Monday, April 06, 2015

The city's pension solution that wasn't

Believe it or not, this is a post about the Pirates.  Opening day has come and the anticipation is abuzz with variations of a theme for the Pirates prospects this year. See for example Deadspin: The Pittsburgh Pirates should be America's Team this season.  I, of course, am more interested in the latest iteration of Forbes' valuation of the team which values the Pirates at a mere $900 million.  A playoff win this year might jump the team over an even $billion.

It all might not have been. Long forgotten is the not-terribly-distant history that could easily have put the Pirates anywhere else but Pittsburgh. In 1985, the Galbreath family, which had owned the Pirates since the 1940s announced their intention to sell the team. For a city in the depth of miasmic economic restructuring, there were multiple obvious choices for a new location for the team and the Galbreaths clearly left open the possibility the team would move as part of any sale.

So the city of Pittsburgh, out of its excessive budget surpluses of the 1980s, loaned a consortium of private and nonprofit sector owners $20 million dollars to purchase the team in 1986. That works out close to $50 million in cash today. The consortium of new owners was named the Pittsburgh Associates and is still the owner of the team and the MLB franchise here, though the original owners have long since sold their shares of the team.   The whole deal was described as a "Public Private" partnership and headline described the deal as: Pirates sold to mayor, steel city businesses.  So the city was clearly the glue of the whole financial alchemy.

While the city's contribution was technically structured as a loan, it really wasn't. It retained much of the risk of the formal equity partners. The city didn't actually have that kind of cash lying around and  needed to finance $20 million fronted to the team with a bond issued in 1986.  The interest rate charged (8%) to the team owners by the city was actually deferred almost every year, while the required bond payments (which could not be deferred) were eaten directly by city taxpayers.

As a thought exercise, imagine the city's $20 million was an equity investment in the team. Just for fun, let's ignore any potential legal problems with that counterfactual. The actual transaction price was $26 million, split nearly equally among the 13 private partners. Thinking of the collective capitalization, the city's contribution would have made the city over 40% owners of the team going forward.  Fun to think about, but it would place the city's share at a value of at least $360 million these days.  That much cash would not completely solve the city's pension problems, but redefine the problem entirely.

Of course, that is all daydreaming.  The city will not benefit from the equity gain in the pirates in recent decades I'm sure.  But where did the value come from?  If you look at Forbes complete list of MLB team valuations you see some interesting things.  A proxy for profit is "operating income" and the lowly Pirates show up as having the 5th highest operating income in all of MLB.  Calculating operating income as a proportion of total revenue looks to me that the Pirates come in a remarkable 3rd.  Winning record, losing record... the team has had a financial success all of its own for many years.

Looking back it is more remarkable that the city found it politically possible to front such a large amount to a set of private sector investors to buy a major professional sports team.  Hard to imagine anything that risky could be pushed forward today with a chunk of public money that size.