostly small details, though – everyone comes out with the same general conclusion. The M’s have about $7 to $10 million left in the budget, assuming payroll is kept similar to 2009.
How the M’s spend that money is still up in the air. There are two obvious places on the roster that could use some help, then a few potential bargains in free agency that could offer upgrades to the team if they can work out the logistics. Here are the options, briefly:
Right-Handed Hitting Outfielder/Utility Guy
This is Bill Hall’s vacated roster spot. With Langerhans/Bradley/Griffey forming some kind of LF/DH job share, the team needs another right-handed bat that can play the outfield to balance everything out. It may be useful if that guy could also play the infield, as Jack Hannahan is currently projected as the only backup IF on the roster, but that may be a perk and not a necessity. Options for this guy have been discussed a lot, with names ranging from Xavier Nady to Fernando Tatis and most recently Eric Byrnes. Nady would be the priciest, and last reports had him asking for a ridiculous $6M contract – he’ll have to realize that the market has crashed and he’s coming off surgery before anyone signs him.
Starting Pitcher
If the M’s were still in pseudo rebuilding mode, than giving the last rotation spot to the winner of the Vargas/Fister/French/Petit/Olson contest would not be a bad idea. But given how aggressive they’ve been in upgrading the rest of the team for a run at contention in 2010, the team should do better in the rotation. There are any number of potential options at starter, ranging from the high risk/high reward guys (Ben Sheets, Chien-Ming Wang, John Smoltz, Pedro Martinez, Erik Bedard) to the less interesting innings-sponge types (Jarrod Washburn, Jon Garland, random old strike-throwers). The costs vary widely, even within the groups themselves.
Bullpen/Second Base/Reserve Infielder
This is the group of spots that could be improved upon, but have competent people in place at the moment. The team could choose to upgrade on the various LH relief options if a guy like Will Ohman is willing to sign for cheap, but they may prefer to give the kids a chance, or just not have a LH reliever again. The M’s are known to like Orlando Hudson, but they have Jose Lopez, and there doesn’t seem to be much of a market for his services in trade. If they could find a team who wanted Lopez, though, they could allocate some of the remaining money to bringing in his replacement. Likewise, Hannahan could be a useful utility player around the infield, but if the M’s could get someone like Adam Kennedy to play the same role at a discount, they may explore that option.
So those are the options. The M’s have a pool of money with which to acquire two, maybe three players, who will likely fit into one of the above categories.
Without knowing what each player’s price and willingness to come to Seattle is, it’s impossible to pick a “best plan”. In some scenarios, it makes sense to spend more on the outfielder and less on the pitcher. In others, maybe you spend all of it on the pitcher and go cheap in the outfield. Or perhaps you trade Lopez for the pitcher, then use the money to sign Hudson and a decent outfielder. Lots of options.
Odds are good that the M’s will fill these last couple of spots with quality players. If they spend it wisely, the Mariners will head into 2010 looking like a ~90 win team or so. That’s pretty amazing.
I really think that the team is going to go after a starter now. There have been lots of rumors about different starters coming to Seattle. I know that the rumors themselves probably aren’t grounded in too much truth, but the general thought of “M’s + another starter = really really good” seems to be prevailing. We have a lot of reliable low-risk, low-reward options for the back end of the rotation, so I think that going after a high-reward pitcher would be a very good idea. Pedro, anyone?
Dave, why do you prorate Felix’s signing bonus? He’s going to cost the M’s $10MM this year, so why not apply it all to this year’s budget? Am I missing something?
That’s how MLB accounting works.
From the Baker link,
For luxury tax purposes, sure. But, Felix will be cashing a $3.5MM check sometime in the near future, unless they’ve agreed to something different. There’s no accounting rule that dictates how signing bonuses are disbursed.
I agree with Leroy on this one. Can someone explain why Felix’s bonus would be pro-rated for the purposes of the 2010 budget? I guess for accounting purposes that it might be true (though I’d really like a bit more explanation), or maybe for the luxury tax, as Leroy suggests, but for budgeting purposes… Makes no sense. Does anyone know the details?
How likely are we to make an offer to sheets? I heard his throwing session on tuesday looked pretty good, and he seems to have a lot of suitors so he’d probably cost a lot, but with him we’d probably have the best top3 in the league. Is that just a pipe dream, or are we actually in the running for him?
