The $189M Payroll: Part 2 of 2

The $189M Payroll: Part 1 of 2
Open Thread: John Axford

This post was written by Moshe Mandel and Stephen Rhoads

In part 1 of this series we went through six different payroll scenarios for the Yankees over the next decade. We were careful to distinguish between total savings and CBA savings, noting that how you treat the difference in payroll can make a big difference. Where you come down on the question of how much the Yankees can save is very much determined by which figures you’re examining. Let’s use Scenario 1 as an example. In this Scenario, payroll goes from $210M in 2013 to $189M in 2014, and then goes back to $210M in 2015. We summarized the savings accordingly:

2014: Payroll at $189M
Payroll savings: $21M
Revenue sharing refund: $10M
Luxury tax savings ($21M*50%): $10.5M
Total saved: $41.5M

2015: Payroll back at $210M
No payroll savings
No refund
Luxury tax savings ($21M*50%) – ($21M* 17.5%): $6.825M
Total saved: 6.825M

2016: Payroll stays at $210M
No payroll savings
No refund
Luxury tax savings: ($21M*50%) – ($21M*30%): $4.2M
Total saved: $4.2M

2017: Payroll stays at $210M
No payroll savings
No refund
Luxury tax savings: (21*50%) – (21*40%): 2.1M
Total saved: $2.1M

TOTAL SAVINGS: $54.625M
CBA Savings: $23.125M

Now, how you account for 2014 really determines whether the savings are significant or not. We peg the initial savings figure for 2014 at $41.5M saved. This number is comprised of a $21M reduction in payroll, a $10M refund from revenue sharing, and a $10.5M savings in luxury tax. However, the $21M reduction in payroll and the $10.5M reduction in luxury tax don’t really have anything to do with the new CBA per se. This $30.5M savings is a savings they could have gotten at any point in the last decade simply by reducing payroll. Thus, the $30.5M is comprised of savings prompted by the CBA, but it’s not comprised of savings emanating from the new CBA. It’s a $30.5M they could have gotten at any point in the last few years and chose not to. It’s still a cash item – it’s not depreciation in a cash flow statement – and it still means more money in the coffers, but it’s not a CBA savings per se, at least in our estimation. This is an important distinction.

In 2015, the payroll goes back to $210M, which means there are no payroll savings and no revenue sharing refund. There is a luxury tax savings though, as the new CBA allows teams to “reset” the luxury tax by going under the threshhold in just one season, an option that was unavailable under the old agreement. This means that any savings reaped due to the reduced tax rate can be attributed to the new CBA and can therefore be included as “CBA” savings. In this particular scenario, these savings are comprised of a $6.825M difference in what their bill would have been had they not gone under $189M in 2014 compared to what it is since they did go below the threshold. In other words, had they not gone under $189M in 2014, their luxury tax rate in 2015 would have been 50%. Since they did, it’s $17.5%. The difference is $6.825M. This is a real CBA savings and it plays out over the 2016 and 2017 as well (rate goes up to 30% and 40%, respective, per the CBA). Thus, the total amount saved in Scenario 1 is about $55M, but only $23M of it is prompted by the new CBA. Here’s the summary, then, of all six scenarios and how much the team could save by going with each option.

Scenario 1 ($210M to $189M in 2014, returns to $210M in 2015 and beyond): total savings of $55M, CBA savings of $23M.

Scenario 2 ($210M to $189M in 2014, stays at $189 for 3 seasons): total savings of $147M, CBA savings of $53M.

Scenario 3 ($210 to $189M in 2014, stays at $189 for 2 of 3 seasons): total savings of $116M, CBA savings of $54M

Scenario 4 ($220M to $189M in 2014, returns to $220M in 2015 and beyond): total savings of $76M, CBA savings of 29M.

Scenario 5 ($220M to $189M in 2014, stays at $189M for 3 seasons): total savings of $199M, CBA savings of $59M.

Scenario 6 ($220M to $189M in 2014, stays at $189M for 2 of 3 seasons): total savings of $152M, CBA savings of $59M.

Clearly the Yankees would save the most total money in Scenarios 2, 3, 5 and 6. In these scenarios, they’re dropping their payroll down to $189M and keeping it there for a substantial amount of time. The most they could save would be in Scenario 5, in which they shave nearly $40M off their payroll and maintain the reduction. In this case they’d net nearly $200M more, $59M of which would be a derivative of the new CBA.

