Opposing Rebuilding Economics

If you’re a resident of the Five County area, and you buy into the extended version of the Brewers’ rebuild, you’ve won the privilege to pay approximately $140 million in debt service while the Brewers “aim for the future.” (That paces the club for “truly” contending around 2020). A recent article supporting Miller Park as Wisconsin’s best private / public partnership details the continued uncertainty of the sales tax sunset date financing Miller Park, describes the economic assumptions leading to that shortfall (including an annual 5.5% sales tax growth projection!!), and promises at least five years of continued sales tax payments (that is, only if the declining tax collection or negative performance stops, or any other economic hiccups don’t appear).

Related Reading:
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Counterbuilding: Drafting & Trading
When Should the Brewers Be Competitive?
Jonathan Villar and Orlando Arcia Delay the Rebuild
The Continuing Costs of Miller Park

While you consider this fact, think about those $28 million taxpayer dollars weighed against the $40 million or more in private revenue that the Brewers are sitting on in 2016 (thus far). The Brewers are “building for the future,” which in blunt economic terms means that they are getting rid of expensive labor (i.e., MLB Players Association veterans) in favor of dirt cheap, unrepresented labor (i.e., minor league prospects). This is one of the shortcomings of the current MLB “analysis” movement entrenched in its second generation (the second generation being those who are now raised into “analysis” as orthodoxy, as compared to those who actually fought the battle in favor of “analysis”). One of the old drums of that movement is the “market inefficiency,” which on the surface argues in favor of cost-controlled players or acquiring cheap players with production that far outpaces their contract. Beneath the surface, market inefficiencies allow MLB clubs an opportunity to allocate revenue elsewhere: sometimes International markets, sometimes infrastructure, and sometimes pocketbooks.

The last option is quite acceptable in any business, let alone one that features extremely lucrative revenue streams that consistently bolster franchise value. The benefit of rebuilding is that an ownership group need not await a sale of their franchise to reap the benefits of that revenue: when the MLB club does not need to win or compete “now,” payroll can be sliced, and the cut revenue need not go anywhere. Rebuilding cashes in on a lesson well-known at least since Donald Sterling’s 1980s Los Angeles Clippers: sports franchises need not put a winner on the field to return handsome profits. In fact, losing can be even more profitable in the right circumstances.

For the Brewers, GM David Stearns’s much-praised offseason effectively started this great transfer of revenue, saving the club approximately $40 (to $60) million (compared to recent payroll levels, or costs that were sunk into labor instead of ownership) for this season. Common fan rebuttals note that Stearns and the Brewers could sink that revenue into a huge International bonus period, organizational infrastructure, or actual analysts or player development personnel (but really probably not). Hopefully, these “non-MLBPA” expenses include improving minor league pay, which would be a welcome and just correction of one of this game’s ugliest features (just pay them more! Just do it!). Unfortunately, these organizational costs need not be disclosed, so barring a huge $30 million spending spree that is hailed in the industry press on July 2, Brewers fans will be left guessing about how their beloved Milwaukee Nine are spending their revenue.

Brewers fans ought to seriously consider the implications of the economics of rebuilding. By the kindest interpretation, the club is transferring revenue away from MLB labor toward much cheaper minor league talent, in favor of a longview that hopefully sees the club contending by 2020. Even this reality has somewhat unsightly consequences (which is why BPMilwaukee will pair prospect coverage with consistent and ongoing coverage favoring increases in minor league pay). The most brutal interpretation of rebuilding economics sees Five County taxpayers sending at least $28 million to service debt on Miller Park during each season in which the Brewers will not spend money to contend. While a standard corporate governance argument would tell those disgruntled Brewers fans to go fly a kite — and courts of law would probably agree, Brewers fans ought to take seriously their position as financial stakeholders in the organization (especially if they reside in the Five Counties).