There’s no accounting rule that dictates how signing bonuses are disbursed.
This is how the M’s do it. If you want to argue, take it up with them.
Calculating payroll is not the same thing as paying it. You can check out Cot’s and take a look at Sabathia’s contract. They do show his signing bonus pro-rated, but he received it in 3 installments over 7 months.
This matters because the M’s have paid at least $5.5MM (Figgins $2MM, Felix $3.5MM) in signing bonuses this year. And they didn’t pay any last year. That means that last year’s budget was overstated (Ichiro $1MM pro-rated signing bonus and maybe others) and this year’s will be understated. That discrepancy could consume a large part of the assumed surplus.
Dave, I’m not arguing, I’m making a distinction between calculating payroll for accounting purposes and actually paying it. That distinction could affect the entire thesis of your post.
I don’t even know if the M’s ownership think of it in dollars. They probably just think “Well, we just got one of the best pitchers in the game for 5 years, for only 370,000 Wiis”.
But in seriousness, if you’re budgeting any large amount, it’s very common to budget capital payments spread across the length of the contract. (Sorry, my parents were accountants and lawyers.)
Anyways, I’d be pointed firmly at a SP, given that it will upgrade the 5th spot of the rotation significantly. And some of those free agents that are asking too much money are going to start dropping their asking prices as the teams start reporting to spring training.
But, I still wonder about the Jose Lopez thing…
And tell me if I’m wrong, but if this season doesn’t go as planned, it seems like we probably have a truckload of trade bait, as well as a bunch of very, very good contracts. This team is so well set up for the long haul that it gives me goosebumps.
I think the high risk/high reward SP is the best way to go. That is the one positoin the M’s have a ton of depth. Not quality depth but, depth none the less. I think of it more as an insurance policy. If one of the high risk guys get hurt Jack has someone to fill the roster spot.
Also, it is easier to find a quality bat at the trade deadline then it is to find good pitching. Lets give guys like Milton, Casey, and Figgins a month or so to prove what the bats can do. I think the lineup is going to score more runs than most believe. As we all know the M’s only need to be about average with Runs Scored.
Lets get another solid arm and be the best RUN PREVENTIVE team in the league.
I am not against another good bat, but if it is one or the other I say SP.
Dave, I’m not arguing, I’m making a distinction between calculating payroll for accounting purposes and actually paying it.
You’re assuming that the team’s budget is set based on the amount of actual cash paid out. That’s not correct.
Ichiro’s deferred money counts against the payroll, even though he won’t get it for ~10 years. It’s accrued this year, so it counts against this year’s payroll. Felix’s signing bonus is accrued over five years, so it counts 20% against payroll.
This is how MLB accounting works. Your hypothesis is wrong.
This is how the M’s do what? Dave, you seem awfully sure of yourself for a guy who has no evidence or backup. Have the M’s ever said that they pro-rate signing bonuses for purposes of their annual budget? Accounting is not the same as budgeting. I haven’t seen it. And frankly, it doesn’t make a whole lot of sense from a budgeting perspective. Maybe you’re right, but an actual explanation would be helpful.
It’s basic accrual accounting. Pretty much every business of decent size uses the accrual method. And yes, I’m confident that I know how accrual accounting works – I spent five years as an accountant for a Fortune 500 company. And I know enough people in baseball to know that this is how MLB teams operate as well.
By accrued, do you mean it’s paid over 5 years? I don’t think that’s the case.
If you look at Milton Bradley’s contract, you’ll see he got a $4MM signing bonus, but the M’s aren’t responsible for any part of that. They are only responsible for his salary. The signing bonus was paid, upfront, by the Cubs.
Just because an expense is accrued in 2010 doesn’t mean it should be reflected in the 2010 budget. A budget is not the same as a balance sheet. Dave, you keep conflating the two. Would a real accountant please step in here?
By accrued, do you mean it’s paid over 5 years? I don’t think that’s the case.
Google the definition of the word accrued. It has nothing to do with when payment is issued.
If you look at Milton Bradley’s contract, you’ll see he got a $4MM signing bonus, but the M’s aren’t responsible for any part of that. They are only responsible for his salary. The signing bonus was paid, upfront, by the Cubs.
They could have paid it in 2047 and it wouldn’t matter. Actual payment date is irrelevant.
I won’t bother responding to CCW. He can be an idiot all he wants.
