“Budget Guy” Says Yanks Have A Budget, Leaves Me Wondering

Let’s revisit old ground and look once again at the amount of the Yankees’ payroll commitment for 2011:

The player salary figures shown in green above are committed, and the numbers shown in yellow above are estimated.  The pink numbers are commitments for players we don’t expect to see in pinstripes in 2011.  At Jason’s suggestion, I reduced the numbers I originally projected for Hughes and Joba.  Most of the other salary figures projected for 2011 are simply the amounts paid by the Yankees to the affected players in 2010.  Bottom line is that the Yankees have estimated salary commitments at this point for 21 active players at a total cost of around $197 million.

Try to find a way to add a Cliff Lee-size salary to these existing commitments, while staying under $210 million, the reported high end of the Yankees’ payroll budget.  It can’t be done.

Of course, Andy Pettitte might decide to retire.  That would reduce the numbers shown above by about $12 million, leaving the Yankees with $25 million to spend to fill five remaining roster spots.  With Pettitte gone, the Yanks could spend $23.3 million on Cliff Lee and $1.7 million on four minimum salary guys to fill out the roster, and perhaps end up with the desired $210 million in payroll.  But the Yankees don’t want Pettitte to retire.  Nor are the Yankees acting like they want to fill their remaining roster spots with minor league promotions.  We’ve heard rumors that the Yanks are interested in Russell Martin, Mark Prior, Pedro Feliciano and Kerry Wood, and none of these guys are going to sign for the league minimum.

We said it here before: if the Yankees sign Cliff Lee and retain Andy Pettitte, that will push payroll spending into the neighborhood of $225 million to $230 million, at minimum.

So, what’s the true story here?  Is Hal Steinbrenner a “budget guy” who’s bad at math?  Or perhaps Hal really has a $225 (or so) million budget in mind, and Marchand got his $200 to $210 million from somewhere else?  I don’t know the answer.  But if the Yankees wanted to prove that their budget is a myth, they could not have done better than to have Hal step forward as the “budget guy” in a story claiming that the Yankees want to sign Cliff Lee and stay within a $210 million budget.

Maybe I should write my next post about the Loch Ness monster.

15 thoughts on ““Budget Guy” Says Yanks Have A Budget, Leaves Me Wondering

  1. AFAIC, the deferrals help for the Lux Tax calculations and actual budgetary/cash flow. Perhaps it saves a few million, (maybe 2-3?) this year.

    Larry's using the AAVs here, where possible. So yes, there are some differences, but it doesn't change the tenor of the story. Nessie is still out there. Right, Larry?

  2. This assumes that $210m is a real number, not a negotiating stance. Assuming Hal knows what he's doing (for the sake of argument), putting out your real budget wouldn't exactly be smart business. Lowballing himself might keep prices down. It's not exactly business genius or anything, but maybe worth a shot?

  3. Adam, we don't know the amount of the deferral. My guess is that it isn't much. The Yanks offered Jeter $15 million a year straight up, and the two sides ended up at $17 million. Maybe the difference between the two numbers is deferred.

    Jason, life is too short for me to figure out how to calculate salary for purposes of computing the luxury tax. But deferred compensation does not reduce the luxury tax calculation — it is added back into the salary actually paid during the term of the contract.

    Moose, if the $210 million is a negotiating stance, then it is not a budget. Also, how does it help negotiations to say that the team's budget is between $200 and $210 million? Are we trying to tell Cliff Lee that the Yanks won't sign him for more than $13 million a year? Besides, I thought that the sticky point in these negotiations was that Lee wants a 7-year deal and the Yanks won't go past 6 years … so I don't see how talking budget will bridge this gap unless the budget we're discussing is for 2017.

  4. He's talking about the portion of the payrol that's subject to the luxury tax. As you guys know and have reported, the Yankees do have a budget, one for the start and one that increases for the postseason push.

    One of the Yankee biggest concerns is how contracts are structured and how they relate to the luxury tax, since there's a penalty (40%?). Why has Kei Igawa been banished to the minor leagues, never to throw another pitch in the majors? The answer is the budget: They managed to get him off the portion of the payroll used to calculate the luxury tax, so he'll never return to the Yankees because they'd have to put him back on. It's the luxury tax budget they're trying to control. They can stucture Lee's contract with an up-front bonus, as they did with CC, that will reduce the luxury tax.

    So Larry's story is fine, but it's not acknowledging what Hal is really concerned about. Saving 40% on the dollar.

