The Dodgers find themselves in the middle of a debt crisis but it wont effect the team in 2017
News broke Saturday that the Dodgers will be forced to exercise a healthy dose of fiscal restraint in coming seasons in order to comply with Major League Baseball’s debt servicing rule. The rule prohibits teams from operating with debt greater than 12 times their annual revenue in order to ensure that teams are able to meet their financial obligations.
With current ownership, the Guggenheim Group, inheriting some $412 million dollars in debt from the previous Frank McCourt ownership and the franchise failing to run a profit in the last 4 seasons the Dodgers are now at risk of violating this clause. As such, Andrew Friedman and his front office will now potentially be forced to cut spending during an off-season in which key figures Justin Turner, Kenley Jansen and Rich Hill are testing the waters in free agency.
If the Dodgers were found to be in violation of MLB’s debt service rule, Commissioner Rob Manfred has up to 16 options for intervention including suspension of ownership, requiring approval of expenses and ordering the team to raise equity.
For his part, Manfred has stated that he does not believe the Dodgers are at serious risk of such a violation and that the franchise is well positioned to remain competitive while navigating the long standing debt problem.
So how did we get here?
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The good news for the Dodgers franchise and its fans is that the team is in such a position largely by design. Offered a five year grace period under a previous CBA to address the teams large debt problem the Guggenheim ownership articulated a clear plan to return the team to contention while regaining control of the teams finances.
As president Stan Kasten discussed on numerous occasions, under the new ownership, the Dodgers would spend heavily in order to return to contention and rebuild the farm system before setting payroll back to sustainable levels.
"“We had to try to be good right away while building for the future”"
The difference is this plan was simply never discussed with the public in the context of absolving the Dodgers debt problem. In reality, this course of action was the only viable option for the franchise.
A return to contention was paramount for the franchise – not just to settle the fan base but also to tackle the teams debt crisis and the logic is simple – you can’t cut debt if you’re not making money and as we know losing teams don’t often make money. With a barren farm system and a Major League team with a shortage of talent, the Guggenheim group was forced to utilize its spending power in order to make the team competitive.
And spend they did. The Adrian Gonzalez blockbuster in 2012 was just the start, eating the massive contracts of Gonzalez, Josh Beckett and Carl Crawford in order to reinvigorate a tired roster. Then there was the $300 million payrolls and the excessive spending in Latin America. In all the Dodgers have accrued $1.81 billion in outlays since the Guggenheim group took over five years ago.
The Dodgers were heavily criticized for their activity on the international market but the spending in Latin America is one of the most important cogs in the operation. In order, to get the payroll back under control the Dodgers had to inject talent into the empty farm system. However, with just 5 years to accrue talent, relying on the draft would have been too slow and risky an enterprise.
Instead, the Dodgers flexed their financial muscle and jump started the rebuilding process thrusting Yasiel Puig, Julio Urias, Yadier Alvarez and Yusiel Diaz into the system while Kenta Maeda and Hyun-Jin Ryu made immediate contributions to the major league roster. This combination of international spending and consistently strong drafts allowed the franchise to build the best minor league system in baseball while winning the NL West in 4 consecutive seasons.
With one of the best cores in baseball and a farm system loaded with talent the Dodgers are now in a position where they can finally begin to pay down the debt. With top prospects, Cody Bellinger, Alex Verdugo and Walker Buehler set to replace the expensive contracts of players like Gonzalez and Andre Ethier in coming seasons, the Dodgers will comfortably shed payroll while simultaneously upgrading the major league roster.
So where do we go from here?
The first thing to note is that the Dodgers have approximately $100m in annual commitments coming off the books after the 2018 season with the contracts of Gonzalez, Ethier and Carl Crawford set to expire.
The other important point is that the Dodgers are still unlikely to face any serious payroll constraints in 2017. As Grant Brisbee of McCovey Chronicles explains:
"This is because the Dodgers’ current roster will cost them $150 million as is. Add in some arbitration increases to Yasmani Grandal and a couple relievers, and they might be up to $170 million or so. That gives them anywhere from $60 million to $90 million to spend, give or take."
$60 million dollars is a lot of money. Not just to people like you and me but also for teams looking to make a splash in free agency, that kind of money could certainly make an impact. That could potentially bring back all three of Jansen, Turner and Rich Hill depending on their respective markets.
But that doesn’t mean that the Dodgers shouldn’t be actively trying to cut payroll and increase financial flexibility where possible – they should. Allocating resources efficiently is paramount to any organisation and to do this I’ll bring up this story from Joel Sherman:
The Dodgers currently have $37m tied up in starters Scott Kazmir, Brandon McCarthy and Hyun Jin Ryu for 2017 and $74m through 2018. Shedding any yet alone all of those contracts would provide the Dodgers with plenty of financial flexibility moving forward, allowing them to address other areas of need.
With the rotation currently consisting of Clayton Kershaw, Maeda, Urias, and some combination of Alex Wood, Jose de Leon, Brock Stewart and Ross Stripling the Dodgers can easily cover the production (or in many cases lack of) lost by the departures of the expensive veterans.
Reallocating the funds tied up in the starting rotation will allow the franchise to continue to upgrade one of the best cores in baseball. With plenty of young talent already in the majors and notable prospects not far away, the Dodgers are in a position that will allow them to remain one of baseballs superpowers and yes that’s even with hundreds of millions of dollars of debt.
The current ownership and front office did not create this problem – they inherited it. Getting further into debt was stage one in a plan to make the Dodgers the best franchise in baseball.