I know what it means, I just wasn’t sure you did. Then we’re good – you realize Felix gets his money now and you don’t think that affects the M’s budget decisions. Personally, I’m more concerned with the checks I have to write rather than the books I have to keep. But, to each his own.
Wow. My favorite baseball blog–hope that’s the right name–is quickly becoming my least favorite accounting blog. I’m going to trust Dave and all of the other baseball writers who have taken up this topic today.
I’m an accountant and Dave is correct.
Does anyone have insight into if the front office would value having someone signed before spring training starts or if holding out till the best possible contract is available at the expense of some time with the team is worth the trade off? Just curious what the odds are the roster is finalized before pitchers and catchers report or if we might have a mid march addition.
Name-calling. Cool. And you still haven’t addressed the issue. Since you busted out your credentials, I’ll bust out mine. I’ve represented 100’s of businesses, large and small, in M&A transactions, buyer side and seller side, in which the issue of the balance sheet and annual operating budget were almost always front and center. A balance sheet, particularly one in which a current expense is accrued prospectively over a six-year period, is irrelevant to a business’s annual budget in the current year. The fact you can’t explain it without resorting to the definition of “accrual accounting” ought to be a tip that maybe you’re missing something.
Any chance with the new found money the M’s will take another look at left field? Swapping out Langerhans with a 3-4 win player would be sweet! I’m not sure the M’s could do it but I didn’t think they’d come up with Cliff Lee either. Would Damon on 1 year contract ala Abreu make any sense?
Dave unfortunately I’m going to have to interrupt this simply fascinating accounting debate going on here and ask a, for the most part, non-accounting question.
How much money do you think we would have to part with to get Jarrod Washburn?
I think an accrual got mixed up with a pre-paid expense. I’m pretty sure Ichiro’s contract would be an example of an accural where Felix’s signing bonus would be treated as a pre-paid expense.
No question, absolutely the most tedious thread here in the last three years. Please guys, no more accounting arguments.
Hopefully a more pertinent question: although we don’t know the size of the payroll, assuming there’s money left, how much sense does it make to save some of it to help swing a deal for what we need at the trade deadline?
“how much sense does it make to save some of it to help swing a deal for what we need at the trade deadline?”
I’m starting to think that this is the right move. It might be wise to be a buyer at the trade deadline in these economic times.
This accounting question is bugging me as I look to my CPA wife. While not an accountant myself, osmosis is very sneaky.
I believe what Dave is trying to convey is this. There are many budgets within a budget. Payroll, in term of what is allowed to be spent on player salary, during the season, is it’s own budget number within the total budget for the M’s organization.
Because of the way MLB teams typically have set payroll numbers, signing bonuses do not subtract from the player payroll budget. The money is spent, sure, When? Who cares. The signing bonus is not factored into the player payroll, hence Dave’s reasoning.
Sometimes we can get caught up in the trees and forget a forest exists. Don’t get too caught up in the semantics, sometimes precision can get one off task.
Good question, but as a practical matter, I’d have to believe the M’s would make money available in the midst of a pennant race that wouldn’t necessarily be available now.
Are we abandoning the accounting debate before we get into depreciation schedules and contra revenue accounts? ‘Cause really, it’s about as exciting as watching the Umps discuss a reply call.
If we can spend the money now to get the guy on the roster for the whole year, I’d prefer that. But it’s an interesting point – who are the most likely July trade-bait?
There is a fairly interesting crop of FA first basemen in 2011. My guess is that Kotchman has about half a season to realize his potential.
You know who still make sense for this team? Nick Swisher. Right handed bat when he needs to be, good fielder, above avg bat, can be your backup 1B. Talk Cashman into resigning Damon and give them a couple prospect for Swisher. I’d love it.
It really gets to one of the questions I would have liked to see answered at Benaroya: to what extent is the annual payroll budget flexible, depending on circumstances? Why should Jack Z have to “save” budget room for a later acquisition. In a real business, if revenues are up (as they would likely be if the M’s are in contention), then there is room for additional capital expenses, especially if those capital expenses are likely to lead to additional revenue.
Dave,
I think another possibility you left out is behind the plate. I’ve seen in numerous places that the M’s have had conversations with Yorvit Torrealba’s agent. Not that I’m necessarily excited about Torrealba, but it appears they’ve explored possibilities at bringing in a catcher, too. I wouldn’t be shocked to learn of a trade, or free agent pickup, at that position (in the sometimes typical “didn’t see it coming” Mr.Z way). And it is somewhat of a risk to assume Johnson is 100% ready to go, and/or Moore is ready for daily work at the Majors level.
