After $1 billion in player spending, Dodgers under MLB mandate to cut debt

The Dodgers, who have spent more than a billion dollars on player payroll in the first four seasons of Guggenheim Baseball Management, face a mandate to reduce debt in order to conform to Major League Baseball rules.

The club is expected to reduce payroll for a second consecutive season, with the goal of cutting from about $300 million in 2015 to closer to $200 million in 2018.

The team says the reductions are unrelated to baseball’s rules about debt, which demand clubs be in compliance within five years of an ownership change. Rather, the Dodgers say they spent heavily in the early days of Guggenheim ownership in order to be competitive as they rebuilt the organization’s player development program and infrastructure.

So, while the Dodgers would have to pay big in order to keep established stars such as third baseman Justin Turner and closer Kenley Jansen from signing elsewhere as free agents, the club says it otherwise is able to operate more efficiently because it has a minor league system that is churning out the young, relatively inexpensive talent necessary to sustain a perennial contender.

Commissioner Rob Manfred said he did not believe fans should worry that ownership would diminish the Dodgers’ ability to win in order to satisfy the debt rule. The Dodgers have won the National League West in each of the four full seasons under Guggenheim ownership, the longest streak in franchise history.

“I think the Dodgers will be in a position that they can comply with our expectations in terms of the debt service rule, without any dramatic alteration in the kind of product they have been putting on the field,” Manfred said.

The rule, designed to ensure teams have the resources to meet their financial obligations, generally limits debt to no more than 12 times annual revenue, minus expenses. The Dodgers were not profitable in any of the first three full seasons under new ownership, co-owner Todd Boehly said last year. Their debt is believed to be in the hundreds of millions.

Guggenheim’s spending — from the assumption of a quarter-billion in contracts to get Adrian Gonzalez in 2012 to the sport’s first $300-million payroll in 2015 — raised eyebrows throughout the industry. The New York Yankees led the major leagues in payroll every season from 1999-2012, but the Dodgers have led in every full season under Guggenheim ownership.

“The Dodgers blew past the Yankees like Grant through Richmond,” said Ron Fowler, executive chairman of the San Diego Padres.

Manfred said the Dodgers’ five-year waiver from the debt service requirements was authorized by the collective bargaining agreement in place at the time of the sale.

“They’re doing what they can to set the team up for the future,” Fowler said. “Do I like it as a competitor? No. Do they have the right to do it? Absolutely, yes.

“They’re expected to be in compliance. They have said, very publicly, that they will be. They have done a very effective job, and I say this with nothing but admiration, of setting themselves up to have a very strong team at the end of the five-year period.”

For 2016, the Dodgers’ end-of-season payroll — including salaries and benefits for all players on the 40-man roster — is about $250 million. That figure will trigger a luxury-tax payment of about $30.5 million.

For the four full seasons under Guggenheim, as the owners looked to jump-start the revitalization of the franchise, the Dodgers’ end-of-season payrolls have totaled $1.069 billion, with another $112 million in luxury taxes. That adds up to $1.181 billion, or an average of $295 million per season.

A significant portion of that expenditure — close to $100 million in 2015 alone — involved payments to players no longer on the roster. The Dodgers bit that financial bullet, they said, to accelerate the financial and roster flexibility that would allow them to lower their payroll while taking full advantage of a replenished minor league system.

The Dodgers could rebuild their system so rapidly — Baseball America ranked it as the best in baseball this year — in part because of significant spending in Latin America, where amateur players are not subject to the draft. And, since the new labor agreement might include an international draft, the Dodgers might have stocked up just in time.

The new labor agreement might also raise the luxury-tax threshold above the current $189 million. That could put the Dodgers in position to reduce or eliminate their tax obligations before bidding on the monster free-agent class of 2018-19, which could include Clayton Kershaw, Bryce Harper and Manny Machado.

Under current rules, the tax rate increases are based on the number of consecutive years a team has exceeded the threshold. If the Dodgers could get below the threshold even for one year, any future tax would be lower, potentially saving the team tens of millions of dollars.

