Kansas City Chiefs’ sealed tax docs outline teams finances

Before the NFL’s 32 teams became the billion-dollar enterprises they are today, the Kansas City Chiefs were a break-even business with lots of overhead. Or so the Chiefs portrayed themselves.

“It’s an expensive operation,” the team’s chairman and chief executive, the late Jack Steadman, told The Star in 1992 after a rare trove of financial documents emerged in a lawsuit titled McNeil vs the NFL. The records showed that the league as a whole and the Chiefs in particular didn’t do all that well in the 1980s.

“There’s just not that much money to be made,” Steadman said.

Big television contracts changed all that across the league.

By 2010, the Chiefs were very much a moneymaker, according to the team’s tax returns from that year, which were recently obtained by The Star. Those returns show:

▪ There is little correlation between the team’s on-field performance and how much money it makes.

▪ That year, the grown children of team founder Lamar Hunt split nearly $40 million in gross operating income. A team executive said they reinvested more than half of it in the team.

▪ Some of the costs fans grumble about the most, such as parking, amount to a tiny fraction of the team’s overall revenues.

The Star examined three years of the team’s state and federal tax returns, the only ones that were available from a public database. The team had fought hard to keep those records private and they were subsequently sealed on orders of a state official. As of Jan. 30, they were no longer open for public view.

While the dollar figures in the tax returns are dated, the financial information within their 381 pages are instructive as they cover a crucial period in the history of the team and the NFL, the years 2008-2010.

The Chiefs and the team’s owners almost certainly make much more money today, thanks to television revenues that have been soaring ever since. But it’s hard to know for sure, because the finances of NFL teams are largely a mystery. Only the Green Bay Packers disclose their numbers, and then only because they are publicly owned.

“Team financial records rarely become public,” said Roger G. Noll, an emeritus professor of economics at Stanford University and an expert on the business of pro sports, “and I am not aware of any recent repeat of what happened in McNeil.”

But thanks to a rare public filing in a dispute between the Chiefs and the Missouri Department of Revenue, fans have a window for the first time in a quarter century into how the team makes money and how it’s spent.

At the time those tax returns were filed, the club was overseeing a major renovation at Arrowhead Stadium, a project that would provide the Chiefs with more robust earning potential locally. At the same time, many more dollars would soon pour in from extensions to the league’s ever-lucrative national TV contracts.

The first year, 2008, was a miserable season on the field: Behind a sputtering offense led by wayward quarterbacks Brodie Croyle and Tyler Thigpen, the Chiefs won only two games, finishing last and prompting the ouster of head coach Herm Edwards.

Still, they sold $51.8 million in tickets, collected $4.7 million from parking and made $2.8 million from fans buying beer, popcorn and other concessions.

By comparison, the Chiefs’ 2010 season was a sunnier affair. With new coach Todd Haley and Pro Bowl quarterback Matt Cassel, the Chiefs won 10 games and clinched a playoff berth for the first time in four years.

Yet, revenue from ticket sales was down 20 percent from 2008, when average attendance was considerably higher. It didn’t matter much to the bottom line, though, thanks to the share-one-share-all structure of the NFL.

“This result reveals the most important structural weakness of the NFL,” said Noll, one of two sports economists who reviewed the Chiefs’ tax returns at The Star’s request. “Poor performance is not punished financially due to the facts that almost all revenue is shared and the biggest cost item (player salaries) is capped.”

How the Chiefs make money

Sports economics professor Rodney Fort at the University of Michigan also took a look at the tax forms and saw nothing unusual.

“They take full advantage of tax reductions on intangibles like player contracts and acquisitions,” he said, which he noted is completely within the IRS rules.

But for anyone interested in how the NFL operates, they provide insight. At the time the team filed those tax returns, the Chiefs were halfway between the era when Steadman called the game’s business performance lackluster and now, when all evidence points to the NFL being a financial and cultural juggernaut.

The documents show the Chiefs grossed $302 million from all revenue streams in 2010, compared to $231 million in 2008. Nearly a third of 2010’s total came from two league entities: NFL Ventures and NFL Enterprises.

NFL Ventures is the league’s marketing arm, which makes money from, among other things, the sale of apparel by brands like Nike. Virtually all of NFL Ventures’ revenue is split equally among the league’s franchises.

NFL Enterprises oversee the league’s controlled media, such as the NFL Network and NFL Sunday Ticket — the league’s subscriber service to view out-of-market games. That money is also shared equally across the league.

Add in the team’s share of the television contract — $99.9 million — along with those revenues from NFL Ventures and NFL Enterprises — $99.8 million combined — and that’s nearly two-thirds of the gross receipts before a single ticket, parking pass or cup of beer was sold.

More than enough to cover its biggest expense each and every year, which in 2010 was the $148 million paid in salaries and wages for players, coaches and other personnel.

That the franchises get so much money from the NFL supports Noll’s view that teams aren’t incentivized to win because they make so much money regardless of on-field performance.

“The problem has grown worse, in part because money from television has grown and in part because of the rapid growth in other forms of central fund revenue (business activities run by the NFL on behalf of all teams, such as product licensing and league sponsorships),” Noll wrote.

Chiefs executives disagree, saying that the more the team wins, the more it can charge its corporate sponsors in fees and licensing. Companies are less willing to partner with losing teams. And if they do want to partner with a losing team, companies won’t spend as much to reach those deals.

TV revenue

The equal distribution of television revenue is a testament to the NFL’s desire for financial parity among its franchises. Compare that distribution model to Major League Baseball, where there is no salary cap and teams sign their own local TV contracts. The result is a wide discrepancy in how much each club can spend on players.