That question would’ve gotten a total non-answer, which is part of why we screened questions beforehand.
What about a trade for Moyer and Ben Francisco?
We get another veteran clubhouse presence, for whatever that’s worth, not to mention a pitcher that can still pitch, if he has healed up in the off-season. What’s more, he’s the perfect pitcher to utilize our defense to the max. And Francisco is the type of righty part timey outfielder the M’s could use.
So… they wouldn’t have answered it. That just emphasizes why I would like to have seen it answered. The “budget” is one of the most critical, yet least understood, components of the Mariner organization.
Beyond which, the business guys have answered that in the past in two ways: they’ve said that they budget for attendance of x (which varies) and that they’ll be able to give the team more payroll if attendance goes well. That said, in practice, when attendance has run over, they haven’t spent more.
You can make of that what you will.
About the Benaroya questions, while I agree that some screening made sense, I think you erred on the side of caution a bit too much. If Jack was not going to reply to a question, he wasn’t going to reply, fine. But he’s shown in the past that even if he can’t disclose something, he can hint at it, or sort of do that *nudge* *nudge* *wink* *wink* thing.
CCW, excellent point! And, by my count, that’s 5 in row. I think you’re right and the Mariners are a “real” business, so I’m not too worried about the money being there when they need it. I think there’s a real chance we see an impact move made at the deadline.
MLB makes teams pay up front for bonuses per the collective bargaining agreement. This is to satisfy players and to ensure they keep the bonus if team goes belly-up. The bonus, though paid over one year, is pro-rated in terms of the teams annual salary projections. This is done by most clubs for their own accounting.
I believe bonuses are also pro-rated over the term of the contract for purposes of calculating the luxury tax, so it isn’t just internal team accounting.
Can we just proceed according to the assumption that Dave’s hypothesis is correct, and the team has extra money left? Because the alternative makes for a pretty boring thread, though nowhere near as boring as watching an argument that belongs on AccountantsTryingToGetLaid.com
justinh,
I don’t see that in the CBA. The only mention of signing bonuses that I find are related to the luxury tax (as CCW just stated). Do you happen to know what section it’s in? Or any other info?
I’m not sure why people don’t understand why the M’s would use this method of accounting. It makes sense to me and I’m an idiot.
For those interested, this is from the CBA:
Article XXIII is the “Competitive Balance Tax”, aka the luxury tax.
This explains why teams pro-rate signing bonuses.
Nobody said they wouldn’t use that method of accounting (accrual). I think we’re all agreed on that point.
Here’s something from Prospect Insider,
Do we know for certain that the Mariners will be spending the money that they saved with Johjima returning to Japan? I ask because they didn’t with Sasaki and we could be up against last year’s payroll already.
Speak for yourself; I find the topic fascinating. Of course I’m a banker and, therefore, have no soul so take my opinion with a grain of salt.
I find the argument over how the money is disbursed to be tedious and somewhat irrelevent.
If the Mariners have opted to NOT let us know what the budget is this year then I see a two headed message being sent. First, we are trying to become competitive THIS year so a set figure is counter productive to achieiving that and second, We believe as an organization that Z will achieve this without breaking the bank. Looking at this team as presently put together, I expect that there will be an upswing in butts in seats at SAFECO. The window for success (WS) has been set at about 4 years (Guti’s last year, Ichiro probable one year contract to chase 3,000 hits, and Felix nears end of his). So is the goal of the Mariners to get to the World Series or JUST be competitive every year. Either one is good BUT we are arguing for WS so budget shouldnt play as big a role.
My only concern is seeing once again the younger players (Tui, Saunders etc) being put on the back burner to win now at the expense of the future. At least this team only has two old men (Griffey and Ichiro)!!!!!!!!
Watch out for LT Nick Hill to grab a rotation spot out of camp. He throws strikes, has good stuff and is a bulldog of a competitor. He had a great year in AA last year. His stats in the AFL were bad but he was only down there to throw strikes and get innings in. He had more than a stikeout per inning in AA and he is not an overpowering guy (87-91) with good sink and a good to very good slider and change. Last year was really his first full year in pro ball without the Army offseason training and comitment hanging over his head. Just keep an eye out he could be there…
I think I have the diagnosis for this thread: Post-Felix-Signing Crankiness.
