A look into the Padres finances has opened a rat’s nest of questions

Over the weekend, Kevin Acee of the San Diego Union-Tribune published an article that has ignited the Padres social media communities. Immediately forced into defending his work, Acee has published a follow-up article and yesterday made an appearance on Darren Smith’s radio show on 1090 AM. It appears that the U-T approached the Padres (or vice versa) with the idea of getting a glimpse into their financial records in the hopes of explaining the team’s spending methods - or relative lack thereof. It hasn’t been received well. There have been several blog and podcast reactions to the article and while this writer is not familiar with the machinations of operating a billion-dollar business, some fantastic points have been made that deserve to be addressed. First, here’s the article that started this all off.

Before I proceed, I’d like to interject my opinion about Kevin Acee and this article. Kevin is a beat writer, he’s not employed by the U-T to be an investigative journalist. Whether this was his idea or the team’s, he needs to harbor a relationship with the team and the people who influence the team’s opinion of him which could limit his access. Many people accuse him of being a “shill” for the team, and for the most part he writes very favorably for them. In this article I believe he was attempting to straddle the line between a “beat writer” and an investigative journalist when presenting this data, and I think he did a pretty damn good job. He laid the facts out for us, the readers, to judge, and he accompanied those facts with quotes and prose that most certainly attempted to cast this information in a favorable light to suit the motives of those who gave him this valuable information. As he said on the radio yesterday, he’s not a financial expert, so to expect him to be given access to a set of data, be able to digest it, and start asking pointed questions is a reach. There’s probably a good reason that the team decided to let Acee review this information. When he was on the radio yesterday, Darren Smith was asking some direct, hard-hitting questions that really need to be focused on the ownership group, and Acee had to try to deflect and defend the organization when he only knows what the team shared with him. I’m not a fan of how Acee interacts with his critics on platforms like Twitter, where while he’s trying to defend his article and ensure that people are reading it properly, all too often he comes across as a condescending jerk while going too far to defend the team’s position. Again, I respect the guy and appreciate what he’s trying to do here, but the reception by the public has been disastrous and his attempts at damage control didn’t really limit any damage.

This story has already opened a can of worms with the “free media” of blogs and podcasts, and the team will need to respond in a major way to clear up what looks like yet another PR miscue. Now, back to the topic at hand.

The impetus for broaching this topic may date back to an article published on January 3rd on Gwynntelligence.com by Padres Jagoff, who you might know on twitter as @HJPreller. In his piece, he pulled data from every resource he could find to support a hypothesis that the team is not actively spending to put a product on the field that is truly competitive. In his piece, he shows that even after accounting for the “all-in” push of 2015 and the international bonus bonanza of 2016-2017, the team has stayed comfortably in the bottom third in spending among all MLB teams throughout the current ownership’s reign. It’s a well-written piece that lays the data out fairly clearly and while there’s a clear bias, the numbers speak for themselves. At no point during the Fowler/Seidler/O’Malley/etc. ownership group era has this organization truly spent to field a quality team.

At this time it is prudent to remind everyone of the “3 Commitments of Ownership” that the ownership group pledged to the public shortly after they acquired the team in 2013. The first bullet is the key point relevant to this topic:

To field a team worthy of the fans support with the goal of competing for a World Series Championship each season.

This pledge has simply not been met. The closest that this organization has come was in the winter before the 2015 season when the organization flushed out the farm system and flipped the major league roster by acquiring guys like Matt Kemp, Wil Myers, Justin Upton, James Shields, Derek Norris, Will Middlebrooks, Craig Kimbrel, Melvin Upton Jr., and a bunch of other new faces. While the fans were excited to see a bunch of “names” in Padres uniforms and it appeared that the team was finally making an aggressive push to be competitive, it turned out to be a bad mix of skill sets and personalities, and the team had to blow it up again to start a rebuild. As a fan, I can understand why a team might need a year or two to lick its wounds and recover. But as we enter the 2019 season, it feels like the can keeps getting kicked down the road as the targeted “window of contention” seems to move farther out each year.

I’m a faithful fan. I’m a die-hard, and as you know if you read my articles, I follow the minor league system with enthusiasm. I am bought-in on the talent that AJ Preller and his staff have gathered and have confidence in the player development staff working to turn them into Major League ballplayers. I believe in “the process” and am excited to see the players we’ve been waiting and hoping for become a part of the next contending Padres team. I also know that any successful franchise needs veteran leadership that often comes with a hefty price tag, and for the most part the Padres have opted to acquire low-cost stopgaps. This would all be understandable if the organization had not committed to “To field a team worthy of the fans support with the goal of competing for a World Series Championship each season.” As Jagoff so plainly laid out, the team hasn’t spent to field a team commensurate with that commitment, and the rosters of home-grown talent supplemented by stopgaps hasn’t come anywhere close to producing performance that would satisfy the stated goal either.

