Why the Los Angeles Dodgers Are Headed for a Fiscal Cliff

7:52 AM, Dec 11, 2012   |    comments
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By Paul Grossinger

If you want to know the difference between the United States government and the Los Angeles Dodgers, look no further than their activity during the month of December.

The Dodgers bought up every free agent in sight, including ace pitcher Zach Grienke, while the U.S. government threatened to default on the national debt because President Obama ordered new toilet paper rolls for the White House.

But, to every jubilant Dodgers fan, a message: there will be a reckoning for all this spending. You have to admire the Dodgers' commitment to win and the organization will reap the benefits in the short term.

But Los Angeles is headed for a fiscal cliff.

En-route to re-defining baseball's pay-walls, shattering the contract dollars record for a right-handed pitcher, and adding nearly $200 million in new salary from trades alone, the Dodgers have created a payroll in excess of $220 million. That in itself is not the problem, the problem is that payroll contains five contracts with over $20 million in average annual value for 2013.

And 2018.

Yes, you read correctly. Counting an inevitable extension for ace Clayton Kershaw, the Dodgers will have those same five contracts for over $15 million on their payroll five years from now. And those players will be ancient: Adrian Gonzalez, Carl Crawford, and Andre Ethier will all be over 35 years old, while Zach Grienke and Matt Kemp will each be well on the wrong side of 30.

Worse, the newly-uber rich Dodgers will be saddled with baseball's highest taxes and revenue sharing payments, which will eat into their record TV revenues. It is hard to calculate what those taxes will be five years out but they could easily exceed $75 million annually if the Dodgers' spending continues to accelerate.

What does that add up to? Nearly $200 million in dead-weight contracts and payments by 2017; plus a first baseman, two outfielders, and a stable of pitchers to replace in the off-season.

If the Dodgers want to spend in free agency to fill those holes with a fresh crop of stars, it will add up to over $100 million in new annual spending, at least in part because of the Dodgers' work this off-season to shatter previous contract records. Combined with other contracts they will inevitably add to the payroll, that would be $450 million in annual payroll-related expenses.

No TV contract will cover that kind of spending.

In many ways, the Dodgers' spending resembles the U.S. government's spending between 2001-2006. Fresh off the surpluses of the late 1990s, which look eerily similar to the Dodgers' sudden windfall, the government funded a huge stimulus package, a $1.5 trillion tax break, and a massive extension to Medicare: Part D for prescription drug coverage. In Dodger-speak, a trade for Hanley Ramirez, taking all the Red Sox's bad contracts, and a massive contract for Zach Grienke.

The U.S. government spent because it could. The money was there, the economy was strong, and the country looked invincible. What could go wrong?

The Dodgers are in the same position: their new owners and TV windfall have the franchise feeling invincible. But, like America's expenses did during the 2008 recession, and will continue to do as entitlement obligations grow heavier, the Dodgers will feel their current obligations when they are trying to build a new contender in 2017.

And, when the Dodgers' fiscal cliff arrives, even a little toilet paper will feel expensive.

 

 

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