I am a lawyer who works for a big 4 accounting firm, and…
Wait, I wanted to ask a baseball question. I noticed last night that Nomar Garciaparra is still looking for a job. Does anybody know if he is capable of filling in at the LF, INF position – or is he basically a 1B/DH type now?
As a CPA… and please don’t take that as me puffing my chest… I feel the issue is moot. Dave is correct that teams keep accrual books and provide accrual financial statements to MLB. He’s also correct that “Pretty much every business of decent size uses the accrual method”. However, there is a difference between keeping the books and budgeting. Its the difference between internal and external reporting. Most organizations keep a cash budget and for good reason… cash is king.
What makes the issue moot is that organizations do not budget solely on individual years, they instead budget on both single and multiple year predictions. As a result, this wipes away most of the book to cash differences.
The answer to how they are adjusting their budget to paying out Felix’s signing bonus really comes down to how much cash liquidity they have. If they are tight on cash and have no financing or investing options (which I doubt), they would budget according to 2010 payouts. My guess is that they’re not tight on cash, so they’ll budget according to a 3-5 year picture.
Very interesting points on all sides, really.
I would lean toward the accrual method being used in this instance (since everyone here is either an accountant by trade or a self-proclaimed idiot, I’ll throw my hat in the ring and say that I’ve been working in the building envelope industry for a decade now, and frankly, none of these methods make a lick of difference in your windows leak and your money gets wet), but there seems to be something critical missing from the discussion…
The window of opportunity for the Mariners to excel has arrived, and providing the people at the helm of the Good Ship Mariner aren’t also self-proclaimed idiots, we will continue to see smart moves which reflect a desire to add to the talent base while also paying attention to the overall budget and being fiscally responsible.
Isn’t this what we’ve all been dreaming of for the last half-decade or so?
Maybe also a way to keep agents from demanding ALL of the remaining dollars for their client?
I agree with this. I think the chance for exceeding anticipated performance is much higher with a promising young player than bringing in a middling free agent. Yes, it may be safer to predict what Langerhans will do than Saunders. But I thought it was telling that Z was so specific at Benaroya saying the goal was to win the World Series–not the division, or the league, but everything. To do that, someone like Moore or Saunders is going to have to break out this year rather than have the Yorvit Torrealbas of the world simply do what they do.
Nice post formerstarQB16. Do you think the M’s can expense a signing bonus in one year? I’m guessing the M’s can’t and that is the reason we see the signing bonus prorated over the life of the contract. And I think you’re spot on with your comments pertaining to a cash budget being separate from the payroll. As was Dave.
I think the accounting argument is highly relevant. As we try to imagine what moves the team could be making available money is important. It’s only irrelevant in so far as all of our conversations about hypotheticals are irrelevant because they don’t influence what actually happens.
For me the confusion is the idea of ‘budget.’ If we think the Mariners have a $100 million budget. That’s not a salary cap limitation, like in football, which is where accounting would be most important. But in the case of baseball most of us think that a $100 million budget for salaries means that ownership is prepared to write $100 million of checks to players for 2010. In that mindset then the accounting shouldn’t really matter. The player salary (accounting) is just an estimate we can use for the checks being written that year (it can be high and low, as people having pointed out with Ichiro counting more against 2010 than is actually being paid out this year).
The problem is that any limitation on payroll in 2010 isn’t an accounting limitation, it’s the owners not wanting to write any checks beyond a certain level. It’s an arbitrary decision.
So I think most people are expressing an opinion that that arbitrary decision will take into account the fact that a $3.5 million check is being written for Felix this year as his bonus. It can be accounted for however you want, but when the owners are looking at cash spent in 2010 that $3.5 million is spent this year. Logically it seems that it will lower what they are willing to pay this year. Regardless of how it is carried on the books.
The best argument against this point above seems to be that a business like this doesn’t operate year to year. It operates on a multi-year budget and larger perspective. If we think about owner expenditure on a 3-5 year scale then it makes perfect sense to spread the signing bonus over the 5 years of the contract.
I hope that made some kind of sense…
I’m smarter than you. I know more accountants than you. Whatever.
Gang, what is important here is to have an educated guess about how much money the M’s might still be willing to spend. That’s it.
