The Yankees’ Budget

OK, sure: the Yankees’ “budget” is often pictured as a mythological creature like the Loch Ness Monster – there’s occasional evidence for the existence of such things, but no confirmed sightings.  The alleged existence of a Yankees budget has been discussed as far back as 1995.  Allegedly, this budget prevented the Yankees from signing Mike Cameron in 2009, and Johnny Damon in 2010.

But in other respects, the Yankees’ budget is like a campaign promise: it becomes more difficult to pin down the further we’re past Election Day.  We were told that the 2010 Yankees’ budget was at $185 million, but somehow by Opening Day the Yankees’ payroll had reached $213 million.  We were told in the beginning of this year that the Yankees only had $2 million left in their budget to sign their final outfielder (money that was spent on the combo of Randy Winn and Marcus Thames), but somehow the Yankees found the extra $3.5 million needed mid-season to sign Kerry Wood and Lance Berkman, and had money left over for the possible mid-season acquisition of Cliff Lee.

So we need to be careful when we discuss the Yankees’ budget.  Hal Steinbrenner has said that the 2011 payroll will “stay within the same levels” as prior years.  Should we take him seriously?  I think we should.

I can see three reasons why the Yankees might be seriously budget-constrained in 2011: (1) the Yankees’ cash resources are NOT unlimited, (2) the Yankees need payroll flexibility to address roster requirements arising after 2011, and most importantly (3) with the collective bargaining agreement up for renegotiation in 2011, there are strong tactical reasons for the Yankees to keep their 2011 payroll as low as possible.

I’ll discuss these reasons for 2011 budgetary restraint in upcoming posts.  But for now, let’s address a fundamental question: assuming that the Yankees have a budget, exactly how large might that budget be?  Hal Steinbrenner said above that it will be about the same as last year’s budget – but how much was last year’s budget?

The Yankees are not in the habit of publishing their budgets.  But we can learn something by looking at the Yankees’ historic payroll levels:

The chart above shows the Yankees’ reported payroll at the start of the season (per Cot’s Baseball Contracts) and at season’s end (as reported by BizOfBaseball.com).  The published end-of-year numbers are important: they’re used to calculate baseball’s “luxury tax”, they cover the team’s 40-man roster, and they include bonuses.  But most of us focus on the payroll numbers reported at the beginning of the season, and that’s what we’ll look at here.

Note that the Yankees’ payroll increased dramatically between 2002 and 2005, but that since 2005 the Yankees have pretty much held the line on payroll spending.  Surprise!  It looks like the Yankees do have something of a budget.  The team has kept payroll between $190 million and $210 million, though they were willing last year to take payroll closer to $215 million.  Let’s use $215 million as being approximately the “level” that Hal Steinbrenner referred to above.

Is the Yankees’ current budget set at around $215 million?  Maybe.  But if this is the limit on the Yankees’ 2011 payroll, then the Yankees are not going to be big spenders this post-season.

Let’s look at the Yankees’ payroll commitment (actual and projected) for the team’s current players likely to remain on the 2011 roster:

The Yankees owe fixed payroll obligations in 2011 to the players highlighted in green and pink above (the pink-highlighted players will probably not appear on the Yankees’ 2011 roster).  The players highlighted in gold have not yet signed with the Yankees for 2011, so the salaries shown for these players are my estimates.  Note that in every case, I’ve estimated on the low side — I’m guessing that Pettitte and Rivera will not receive raises, and that Jeter will receive a substantial pay cut.  But even though I’ve guessed on the low side, I’m showing a Yankees payroll of $196 million for these 21 players.

If the Yankees sign Cliff Lee at a figure matching CC’s salary (and we can guess that Lee would cost the Yankees more than this), the Yankees’ 2011 payroll would balloon to $220 million, for 22 players.   To get to 25 players, the Yankees’ payroll could reach $225 million.  And if the Yankees cannot talk Jeter into a substantial pay cut … if the team needs to offer Pettitte a raise to persuade him not to retire … or if we take seriously the rumors that the Yanks are interested in Jorge de la Rosa — then we’re looking at a 2011 payroll that might exceed $230 million.

(If you’re interested in the Yankees’ budget and the Yankees’ future payroll, you should give a close read to this terrific piece by Joe Pawlikowski at RAB.  Joe focuses on the growing size of the Yankees’ long-term salary commitments — I share Joe’s concern, and I’ll try to focus on this problem in a later post.  But Joe also concludes that the Yankees “can probably sign Cliff Lee and still come in with a [2011] payroll under $210 million.”  With all due respect to Joe, I don’t see the 2011 numbers the same way that he does.)

Should we be concerned about the size of the Yankees’ 2011 payroll?  I think we should.  I think that the Yankees would like to keep their payroll at something much closer to the old $215 million limit.  I think there are good reasons for the Yankees to respect this limit.  I will address these reasons in upcoming posts.

17 thoughts on “The Yankees’ Budget

  1. $2m for Joba seems extraordinarily high for a middle reliever in arbitration, no?