These gains would be real, but they’re not entirely relevant for our purposes. Saying the team could save nearly $200M in Scenario 5 is true, but it’s also true they could save $75M right this moment if they dropped their payroll down by $75M. Of course, they haven’t done that at any point in recent memory. Our concern is the CBA savings.

The team would obviously save the most by dropping the payroll and keeping it low. Their tax bill would be lower, and they’d receive money back from the revenue sharing refund. However, these CBA-related savings don’t seem to amount to more than $60M. If they don’t maintain the new low payroll, the savings are even less. In Scenarios 1 and 4, in which they drop the payroll for one year and return it to prior levels immediately after, they’d only save $23M-$29M over four years. At most, this amounts to a little over $7M per year. In the latter scenarios, this annual savings figure rises to a little less than $12 million per year.

It’s our opinion that if the Yankees were interested in saving fifteen to thirty-five million dollars a year in payroll and tax, they should have done it already. They could have done it at any point in the last decade. We’re told that the new CBA incentivizes them to get below $189M to incur specific savings, but we see that the only time those savings are truly noteworthy is in the unlikely scenario in which the Yankees stay under $189M for a significant amount of time. Furthermore, we see that the CBA-related savings, at their most extreme, are about $12M a year. Are the Yankees really concerned about $12M a year in “new savings”? Are they suddenly concerned about the fifteen to thirty-five million dollars a year that they could have been saving all along? Perhaps most importantly, are they willing to forgo top free agents and risk missing the postseason to garner those savings?

Without further guidance as to what the true long-term goal is, we can’t get more specific than this. But it seems to be the case that the team will only realize serious, significant gains if they make a permanent move towards a payroll level more reminiscent of the early part of the last decade. Perhaps we’re stuck in the denial stage of the 5 stages of grief. It’s hard for us to understand the prospect of a “new normal” in which the payroll drops 10-20% while the team simultaneously reaps greater and greater revenues from a lucrative television network and new stadium. It’s even harder for us to understand risking contention in an increasingly competitive American League with an already-expensive roster to simply eke out a pittance in savings relative to the team’s balance sheet. But this may be the new Yankees reality, in which the Steinbrenners reach for a modicum of fiscal responsibility at the expense of some performance certainty. If it is, we all need to adjust our expectations accordingly.

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The $189M Payroll: Part 1 of 2
Open Thread: John Axford
  • JK

    Scenerio 2, 3, 5 & 6 are completely wrong. The revenue sharing refund would be near 40M per year, not 10-15M

    • http://riveraveblues.com Moshe Mandel

      Where did you get that from? Because that is not what Joel Sherman’s article said, and that’s where the whole 189 thing is coming from.

      • JK

        Several teams are getting disqualified from receiving revenue sharing from the rich teams.

        Their revenue sharing bill would be reduced from 100M+ to 60M or so, the 40M in savings is annual! You think the Yankees would be talking like this if it wasn’t substantial money to be saved?

        • http://twitter.com/stephen_mr Stephen Rhoads

          You’re just reiterating what you said before.

          Sherman’s quote: “And even if they just went under $189 million for 2014 before going over again in 2015, the Yankees would receive serious benefits. They would get about $10 million in the revenue sharing disqualification program”.

          So again Im curious where you’re getting your info on the $40M annual reimbursement, given that Sherman pegged it at $10 mil in 2014.

        • http://riveraveblues.com Moshe Mandel

          Two teams, I believe. Not sure how you get 40M saved per team. Considering Sherman’s article states it pretty clearly, I’m going to stick with our conclusion.

  • Andy In Sunny Daytona

    George wouldn’t be concerned over $12 million, but there are a lot more hands digging into the Yankee profits now, and they probably think they are all entitled to “George the Owner”-type money.

    • MannyGeee

      You know what George woulda done? He would have gone on a media blitz to denounce this entire Luxury Cap revamping lunacy and (rightly) called it a system to single him out for being an owner who cares about putting a winning team on the field.

      and then he woulda bumped the payroll to $250M in 2014 and wrote the Luxury Tax check in his underwear, while lighting a cigar with a $100 Bill. And he woulda told someone about it….