Part of the reason for Dave (and others) trying to use a consistent method for this analysis is that the M’s were well-known in the past for playing fast and loose with the numbers. The M’s would use one method for some purposes and other ones for others, but never quite explain themselves. While that may be legit (due to different rules, e.g., for “rent” calculation under the lease and “luxury tax” obligations to MLB), the M’s often tried to have it “both ways” when defending themselves publicly, particularly when trying to convince their fans/season ticket-holders they were “investing” in the team and the citizenry that they were behaving responsibly given the huge public subsidy for the stadium.
zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz
Money is a big part of baseball and, for some of us, a very interesting part. If you don’t want to discuss it, fine. If you don’t want to read about it, fine. But we really don’t care how bored or disinterested you are.
Just off the cuff, since we are talking about MLB accounting. Does anyone have an insight into how teams are allowed to depreciate player contracts and how deferred money is factored in said depreciation? I have always suspected that most MLB franchises have positive cash flows (which allows for things like 3.5 mil signing bonuses). Then, play an aggressive depreciation game with their contracts to bury their balance sheets when it comes time to ask for government assistance with things like Stadiums or Bus routes.
I’m neither an accountant, a former star QB, nor an idiot (I hope), but strangely this was one of the more fun threads in a while, at least in terms of imminent numerical violence.
Spoiled by the most exciting off season in Mariner history, we are clearly going stir-crazy as two days devoid of major signings or extensions find us at our breaking point.
I wouldn’t want it any other way.
Wow! Interesting post laying out what is pretty clear to everyone following the team. Followed by probably the least-interesting discussion I’ve ever seen on USSM. I may just have to read the PI’s blog to pass the next 30 minutes until lunch. Horrible.
Looks like a rock band name.
For tax purposes, they would be required to count the signing bonus in the current year, since this is the year the bonus was paid. Using GAAP, you would be allowed to defer (pro-rate) the bonus over the life of the contract.
Depreciation doesn’t enter the equation, since depreciation only relates to the expensing of capitalized assets. Players, although we like to discuss them as if they were assets, are instead labor.
And I’m sure it is:
http://www.bandnamemaker.com/
Just for fun.
This thread has gotten way outta hand. So the Mariners signed Felix to a great contract. Accept its brilliance, don’t over-analyze it.
Seems to be about 50/50 out there whether this is (a) the most boring thread ever or (b) extremely interesting. That seems a fun thing to debate.
I vote b.
Am I alone in suspecting that Zduriencik may yet again have something completely unpredictable up his sleeve?
~$7-10M is a lot of payroll flexibility to just automatically assume we’re going to sign Fernando Tatis and Jarrod Washburn (etc.) and call it a day.
If Jack has shown a proclivity towards anything, it’s the ability to stretch a dollar far beyond our expectations by taking unusual paths, and I’m not quite ready to say he’s simply going to add a couple of wins and call it an off-season.
I could be wrong, but not if history is any indication.
I thought I remembered that there was some tax provision for the owners that did allow depreciation, or something like it, for player contracts. My impression was that this was spread over a 5-year period after purchasing the team and could be applied against profits. One effect was that it could create an incentive to sell the team once this tax benefit ran out.
I found an article related to the subject, but I don’t recall more details or know the tax provisions well enough to understand it all. In terms of normal accounting and economic theory, of course, it’s correct that it makes no sense to depreciate labor costs.
The purchase of a team is different then the operations of a team. The IRS does permit organizations to amortize intangible assets (players), but this is different then depreciation. When a businees is purchased, the price of the purchase is allocated out amongst all assets, as chosen by the buyer (within reason). MLB teams are allowed to allocate up to 50% in players as assets. While some like to argue it, this is not a big IRS conspiracy to line the pockets of the owners. If the team was not allowed to make players intangible assets, it would instead be allocated to goodwill (law took effect in 1993)… as this is the difference between purchase price and all physical/other intangible assets (no different for any business). The only benefit sports teams are allowed, is that they can amortize the amount over a shorter time period 5 years vs. 15 for goodwill.
While the deduction of intangible assets does reduce net income, they will get absolutely blasted when they sell the team… since their basis is so low. Albeit at a 15% Capital gains rate as opposed to 34% ordinary income rate.
Would a prepaid expense fall into the realm of an intangible asset?
