If You Spend It, Will They Come?

Jerry Colangelo got a crash course in baseball economics. Time will tell what his grade will be.

Losses on the field are painful. Losses at the bank, verboten. It was time to set a new course.

A mere seven months ago, the Diamondbacks appeared to be raking in cash. They projected an $18.5 million profit for 1998, according to Phoenix IDA bond-disclosure documents.

As late as last July 1, the Diamondbacks were telling potential bond buyers that the team "feels it can establish positive financial results in each year of operation."

The team made the assertion in a disclosure statement associated with the Phoenix IDA's issuance of $126.9 million in bonds on behalf of the Diamondbacks. The team is using the money to pay off bank loans and cover some construction costs.

It doesn't appear the Diamondbacks were anywhere close to the $18.5 million profit projected in the bond disclosure for the Diamondback's inaugural season.

When it was wooing bond buyers with its disclosure statement, the team said it expected to generate $113.5 million in revenue during the 1999 season, and $20.1 million in profits.

The bond-disclosure documents--which include a six-year revenue, expense and profit projections for the team--state that profits were expected to continue apace: $16.7 million in 2000, $17.5 million in 2001, $17.2 million in 2002 and $22.2 million in 2003.

But those projections were made before season-tickets sales plunged, and Colangelo acknowledged the Diamondbacks faced the prospect of losing money in 1999. Instead of cutting costs, Colangelo elected to sharply increase spending and defer paying bills well into the future.

"The only choice was to protect that investment by moving forward as we did," Colangelo says. "There's really no choice. Either you compete, or you are down at the bottom, and that would never fly."

It remains to be seen how decisions made since the IDA documents were filed will impact the financial projections. What is known is that the Diamondbacks will have to vastly boost revenue at some point to cover significantly higher payroll.

The team projected in the bond documents that payroll for 1999 would total $35 million. The signing of five free agents increased payroll to $42 million, with another $20 million of 1999 payroll (plus interest) deferred.

The bond filing also provided details on how much money the Diamondbacks expected to generate from sources other than ticket sales. The team has secured sponsorship agreements worth $350 million from 50 sponsors, most of whom have signed deals of 10 years or longer. The largest sponsorship agreement is with Bank One for the stadium's naming rights--the team will get $66 million over 30 years.

The Diamondbacks also have a 10-year television contract with Fox Sports Arizona worth $59 million. Combined local television and radio contracts were projected to earn the team $17.7 million in 1999.

The signs that blanket the stadium would generate $7.875 million this year. Luxury suites were to kick in another $6 million, while concessions were projected to generate $7.4 million.

The IDA bonds helped the Diamondbacks reduce interest expense and loan payments. While the bonds are officially issued by the Phoenix Industrial Development Authority, the city has no obligation to repay them if the team should default, says IDA attorney Bryant Barber. A bond insurance company--AMBAC Assurance Co.--stands ready to pay bondholders in the unlikely event the Diamondbacks default on the $10 million-a-year payment.

The original bond documents obtained by New Times contained a provision requiring the team to submit quarterly audited financial statements to the IDA board. Those statements would have been accessible to the public.

But IDA records show that the team and the IDA board agreed to remove this stipulation in December. The reason, according to minutes of the December IDA board meeting: "The Ballpark and the Authority do not want unnecessary information on file because of the possibility of public records request."

IDA board president Victor Flores says the board didn't need to see the team's financial reports because the city was well-shielded from potential liability in the event of a default.

"Our only concern was to make sure the authority was protected," he says. "Whether somebody is making a ton of money or a little bit is really not my concern."

Making a ton of money is certainly a concern of Colangelo's. After lengthy discussions with his staff, Colangelo says he decided his only option to protect the massive investment in the Diamondbacks was to "go out and compete, and compete now."

But how?
"The game plan was very simply this: If we went out to sign some free agents what would you do? It would be pitching. Because pitching would be the shortcut to becoming competitive as fast as we could. That speeds up the process considerably.

"Pitching and defense win in baseball. That can carry you even if you are short offensively. So in my first meeting with Randy Johnson, who was the first free agent we spoke to, one of his first questions was, 'Well, if I did decide to sign with you, how are we going to get competitive?'

"And my reaction was, 'You could help make it happen a lot sooner.'"
Colangelo's "creative financing" plan emerged.
"Let's assume we negotiated a deal that was a four-year deal, and you were willing to take a payout over eight years. I said if I got three or four or five other players to do the same thing, we could get other players, and we could get competitive a lot sooner," Colangelo explains.

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