Divulging finances, Pirates clarify report
Club explains origin of payments made to shareholders
PITTSBURGH -- Anticipating a developing wire-service article about the Pirates' finances, majority owner Bob Nutting and president Frank Coonelly made the unprecedented move of divulging the club's financial books to a group of reporters on Sunday.
The figures, which included a $5,409,087 profit for 2009, dispute the perception that anyone in the ownership team has been earning a profit on the club since Nutting took over as the majority owner in January 2007.
Although the club operated at a profit in 2007, '08 and '09, the figures showed that no dividends were paid to partners in the ownership group over those years and the majority of that profit went into capital expenditures, such as the recently opened Dominican Academy, improvements to the Spring Training facility in Bradenton, Fla., and the purchase of the Class A Advanced Bradenton Marauders to expand the Minor League system.
Expecting that the forthcoming Associated Press story would include an audited financial statement for the club's 2007 and '08 finances, the Pirates provided net income figures from 2007, '08 and '09, as well as the organization's capital expenditures from the same period, in a 90-minute session with four media outlets, including MLB.com.
Of particular concern to the Pirates was a $20.4 million payment distributed to partners in 2008. This, Coonelly and Nutting said, was what they feared would be misrepresented in the anticipated AP story.
"I wanted to make sure that we opened up a dialogue before that blows up, because I don't have a clear sense of what the storylines may be," said Nutting, who has received no salary and no management fee since taking over as the Chairman of the Board. "But I am sure that any number of numbers can be pulled out of context and blown up and greatly misrepresent the financial picture of the club. I think that would be a disservice to the club."
The organization is run as a limited partnership, meaning that there are a number of investors who own a percentage of the Pirates. Though the 2008 payment appears as one lump sum, it was used to cover four entities over a three-year period. A total of $10.839 million was distributed to shareholders to cover their tax liabilities associated with owning part of the club.
Though none of these shareholders has received any personal payments since Nutting assumed control of the club, each is still responsible for paying income tax on the team's income. In other words, if a shareholder owns a five-percent stake in the Pirates, he or she would have to pay an income tax on five percent of the team's total income for that fiscal year.
That $10.839 million was part of two payments made to cover these income taxes. Of it, $7.178 million covered income tax accrued in 2006 (before Nutting moved into his role as majority owner), and $3.661 million covered income tax from 2007. The Pirates have typically forced their shareholders to cover their own personal income taxes, but an affirmative vote by the Board of Directors resulted in this payout to help cover part of each shareholder's 2006 and '07 tax liabilities. No payments were made in '08 or '09 to help offset the shareholders' income tax responsibilities.
The rest of that $20.443 million distribution figure comes from the $9.604 million paid out to cover interest on a loan provided by the Nutting family in 2003, when the organization was in a dire financial state under former controlling owner Kevin McClatchy.
"The total of $20.4 million in distributions made in the 2008 fiscal year looks significant simply because, as a result of the timing of Board votes, two separate interest payments and two separate tax payments associated with three different years were all made in one fiscal year," Coonelly said. "Had the four distributions been made over the three years to which they related, there likely would have been little interest in these standard and appropriate distributions."
The $5.4 million profit the organization earned in 2009 was a sharp decline from the profit in '07 ($15,008,032) and '08 ($14,408,249). The significant decrease was largely a result of more money going to the budgets for the First-Year Player Draft, international signings, player development and the scouting department.
Also detailed in the financial statement was the money the organization has spent in capital expenditures over the past three years. Those totals are $4,415,258 for 2007, $8,051,841 for '08 and $7,322,713 for '09. That money from '09 included the purchase of the Bradenton affiliate, as well as adding a fifth field at Pirate City in Bradenton. In 2008, the majority of the capital expenditure cost was on the club's Latin American facility in the Dominican Republic.
Though these capital expenditures are paid over an extended period of time, Coonelly emphasized that it was important that the Pirates maintain some sort of profit so that when payments are necessary, the club is not taking on more debt.
"We need to be able to generate positive net income in order to meet long-term obligations and to make long-term investments to the club," Coonelly said. "If you budget to simply break even, or even budget to lose money and things get a little bit worse, then you're in trouble. The only other way to pay for it is to add additional other debt, and we don't want to be in position to be over-leveraged from a financial standpoint."
As for the Pirates' current debt, Coonelly described it -- without divulging a specific figure -- as manageable.
"We are comfortable," Coonelly said, "and most importantly, our banks are very comfortable."
Connelly also reaffirmed that though the club's profit decreased from 2008 to '09, that will not prevent the Pirates from being able to increase their Major League payroll in 2011.
For the past three years, Nutting has taken significant heat from a portion of a fan base that believes the Pirates' Major League payroll is the result of the Nutting family preferring to collect profit over reinvesting money into the team. Not only do the numbers presented on Sunday refute that, but Nutting closed discussions by reiterating his faith in the direction of this franchise.
"I really believe that we are doing the right things for the club," Nutting said. "I know we're acting honorably. I know we're acting in the best interest of the Pittsburgh Pirates baseball club. I know we're making good decisions that are going to help us create a winning organization.
"I really believe that what we're going through is worth it," Nutting continued. "If we didn't, there would be no reason to put up with the agony of the on-field performance this year or the public lashing that comes through. We're going to stick to the course because it's the only opportunity that the Pirates have to rebuild a 123-year franchise into something we can be proud of."
Jenifer Langosch is a reporter for MLB.com. This story was not subject to the approval of Major League Baseball or its clubs.