A Slightly Less Evil Empire

http://www.thechiefly.com/features/slightly-less-evil-empire/

The New York Yankees have already locked up two of baseball’s most sought-after free agents this offseason, signing center fielder Jacoby Ellsbury to a seven-year, $153 million deal and catcher Brian McCann to a five-year, $85 million pact. Though they surprising allowed homegrown star second basemen Robinson Cano depart for Seattle’s 10-year, $240 million deal, they countered by signing Carlos Beltran for three years and $45 million and they’ve already inked Hiroki Kuroda to a deal.

This type of free agent spending would have been a typical ho-hum storyline a few years ago — The Yankees, king of large-market teams, gobble up all the elite free agents; small-market teams collectively groan.

You’ve certainly heard that one before. In 2009 — perhaps not coincidentally another offseason, like this one, that followed a pinstripe-less postseason — the Yankees inked a trio of free agents (Mark Teixeira, C.C. Sabathia, and A.J. Burnett) for a combined figure north of $420 million.

What’s surprising about this offseason’s spending spree is that the Yankees have been more reserved in the free agent market since that ’09 outburst. New York’s biggest free agent acquisition (from a non-Yankee team) since 2009 was the three-year, $35 million deal they handed out to reliever Rafael Soriano in 2011.

The Yankees have still flexed their financial muscle on numerous occasions, re-signing the likes of C.C. Sabathia and Derek Jeter to hefty extensions, but they’ve watched as marquee free agents like Albert Pujols, Josh Hamilton, Prince Fielder, and Cliff Lee have landed elsewhere.

In fact, there’s been an interesting trend developing in recent years. The Yankees still lead all of MLB in payroll every year (though they could cede that crown to the Dodgers in 2014), but the gap between the Yanks and baseball’s next biggest spenders has been gradually shrinking. In 2004, for example, the Yankees opened the year with a $184 million payroll. The next closest team, the Boston Red Sox, checked in at $127 million and only one other team (the Angels) reached the $100-million mark. Fast forward to 2013 where the Yankees’ payroll advantage slipped to just $12 million over the Dodgers, four other teams reached at least $140 million, and nearly half the league cracked the $100 million barrier.

You can see this graphically below:

payroll (1)
Source: USA Today

In 2004 the average non-Yankee team spent $65 million on payroll. By 2013, this figure had risen all the way to $99 million. Meanwhile, the Yankees’ payroll has hovered right around $200 million over the past 10 years, though it did spike to a record-high $229 million last year.

Changing guards and priorities

As George Steinbrenner began to relinquish control of the Yankees toward the end of the last decade, the new brain trust, which included Steinbrenner’s sons Hal and Hank, started searching for a more sustainable path to success. While playing Russian roulette with top free agents has worked just fine for the Yankees in the past – they’ve won at least 90 games in 11 of 14 years since 2000 – it’s not the only way to run a large-market franchise. Massive contracts for top talent will likely always be part of the Bronx blueprint (as they are showing this offseason), but there are other avenues to success – like drafting, developing, and locking up cost-controlled talent or searching for undervalued assets – that don’t necessarily involve paying stars the market rate to watch their decline years unfold.

There’s also an elusive number the Steinbrenner brothers have been chasing – the luxury tax threshold.

Implemented 10 years ago as a means to encourage competitive balance, the George Steinbrenner-led Yankees treated the luxury tax threshold like the drinking age in a college town (they largely ignored it), paying out more than $250 million in penalties to MLB’s central fund. The Yankees’ plan all along, post-George, has been to get below the threshold – now at $189 million — for 2014, thanks to a lot of pricey contracts (Cano, Mariano Rivera, Curtis Granderson, Andy Pettitte, Kevin Youkilis, Phil Hughes, etc.) coming off the books.

It doesn’t take a mathematics degree to understand that the Yankees stand to save a lot of dough if they can get under the threshold, even if for only one season. Not only would the Yankees avoid paying a luxury tax for the first time in the system’s existence, they could also reset the rate at which they are taxed in future years. (Currently, the Yanks are paying 50 percent on their overages as a repeat-offender but that number would drop to 17.5 percent if they get under the tax cap for just one season).

The Yankees could return to an over-threshold payroll as soon as 2015 and still save a lot of money if they are able to stay south of the $189 million mark this offseason.

The following chart gives two examples of projected (i.e., guessed) New York spending habits over the next five years (the conservative approach is in red, the more aggressive one in green), which gives you an idea of how much they could save by staying under $189 this year.