  5. A correction: By structuring Lee's contract with an up-front bonus, it won't reduce the luxury tax, but it will decrease the luxury tax payroll in year one. By year two, Posada's contract will be gone, just as Lee's goes back up. It's shifting the dollars around in the budget. So certainly the Yankees are concerned about their overall budget, the real amount of money they pay out each year. That part of the budget is more flexible. I suggest it's the luxury tax payroll that is not that flexible, or is only as flexible as the accountants can structure it. Every dollar saved is a $1.40.

  6. MikeD, you're making good points, but let me clear up a few points for you.

    It cannot be the case that the Yankees have a $200 – $210 million budget for the payroll that is subject to the luxury tax, because the Yankees have routinely exceeded this amount in prior years and will probably exceed this amount in 2010. If you go back to my original budget article here (http://bit.ly/gtqK5f), you'll see that the Yankees' end of year payroll used for luxury tax calculations has been around $220 million for the past 3 years. We don't have the 2010 calculation yet (we should have it in a week or two), but you can anticipate that the end-of-year payroll for 2010 will be at least $220 million, maybe more.

    The luxury tax payment calculation is quite complicated, which is why I decided to focus instead on the beginning of year payroll numbers as reported by Cot's. I do not pretend to have mastered the rules governing the luxury tax — they're all available in Article XXII of the collective bargaining agreement (available here: http://bit.ly/bv0tNX) for anyone to examine and analyze. The general rule is that payroll is computed for luxury tax purposes based on the average annual value (AAV) of a player's contract — just take the total amount payable under the contract, divide by the number of guaranteed years under the contract, and you have the AAV. The rule for up-front bonuses is the same: you add the bonus in with the other amounts payable under the contract.

    So for example, if the Yanks agree to pay Lee $22 million a year over 6 years plus an up-front signing bonus of $12 million, this would result in the AAV of the Lee contract being $24 million a year. True enough, the Yanks will have paid Lee $34 million in year one and only paid luxury tax on $24 million, but this is not exactly a tax savings. The Yanks could achieve the same effect by paying Lee more in the early years than in the later years. But the main point is this: the luxury tax system looks at average salary, it is designed to ignore fluctuations in salary. Show me where I'm wrong if you think I'm wrong, but I don't think the Yankees can defer the luxury tax hit for Cliff Lee regardless of how they structure Lee's contract.

    Moreover, it's not in the Yankees' long term interest to move their luxury tax liability to later years. At the moment, the Yanks are paying luxury tax at the top rate of 40%. But the collective bargaining agreement will be renegotiated next year, and there's pressure to increase the luxury tax, perhaps to 50%, perhaps higher. If the Yanks could manage it, they'd be better off taking a tax hit NOW in order to avoid paying taxes later at what might be a higher rate.

    A quick aside on Kei Igawa. I think you're right that by leaving Igawa off the team's 40 man roster, the Yanks' $4 million commitment to Igawa is not subject to the luxury tax. But Igawa has been banished to the minors because he cannot pitch effectively in the majors. The Yankees would happily pay $5.6 million to have Igawa produce wins for the ballclub.

    I'm not saying I have these luxury tax rules mastered, by the way, or that the rules cannot be manipulated under the right circumstances to reduce tax liability.

    With all of this said, I agree with you. The Yanks want to do all they can to keep their luxury tax exposure to a minimum. I'm working on a post about this. It may well be the case that the Yankees' budget DOES compute payroll using the luxury tax rules, so as to fix the maximum amount of luxury tax that the team is willing to pay. But it can't be the case that this luxury tax budget is $210 million or less.

  7. There are two key points which have been overlooked here. One, Mr. Steinbrenner never specified a number, Marchman did, and Marchman's wording suggesting Steinbrenner probably said something like, "We plan to have a payroll in the neighborhood of what it was last year."

    Secondly, and probably more important, is MikeD's first sentence, that Steinbrenner is "talking about the portion of the payroll that's subject to the luxury tax." If the salaries in the chart are adjusted to reflect the contribution of the 25-man roster toward the team's final 2011 competitive balance tax (CBT) assessment, the total would be $17.63MM less than is presented.

    Alex Rodriguez: $4.5MM less for CBT purposes

    CC Sabathia: $1.28MM less

    Derek Jeter: $2.25MM less (for CBT purposes, player options are considered guaranteed, so Jeter's deal in that regard looks like a 4-year, $59MM contract)

    Robinson Cano: $2.5MM less

    Nick Swisher: $4.65MM less

    Curtis Granderson: $2.2MM less

    Nick Johnson: $250K less since his buyout counts toward 2010

    Subtract that $17.63MM from the total presented in the post, and for CBT purposes the portion of the team's final number which is derived from MLB payroll is at $206,969,414.

