Fixing the Reds’ Payroll Collapse: Part 1

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No matter the town, Major League fans want their favorite team to spend more on its players. We get a kick watching good baseball and love it when our team wins. Our assumption in pleading for more spending is that (other people’s) money translates to a better roster and victories. Right or wrong, it’s in the nature of fans to complain about the stinginess of the local club.

Cincinnati Reds owner Bob Castellini hasn’t escaped that criticism. For much of the time he’s owned the team, the 81-year-old Castellini has been charged with being cheap.

Yet, a fair assessment shows for most of his 16 years as payroll master Reds spending on player salaries has been in line, even generous at times. That assessment holds true even if you choose an expansive measure of the team’s modest market size.

My long-held view has been that while there are legitimate and deep criticisms of Bob Castellini’s management of the Reds, excessive frugality hasn’t been one of them. I even defended the club’s pandemic-spawned budget cuts from 2020 to 2021.

But over the past two budgeting cycles, Reds’ spending has veered sharply away from trends in their industry, plummeting to a Castellini Era low. Adjusted for inflation, the club’s 2023 payroll is its lowest since 2004.

Something new is going on.

As it turns out, no single cause explains the stunning decline. A witch’s brew of factors is to blame. The team’s ownership structure, a short-sighted promise to investors, worst-case decision-making, idiotic statements from ownership and trouble in the media industry are conspiring to bring the Reds and the team’s fans to our present discouraging situation.

This is the first installment of a three-part series that diagnoses and explains the circumstances. In the final part, we’ll look at solutions. Much of what we think about the cause is wrong. The solutions aren’t easy or obvious.

Let’s start by examining the problem.

The Payroll Collapse

In a signing that seems like several lifetimes ago, the Reds’ front office reached agreement with Nick Castellanos on a four-year deal to pay the free agent outfielder $64 million. That took place less than three years ago.

In previous weeks, the club had agreed to other deals with free agents, making the Reds offseason spending the fifth-largest splurge by a major league team that year. Keep in mind, in 2020 the Reds were also paying big bucks to Joey Votto ($25m) and Trevor Bauer ($17.5m). Sonny Gray, Raisel Iglesias and Eugenio Suarez were team cornerstones, all making more than $9 million.

That $16 million owed to Nick Castellanos pushed total salary commitments to $149 million – the highest in club history, and smack dab average for major league teams. 2020 was no anomaly in that regard. In 2019, Bob Castellini had approved a payroll of $133 million, ranked fourteenth out of thirty MLB organizations.

That Castellanos signing was one month to the day before a public health official in Seattle reported the first death from COVID in the United States.

In 2020, with 100 regular season games canceled by the pandemic and no fans in attendance for the remainder, Major League Baseball suffered industry-wide losses. The hometown club fell in the red even though it qualified for the postseason. The plan was to use playoff revenues to sustain the payroll bump, but the pandemic intervened.

Heading into the 2021 season, significant uncertainty about attendance lingered. Castellini, hedging against another loss, shaved payroll by $20 million, back to 2019 levels. That move was in line with much of the industry. Average MLB payroll fell from $150 million in 2020 to $130 million in 2021. Despite roster cuts decimating the bullpen, the 2021 Reds went 83-79 and would have made the postseason again were it not for the absurd 17-game September winning streak by the Cardinals.

That brings us to a year ago. The offseason before 2022 is when something changed.

Castellini made a surprising decision to slash payroll once again by more than $20 million. I say “surprising” because this time, the move was out of step with the sport, as average 2022 MLB payroll had jumped back to pre-COVID levels. And, well, beyond the money, the Winker/Suarez trade with Seattle was shocking.

Announcing a sweeping rebuilding plan, the Reds traded a slew of talented and popular players for young prospects. They finished 62-100, 21 games worse than 2021. Only two Major League teams had more losses.

And that was just the start. As the calendar turns to 2023, the Reds continue to pursue radical austerity. Again, it’s at sharp divergence from what other Major League clubs are doing. Average MLB payroll will be up by at least $10 million (not all the free agents have signed yet). Bob Castellini, on the other hand, has swung a sharp and heavy axe, chopping Reds’ player salaries by more than $25 million.