Year Est. Cap Under cap in ‘14 Penalty Rate Tax Penalty Over cap in ‘14 Penalty Rate Tax Penalty
2014 $189M $188M 0% $0 $225M 50% $18M
2015 $189M $200M 17.5% $1.9M $230M 50% $20.5M
2016 $189M $212M 30% $6.9M $235M 50% $23M
2017 $200M $224M 40% $9.6M $240M 50% $20M
2018 $200M $236M 50% $18M $240M 50% $20M
Total (avg)      – $212M 34% $7.3 $234M 50% $20.3M

 

Those numbers are obviously for entertainment purposes only and could be adjusted in any direction that you expect the Yankees to go over the next five years. The point, though, is that they can easily save, say, $10 million a year in luxury tax payments, if not more, just by lowering their payroll below the tax threshold in 2014.

While saving money on player contracts would be a welcome boon for the Yankees’ coffers, they still have to figure out how to consistently put a championship-caliber team on the field while competing with other organizations like the Dodgers, Angels, and Red Sox that have continued to spend extravagantly in recent years.

The Yankees have to examine whether it’s worth it to save costs on payrolls and taxes, or if the risk of falling out of contention again, like they did in 2013, is too detrimental to the walls of the empire they have built.

The only downside to the Yankees’ longstanding high-payroll, high-revenue model is that it could come crumbling down if their performance falters for any extended period. Luckily for them, the Yankees haven’t missed the playoffs in consecutive years since 1993, so they haven’t had to test the limits of their model in the real-world just yet.

Even just last year, though, when the Yankees still won 85 games and were in the playoff hunt most of the year, Ben Lindbergh notes that their ratings fell by roughly a third and their attendance dropped 3,000 fans a game. Yankees’ fans are more sensitive to winning than the average fan base, and severely declining ratings and empty seats isn’t going to support a $200-plus million payroll infrastructure for long.

How much money do they have left?

If we assume New York hasn’t abandoned its plan to get the payroll under $189 million this season, how much room do they have left before reaching that mark? They’ve already had an extremely busy offseason, signing the aforementioned Ellsbury, McCann, Beltran, and Kuroda to free agent contracts. With help from Cot’s Contracts and Yankees’ blog River Avenue Blues, we can try to patch together a reasonable estimate of how much room the Yanks have left before they hit their ceiling.

Type Estimated Dollars (M)
Under Contract (13) $173.07
Arbitration-Eligible (5) $14.8
Pre-Arbitration-Eligible (22) ~$5M
Player Benefits* ~$12M
Potential Bonuses** $13M

*All teams contribute money to player benefits
**A-Rod for 660 home runs and Jeter

Factoring in the $6 million from Alex Rodriguez’s 660 home run bonus, almost a sure-thing if Rodriguez plays this season, puts the Yankees at an estimated $210.87 million. Apparently, they have scrapped the plan to get under $189 million this year. Not so fast, though, as there’s one important caveat which includes the aforementioned A-Rod and revolves around his potential season-long, Biogenesis-induced suspension for 2014.

If Rodriguez is indeed suspended for all of next year, that’ll allow the Yankees to subtract $33.5 million (his salary plus the bonus) off their ledger and bring their for-tax-purposes-only payroll back down to $177.4, giving them a little bit of breathing room before again reaching the tax threshold.

The Yankees either (1) have scrapped their previous $189 million goal, (2) know A-Rod is going to get suspended and are still planning in the context of getting under the luxury tax threshold, or (3) don’t have any idea about the suspension and are hoping to get lucky if they want to remain on budget.

The Yankees have entered a new era where they are trying to show some form of financial restraint while also building a perennial World Series contender.

While the Yankees can still wreak havoc on the free agent market as they’ve shown this winter, signing (arguably) four of the top 10 free agents, they are also dealing with 29 other teams that are reaping the benefits of new television deals, revenue-sharing, and a general influx of money into the game that has spending at an all-time high.

You can look no further than Seattle, which is somewhere in the vicinity of a mid-market team, outbidding the Yankees — apparently by a significant amount — to pry away their franchise player.

It’s tough to fully grasp the Yankees’ 2013-2014 offseason approach just yet, with the Winter Meetings starting on Monday and the team apparently interested in a number of additional free agents. What we can already conclude is that New York has abandoned its conservative free agent spending habits of the past few years and seemingly put its plan to get under the luxury tax limit on hold.

Perhaps the missed playoff run in 2013 was too harsh a reminder of the money at stake if the Yankees consistently fall out of contention in a strong AL East – the Red Sox winning the World Series may have helped too — and the brothers Steinbrenner have realized that their father’s outrageous spending was sound business all along.

Dustin Palmateer

Dustin Palmateer

Dustin Palmateer

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