The most specific action fans can take is to gain awareness of revenue allocation within an MLB organization, and demand to know how excess revenue beyond a basic 50-50 labor split is spent. This is the first reasonable step to addressing the economic implications of rebuilding. If a club is not spending money on the field, or in easily verified signing bonuses, how is that revenue aimed to help a team compete or contend? A more audacious fan action would be to demand that revenue diverted from the playing field be applied directly to the debt service of Miller Park. This is a fantasy, but it pushes corporate governance arguments to the other logical extreme: After all, even if the Brewers are no longer using their publicly financed asset to try to contend, taxpayers must continue investing in the tricky business of sports real estate; in order to moderate the risk of investing in such a venture, diverting unused MLB revenue to Miller Park’s costs would compensate fans for the lack of a contending team.

The most straightforward tax payer argument is that the venue was built under some assumption that Milwaukee would remain competitive; in this regard, standard tax burdens are traded as a public investment for a good baseball team. As that baseball team fades on the MLB level and pushes competitive goals down the road, the team renegotiates one good faith assumption of the public debt without assuming any additional risk. (The risk of the MLB team, of course, was visible from roughly 2006-2015, where Milwaukee built out of a terrible series of performances and relatively large amounts of money into the big league team, only to see many contending efforts thwarted in heartbreaking fashion. The risk of the public is maintaining and improving an elite sports venue, right down to the front office furniture).

Fans and residents from the five counties are stakeholders in the Brewers’ financial performance. Since residents pay to service a significant portion of the Brewers’ operating costs (namely, Miller Park), they are personally vested in the success of the franchise to some degree. The Brewers franchise ultimately has responsibility to maintain its financial value and return the greatest possible revenue share to ownership; the operation of MLB owners across the board has proven this fact over recent seasons. The fans, on the other hand, get stuck with the warm and gooey “civic pride” claim, which shortchanges their actual investment in the club (especially as taxpayers). By analyzing the costs, depreciation, maintenance schedules, and improvement plans, residents and fans can reorient an aspect of the Brewers’ traditional profit-oriented responsibilities into behavior that more evenly balances the risks of fielding MLB labor and the risks of operating a ballpark. The public cannot be reasonably expected to burden one aspect of this equation without the club shouldering their burden to compete.

One might be tempted to return to the mid-1990s arguments for Miller Park in order to clearly define the role of the taxpayer in this matter. In 1995, Hank Aaron made the gushy civic pride argument that ironically serves as some recognition that taxpayers serve as stakeholders in the Brewers’ future. “When the Brewers go anywhere — no matter where it is — when they say … ‘Milwaukee Brewers,’ … that means that team is yours. It belongs to you.” In the case of previous owner Bud Selig, the lines between competing and creating revenue were blurred. Selig said, “There is no professional sports franchise that has made the commitment to work with a governmental entity the way we have. In most cases, it’s ‘Look, you either do this or we’re gone.’ We’re doing more to stay in our area than any other team by far. We wouldn’t be doing it if we didn’t think we could make it, but we need the new stadium to be competitive.”

Competitive sounds like a great word for the field, but a surprisingly honest comment by Selig suggests that the matter was financial competition, rather than fielding a competitive baseball team: “We need a new stadium to maximize revenue. There’s no other place to look [for revenue] in this market. We can be competitive if we get it, but not if we don’t.” While new dwellings for MLB teams were frequently adorned with the spirit of winning, or competing on the field, there is no way around the economic reality that clubs were simply looking to publicly subsidize their operating expenses. That economic reality could not be clearer in 2016, which is why it will be crucial for fans to track additional revenue spending by the Milwaukee front office.