  8. Another thing I meant to add is that total payroll-related expenditures, because of the CBT, do not behave in a simple, linear manner. That's likely obvious to many, but numbers give a better idea. I'll use fictional numbers, though we'll have a better sense when the Yankees get their annual CBT assessment this month.

    Let's just assume that the team's CBT calculation remained constant from 2009 to 2010. 2009 is the last year for which we know the team's CBT number. The team paid a tax that year of $25,689,172.80, which means their total CBT number was $226,222,932.80.

    (For those who want help with the math there, the team paid $25.7MM in tax. That number is 40% of how much they went over the $162MM threshold. Thus, the team was taxed for being over by $64,222,932. Combine the $162MM with the $64.2MM, and the team had a CBT number of $226.2MM.)

    Reminder: The following numbers are not real, just made up for demonstration purposes, and the key is the idea of keeping the team's CBT number constant, or close to it, no matter how much is actually paid to players this year.

    Out of Pocket Payroll Expenses: $240MM
    CBT Payroll Calculation: $226MM
    CBT Assessment: $22.4MM

    The CBT threshold is $170MM for 2010. And for 2011, the CBT threshold goes up another $8MM to $178MM. So, with that in mind, the team can increase its out of pocket expenses on payroll while keeping its overall payroll-related expenditures relatively flat. Again, made-up numbers here:

    Out of Pocket Payroll Expenses: $250MM
    CBT Payroll Calculation: $226MM
    CBT Assessment: $19.2MM

    The key, obviously, is controlling the CBT calculation of the team's payroll, regardless of what is actually paid to players. With numbers like these, the Yankees could reasonably increase their payments to players by $10MM this year, but only increase their total outlay by $6.8MM.

  9. Thanks, Larry. I'll take the easy one first. Regarding Igawa, he may very well be able to contribute on the MLB level to some degree, but it's not worth the additional $1.6 million it will cost to find out. Even if they only needed him for a couple weeks to serve as the bullpen equivalent of cannon fodder, they'd have to remove some player from the 40-man just to make room for Igawa. This situation, coupled with Igawa's poor showing, means he's never returning.

    I do wonder if 2011 might see a return of Igawa. The Yankees could eat $2.5 million and trade him to a team that needs a lefty and who might eat the other $1.5 million. The Yankees would save money (even with the luxury tax on the $2.5 million). An NL west team, like the Padres, with no DH and their big park might serve the HR-prone Igawa well. Yet beyond saving 500K, it's probably unlikely the Yankees will go for this. Imagine if Igawa actually pitched well. It would be further embarassment. No, the most likely end for Igawa is one last year in AAA, and then he heads home after 2011 with a damaged reputation, but a fat bank account. We should all be so damaged.

  10. The Igawa issue reminds me of an opposite situation. While Igawa's salary should not be included in the luxury tax calculation, on the other side we have to add in Brackman's salary, since he is on the 40-man. Not sure, however, what he's making in 2011.

    Next, regarding the main issue here of luxury tax, I hadn't considered the potential increase of up to 50%. I'm sure this is a big concern to the Yankees, because it's an unknown, making it difficult to budget ahead until the new CBA is negotiated.

    Last, regarding luxury tax calculations, I thought that a bonus was averaged out over the course of a contract. So when CC signed, he had a $14 million salary in 2009, with a 9 million bonus, for a total first year payment of $23 million, which is exactly what they're paying him for all the other years. So for luxury tax purposes, in 2009 it's calculated at roughly $15.2, and each remaining year at roughly $24.2, resulting ina lower luxury tax for 2009. I'm really not sure, but it might explain why they structured the contract this way, and they could do the same for Lee.

  11. Jeter contract is $15 mill in 2011, with $2 mill deferred – freeing up an additional $4 million.

  12. What I understand is that the Jeter deal comes down to $48 million guaranteed over 3 years. (Thanks to Ken Davidoff at Newsday for solid reporting here: http://bit.ly/dGDeuu) So it will probably be a $16 million annual line item on the luxury tax payroll.

  13. No, Jeter's contract is not a $16MM line item for the CBT because player options are figured in when calculating the AAV. For CBT purposes, the Jeter contract has an AAV of $14MM since it's $56MM total, three years guaranteed at $48MM and an $8MM player option.

  14. Brad, right. Forgot about the options. Amazing that tacking an option at the end of a deal that no one would ever exercise can actually work to reduce the luxury tax.