Thank you, I very much appreciate the clarification. I guess the part where I’ve been getting confused is that this commonly gets characterized as “writing off” the assets, which is terminology I associate with depreciation, not amortization. Maybe it’s a problem with the journalism in this area.
I vote this thread was a hoot. Outside of a few well-intentioned posts, it was fairly civil. Personally, I’m fascinated at how the accounting angle works. Loved the J-Dog “I am a lawyer who works for a big 4 accounting firm, and… Wait, I wanted to ask a baseball question post and the other clever/witty posts by others that infused some mirth into payroll quandary.
As a data analyst for a fortune 507 company, I find it hard to over analyzing anything aside from A) the mind of Carl Everett or B) the brilliance of Christopher Walken.
…more numbers please
A prepaid expense is not amortized or depreciated. It is a current asset. If the organization uses cash basis, the prepaid expense must fall under the “12-month rule”, meaning the expense must be for services to be rendered within 12-months of end of year.
I guess MLB teams could use the accrual method for tax, but then they would be in a losing battle with the time value of money when it comes to player bonuses that would be spread out over the life of the contract.
But this is getting away from the point. Budget-wise, excluding tax benefits, it’s a wash.
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Exactly. Can we assume that all the teams that decide to make moves toward payroll relief have already done so? If not, there could still be some unexpected players available beyond the standard remaining free agents.
Ahhh… That makes more sense. So an intangible asset would just show up as an other asset on a financial statement ala goodwill as you have mentioned. Thanks
There is something I have been wondering and have not seen anything about it lately. If Tui comes in and rips the cover off the ball, plays an avg to above avg 3rd base, do we move Figgins to 2nd and trade away Lopez? I know the M’s have been looking at trading Lopez, but in this scenario maybe they ask for less. I know we like his bat, but Figgins would be an upgrade defensively. This would also free up some cash for either a bigger bat, or more at the trade deadline. I know with some the Washburn thing might not be real popular, but if he is cheap I would not mind seeing back as a #4 or so.
As for the acct methods, I do not care how they figure out the money, but the pockets of this team can be as deep as they need/want to be. If they settle on a $100 mill budget, but Z pulls another rabbitt, they could jump up another $5 or so mill without blinking. I know they need to make money, but you gotta spend it to make it.
FWIW, the M’s spent ~$95MM last year on player salaries/bonuses. This year it’s up to ~$91MM in commitments. The CBA-compliant payroll calculation overstates what the M’s spent last year and understates what they’re spending this year.
BTW, thank you formerstarQB16 for all the insight.
I stand corrected on one point though… MLB teams would be required to file an accrual basis tax return due to their revenue levels. However, they would still expense player bonuses as current year labor expense to take advantage of the time value of money.
Dave said:
If you’re using the pro-rated signing bonus formula, then Geoff’s got it right – Ackley gets $1.5MM/year.
I actually have Ackley’s contract at $1.6MM in 2010… See Here
I hope they spend money on a starter like Washburn or Sheets if they think he is 100%. We have some minor leaguers who will be fighting for jobs this spring so I don’t see any money spent on non-pitchers until we see what we have. Tui had a big spring last year, Saunders, Ackley, and a couple of outfielders might change the whole game plan. If Tui is ready he could backup 3rd, 2nd, and DH. If Saunders is ready then we have 4-5 outfielders plus DH backup. In summary, leave a space or two for promotion from within.
That probably won’t happen. Moving Figgins to 2b would block Ackley as, judging by what we’ve been hearing regarding him, the team has pretty much decided to switch him to 2b.
I guess it’s possible that they would switch him temporarily, but it’s doubtful.
Yeah, and his pro-rated signing bonus is actually paid this year too.
Oh, I hope it’s not a Wash. I’d rather have Liriano.
When’s the announcement for Bengie Molina?
Is there any rough outlines of the type of arm lopez would bring back other than the liriano template? Also accounting definition blah blah blah……
Shannon Drayer asked Jack Zduriencik about the budget today. To no one’s surprise, he wouldn’t say.
That seems a bit harsh.
Not letting anyone know what your budget is gives you a competitive advantage. I don’t blame Jack one bit.
Z has said he likes to see win/win scenarios with his deals. Re-signing Bedard to a one year incentive laden deal could be just that. If it works and he stays healthy the M’s have a 1-2-3 of Hernandez/Lee/Bedard for a season and Bedard gets an opportunity for a payday in 2011. That would also allow his salary to come off the books and hopefully give the M’s a chance at signing Lee to a deal next year…that’s a win/win if you ask me.