A bit of context: Just three seasons ago, the Reds committed to pay 13 of their 25 players more than $3 million each. In 2023, the Reds will only have two in the dugout or bullpen – Votto and Wil Myers – who crack that threshold. One of those guys has a guaranteed contract. The other will likely be traded in a few months. As of today, only four Major League teams have a lower payroll than the Reds.

At $80 million, Reds spending has sunk to half of what the average team is doing, the lowest level by far during the Castellini Era.

That’s the payroll collapse. Let’s take a look at what’s behind it.

Ownership Structure

The explanation begins with the team’s ownership structure.

Every professional sports team has a designated control person who has unilateral authority to make decisions. In any of the major American sports leagues there is no voting on trades or other moves. One person is given final authority. That person for the Cincinnati Reds is Bob Castellini. He gives a target payroll number to the front office at the start of the offseason; Nick Krall and his staff operate under that constraint.

While Castellini has sole power, the franchise’s broader ownership structure does play an important indirect role. Understanding how that operates is an essential starting point in explaining how Castellini reaches his annual payroll figure.

To begin, let’s return to the year 2006.

That winter, in a unanimous vote, Major League Baseball owners approved the acquisition of the Reds by Castellini and his ownership group from the team’s previous owner Carl Lindner Jr.

The new owners purchased 70 percent of the club, which was valued at $270 million. The remaining 30 percent stayed with Lindner and a couple other individuals who already owned pieces of the team.

The three primary new owners were Castellini and the Williams brothers – Joseph and Thomas. The Williams family has a long history of owning the Reds. Two members of the previous generation had been co-owners from 1981 until 1984. Joseph Williams is the father of Dick Williams, former Reds president of baseball operations.

At the time they bought the Reds, Castellini and the Williams brothers had been part owners of the St. Louis Cardinals, whose primary owner was then, and still is, fellow Cincinnatian Bill DeWitt Jr.

19 Owners, 27 Shares

As part of the purchase, Castellini raised $84.5 million by selling thirteen non-voting shares of the club for $6.5 million apiece. These shares went to car dealers, CEOs, philanthropists, venture capitalists, investment groups, LLCs, former executives, managing partners of law firms and more. Most had deep ties to Cincinnati and were Reds fans.

The composition of that group is no mystery. You can find the names on page four of the club’s annual Media Guide. At the top, above Baseball Operations, Ballpark Operations and Business Operations, there they are. In wealth, they range from billionaires to simple millionaires. They are the 19 Reds investors, the Castellini Ownership Group.

The owner roster has remained remarkably stable since 2006. The Nippert Trust sold Mrs. Louis Nippert’s share in 2014 (more on that later). A few other owners have passed away and their shares were maintained by estates or LLCs.

The Reds franchise is divided into 27 financial shares, each share representing a bit under 4% of the company.

All 19 owners own at least one share. When you read that Bob Castellini owns 15% of the Reds that’s saying he owns four shares. Five shares would still fall below 20%. The Williams brothers own more than one share, possibly three or four between them. The Lindner family retained two shares. William Reik, an owner under Lindner, owns two shares, etc.

A Binding Equity Structure

That equity structure dictates how the team’s financial responsibility is divided. Any annual operating losses would be covered proportional to those shares. Operating profits would be distributed on the same basis. As the control person, Castellini can decide to not distribute operating profits and instead put that money back into the team.

Important: Castellini’s own wealth and personal desire to spend more on the Reds matter less than most of us think. Because of the financial structure of the franchise, Castellini can’t wake up one day and simply pour additional cash (equity ownership) into the team. He’d have to get proportional buy-in from the other owners. That’s how it works, based on the share of the team’s economics each investor owns.

There’s nothing unusual about this arrangement per se. Castellini and the Williams brothers decided to spread the debt burden and equity. It’s a common practice. But the way it operates – thanks to an unusual founding promise – plays a key role in explaining the team’s recent payroll plunge.

We’ll look at that pledge and other causes of the club’s financial predicament in the next part.