Economics of Minor League Baseball

[PowerBoater69]

On the main board we were having a typical Lerner's are Cheap argument when the discussion turned to the cost of running a farm system.  Having no knowledge of the subject I put forth that I don't believe that major league owners would spend much more than a few millon on minor league payroll.  Others suggested that the number was close to $20 million when travel costs and other expenses are factored in.  Which I find hard to believe because for that much money I'd suspect that owners would be tempted to drop their minor league teams and use the savings on increasing their big league payroll.  Plus the top paid guys in the minors are usually counted in the 40 man roster payroll for the big league club, so they should not be double counted as farm system payroll.

I Googled "Minor league baseball economics" and mostly found articles about the economics for the host cities and towns.

So my questions for NFA_Brian or anyone else with the info are:

• What are the minimum and average salaries for players at each level of minor league ball?
• What are the roster sizes and do teams generally operate with a full roster.  (It was suggested that they are allowed to carry 40 players but that seems inefficient since many of the guys wouldn't see much playing time.)
• How do the owners of the minor league and major league clubs split the revenues?  Gate?  Signage?  Concessions?  (It was also suggested that the major league team gets the money from t-shirt and hat sales because they own the logos, but the minor league club must see a cut of the profits otherwise why bother to push sales?)
• What expenses are covered by the minor league and major league clubs?  Hotel and travel?  Balls and equipment?  Coaches?  Ballpark lease?  Ballpark utilities?
• Do the minor league owners pay a flat fee to the major league club?  (I assume that every deal is unique as negotiated between the two parties.)
• Since the minor league owners generally make a profit (or they wouldn't be in business) is it a poor assumption that the major league owners don't make any money from the farm?

Lots of questions, thanks for any answers or useful links.

[houston-nat]

I'm currently reading a book called Odd Man Out by Matt McCarthy, ex-pitcher for the Provo Angels (rookie league team for Anaheim). In his season with the club, back in 2002, his salary was $600 a month, from which $30 was deducted to cover the laundry detergent needed to wash his uniform. There were also fines assessed for missed workouts, paid to the conditioning coach, who pocketed them. McCarthy's conditioning coach saved up the fines and spent them on strip clubs in Canada. On the other hand, the head coach of the team, Tom Kotchman (father of Casey), paid out of his own pocket for the starting pitcher of a road opener to fly to the destination city so that he could get some sleep before the start, rather than spending all night on the team bus. Tom Kotchman still manages the team, although they've moved and are now called the Orem Owlz.

At least in 2002, the minimum signing bonus was $1,000. McCarthy got that after being drafted in the 26th round; so did his best friend in college, Craig Breslow, now a top-notch major league reliever.

Back in '02 rookie ball rosters had 30 guys but now I think it is 40.

Players paid for their own lodging while living in the home city. In McCarthy's case, the Marriott hotel cut a deal with the team to charge only $40 a night for rooms, but even so, that's double a player's salary right there. McCarthy lucked out: a host family took him in for free.

[PANatsFan]

http://www.jstor.org/stable/2487998

[PowerBoater69]

I'm currently reading a book called Odd Man Out by Matt McCarthy,...

Cool stories.  That's about what I expected for that level of baseball.  Lot's of fun but no money.

[PowerBoater69]

http://www.jstor.org/stable/2487998

Thanks for the link but I'm more curious about the economics from the standpoint of the parent club than from the host city.

[tomterp]

Thanks for the link but I'm more curious about the economics from the standpoint of the parent club than from the host city.

Well let's start with the Forbes article, from which I've derived a high level P&L.

After an Operating profit (EBITDA) of $43m, I would estimate interest expense of $13m based on  5% rate on Forbes' debt estimate, but that does not account for any principal payments required. 

[PatsNats28]

I assume those are all in thousands?

[tomterp]

I assume those are all in thousands?

Read carefully, starting at the top....

[PatsNats28]

haha nvm

60 million on minor league players is a lot

EDIT: that's the major league payroll. i fail.

