Wednesday, July 18, 2012

New owners and how it affects payroll

With the recent news regarding the sale of the San Diego Padres to the O'Malley group, reportedly scheduled for an approval vote on August 16th, can Padres fans expect immediate changes to the quality of the product on the field?  Noting the circumstances of the sale -- in particular, the increase in the purchase price related to the upfront payment from the Padres new television deal -- this is not an easy question to definitively answer.  However, what I can do is examine ownership transfers and team purchases in recent history to deduce an estimate of the effect the change in ownership may have.

Without much theoretical motivation to warrant an examination of win/loss differences related to an ownership change, I will instead focus on the immediate effect on the opening day payroll (using USA Today's database).  The reason for this is two-fold: there is a relationship between an increase in payroll and an increase in team winning percentage, and (in general) the payroll is a more direct reflection of the decision making process of owners than wins and losses.

Before we understand how the payroll changes with respect to an ownership change, we should first have some context about Major League Baseball payrolls in general.  The following chart tracks the MLB opening day payroll for each team from 2000 through 2012, along with the league average (in large, red, upside-down triangles) and league median (in large, black triangles).

As can be viewed, the league average steadily increases by roughly three million dollars per season while the league median trails for most seasons, increasing by roughly two million dollars per season.  So, if a change in ownership does not affect payroll, we should expect an average increase between two and three million dollars per season.  A different result may be indicative that an ownership change is predictive of an atypical change in payroll.

Since 2000, there have been sixteen changes in ownership and one additional effective/operational change in ownership -- the Moores to Moorad rejected sale -- from which we can deduce an estimate.  I researched each of these sixteen ownership changes since  2000 to determine the year that should be considered the initial season to use for each new ownership.  In order for a season to be considered the initial season, the new owner(s) must have had a significant portion of the free agent signing period fall under their reign.  For example, the Oakland Athletics, purchased on April 1st 2005, have an initial season of 2006 in this study, as the new owners wouldn't have had an adequate opportunity to increase payroll.  However, the Brewers, whose sale to Mark Attanasio completed on January 13th of 2005, have an initial season of 2005.  Additionally, the Mets sale to the Wilpon family was excluded as the Wilpons already owned a significant portion of the team prior to increasing ownership to 100%.  There is certainly some arbitrariness in this method, but it is tolerable for the exercise at hand.

For each team, I compared the average opening day payroll for the three seasons prior to our assigned initial season to the team payroll in the initial and second seasons.  The second season was added to minimize the effect of having a full initial offseason, as not every case had a clear cutoff.  The result:

Avg. Prior Avg. Next 2 Seasons Avg. Difference Relative increase
$64.98 million $73.72 million $8.74 million 13.5%

As previously mentioned, however, there is a year-to-year increase that should be expected anyway. How does the $8.74 million figure compare to our expectation of a normal salary increase? Performing the calculation as above for all combinations -- meaning, I calculated the three seasons prior to 2000 for every team and compared that to the two seasons after, and repeated for all years through 2011 -- results in the following league average expectation:

Avg. Prior Avg. Next 2 Seasons Avg. Difference Relative increase
$67.98 million $75.88 million $7.89 million 11.6%

As seen in the tables above, our methodology shows that, since 2000, an ownership change has been met with a 2% relative payroll increase in the first two seasons of ownership compared to the three years prior, on top of the standard 11.6% increase that is seen league-wide.

In addition to the averages presented above, we may also want to examine what happens in the typical purchase. Of the fifteen data points, just four experienced a decrease in payroll, while three teams experienced an increase of over twenty-nine million. Overall, ten of the fifteen have a payroll increase higher than the $8.74 million figure, giving a median value of $11.6 million: a 17.8% relative increase.

What does this mean for the Padres? Over the past three seasons, the Padres have had an average opening day payroll of $46.4 million. Projecting the average relative increase from our examined ownership changes results in an average payroll of $52.7 million over the next two seasons. This increases another two million when using the median value. If the Padres new ownership emulated the largest new ownership relative increase since 2000, the payroll would open at 79.0 million.

However, perhaps the three year average as the starting point is not accurate for the Padres. Outgoing minority owner Jeff Moorad's opening day payrolls have gone from $37 to $45 to $55 million in the past three seasons, which makes using a three year prior average somewhat misleading in this case. If the most recent opening day salary was used as the three year average, the 17.8% relative increase results in a $64.6 million average opening day payroll over the next two seasons.

This $64.6 million figure can serve as an optimistic, but reasonable projection for the average payroll in the 2013 and 2014 seasons, if we accept that the result of our fifteen point dataset is meaningful (which is not necessarily the case). Of course, this is not a robust model (nor really a model at all), just a simple projection based on a surface examination of what has happened when ownership has changed hands historically.

With the team discussing moving in the fences and a long-overdue scoreboard upgrade potentially on the calendar, in addition to eating the salary of any contracted executives to be cut loose (like what's left on the recent Josh Byrnes extension), I don't think there is much reason, that isn't guided by sheer wishfulness, to believe the team will exceed the ~$65 million figure in the immediate future. The rumored retention of several of the minority owners from the penny-pinching Moorad group certainly doesn't bode well for a sudden change of direction, either.  (Note: this is an entirely different argument from whether or not the team is justified in not increasing payroll.  For more on this, see our initial post on Empiricism.)

One final consideration is the effect of the new revenue sharing system on increasing payroll. With the new revenue sharing rule, whereby the payroll of your 40-man roster now has to be at least 25 percent larger than the amount you're receiving from revenue sharing, the Padres payroll may have to increase by a certain amount just to avoid losing its stipend. In other words, the Padres payroll may have had to increase regardless of a change in ownership. There is also the new caveat that the team must prove that revenue sharing dollars are spent on improving the Major League team. (In the past, the burden fell to the Players Union; without the books to prove their case, it is widely accepted that teams were using these revenue sharing dollars to pay down their debts.) As any new owner(s) of the Padres come on board with significant debt owed for the construction of Petco Park in addition to paying nearly $800 million for a team valued at less than $500 million by Forbes, it seems unlikely that the new owners would add to the payroll with their own dollars, rather than just trying to attribute the increase in payroll related to revenue sharing stipends to their interest in improving the club.

All in all, pessimistic Padres fans should temper their pessimism, at least recognizing that it seems unlikely for new owners to willingly forego a lucrative revenue sharing check (which exceeds the money saved in a salary dump). Additionally, history seems somewhat favorable for the opening day payroll of teams with new ownership. However, equal tempering should be in place for Padres fans that believe the team will significantly add payroll. The favorable history for payroll under new ownership is only a small increase compared to the rest of the league and, on aggregate, cannot be expected to significantly alter the competitive edge at which the Padres operate.

1 comment:

  1. Good stuff David, though I'm 90% sure that the $800 million price tag includes stadium debt.