The Dodgers are engaged in an ongoing process with Major League Baseball regarding the team’s compliance with the league’s debt-service rule, according to reports from Bill Shaikin of the Los Angeles Times and ESPN.com’s Doug Padilla. The organization is said to be carrying hundreds of millions in debt as it nears the conclusion of a five-year waiver from those debt requirements, which went into effect when the current ownership group purchased the club.
Baseball teams are subject to a rule that “limits debt to no more than 12 times annual revenue, minus expenses,” writes Shaikin. In the case of the Dodgers, the large amount of debt is offset by a massive television rights agreement – reportedly worth $8.35B over 25 years – along with the ticket sales from league-best attendance (among other sources of revenue). Of course, the club has also committed more in payroll ($1.181B, including $112MM in luxury-tax payments) since the sale than any other organization.
While the Los Angeles Times report suggests that there is a league mandate for the Dodgers to reduce their debt ratio, that’s not the team’s interpretation. “There is no mandate,” president/CEO Stan Kasten tells Padilla. “There is no problem with our debt and we continue to work on the same program we have been working on from the day we walked in here in 2012.”
More broadly, Kasten emphasized, “business for the Dodgers is very strong and very healthy.” While the team has focused more on obtaining and developing young talent than on continuing to take on huge salary commitments, top organizational figures say that’s all part of the original plan rather than a reflection of some mounting debt problem.
From the league’s perspective, it seems, Los Angeles remains on track to comply with all applicable standards. Teams in violation of the debt-service rule can be subject to discipline, with a variety of measures at the disposal of commissioner Rob Manfred, which can even include the requirement of approval of expenditures or suspensions to ownership and/or team executives. But Manfred suggests that he does not see any likelihood of formal action being taken by the league – or even any significant change in operating philosophy.
“I think the Dodgers will be in a position that they can comply with our expectations in terms of the debt service rule, without any dramatic alteration in the kind of product they have been putting on the field,” he told Shaikin. Manfred added that “the Dodgers have always had a plan that would give them financial stability over the long haul.”
The commissioner also made clear that the organization would not be forced to trim payroll to ease its debt burden, as Padilla reports. Under the league rule on debt servicing, he said, “non-compliant clubs are asked to submit a plan demonstrating a path to compliance,” explaining that “clubs are evaluated on an ongoing basis relative to that plan.” Manfred further emphasized that “there are various ways to achieve compliance and there is no mandate to cut payroll.”
All told, it does not appear as if there is any particular reason to believe that the Dodgers’ immediate offseason decisions will be impacted by the debt issue – at least, that is, beyond the prior planning that has already been undertaken. But it remains to be seen just how much the organization will be willing to spend this winter with several holes to fill and notable free agents including closer Kenley Jansen, third baseman Justin Turner, lefty Rich Hill, and second baseman Chase Utley.
Los Angeles does have a rather substantial slate of current payroll commitments, including several to players who are no longer on the 40-man roster. The team concluded 2016 with a payroll in the $258MM neighborhood and already has upward of $193MM in commitments for next year, Jason Martinez of MLBTR and Roster Resource estimates. They’re on track to exceed the luxury-tax threshold again in 2017, then, even though it could increase from $189MM in the current CBA to around $200MM in the next agreement. There’s also already over $130MM committed to 2018 payroll, though the standing obligations draw down rather rapidly from that point forward.
Despite their debt situation, the Dodgers have made many sizable commitments on the international market and have not been dissuaded from some notable, mid-range free agent signings. We’ll soon learn how much appetite the organization has for similar, or even larger, agreements in advance of the 2017 season. The Dodgers are reportedly interested in pursuing reunions with all of their free agents, and have also been tied to prominent open-market players such as closer Aroldis Chapman. The trade market may provide an alternative; Los Angeles has recently expressed interest in reasonably priced standouts like J.D. Martinez, Ian Kinsler, Brian Dozier and Logan Forsythe — all of whom are under contract for two or fewer years — though acquiring any of them would presumably weaken their farm system.
A prior version of this post mistakenly suggested that the Dodgers would be forced to cut payroll in order to comply with MLB’s debt-service rule.