[PowerBoater69]

After an Operating profit (EBITDA) of $43m, I would estimate interest expense of $13m based on  5% rate on Forbes' debt estimate, but that does not account for any principal payments required. 

Principal payments translate to equity in the team so that is still considered profit.  If the entire operating profit is going toward paying off the debt, Lerner will own the team outright after a decade and a half of ownership.  That's an incredible building of wealth with relatively little personal investment or risk.  (I thought Forbes had included taxes in the $43 million.  So the net would be a good bit less.)

I'd like to see the itemized estimates for the other operating costs.  Of course Forbes does not have access to the Nats books, so they are guessing based on knowledge of the industry.  Kasten of course claims that the numbers are way off.

[JCA-CrystalCity]

Well let's start with the Forbes article, from which I've derived a high level P&L.

After an Operating profit (EBITDA) of $43m, I would estimate interest expense of $13m based on  5% rate on Forbes' debt estimate, but that does not account for any principal payments required. 

Glad I gave up accounting . . .  The gray box - you estimate other operating costs at $66m. Is that a plug number, the remainder of public estimates on revenue, operating profit, and payroll?

[blue911]

Glad I gave up accounting . . .  The gray box - you estimate other operating costs at $66m. Is that a plug number, the remainder of public estimates on revenue, operating profit, and payroll?

I gave up accounting when I found out it didn't have anything to do with Quarters

[tomterp]

Glad I gave up accounting . . .  The gray box - you estimate other operating costs at $66m. Is that a plug number, the remainder of public estimates on revenue, operating profit, and payroll?

It's derived from what is known per Forbes - Revenue of $184m, Player costs of $75m, and EBITDA of $43m,, which leaves $66m for other expense categories.  I tried to just list items I thought of, I'm sure somebody else could think of other items.

[HalfSmokes]

It's derived from what is known per Forbes - Revenue of $184m, Player costs of $75m, and EBITDA of $43m,, which leaves $66m for other expense categories.  I tried to just list items I thought of, I'm sure somebody else could think of other items.

Is payroll tax part of add'l bebefits/payroll? That is probably the bulk of 'other' if not. Also, I don't know if the Nats bothered insuring any of their contracts against dl long term dl stents, but those can cost a fortune- up to 10% of annual contract value
http://www.sportsbusinessdaily.com/article/120793

[tomterp]

Is payroll tax part of add'l bebefits/payroll?

Yes.

[JCA-CrystalCity]

do we pay a "payroll" tax when we are below MLB average on payroll?  Is it a revenue tax?

[tomterp]

do we pay a "payroll" tax when we are below MLB average on payroll?  Is it a revenue tax?

Social security employer match is a payroll tax.  All employers pay these.

[PANatsFan]

Social security employer match is a payroll tax.  All employers pay these.

at your restraint on smartass smileys.

[JCA-CrystalCity]

Social security employer match is a payroll tax.  All employers pay these.

If that is what you meant by payroll tax, fine.  I thought you meant one of the MLB competiveness taxes.  and if you do mean SS taxes, most of the pay roll would not be subject to it because even the minimum MLB salary guys go over the max salary threshold for SS taxes sometime in May.

[NatsAddict]

The 6.2% social security tax ends at $106,800, meaning that about 3/4 of the payroll to a player making the major league minimum is exempt from the tax.  The tax on A-Rod and the typical Marlins player is the same at $6,622.  Payroll taxes make up a small portion of the "other," even for the Marlins.  Most is minor league payroll and signing bonuses.

(FWIW - in addition to being one of my pet peeves, this is one of the taxes that causes our overall tax system to be regressive.  Most people pay 6.2% of their salary to social security; A-Rod pays 2/100ths of 1% of his salary.)

[JMUalumni]

Very good article over at Baseball America on minor league salaries, written by Garrett Broshuis, a former minor league pitcher for the San Francisco Giants:

http://www.baseballamerica.com/today/minors/season-preview/2010/269689.html