This offseason & the following offseason there will be a lot of talk about the $189 million payroll limit that the Yankees will try to get under by 2014 and the impact that it has on the moves the team will make. A lot of people are unclear as to what this limit really means, so I thought I would write this to help educate fans on how the limit is calculated & how the current Yankee team is impacted by those calculations.
The CBA & Luxury Tax Calculations
The Collective Bargaining Agreement signed by the MLBPA & Ownership is what governs the interactions between players & management in Major League Baseball. Last offseason a new CBA was signed which introduced new wrinkles into the luxury tax agreement that has the Yankees attempting to get under the limit for the first time in a decade. Here are the basics:
- The luxury tax limit for 2013 is $178,000,000. For 2014-2016 it is $189,000,000.
- There is a new revenue sharing refund program which forces teams who are in the 15 largest markets to refund their revenue sharing if they were eligible in increasing proportions until they refund 100% in 2016. The Yankees pay around 27.5% of all revenue sharing each season, and would get some of that back thanks to the disqualification program. The teams who are going to pay back as of now are the Athletics, Braves, Nationals, and Blue Jays. They receive around 23% of all revenue sharing.
- The amount of refunded money the Yankees receives is based on how many consecutive years they have crossed the luxury tax threshold. 100% if they were not over the limit in the previous year. 75% if this year is the 2nd year they have gone over the limit. 50% if this year is the 3rd they have gone over the limit. 25% if this year is the 4th year they have gone over the limit. 0% if this year is the 5th (or more) year they have gone over the limit. If the Yankees did not go over the luxury tax for 2014-2016 they would receive 11.65% of their revenue sharing back in 2014, 17.47% in 2015, and 23.3% in 2016. This assumes the same teams above will continue to receive revenue sharing.
- The payroll value used to check against the luxury tax limit is not simply the sum of the team’s season contract values. Payroll figures like those found on ESPN or COTS MLB Contracts are not the number that is used to determine payroll. Payroll is the sum of: 1 year contract values of everyone on the 40 man roster, the annual average value of multi-year contracts including bonuses/player options/buy outs of non-player options, cash considerations from trades, single season salary escalators or bonuses (such as MVP bonuses/games played bonuses), any amount deductible or includible based on specific player events, and a 1/30th share of player benefits.
- Beginning in 2013, the amount of luxury tax a team pays will be changed to the following: 17.5% for first time offenders, 30% for second, 40% for third, 50% for fourth or more. A team which did not go over in the previous year will reset to the 17.5% amount if they go over again. This tax is only paid on the marginal overage, meaning if your payroll as calculated above is 190 you would pay tax on the $1 million not $190 million.
- The 1/30th share of player benefits is $10,799,590 for 2013, and will increase or stay the same for 2014.
How the Yankees will be looking at 2014
If you read and understand the above, you can see there is definitely incentive for the Yankees to get under the limit if their goal is to increase profits. They will not only get the savings from simply reducing payroll, but also from paying reduced or no luxury tax and from potential revenue sharing rebates.
Unfortunately for the Yankees, the $189,000,000 goal will be difficult for the team to get under without some very shrewd maneuvering and getting a bingo on a minor league prospect or three. The 2014 Yankee club, as viewed through a luxury tax lens, looks like the following:
Team must be at or under $189,000,000 for entire season costs
Alex Rodriguez -$27,500,000 (Average Annual Value of contract)
Mark Teixeira -$22,500,000 (Average Annual Value of Contract)
CC Sabathia -$23,875,000 (Average Annual Value of Contract [Original + Extension])
Player Benefits -$10,799,590 (Or more!)
Remaining budget room: $104,325,410
These are known costs, but there is 1 more cost that will definitely factor in to 2014. It is variable. If Derek Jeter accepts his player option for 2014 he will cost $15,500,000 (14 AAV+1.5 silver slugger bonus). If Derek Jeter declines his option, he will count as $9,000,000 for 2014, due to the rules of the CBA. Derek Jeter’s $8 million player option for 2014 counts as a guaranteed year and is included in the AAV calculation, which lowered the AAV of Jeter’s deal from $16mm to $14mm. The Yankees will owe $2mm each in back pay for 2011, 2012, and 2013. They will also owe $3mm for his buyout.
Without doing anything significant via trade, the Yankees 2014 operating budget will be either $88,825,410 or $95,325,410 depending on what Jeter does. This does not include anyone in arbitration or minor leaguers on the 40 man roster.
Can the Yankees fit ~21 players under that salary amount while still competing for the playoffs?
You can find the CBA at http://mlb.mlb.com/pa/pdf/cba_english.pdf