    The long term salary implications of this team scare me to no end. At some point (2014?), this team is going to crash and burn due to the largess… unless the Steinbrenners are willing to continue to raise the bar significantly each year to compensate for the sunk costs/dead weight on this team. It is just starting to feel like a ponzi scheme.

    I really, really like CC, but if he exercises his out clause after 2011 and signs elsewhere, I will bemoan the team's chances due to his absence but I sure won't cry about the increased financial flexibility… knowing, however, that those freed-up dollars will just be used to chase down the next gotta-have starter (Felix anyone?)…

    • LarryAtIIATMS

      Jason, I took the Joba estimate from here: http://bit.ly/aDUSuO. But you're right, in retrospect that does look high. That's $1MM in savings right there!

  2. Brian

    *whatever it takes

  3. Brian:

    Our "obsession" might not be a healthy one and it might be much ado about nothing. But would you prefer us to simply adopt an "add at any cost" mentality? What we strive for here is to add the layer of fiscal considerations into any discussion, when appropriate.

    Some of us are finance guys (like me) and we're trained to look past the immediate and consider the longer term implications of our decisions. Sure, the Yanks' payroll can (and probably) will continue to escalate as needed, that doesn't mean the team can act without employing a sense of financial rigor to the decisions.

    The team can't really "spend whatever it takes" every single year, backloading the contracts and moving on. The piper expects to be paid at some point, no?

  4. Brian

    Another thing I don't like is the way that even in 2010, people still blindly favor management over labor

    It's insane to me. People get wildly jealous of players making millions of dollars a year (even though the money is taxed, which of course eases the burden on us 9-5'ers making 50, 60, 75, 100 k a year…), and yet, they have no problem with billionaires running rough shed over the rest of the country

    I know a lot of fans would love to see the Yankees lower the payroll to around 150 million or so… but my question is, WHY?

    So Hank and Hal can stuff that money into their pockets? What did they do to earn it, nothing except be born into the right family! I'd rather have Jeter and Mariano get the money, rather sign Cliff Lee, rather KEEP the payroll above 200 million and even raise it some more in the future.

    But that's just me.

  5. LarryAtIIATMS

    Brian, am I complaining? Favoring management over labor? I don't think I've done either of those things.

    I don't agree that the Yankees' budget is "whatever it takes to make the playoffs." There are limits on what even the Yankees can spend. The Yankees can (and do) generate enormous revenues, but these revenues are not without limit. Also, the Yankees play in a league with revenue sharing and a luxury tax, and the rules governing revenue sharing and luxury taxes can (and probably will) be changed to make life more expensive for the Yankees.

    I will address these issues in subsequent posts, but I think the Yankees are a lot closer to their real-life spending limits than most people believe.

    I agree with you: as a general rule, I'd rather see the players make a little more and the owners make a little less. I have no problem with successful baseball players becoming multi-millionaires. I'd personally like to see some of these riches trickle down to guys struggling to make ends meet in the minor leagues, but as you put it, that's just me.

    In any event, I'm not presently addressing management v. labor concerns. I'm looking at the concept of the Yankees' budget. I'm trying to figure out how large it is, and how much the Yankees really have to spend. Personally, I love to complain, and I like taking sides, but I'm not doing either thing here. Not intentionally, anyway.

  6. Brian

    I feel like we're going around in circles but I just can't get past this one (what I feel is rather obvious) point.

    When push comes to shove, they Yankees are GOING to spend what they need to spend to make the playoffs every year, they just are, that's what the fans demand. It's a multi BILLION dollar brand centered on winning.

    If the Yankees can make the playoffs every year for the next 5 years will a payroll around 200 million then they will do that. I'm fine with that. But if you think the yankees are going to MISS the playoffs consistently with a 200 million payroll vs. make it with a 225 million dollar payroll because "it's a business", you're wrong.

    • Jason@IIATMS

      One other thing that I hope you’ve picked up on because I’ve said it many times: I am staunchly pro-labor. Too many around the game seem to resent the players more than the owners. Me, I want the talent to earn their fair share, even if it’s completely out of whack with “reality”, whatever that might be!

      Look here for all my “pro-labor” references

  7. LarryAtIIATMS

    Brian, two other points, also rather obvious. First and foremost, you cannot simply spend your way to the playoffs. Yes, if you're trying to make the playoffs, it helps to spend a lot of money, but the money alone won't get you there. Just ask some of the other top-spending teams in baseball, like the Mets and Cubs. Or ask Don Mattingly about his experience as a Yankee.

    Second point: even if you could spend your way to the playoffs, there's no ironclad rule that the Yankees must do so. If the Yankees are behaving rationally, they're going to spend whatever it takes to make the most money. If they can make the most money by making the playoffs, then that's what they'll try to do. Agreed, at the moment, I think the Yankees can make the most money by spending in the $215MM range on payroll and making the playoffs. That doesn't mean it's rational for the Yankees to spend whatever it takes to make the playoffs. If the price for making the playoffs was $250MM annually, or $300MM annually, then it might be more rational for the Yankees to spend less and finish second.

