A possible payroll hedge?

Breaking down what exactly the Yankees’ 2014 budget plans entail once again this morning, Joel Sherman reports a detail that I was actually unaware of, and leaves open a potential rationale for scrapping the plans altogether:

The second inducement for going below $189 million is in the CBA’s revenue sharing refund program. It is a complicated concept and formula, but what is important to know is the Yankees would be rebated a percentage of what is the highest revenue-sharing payment in the sport, but — and this is key — only in years they are under the luxury tax threshold. If not, they forfeit the rebate.

There is debate about how much the rebate is worth since it is tied heavily to the revenue that, in particular, Atlanta, Houston, Toronto and Washington generate. Some initial projections had the Yankees getting between $5 million-$8 million after 2014 with a steady climb afterward. So between lower payroll, no tax and the steadily climbing rebate, the Yankees could save real money, $30 million-plus annually perhaps.

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This adds some details to the revenue sharing refund aspect of the CBA that we hadn’t really been aware of before, and that make it a less obviously appealing thing to strive for than I had previously thought. First, the amount that would be refunded isn’t yet known, meaning that it’s at least possible that the number could be so underwhelming that the Yankees decide it’s not worth pushing payroll down rapidly in order to obtain. Secondly, there’s the fact that the amount would escalate in successive years, but basically all speculation from reporters has been that getting below the threshold would only necessarily be a one year thing to reset their luxury tax rate, and that spending could return to “normal” level in 2015. Indeed, Sherman points out that the post-2014 free agent class is currently scheduled to include Justin Verlander, Felix Hernandez, Clayton Kershaw, and Elvis Andrus, so passing on any one of them in favor of staying below the luxury tax mark is pretty much a non-starter if your concern is protecting the “Yankee brand.”

That said, I wouldn’t get your hopes up just yet. The luxury tax savings that are supposedly paramount here are also fairly miniscule in the context of the payroll size we’re talking about, since only dollars above the threshold are taxed. At a $209 million payroll (an even $20 million above the threshold), the savings between the 50% rate and a 17.5% rate is a mere $7.5 million. That sounds like a lot, sure, but when compared to our total payroll it’s only a mere 3.5%, or far less than the amount of sales tax the majority of the country pays every time they go to Target. You also have to consider that the opportunity cost of saving that hypothetical amount involves making very few potential impact additions between now and the winter of 2014-15, which hardly seems worth it for an amount that barely buys you a useful veteran starting pitcher.

Which is to say: the picture of the current plan is one of an ownership that’s very concerned with saving every penny it can, as well as bringing long term payroll expectations down from the $200 million level that most baseball fans have grown accustomed to. It’s possible that lower expected savings could alter those plans, but at this point I doubt it. The biggest saving both in the short and long term come directly from slashing the amount the team is spending on payroll, which the lower (or non-existent) tax bill and share of revenue sharing refunds functioning, essentially, as a pot sweetener. With that in mind, not only do I not think anything short of a completely disastrous 2013 season will change their plans, I’m not at all convinced there’s any intention on the part of ownership to return payroll above the tax threshold once 2015 rolls around.

15 thoughts on “A possible payroll hedge?

  1. Rob

    I wouldn’t mind this so much if they hadn’t decided this in the middle of some truly terrible contracts. It’s not as if they can’t win with a $189M payroll, but too much of that is already tied up, so we’re losing value all over the place.

  2. Dan

    I feel like they have all the reason in the world to sign 2 of those guys in the 2014 class. Obviously, they would fill roster needs with premier talent. But from the $189 perspective, they'd be getting 5+ year deals (and probably closer to 7 years). So before those contracts are halfway done, ARod, Tex and CC's contracts will be off the books. Considering teams are locking up FAs earlier to team friendly contracts, there is a good chance that will be the best FA class from 2014-2017. So they should spend on it, and then the payroll should automatically come down below the salary threshold by other contracts coming off the books.

  3. uyf1950

    I realize there are a lot of what ifs and unknowns that various blogs and fans have mentioned about the Yankees proposed desire to get under the Luxury Tax Threshold for 2014. One monkey wrench that I have not heard anyone mention is attendance at the ballpark. Over the last 2 years it has dropped from a level after the 2010 season of: 3.765MM to 3.653MM in 2011 and 3.542MM in 2012. IF the numbers continue to slid about 100K each year over the next 2 or 3 years down to a level of 3.2MM plus in 2015 that would represent a drop of over 500K people and they spending at the ballpark in just 5 years. The revenue loss to the Yankees I would think would be pretty substantial over time?

