The following is a guest post from Zachary Abate, a journalist in the DC area and lifelong Yankees fan. He wrote about the Yankees’ financial situation and their offseason spending.
Hal Steinbrenner and the Yankees ownership team have talked about getting under the luxury tax threshold for years. In a March 2015 interview with Bill Madden of the New York Daily News, Steinbrenner responded to claims of being cheap after the team passed on free agents Max Scherzer and James Shields and were outbid by the rival Red Sox for Cuban top prospect Yoan Moncada, specifically by citing the tax threshold.
“I’m not saying we’ll never give another seven-year contract, but going in you know you’re probably only going to get three-four good years out of it. It remains my goal to get under that $189 million (luxury-tax threshold), but it’s not going to happen for at least two more years when these big contracts we have expire. But I’ve continued to say you shouldn’t need $200 million to win a championship.”
The Yankees finally reached Steinbrenner’s goal in 2018, finishing the season with a $193 million payroll — approximately $4 million below the $197 million luxury tax threshold for the season. Mission accomplished.
During the same stretch of years in which Steinbrenner and company banged the luxury tax drum, Yankee fans debated where the financial future of the team lied. The most optimistic among the crowd pointed to the 2018-2019 offseason when Bryce Harper (26), Manny Machado (26), Clayton Kershaw (31), Josh Donaldson (33), Charlie Blackmon (32), and others were scheduled to hit the free-agent market. If the Yankees could sneak under the luxury tax threshold in 2017 or 2018, they could hit the reset button, freeing themselves of any multiplier penalties, and splurge on this premier crop of players in a spending spree reminiscent of the 2008-2009 offseason. Surely this was the plan.
Other fans were quick to point out that the Yankees ownership never said they would resume their big spending habits once the team was under the luxury tax threshold. And if Brian Cashman could find a way to build a competitive roster for around $200 million, the temptation to remain near or under the threshold would be great for Hal Steinbrenner.
The Declining Spending Habits of the New York Yankees
As the early 2000s teams fade a bit in our memories, it’s worth revisiting just how much financial might the Yankees used to exercise. The following revenue figures are courtesy Forbes, while the player payroll figures are from Cot’s Contracts.
Going back to 2003, the first year of the collective bargaining agreement instituting a luxury tax, the Yankees raked in approximately $238 million in revenue and spent more than 75% of that revenue on player payroll, just around $180 million. The Yankees didn’t simply carry the league’s highest payroll; they crushed the competition. While the Yankees were knocking on the door of $200 million, only two other American League teams, the Rangers and Red Sox, crossed the $100 million plateau — and just barely. The next closest MLB team in spending, the Mets, carried a $116 million payroll. Adjusted for inflation, the dollar gap between the Yankees (no. 1) and Mets (no. 2) spending in 2003 was the same as the gap between the Red Sox (no. 1) and Indians (no. 16) spending in 2018.
In the years that followed, the Yankees annual revenue soared, passing $300 million in 2006, $400 million in 2009, $500 million in 2014, and $600 million in 2017. TV deals, casino partnerships, and corporate sponsors pumped cash into the league, and no team saw revenues rise as swiftly as the Yankees.
And yet, spending on player payroll did not hold steady. Instead, over the 15 years since the 2003 CBA, the percent of Yankees revenue going to team payroll dropped sharply: from approximately 75 percent in 2003 to 60 percent in 2008 to 50 percent in 2010 to less than 40 percent in 2017.
Looking at the data, it seems apparent that the luxury tax threshold has worked as a cap to curb Yankees spending habits, even far before Hal Steinbrenner’s publicly-announced austerity plan. While Yankees payroll grew by $65 million between 2001 to 2003, it’s been mired in the $185 million to $245 million range in the 15 years since. Indeed, even despite the flatlined payroll, the Yankees have paid $341 million in luxury taxes since 2003 (on average $21.3 million per year).
It’s hard not to compare the Yankees payroll growth with that of the Red Sox. At their post-2003 spending peak (2016), the Yankees had a $244 million payroll, an increase of 36 percent from 2003 not counting inflation. At their post-2003 spending peak (2018), the Red Sox had a $239 million payroll, an increase of 128 percent from 2003 not counting inflation. That despite New York enjoying hundreds of millions more in revenue than Boston over this period.
If the Yankees simply maintained the same level of spending as they did in 2003, ignoring revenue gains but adjusting for inflation, they would’ve spent $247 million in 2018. If the Yankees preserved the same distance between themselves and the next highest spender as they did in 2003, they would have spent $370 million in 2018. If the Yankees spent the same percent of revenue on payroll as they did in 2003, the team would’ve spent $468 million in 2018, using 2017 revenue numbers.
Now don’t take the previous paragraph as an advocation for dropping a payroll north of $450 million in 2019. Those numbers simply show us the massive financial might the Yankees levied in the early 2000s, and the advantage they have let slip away.
Where’s the Revenue Going?
The knee-jerk reaction to the above question is simply, “Ownership is pocketing it.” And while ownership is most certainly pocketing some of the money, there are other factors at play.
Revenue tells us the income being earned by an organization, but that is not the same as profits, which tells us the difference between income earned and expenditures. While exact data on Yankee profits is not publicly available, we do know that Yankee expenses are massive.
Expenses for the franchise include annual debt payments for Yankee Stadium construction, which reached $76 million in 2018. Additionally, the Yankees have recently sunk millions into renovating Steinbrenner Field and Yankee Stadium, upgrading minor-league facilities, and amassing possibly the largest analytical department in the major leagues.
Other expenses include stadium upkeep, inventories, non-player salaries, legal fees, travel expenses, recruiting and scouting costs, player development costs, marketing, taxes, and revenue sharing. Unfortunately, the total sum of these expenses is not disclosed by the team, though there are reports that Yankee profits may be lower than the public realizes.