      LIKE
      A
      FCKING
      BOSS

      Thats what George woulda done.

      • the other Steve S.

        Love it…

  • Tom Swift

    The CBA seems to be aimed at getting the Yankees to be more like other teams and have some cyclicity in their performance. The idea might be that if the Yankees are seen to be “rebuilding” every once in a while, that takes the political pressure off the League to adopt more drastic measures, such as a hard salary cap.

  • Chris

    Is anyone going to see how this will effect the other teams in MLB? I always assumed that teams like the Marlins and Pirates pocketed the revenue sharing money only to one day go on a spending spree (like we saw this year) but a portion of that comes from the Yankees going over the tax. 25 million is a lot of money!!! Now if you take that away, and give the Yankees 10+ what does that do to revenue sharing? Does that not penalize the small market teams even more? How is it fair to give the New York Yankees any revenue sharing? This new CBA looks like a case of be careful what you wish for.

    • Need Pitching

      luxury tax proceeds go to the Industry Growth fund and Player benefits, not to small market teams, so that aspect will have little effect on small market teams (other than all teams may be required to pay slightly more in player benefit costs to make up for the shortfall) The $10+M the Yankees would realize in revenue sharing would be from revenue sharing no longer being paid out to big market teams like Toronto, and would only hurt the bigger market teams receiving revenue sharing, while having zero effect on small market teams

  • Chip

    So you’re saying that we can have a rotation of CC/Hamels/Darvish/Nova/Banuelos next season? Awesome

    • Mike Myers

      you forgot trading nova for king felix

  • Jose M. Vazquez..

    One of the problems the Yankees are having now is that they have been setting the market for a long time. They have overpaid in many occasions getting little in return for their investment.

    • Jose M. Vazquez..

      By overpaying for players the Yankees have set the price to be paid on free agents. This will be demonstrated in the next few years when they stop signing players to big contracts. Prices will probably drop if the Yankees are not in on any free agents. By the way, I don’t think Hamels or Cain will reach free agency.

  • MattG

    I don’t understand why some scenarios start at $210M, and others at $220M, but I’ll leave that alone.

    IMO, the reason the Yankees are intent on doing this is not entirely to save money. They are doing it because Brian Cashman believes a $189M payroll is more than enough to be a perennial winner. If not for the meddling of his bosses, Cashman might’ve had this team under the threshold already, with no Rodriguez or Soriano (certainly), and possibly no Burnett. If you want a silver lining on this new CBA, the Yankees will probably drop their stance on extensions for pre-arbies, and re-double their commitment to internal development and patience.

    The only thing that saddens me is that I see a team in 2014 that looks vulnerable, as the Yankees will have $55M tied up in two corner infielders in steep decline. While $189M is certainly plenty, the $134M they have for the other 23 roster spots will make 2014 dicey.

    • http://riveraveblues.com Moshe Mandel

      The scenarios are based on different payroll assumptions. One is based on the idea that if they ignored the effects of the new CBA, they would have a payroll around 210, the other around 220. It basically depends on how you see salaries and payrolls inflating.

    • Sweet Dick Willie

      They are doing it because Brian Cashman believes a $189M payroll is more than enough to be a perennial winner.

      Maybe ownership offered Cashman a HUGE bonus (percentage of savings, maybe) if he delivered the savings?

      I have not heard this, and have absolutely nothing to back it up; just throwing it out there as a possibility.

  • MannyGeee

    well, bright side is they only have $75M committed to 2014 right now…

    Bad news of course is that that is only 4 players.

    • Mike

      That still leaves them $5.43 million per player to fill out the rest of the roster. I’m pretty sure that should be doable. If 5 players are league minimum ($500k), that’s $6.97 million for each of the last 16 players. That’s even more doable.

  • MattG

    I assume that if they are at the $189M threshold on opening day, that means they cannot take on salary during the season, lest they will not reset the tax?

    • http://www.twitter.com/twilkinsonmedia T-Dubs

      Luxury tax is based on payroll from December 12- December 11 (give or take a day, I believe). So players acquired during the season are subject to the luxury tax.

      If a player (like Berkman in 2010) is on the Astros for 80% of the season and the Yankees for 20%, that 20% of his total contract gets factored into the 2010 Yankees’ luxury cap figure.