Under the basic tenets of corporate governance, or the legal-moral theory that considers a business’s obligations, one would not expect the Brewers to have any responsibility to disclose organizational spending. First and foremost, from a competitive standpoint, MLB clubs would be placed at a considerable disadvantage if they had to release their spending habits to the public. One would expect MLB clubs to embellish or mislabel such figures, leading any public disclosure to be vague (in order to protect proprietary information). Second, the most vulgar interpretation of ownership’s responsibility would find no issue whatsoever with an MLB club failing to invest their revenue in labor. While it is fun to think about sports teams as civic enterprises, any MLB club is simply a private entertainment enterprise that receives allocations of media revenue thanks to their lucrative monopoly over baseball. In this sense, the actual sport of baseball is about as far removed from the purposes of an MLB organization as one can imagine; as the Braves ownership group recently summarized in surprisingly frank moment, the Braves are now “a fairly major real estate business.” Milwaukee has not yet reached that point, but one should understand that the longer an industry basks in the language of market inefficiencies, the more likely they will be to shift their focus to investing in as many inefficiencies as possible (if one such market inefficiency is publicly funded sports venues, so be it, taxpayers be damned).

The Brewers may not be a fairly major real estate business yet, but they are a fairly major television entertainment enterprise (even as a small marketMLB team), and that outlook defines their profit structure moreso than baseball. So, on some level, why would they ever contend? The Brewers are in the business of selling cable television subscriptions and collecting revenue; that will always be more profitable than winning. Rebuilding simply reifies that logic.

As an analytically inclined baseball fan, it is almost impossible to dislike the implications of finding a “valuable” player. A valuable player, in most instances, will be one that returns production at a greater rate than their cost. Given the scarcity of resources in baseball (i.e., consistently good performances), finding value from players is important on some level. However, as those ideals become further entrenched in the game, sunk into organizational infrastructure, hiring practices, and even training practices (such as hiring economists, businesspeople, and mathematicians with elite backgrounds to run baseball operations), they can become distorted as they become orthodoxy. Finding the greatest possible value in amateur talent, for instance, can result in some anti-competitive behavior to gain draft picks.

In general, the ideal of “stockpiling controllable talent for the future” becomes synonymous with periods of time in which it is acceptable for an MLB team to field a less-than-stellar ballclub. “Rebuilding” and analytical approaches in baseball employ sound statistical arguments and mechanical methodology to shave revenue toward ownership, and away from labor. From an ownership standpoint, both the stunning availability of rebuilding cycles and the recalibration of salaries and production through analysis are arguably the most effective anti-labor tools since collusion. This industry standpoint is problematic where it is anti-competitive, and it is doubly problematic where rebuilding plotlines are played on publicly-funded stages.

Brewers fans will rightfully support rebuilding for several reasons, not the least of which is the most valid reason of hoping to see a Championship banner at Miller Park. But fans should take the unspent $40 million seriously, especially when they are within the geographical area that still faces the annual $28 million tax bill. Residents should also not shy away from their own stake in the organization’s financial and baseball success: if it sounds ridiculous to demand greater financial transparency from the club now, just remember how ridiculous it sounded to most ears to cite VORP or Pitcher Abuse Points a decade ago. The institutional obsession with rebuilding, and all of its logical points, must be redesigned in a manner that squares residents’ investment risks in team infrastructure with the performance goals of the ballclub. Rebuilding as a substitute for just economic arrangements is neither desirable in terms of MLB labor, nor feasible for the public’s interest in maintaining Miller Park as a ground for competitive baseball.

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4 comments on “Opposing Rebuilding Economics”


Another interesting article. I see one major flaw. There is a lot of talk about what is wrong without offering a solution. Without a clear, well thought put, reasonable solution there is a gaping hole in this piece. What would you propose for a change? Should the Brewers extend contracts to players simply to spend down the overrun? Isn’t this the whipping boy of analytics for the last seven our so years? As a five countY resident, would this not be better seen as a financial investment for a (potential) emotional reward?

Nicholas Zettel

Good question, this is entirely the issue, and I have previously been one of the people as a part of that movement to criticize big league spending. I think the general solution is to just compete — if you’re not going to spend in verifiable ways to improve the minor league system (such as putting together a huge July International class), you can put that $$$ into short-term contracts at the MLB level (as one example). Imagine this year, even while rebuilding, how a few more big leaguers of moderate-to-good performance level would help this team.

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