The Los Angeles Dodgers in 2013 signed a mammoth 25-year, $8.35 billion contract with Time Warner — now Charter Communications — to televise games in southern California. Compare that with the Kansas City Royals, who are approaching the end of their current television contract that pays out $25 million a year to the team. As a result, the Dodgers had the third-highest payroll in the majors last year. The Royals came in at No. 18.

Thanks to rising TV revenues, all NFL teams are growing richer. The nearly $100 million that the Chiefs and other NFL teams made in 2010 has since gone up 150 percent. NFL teams now get $255 million a year from the league’s revenue share, most of that coming from its current television and streaming contracts, owing to the amounts that ESPN, CBS, Fox and others are willing to pay to broadcast the league’s games.

Whether 2010 or now, the amount that NFL teams reap from television dwarfs other income streams.

It wasn’t always that way. Television contract rights in the NFL’s early years were confined to the three major networks and would later include ESPN and Turner Broadcasting.

Then, in 1993, Australian media magnate Rupert Murdoch brokered a four-year deal that paid the NFL $1.6 billion for rights to broadcast NFC games, which include teams in the league’s biggest markets: New York, Chicago, Dallas and Atlanta, among others.

For Fox, airing football games was a way to gain credibility. Before, the network had little to offer viewers outside occasional hits like the “X-Files” and sitcom portrayals of sad-sack American families in the form of shows like “Married With Children” and “The Simpsons.”

The Fox deal set off an arms race among broadcasters competing for the right to air NFL games, which padded the bottom lines of all NFL franchises well into the future.

In the shadow of television money and league distributions, other ways the Chiefs make money amount to small details, the tax records show.

This is an excerpt from the Kansas City Chiefs’ 2010 Missouri tax return showing where the team made its money that year.

State of Missouri Administrative Hearing Commission

It may seem expensive to pay parking fees at the Truman Sports Complex for Chiefs home games, but those revenues are puny in the team’s overall financial picture. The 2010 tax return showed that Chiefs realized $4.7 million in parking revenues, barely 1.5 percent of the team’s overall haul.

It cost $22 to drive through the gates for a regular-season game back then. This year it was $35 if you bought a parking pass in advance, or $60 cash on game day at the gate.

All those advertisements you see projected on massive scoreboards around the stadium? That was good for $3.7 million in 2010. That same year, the team made $6.6 million from corporate sponsorships.

Secrets revealed

The Chiefs were desperate to keep their tax returns from becoming public record during the team’s long, little-known legal battle with Missouri’s tax collector, calling them “some of the most sensitive documents the club has.”

The case centered on the $375 million renovation of Arrowhead Stadium that was completed in 2010. The Chiefs oversaw and partly bankrolled the project, kicking in $125 million of the total.

Afterward, the Department of Revenue billed the team $1.8 million, which is the amount the department said the Chiefs improperly escaped paying on a set of purchases that were not tax exempt. The team appealed.

It gets complicated from there, but along the way the revenue department argued that the Chiefs’ federal tax returns were key to the case and demanded they be turned over. For months, the team’s legal team refused.

“We simply cannot turn those over and risk them becoming public record. I know you understand,” one of the team’s attorneys wrote the revenue department’s attorney in 2015.

The Chiefs never did hand over the documents. But as it turned out, the revenue department didn’t need the team’s cooperation, as the federal returns were attached to the tax forms the Chiefs filed with Missouri.

So without the team’s permission, the state’s lawyers dumped them into the case file on April 15, 2016. And there they sat in the open for anyone to view for nearly three years, until last month, when the hearing commissioner presiding over the tax case closed the records at the team’s request. By then, The Star’s reporters already had copied them.

Forbes fact check

Until now, the best guess on the Chiefs’ and other NFL franchises’ finances came from Forbes magazine. When The Star compared the actual numbers and Forbes’ educated guesses, the magazine’s estimates were fairly close in some ways and in others Forbes was way off.

In 2009, Forbes pegged the Chiefs’ revenue at $235 million, but the actual number was $273.9 million, according to the team’s federal return. Further off was Forbes estimate of what the team cleared after expenses. Forbes pegged the Chiefs’ operating income at $47.8 million, more than twice what was reported to the IRS.

Also that same year, Forbes said the Chiefs’ value was $1 billion, a guess that will have to stand on its own. Tax returns can’t be reasonably reverse engineered to determine a team’s value, and a team spokesman said the Chiefs don’t comment on Forbes’ numbers.

Last fall, Forbes upped its estimate to $2.1 billion, which sounds like a lot, but puts the team only 24th among the NFL’s 32 teams.

Not that it matters all that much, as the Chiefs have been in the Hunt family since Lamar Hunt founded the team (then the Dallas Texans) in 1960. There’s never been the slightest hint that the team has been or ever will be for sale.

And it produces a nice income.

According to the tax returns, the team’s operating income before taxes was split up five ways in 2010 and the previous years. In 2010, there was $38 million available for distribution among the five share holders. But the Hunt family took only $17.6 million, leaving a bit more than $20 million left over. A Chiefs executive said that $20 million was reinvested into the team business operation that year.

The $17.6 million was divided almost equally among the four children of the late Lamar Hunt Sr. — Clark, Lamar Jr., Daniel and Sharron. Hunt’s widow, Norma Hunt, got 1 percent.

What taxes they paid on their shares, we don’t know. That’s between them, their accountants and the IRS.

As for the enterprise that produces that income, it’s in good health, Chiefs President Mark Donovan said. But he said pro football remains every bit the tough business it’s always been.

“Its a bigger business,” he said. “The NFL’s bigger. The Chiefs are bigger. But bigger on both sides. Bigger in revenue and bigger in expenses.”