Sowing seeds and tending crops on the farm isn’t the big money-making portion of operating an MLB baseball organization. There is ballpark revenue, corporate sponsorship, TV deals, profit-sharing, and a whole stack of revenue streams that happen behind closed doors. Baseball is a private business, and the Padres are a private company. They don’t need to show anyone their finances, but the consistent public outcry this offseason must have compelled them to justify this disclosure.

Fans have been crying for the team to make a run at the free agent market this offseason, and for good reason. The team has gaping holes on the left side of the infield, meanwhile there’s an elite talent available in Manny Machado whose market seems to be falling, the team didn’t seem to have any interest in Josh Donaldson, and it’s only been remotely connected to Mike Moustakas. Last fall, Fowler was outspoken in stating that the team would not get into a bidding war for a premium free agent at this time. The starting rotation looks like it’s going to be another year of rookies and projects, meanwhile Nathan Eovaldi, Patrick Corbin, Yusei Kikuchi, Lance Lynn, and others have signed. Regardless of the relative fit, the lack of activity (and don’t tell me that Garrett Richards and Ian Kinsler move the needle) combined with well over a decade of non-competitive baseball have made fans restless.

This is where someone will typically bring up the counterpoint of the Wil Myers extension and Eric Hosmer free agent signings. While those are big-ticket contracts that should figure to bump the payroll up significantly in the future, they are by no means hampering the team when looking at other MLB payrolls. This year’s roster sits at roughly $80M plus whatever additions happen between now and Opening Day, (including $23.5M in dead money going to players no longer in the organization) and that would have been 27th or so on last year’s scale. The current commitments plus arbitration projections have the Padres estimated to have a payroll around $128M in 2022, which seems like a lot for a fanbase used to eight-digit payrolls, but the MLB team average in 2018 was nearly $140M and salaries have been inflating at a significant rate. There are a lot of moving parts between now and then, but it’s pretty easy to see where the team can easily add $30M in salary while still staying below league average even when the current players have max financial impact. According to Jagoff’s analysis linked above, the team has been somewhere betwen $50-60M below average across the five years of this ownership group. It’s become increasingly clear that this organization hasn’t been spending on the on-field product, and there hasn’t been any recent indications that the team intends to begin doing so any time soon.

So the team decided to give their beat writer a peek into the books. As David Marver pointed out in his first Gwynntelligence podcast on the topic, the team could not have given Acee full access to the entire accounting record of the team. He was likely shown a sampling of numbers that told a large part of the story overall and specifically fit the narrative that the team wants the public to buy. The story that these numbers told stated that the ownership group took on substantial debt related to the construction of the ballpark and related facilities when they purchased the franchise, and that paying down those loans have tied the team’s hands until a recent cash call that paid off the balance of the debt. To a financial kindergartener like myself, the story seems to make sense and the reader might even feel sympathetic for the burden that they took on and happy for them that they are finally coming out from underneath it. It paints a happy picture of a team finally getting ready to deliver on their promise that they made five years ago.

But when you really look at it and consider the landscape of Major League Baseball, that story’s not so pretty.

According to the accounting presented in the article, the team has spent “88 percent of the money they have taken in operating the team and ballpark — including local revenues (tickets, concessions, sponsorships, etc.) and revenue paid by MLB (national television, licensing, etc.) — while 4 percent has gone toward debt reduction and 5 percent toward interest payments. The other 3 percent has gone toward capital improvements at Petco Park.” Note that there is no profit margin mentioned and the nebulous term of “operating the team and ballpark” is left to the reader’s imagination to break down other than some very vague categorizations. Furthermore, Acee states that “...only $35 million in capital calls from ownership and $68 million in payments from MLB’s sale of its technology arm, BAMTech, has kept the team at break even on a cash basis.” If the organization is really spending every penny they are taking in and only 9% is going toward paying down debt, and they can only afford to field the 24th highest payroll in the league across the last five years including all draft and international bonus spending, then the team is horribly underfunded - and that’s after $100M in extra funding was pumped into the organization from “cash calls” and the sale of BAMtech. There is no way to shuffle those stacks around and find a way to pump the team’s MLB payroll up anywhere close to league average. That’s a major problem for a team that will need to make key additions to fortify a home-grown roster and deliver on their promise to “To field a team worthy of the fans support with the goal of competing for a World Series Championship each season,” let alone in any single season. If anything it sounds like someone who got themselves over their head in debt and needed someone to come bail them out!

Please explain to me how this article is supposed to give me confidence in this ownership group and their ability to deliver on their promise.

