The Los Angeles Dodgers Debt Situation is No Big Deal

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Bill Shakin of the Los Angeles Times reported that the Los Angeles Dodgers are hundreds of millions of dollars in debt and didn’t turn a profit in their first three full seasons under Guggenheim Baseball Management. In a vacuum, those facts should be terrifying. In the context of reality, however, they’re a minor concern.

The Los Angeles Dodgers Debt Situation Is No Big Deal

To correctly understand the situation, the amount of funds that Major League Baseball operates on and the franchise’s short-term plan must be considered.

MLB operates on a flow of cash that is on a level that most fans will never realize in their own personal finances. For an MLB franchise like the Dodgers, who have the league’s most lucrative broadcasting rights contract and led the league in both average and total attendance in 2016, hundreds of millions of dollars in debt is like a Dodgers fan who is locked into a 30-year mortgage with a bad interest rate because of a poor credit history.

If that random fan can scrimp to make the payments until her/his credit rating improves, the plan will be to re-finance at a lower rate which will afford that person a more comfortable mortgage payment. That’s essentially what the Dodgers have done, put themselves in a bind in the short-term in order to enjoy a better situation for the long haul.

MLB Debt Limit

MLB has a rule in place that limits the debt that teams can carry to 12 times annual revenue minus expenses (the last reported revenue based on Forbes’ calculation was $438 million, but without knowing the exact expense figure for the franchise, it’s hard to know exactly what that debt ceiling is). However, there is a loophole in that rule which allows franchises to be exempt within the first five years of coming under new ownership.

During that five-year window, which they will still be inside of for the 2017 season, the Dodgers have taken full advantage of their exemption. They have taken on bad contracts in order to acquire prospects, building the top farm system in the majors according to Baseball America. While the maturation of prospects into major-league talent is as unpredictable as the rest of baseball, the plan is for the meat of those prospects to be ready for the bigs when those bad contracts start coming off the books.

In addition, the new collective bargaining agreement that is currently being negotiated could raise the threshold for having to pay in to the revenue sharing pool. That “luxury tax” is figured on a percentage of the amount a team is over the threshold, so the combination of a drop in payroll when the Dodgers’ most hefty contracts come off the books and a rise in the threshold will combine to save the Dodgers significant sums of money.

Andrew Freidman

Finally, the activity that we have seen from the current front office must be considered. Shakin adeptly points out that since Andrew Friedman has taken over in LA, the Dodgers haven’t given out any contracts with a guaranteed dollar value over $48 million and much of the debt that the team currently carries was present when Guggenheim bought the team.

There’s also an out that the ownership group could use to get in compliance with MLB debt rules if push comes to shove. Guggenheim could re-finance the debt using its other assets or personal assets of the group’s membership as collateral, removing the franchise from that category.

Things look grim in considering the Dodgers’ current financial situation simply on its own merit. The franchise is paying tens of millions of dollars to players who play for other teams, carrying hundreds of millions of dollars in debt and failing to show a profit despite leading the league in ticket sales and getting a huge TV payment.

When the bigger picture is considered, with the Dodgers’ assets and their solid plan to quickly turn that situation around taken into account, it’s all clear how the cost could easily be worth the reward.

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