Nutting Opens the Books, But Will It Make a Difference?
As detailed by Dejan Kovacevic in the Post-Gazette, the Pirates have opened their books as a pre-emptive strike, due to the leaking of team financial records to the Associated Press. The audited reports released by the Pirates show slightly over $15M in profits in 2007, $14.4M in 2008, and $5.4M in 2009. More significantly, Kovacevic reports that, according to the Pirates, Bob Nutting has not taken any salary or management fee, and there have been no cash distributions since 2008, but there was a distribution of $20.4M in 2008.
The Pirates’ explanation points to two bases for the distribution. First, a little over half of the money went to all of the partners to offset income taxes on the team’s 2006-07 profits. The rest went to the Nutting family as repayment of interest on a loan they made to the team in 2003. According to the Pirates, the Nuttings tried to convert the Pirates’ debt to equity in the team, but the minority owners objected. After an adverse vote from which the Nuttings were required to recuse themselves, they had to take the payment in cash.
One point to make here before we go any further: Contrary to what many fans believe, or claim to believe, Bob Nutting is not free to take money out of the Pirates whenever he pleases. It’s not his money. Just in case, let me make that clearer: IT’S NOT HIS MONEY. It’s the partnership’s money. Yes, the Nuttings have partners to whom they are accountable, even though many fans and some inept Post-Gazette bloggers don’t want to believe it. They don’t own the team by themselves. Distributions of partnership funds have to be made to all the partners in proportion to their ownership shares. And this principle doesn’t just apply to distributions, it also applies to contributions. If Bob Nutting puts his own money into the team, it has to be reflected in the books in some manner. If it’s a capital contribution, it increases the percentage of his family’s ownership share unless the other partners contribute amounts proportionate to their shares.
What the figures in Kovacevic’s article show is that, since 2006 at least, the partners who own the Pirates have not taken any money out of the team. Now, keep in mind—and this is another point that many fans don’t like to hear—making profits and taking money out aren’t the same thing. “Profits” are just a line on a balance sheet. They don’t represent cash. If the money stays in the partnership, the partners have still “profited,” they just haven’t realized the profit yet. And that’s just operating profits. The primary profit from ownership of a MLB franchise comes from the appreciation in the value of the franchise, which the owners don’t realize until the team is sold. It’s vital to make the distinction between profits and cash distributions. The latter represents actual money in somebody’s pocket. The former doesn’t.
According to the figures presented to the Post-Gazette, the Pirates’ owners haven’t effectively realized any profits over the past several years because the only distributions they’ve received were intended to offset income taxes. As the article points out, partnerships don’t pay taxes on their profits. The profits are passed through to the partners, who are responsible for the taxes. As Kovacevic’s article points out, if a partnership shows a profit but makes no cash distributions, the partners are left paying taxes on the profit out of their own pockets. According to the article, the Pirates covered their owners’ taxes for 2006 and 2007, with the money going to all of the partners, not just the Nuttings. This is how distributions work. For 2008 and 2009, the partners did not receive distributions to cover the taxes they owed on account of the team’s profits. This is credible, as Kovacevic reminds us in the article that he previously reported on the minority partners’ unhappiness over the absence of cash distributions the last couple years. The bottom line is that the Nuttings have incurred the wrath of their partners in order to retain the team’s profits within the team. The partners, including the Nuttings themselves, have incurred a net short-term expenditure. This does not mean, of course, that they experienced no profit. They just haven’t realized the profit because the money is still in the team.
The explanation with regard to the loan is also entirely credible. The Pirates state that the Nuttings wanted to convert the debt to equity rather than taking cash out of the team, but the other partners objected because it would have reduced their percentage shares of the team. With the Nuttings unable for ethical reasons to vote their own shares, they were required to take the repayment in cash. Nevertheless, the cash represents a repayment. It does not represent the Nuttings taking profits out of the team.
The big question is, Will this make any difference? Will the people who’ve been screaming and wailing for the Nuttings to open the books stop screaming and wailing now that the Nuttings have opened the books? Of course not. It’ll all just be dismissed as a conspiracy. Never mind the elephant in the room: As Kovacevic notes, these are audited reports that are released annually to the players’ union. Not only does the union receive these reports, it has the right to conduct its own audits. The union has publicly stated that it is satisfied with the Pirates’ explanation of their low payroll. Why the union would acquiesce in the Pirates’ current spending level if the managing partner was looting the team of untold millions of dollars, as so many fans insist, is a mystery. Nobody has more incentive to hold the Pirates accountable than the union, but that won’t stop the conspiracy enthusiasts. To reality-based fans, however, the PG article provides a credible answer to the question of where the money is going.