Oh, and by the way, how does this financial situation explain the Eric Hosmer signing? I’m not going to dissect whether he’s going to be “worth” the $144M that the team is currently on the hook for, but if the books were really that bad and the strings are that tight, why sign an expensive first baseman to the franchise’s biggest contract ever when it was clear that the team wasn’t on the cusp of breaking through? Conspiracy theories have suggested that the team’s acquisition of the Chase Headley contract and then the Hosmer signing were made in part to demonstrate to MLB that the team was putting forth an effort to field a competitive roster and therefore avoid a grievance or a lawsuit from the MLB Players Association like they did against the A’s, Pirates, Marlins, and Rays, but I digress. I’ll take the tin foil hat off and get back on topic.

A large part of the article is devoted to discussing the expense of maintaining and improving the ballpark. While the new video boards, LED lights, solar installation, upgrades to luxury suites and the Omni Club are significant and worthwhile costs, they should all have been expected expenditures, as should any costs to renovate and maintain the park. From the article: “They grossly underestimated how much it was going to cost to maintain this park at the time (it was built),” said [Ronda] Sedillo, who joined the Padres in January 2013. “Our goal when we took over,” Fowler said, “was over the next 10 years to get the ballpark looking like it was five years old and keep it there.” The maintenance and improvements to the ballpark and responsibility for those costs were written into the laws that were passed to approve its construction in the first place. When this ownership group entered the picture, the ballpark was well over a decade old, so they had all the information they needed to understand what costs they were taking on to sustain the space and maintain it as the team’s home. They have done a great job, it’s one of the best ballparks in the nation and the re-coating of the steel structures that are being done this offseason will make it look fresh again this year. But to point at maintenance and ballpark upgrades as an unexpected burden is either a case of awful estimation and budgeting or it’s a distraction tactic to sink funds that should have been set aside for that purpose anyway.

Another writer for Gwynntelligence known as “@TheChamner” wrote a lengthy article debating some of the fundamental positions presented in the article. A simpleton like myself can understand “money in, money out” like balancing a checking account, but when an organization is purchased for roughly $600M (including taking on debt, which should be discounted against the purchase price) is worth something like $1.2 BILLION five years later, there are many other forces at play. His main assertion is that, when the Office of the MLB Commissioner approved this ownership group’s purchase of the team and declared them to be “very well capitalized”, they should have had deep enough pockets to essentially pay the debt off right away or in short order. To claim that this inherited debt has essentially hog-tied ownership and prevented them from delivering on their promise to their customers for five straight years is disingenuous to say the least, and this article only makes that look worse when the impact of that debt is reported to add up to 9% of total spending. The way TheChamner presents it, this ownership isn’t running this franchise as a sports team with the intent to bring a championship to a loyal and hungry fan base, they’re running it like a financial institution that acquired an asset and is trying to maximize its gains for its shareholders.

Now I’ll circle back to the 2015 season and the aftermath from its collapse. If you don’t already subscribe to @SacBuntDustin’s “Sacrifice Bunt Newsletter”, I highly recommend signing up. He’ll hit your inbox with a daily article that contains so much quality analysis that he got hired by TheAthletic, which is also worth paying for, but I digress. Yesterday’s edition was dedicated to taking issue with a key quote from the article, where Acee noted, “The Padres bumped up payroll by $40 million in 2015 and realized just a $15 million increase in ticket and concessions/merchandise revenue for that year. “It really convicted me,” Fowler said. “I didn’t need much change in my belief, but it convinced me that the business model didn’t work. We had a blip in terms of revenue … (and) we dug a big hole for ourselves.” Dustin pointed out that while Petco Park saw a record increase in attendance, the team fell below .500 on June 6th, manager Bud Black was fired barely a week later, and it was clear at that point that the experiment was an abject failure. The team was stripped down the following offseason, so whatever goodwill the team made in fielding some big names disappeared very quickly. Again, it’s disingenuous to blame a lackluster increase in revenue on one season when the air was out of the balloon barely a third of the way into that season. Dustin’s point is that, if the 2015 effort had turned out to be anything but a complete failure, the financial benefits would have been completely different.

Like I said before, I consider myself a die-hard Padres fan. I signed up to be a season ticket holder last year for the first time in my life and I’m not walking away now. I believe in the process and the players that are on the way up and I’m keeping the faith that there is more to the story that isn’t being told through the cooked books that were presented to Kevin Acee in his article. The Padres are a billion-dollar organization that’s a part of a larger organization that is pulling profits in hand-over-fist. Manny Machado and Bryce Harper are about to sign record-setting contracts and revenues are higher than ever before. I find it hard to believe that the Padres ownership group are squeezing every drop of revenue to field one of the lowest payrolls in the sport. Everyone in the industry is stuffing their pockets right now (except minor leaguers, but that’s a topic for another day) so the Padres should be getting their slice too. My hope is that this article was an ill-fated attempt to explain another offseason of lackluster activity while the “window of contention” gets pushed farther out. Whatever the intent was, the initial response on social media has people calling for boycotts, so the team will need to react in a big way to win a very “vocal minority” back onto their side.