    • uyf1950

      By my calculation the loss of 500,000 fans attending games at Yankee Stadium from the 2010 level of 3.765MM to potentially 3.265MM in 2015 even at just a conservative $50 per person means a loss in revenue in just 2015 of over $25,000,000

      • LarryAtIIATMS

        Probably the bigger concern is TV ratings for YES. With season ticket sales, loss of revenue at the ballpark is less of a short-term concern.

        • Cs Yankee

          Isn't there also some lost picks for being over the 189M$?

          If its just dollars and such, it seems like the Dodgers are ahead of the curve. The 50$/head seems way light, doubtful if the average is under $100 per…add in the need to stay dominate for YES and I could see the network claiming all the added monetary costs.

          Save 10-30M$ in league penalities versus (re)gaining 75M$ in lost revenue…seems like a balancing act that will be bad for the career ends of Jete/Mo/Andy.

          Why aren't they taking one last bite of the apple? Give Hamilton 1/30, Zack 1/25 and enjoy the last year of Grandy, Cano, Mo & Andy with #28!

          • uyf1950

            C's, there are no lost picks for going over the Luxury Tax Threshold. I believe the only time a team loses picks is when they exceed their allotment for signing amateur or international players in the draft.

            As for signing Hamilton and/or Greinke to 1 year deals. I doubt very seriously either of them would go for 1 year deals even at the dollars you mentioned.

        • jay_robertson

          In that case, they needn't worry. I might not watch every game, but you can't just subscribe to YES for the games you want to watch.

          (actually – I subscribe to MLB-TV – being far from the YES area – but I imagine the Yankees get some share of that – maybe even get a percentage, based on how many of "their" games get watched, as opposed to KC or Seattle. I don't know. But I WILL keep watching, as long as they're the Yankees.)

        • John

          Hey! It's a Larry sighting. Seems almost as mysterious as sighting a bigfoot these days.

          Good to see you Larry!

      • Mister D

        A 500000 fan loss would be a massive loss. You're thinking 25% of the fans in attendance know or care about what's going on with the team's finances. I doubt that's the case. Also consider the timing – 2014 was a year in which the Yankees were probably expecting to lose Jeter and Mo, which I think would impact attendance more than the payroll policy. Without any obvious minor league talent or (perhaps in their view) desirable free agents, 2014 is just a good year to take the rebuilding hit.

        • uyf1950

          Mister D, I'm not talking about what the fan base thinks about the teams finances. At least that's not the impression I want to give. I'm talking about the fans that attend games is more directly related to the product the Yankees field. If the Yankees start to concern themselves more with lining their pockets AND the product on field starts to suffer in my opinion fans are less likely to lay out a lot of cash to go to the ballpark and spend their money. As far as a loss of 500K fans as I mentioned they have already lost over 200K from their 2010 level. Oh and btw, 500K total loss on a starting figure of almost 3.8MM is only a little over 13% NOT 25% as you mentioned. But it's still a substantial decline.

          • Mister D

            A 500000 fan loss would be a massive loss. You're thinking 25% of the fans in attendance know or care about what's going on with the team's finances. I doubt that's the case. Also consider the timing – 2014 was a year in which the Yankees were probably expecting to lose Jeter and Mo, which I think would impact attendance more than the payroll policy. Without any obvious minor league talent or (perhaps in their view) desirable free agents, 2014 is just a good year to take the rebuilding hit.

            1. Yeah, my bad on the math. Really tired when I wrote that. And as I write this. Hmmm. doesn't bode well.

            2. I'm not sure how much this is about lining their pockets. It is not just about how much they'll make – its also about the penalties they avoid. The team made bad decisions in recent years, and it was naive to think that they would never suffer for them. Given the amount of payroll due to come off the books this year and next, I do think that they will be able to field a competitive team and that should put butts in seats.

            3. As for butts in seats, we're also out of the post-WS, new stadium honeymoon period, and still in tough economic times for most fans. The decline of 200K over 2 seasons (as opposed to 500k over the next 2) isn't shocking.

  4. uyf1950

    Off topic slightly, but not really. Can someone please partition ESPN-NewYork.com to dump Andrew Marchand. The majority of his articles about the Yankees are insulting and totally one sided.

    • Even as a former espn affiliated site, I completely agree.

      • John

        Agree as well, but Wally is even worse I think.

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