  • Januz

    The biggest change in the CBA that will occur relates to the draft, where the strict budgeting teams will actually force teams copy the Yankees method of signing fewer guys, as a way to save money (Since everyone will be on a budget.) This particularly relates to avoiding those players that can be considered filler. It means being more selective about who will be signed. For example, they signed only 23, and they essentially abandoned the second half of the draft (The signed only three guys: Chaz Hebert (pick 27), John Brebbia (Pick 30) & Joey Maher (Pick 38)). This coupled with the earlier draft signing day, and the decline in rounds, will force teams to know their draftees much better than ever before. For example: Guys like Hebert, James, Camarena, Jones & Cave that were considered talented but tough signs (While wanting to be Yankees) were added to the organization, and the guys who were not as eager, and or not as good were not (The Exception to this was Greg Bird who showed how good he was in Summer Leagues). I really think for this reason, you will see fewer players in Organized Baseball (Summer Leagues, Minors and College). It will be interesting.

    • Ted Nelson

      I’ve read that the $ allocated to a pick is lost if that pick isn’t signed. And I’m really fuzzy here, but there’s something about it being for the first 10 rounds.

      • http://www.yankeeanalysts.com Eric

        That’s correct, you can’t just redistribute the money slotted for an unsigned player

  • RetroRob

    The Yankees crossed the $200 million mark in 2005 with an opening day payroll of $209 million. In 2011, their opening day payroll was $207 million. It appears that 2012 will mark the 8th straight season where the Yankees will sit around the $200 million mark. Since the rapid increase in payroll under GMS in the mid-00s, the Yankees payroll has pretty much stablized, meanwhile the luxury tax threshold has creeped closer, and the Yankees have paid less tax. It seems clear they were trying to hold the line on payroll until the luxury tax threshold caught up. Since the penalty is now being increased to 50%, and there are also additional savings to be had, I think the answer is a very strong Yes that the Yankees goal under Hal Steinbrenner is cease paying the luxury tax, or at least not be paying it every year.

    • http://riveraveblues.com Moshe Mandel

      The problem, though, is that they did not stop signing long-term deals that will make it increasingly difficult to contend every season while holding the line.

      • RetroRob

        I know. The Soriano deal is a perfect example. They could have dropped their luxury tax base by an average of over $12 million per right there.

        That said, they may have a timeframe on when they planned to achieve falling below the threshold, knowing it can’t be done immediately, and also waiting to see the details of the new CBA to confirm what they’re up against.

  • John Ya Ya

    I’m still kind of confused as to why a team like the Yankees that makes so much cash just off of its TV network earnings is looking to save a comparatively measly $10.5 million on payroll luxury taxes. That is unless they made some backroom deal with MLB to trim their payroll and avoid more severe restrictions in the future. Of course there’s also the possibility that I’m completely missing the point.

  • viridiana

    Yanks are no lock to keep drawing close to 4 million fans a year if they start fielding non-winner –, or even just boring teams dominated by fading overpaid stars. This could all back-fire big time. It would make more sense under old rules, where Yanks could still shine with international talent. But now, once the current crop of farm talent has run through the system may be tough to excel without big spending.

  • Jayfoot

    All I care about from the financial side is we have a competitive team and I think 189mill should be more then enough. Even if the yanks have 75 million tied up with 4 players in 2014, that means 114 million for 21 guys or 5m each. If it is the 40 man roster then its 3m each.

    If they raise ticket prices though in any of those years though we should go crazy.

  • http://www.twitter.com/twilkinsonmedia T-Dubs

    The question I wonder also is how much monetary gain the Yankees see with a successful Postseason run. For instance, the amount of extra money earned in 2009 vs. 2008.

    It would be really hard to justify shorting the active roster in an attempt to shed salary if it meant less of a chance of success in the Postseason. Unless it’s a full-on sea change and they plan on staying under the luxury tax threshold for 3+ years.

    • Need Pitching

      according to this article, the 2009 WS run resulted in an extra $72M in revenue. It’s entirely possible that if the lower payroll results in not making the playoffs, they would lose more in revenue than they would gain with cost savings.
      http://itsaboutthemoney.net/ar.....99-budget/