Account yourself some underpants.
So this is off-topic based on the current line of conversation, but is on-topic considering the original post.
Whatever happened to John Danks? I remember Dave mentioned a Lopez/Lowe/Vargas trade way back at the beginning of the offseason, but I’d completely forgotten about it until I was listening to Dave on B&S today.
I wouldn’t be too sanguine about the owners being willing to dig deeper if necessary. I’m sure there’s some additional flexibility (perhaps more so at the trade deadline if a pennant race and the associated excitement and attendance is in the offing), and the owners are probably feeling a little better about their other investments than they were this time last year, but the team is still expected to function as a viable business.
And from a business perspective, it’s still not what it could be. Here’s one measure: last year the M’s spent the 5th most in payroll to put butts in seats: $45.05 in payroll per spectator, on par with the Mets and more than any other team save the Yankees, Tigers, Braves, and Indians. The Phillies spent just $32.55 per spectator; the Red Sox (even with their huge payroll and tiny stadium) $39.81. The 2009 M’s were at least much better than the 2008 version which spent over $50 per spectator, the most in baseball that year (and $2 more than even the 2008 Yankees) — that’s what a bloated payroll and 100+ losses will do to you. But it’s also a far cry from years past: as recently as 2004 they were spending just $27 in payroll per spectator, 12th among all the teams and in the same range as the Royals and Twins. (Those spectacular playoff-bound 2001 and 2002 M’s teams were way down around 24th or 25th.)
Assuming last year’s improvement on the field and the excitement around the team this offseason translates into more ticket sales, and the team wins enough in the early going to sustain the interest, they should do much better in 2010. But that improvement gets eaten up quickly if they’re handing out $10M to every Tom, Ben, and Jerod they can put their hands on.
Yeah, that was the impression I got from his non-answer at the Benaroya meet-up: there’s no upside to letting everyone know how much money he has left to spend, even in the most general terms. He wants the agents to think he has almost nothing left to pay their clients; he wants the Angels and Rangers to think that he can out-bid them for anybody. And he certainly doesn’t want to be on the hook for any “official” number when the stadium authority, local/state officials, or MLB come around to calculate taxes, revenue sharing, and so on (the team has people to supply the appropriate numbers to each of those groups — and if you think the discussion here was eye-glazing….)
In an interview with Mitch Levy on KJR this morning, Jack Z just said Toronto is paying a portion of Brandon League’s salary. Makes the trade look better and there is a little more money in the budget.
At the end of the Cliff Lee press conference, Jack Zduriencik spoke on the payroll again without being prompted by the media. He basically said the same thing that was in the Shannon Drayer article.
Should be interesting to see how this plays out.
This is true, to an extent, but I think the secrecy regarding the budget goes hand in hand with the secrecy regarding how much money the team makes. And frankly, I think it’s mostly bullshit. This has very little to do with Jack Z, but I think major league baseball teams owe their fans a lot more disclosure than they currently give regarding the money they’re making. This is especially true in a case, such as Seattle, where the taxpayers funded the capital expenses of the team to the tune of $300+ million, in the form of a new stadium.
If this were a traditional “business” and we as fans were just “customers” then maybe that wouldn’t be true. But fans are more than just customers, in my view.
[this is not a board]
The Ms payroll budget for 2010 was reported on the Mariner’s Official Website on November 19, 2009 in an article by Jim Street as “this year’s projected payroll of around $96 million.†Now if they let that figure stand on their own website it either has some basis in fact or is deliberately misleading (to what advantage?) or they just don’t pay attention to the details of stories on their own website (Bavasi might have done that but Z I doubt). The article is at: [please learn to use the link button]
I’ve loved the accounting debate. (I signed up simply to be a part of it.)
I’m with Dave on this one, and I’m disappointed that the anti-Dave accountants kept using the term “budget” to talk about the amount of money they are able/willing to pay out this year. (The term “cash-flow statement” would probably have installed more credibility.)
No, they’d have a 1-2 of Hernandez/Lee for half a season and then a 1-2-3 of Hernandex/Lee/Bedard for the second half of the season. If the surgery is successful and he recovers fully, of course.
A cash flow statement has little to do with a budget.
Tom Tango also picked up our discussion and had a few thoughts of his own. I liked his ARod example about signing bonuses.