  8. LarryAtIIATMS

    Brian, if the Yankees go to a $300MM budget, baseball WILL retaliate. They will bump up the luxury tax so that even the Yankees will feel the pain. You don't need a full-blown salary cap to reign in the Yankees' spending.

    Hey, this is IIATMS territory! I agree that the Yankees' spending was NECESSARY to their recent run of playoff success. But the spending was not SUFFICIENT, not by itself. Every serious study of this topic reaches the same conclusion: there is a weak correlation in baseball between spending and winning. Personally, I fight against these studies, because I think they're based on a small sample size that is heavily influenced by some big market teams (like the Mets and Cubs) who have underperformed. So when the experts proclaim that 2010 was a bad year for money, that doesn't say much about the power of money in baseball. It says that the Red Sox had a rash of injuries, and that the Dodgers sunk under the weight of the McCourt's mismanagement and deepening debt. Assuming that Sandy Alderson is able to turn the Mets around, we may suddenly see a better correlation between money and winning.

    But the experts are not entirely wrong. There is not THAT strong a correlation between money and winning, simply because baseball player performances are inherently unpredictable. All the Yankees (or any other rich team) can do is to spend a lot of money on players who have performed well in the past. But like investments, past performance is no guarantee of future success. Even using the most advanced sabermetrics, you can only predict about 38% of a baseball player's future performance based on his past statistics. Meaning that for every CC, you can expect about two A.J.s.

    So, agreed: the Yankees needed all of their financial resources to make the playoffs 15 times in 16 years. There's no way that the Rays or Royals could have pulled off the same trick. But the Yankees needed more than money to have succeeded this well. If you want to think that what the Yankees had (and so many other teams lacked) was "competent management", I won't argue that point in this post. You're touching on topics that go well beyond what I want to cover here, and besides, I'm hoping to address the importance of management competency in a series next year.

    • MVD

      Ha ha, really? I'm pretty AJ's past performance predicted his future horribleness accurately. He sucks. That contract was a mistake.

  9. Sabrina

    Larry I just hope the Yanks spend smart. I don't want them to just spend for spending sake. Spend money on the players we will need to make it to the playoffs. And make some smart trades too. I hear the Yanks are interested in BJ Upton. Hopefully the Yanks sign Lee and most of our free agents and we make a run as usual.

    • LarryAtIIATMS

      Sabrina, I've also heard about the interest in Upton. I try not to take what I hear too seriously. Upton would cost the Yanks dearly in prospects. Sure, the Yanks should be willing to trade prospects if the deal is good and they're meeting a need. But I don't see outfield as the Yanks' most critical need, and if I'm wrong, the Yanks could meet that need (without having to trade anyone) by signing Carl Crawford. So the rational side of me discounts anything I hear about Upton.

      • LarryAtIIATMS

        Correction: what I've heard is about Justin, not B.J. But B.J. might be available, too.

      • Sabrina

        mistake and said bj..i wish..it was justin upton. It is interesting and paying our way is easier but I fear the budget issues you have addressed. Maybe trading for pitching might be smarter. We need that

  10. Jim P.

    Larry — The debate between you and Brian is interesting regarding whether the Yankees would miss the playoffs over money. While Brian has a good point that spending a certain amount more makes sense to increase the chances of making the playoffs, I agree with you that there must be a tipping point beyond which it does not make sense FOR THAT PARTICULAR YEAR. There may be a balancing act between playing for a particular season and showing some prudence (relatively speaking) towards what are at some point limited resources. The Yankees' balance point is just different from everyone else's.

    But here's a possible solution to the issue. Perhaps baseball might consider changing the way it ranks the teams. Instead of by wins and losses, why not by return on capital, or free cash flow. That would offer — in one fell swoop — the benefits of transparency, elimination of luxury taxes, and instant creation of parity among small market and big market teams alike. Hey, I'll even volunteer to round up some of my old wiffle ball buddies — we'll play for free — to play a 162-game season. If we can win just one game, we'll be at the top of the heap. While TV revenue may suffer, our team won't need the revenue anyway. We'll need a blog writer to stimulate interest — are you in? Whoops, there goes the budget….

  11. LarryAtIIATMS

    Jim, it's not clear to me whether your proposal would rank teams before or after revenue sharing. No matter. Your proposal fails to account for the law of diminishing returns. Let's look at the Yankees and a second, truly awful baseball team — the 2010 Pirates spring to mind. Adding ten wins to the Pirates would be a lot easier (and less costly) than adding ten wins to the Yankees. The Yankees ARE spending the money that they hope will get them those wins needed to finish on top of the baseball heap, and as a result they'll always be spending more per win than a team at the bottom of the pile.

    The law of diminishing returns is an unavoidable part of doing the business of baseball in a way designed to field a consistent winner. But if you're ranking teams on the basis of who produces the most wins with the least cash (I think that's what you're proposing … as your wiffle ball team is not going to generate much in the way of cash flow), then teams like the Pirates and Marlins are going to play in a lot of World Series.

    Then again, I should know better than to debate these matters with you Wall Street types. What's next on your agenda of economics run amok? I sense a discussion of Elliot Wave theory in my future!

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