Under Andrew Friedman, the Dodgers’ president of baseball operations the last two years, the Dodgers have not guaranteed more than $48 million to a major league free agent. The Dodgers likely would have to top that figure to retain Turner or Jansen; they say they would like to bring back both.

Friedman would not say if the Dodgers’ owners discussed the need for the team to get into compliance with the debt service rule when they recruited him from the Tampa Bay Rays. He said the owners understood that an infusion of young players — rather than a reliance on free agents often past their prime — is a necessary building block for a consistent contender.

“A big part of the reason I accepted this job is that, philosophically, we were very aligned,” Friedman said, “as far as winning being the number one thing, but appreciating what that means in the near term and the long term. They have demonstrated over and over that desire to win, but it’s also their ability to understand the short term and the long term.”

Tucker Kain, the Dodgers’ chief financial officer and the managing director of Guggenheim Baseball Management, said the team’s strategy is not driven by the need to reduce debt.

“You have to have a pipeline of players coming up,” Kain said. “You have to be able to plug in a Corey Seager and a Joc Pederson and have a rotation of young talent, and you’re not relying on the down years of free agents to sustain success.

“Financial dynamics totally aside, that is the right way — in our opinion — to build a long-term successful baseball team.”

New owners are required to submit a long-term business plan to the league and can be exempted from the debt service rule for as long as the first five years of ownership, according to the collective bargaining agreement.

“It’s to give clubs an opportunity to get their feet on the ground,” Manfred said. “I think the Dodgers have always had a plan that would give them financial stability over the long haul.”

Manfred has wide latitude to sanction teams that fail to satisfy the rule — among 16 options, he could order a team to raise equity, require approval of team expenditures or suspend ownership and/or management — but he said he would prefer to work with the Dodgers so long as they work toward compliance.

“I firmly believe that, over the long haul, they will be a club that will routinely be in compliance with the debt service rule,” he said. “I also believe it’s important for the game not to have major dislocations in terms of people trying to get in compliance. We will continue to work with them.”

Kain declined to say if the team last season had turned its first profit under Guggenheim ownership.

“The business is as healthy as it’s ever been,” he said.

Neither the league nor the team publicly discloses financial information. Forbes magazine estimated the Dodgers lost a total of $166 million from 2013-15, the first three full years of Guggenheim ownership — almost $100 million more than the Philadelphia Phillies, at $69 million.

The Phillies since have slashed payroll commitments as part of a rebuilding process. Forbes estimated that only one other team — the Toronto Blue Jays — lost more than $6 million over those three years.

Forbes also estimated last year that the Dodgers had debt of $400 million.

“We’re not talking about, ‘Let’s reduce our payroll by $40 million and we’ll be compliant,’ ” said a person familiar with the team’s finances but not authorized to discuss them publicly. “They have hundreds of millions in debt.”

When Guggenheim bought the Dodgers for a record $2 billion in 2012, the new owners assumed $412 million in team debts as part of the deal. They also funded the purchase in part with about $1.2 billion in investments from insurance companies controlled by Dodgers chairman Mark Walter, as The Times reported in 2012. Boehly said then that the companies would be repaid for those investments — over time, and with interest.

The Dodgers since have signed a record $8.35-billion, 25-year television contract for SportsNet LA, and they have sold the most tickets of any major league team in each of the last four seasons. Local television rights and ticket sales are the biggest drivers of revenue generated by each team; the league splits revenue from national television and Internet rights equally among the 30 teams.

In addition, the Dodgers’ owners could comply with the league rule by renegotiating some or all of the debts to ensure team revenue is not used to repay them or as collateral for them, according to the collective bargaining agreement.

Kain declined to discuss the Dodgers’ debt level or how they would reduce it, but he emphasized the team would comply with the debt service rule.

“We understand all of our obligations and work closely with baseball,” he said. “We’ll be in great shape with baseball.”

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Twitter: @BillShaikin