Forbes calculated the Yankees operating income, which they define as “earnings before interest, taxes, depreciation and amortization,” as only $14 million in 2017, which would put them in the bottom third in the league. Note that this total does not include any operating income from other businesses owned or partially owned by Yankee Global Enterprises LLC, such as Legends Hospitality Management, the YES Network, and the New York City FC soccer team.
It’s impossible to dig further into the numbers here unless more data is made available. While the Yankees are investing a smaller and smaller percentage of revenue into player payroll, they are at least investing money in analytics and player development. But are non-payroll expenses truly eating up over 60 percent of revenue? Or is this fancy accounting? Mets-like financial incompetence? Or just rising costs in an expensive industry?
The number crunching is murky.
Spending on Payroll Seems to Be a League-Wide Issue
While league-wide revenue rose for the 16th consecutive year in 2018, reaching a record of $10.3 billion, the total amount spent on team payrolls dropped and the average MLB salary dropped. The table below shows league revenue according to Forbes estimates and total team payrolls according to the Commissioner’s Office.
The decline in revenue spent on player payroll was less steep league-wide than it was for the Yankees, but the decline was there nonetheless. While FanGraphs and other outlets were ringing warning bells earlier, it wasn’t until the sluggish 2017-2018 and 2018-2019 offseasons that the issue of declining team spending really came into the spotlight. And whether lethargic free-agent spending is a result of collusion (unlikely), the luxury tax working exactly as intended by owners (likely), or simply the result of teams abandoning players over 30 for younger, cheaper talent, player salaries will be a hot topic in negotiations between MLB and the MLBPA when the current CBA expires in 2021.
But it’s not all bad news on this front. Ben Lindbergh of The Ringer argued in February 2018 that the change in percent of revenue going to players may not be as dire as previously reported, when adding player benefits to the payroll figures and using MLB’s much lower league revenue estimates.
What Does the Future Hold for the Yankees?
The word “cheap,” when used as a descriptor for an individual, means stingy or penny-pinching. Therefore, it’s not a good descriptor for Hal Steinbrenner, who has OKed team payrolls north of $200 million for most of the past decade, paid tens of millions in luxury taxes and revenue sharing, and allowed significant investment in the team’s analytical department and player development areas. And the Yankees certainly haven’t been cheap by the strict definition of the word this offseason, spending approximately $89 million in guaranteed dollars to sign Zach Britton, Brett Gardner, J.A. Happ, CC Sabathia, and Troy Tulowtizki.
But it seems that the Yankees have undergone an intentional shift in strategy and surrendered their single greatest advantage — the willingness to financially bully their rivals.
In 2018, a year in which the team had clear World Series aspirations, the Yankees carried a player payroll smaller than their payroll from 13 years prior, and that’s without adjusting for inflation.
The Yankees spent a smaller percent of 2017 revenue on 2018 Opening Day payroll than 28 other teams — the tanking White Sox were the only team behind them. Yes, even the Rays, Athletics, and Marlins invested a larger percent of revenue into their Opening Day payroll than the Yankees.
Even prior to 2018, the effects of lowering payroll were felt in the Yankees pursuit of a championship. In August 2017, the Yankees passed on claiming Justin Verlander, who had finished second in the Cy Young race in 2016, because of his salary. A claim would have either given the Yankees Verlander for just the price of his contract, opened trade negotiations between the Yankees and Tigers, or forced the Tigers to pull Verlander off waivers. Instead, the Yankees did nothing, for fear of being stuck with Verlander’s salary, and the rival Astros made their move. Verlander was instrumental in defeating the Yankees in the playoffs and leading the Astros to a championship.
The 2018-2019 offseason is a test of the Yankees willingness to display their financial might. Two 26-year-old premier free agents, Bryce Harper and Manny Machado, are available and only a handful of teams are competing for their services. The Yankees could use either one — Harper would help balance an extremely right-handed lineup, while pushing Gardner into a fourth outfielder role, and Machado would give the Yankees much-needed stability at a premium infield position.
Signing a fourth outfielder, a 7th inning reliever, a minimum-wage veteran infielder, and two 35+ year-old starters is one thing. But making a long-term investment in Harper or Machado is another thing. This is exactly where the Yankees financial might is most crucial. It allows Cashman to assemble a competitive team and then add the expensive, impact player to take them over the top.
Spending simply for spending’s sake is foolish. And it’s reasonable to assume the Yankees may have been spending too much of revenue on player payroll in the early 2000s to be sustainable — in 2003 for example, the Yankees spent more than 75 percent of revenue on payroll, while league average was 59 percent.
But there’s no denying these facts:
- The Yankees window to win the World Series is open now, and there is no guarantee — no matter how talented the roster — that the window will remain open for a long time.
- The Yankees have not even won their division since 2012.
- Young players on potential Hall of Fame paths are rarely, if ever, available in free agency. This offseason, two of them are.
- The Yankees have room for both Machado and/or Harper on the 25-man roster, and both would improve the team in 2019 and going forward.
- The Yankees are currently spending a smaller percent of revenue on player payroll than they have at any point in the last 15+ years and well below league average.
- The Yankees rake in more revenue than any other MLB team by a wide margin.
It feels like the Yankees are at a crossroads. The years-long goal of getting under the luxury tax threshold and resetting the penalties has been accomplished. Hal Steinbrenner and the Yankees brass must decide if the team will once again wield their checkbook as a financial cudgel over their rivals or simply accept being just another team hovering around the luxury tax threshold.
For fans who have only seen prices — for tickets, parking, stadium food, memorabilia — go up over the last 15 years, it surely does not appear like the Yankee ownership will be sharing any of the savings they enjoy.
So swing the cudgel, Hal. This is your moment.