Would the Yankees truly suffer if they eclipsed the 2014 competitive balance threshold?


The New York Yankees cannot look at the 2013 season without reference to the bigger picture of 2014 as they continue to say they will make a push to fall below the competitive balance threshold.

I wrote a very non-scientific plan the Yankees could adopt to get their payroll around the $175 million mark in order to completely stay under the $189 million zenith (more on the way this is figured later). In it the Yankees would be able to go after some middle-tiered at best free agents to shore up starting pitching and a vacancy or even two in the outfield. But the players they are already committed to (Alex Rodriguez, Mark Teixeira and CC Sabathia), plus the anticipated extension of Robinson Cano and possibly another one for Derek Jeter will leave the Yankees with less than they are used to doling out in recent years.

Yankees general manager Brian Cashman has his work cut out for him in 2014. (Image: Tim Fuller-USA TODAY Sports)

This offseason the Yankees are not “in on” any of the top names available in free agency (Zack Greinke and Josh Hamilton to name a couple). Some of the reason is the contracts those players are commanding and some of it could be they are not exactly a good fit anyway. The Yankees are willing to spend this offseason — see the signing of Hiroki Kuroda — but only if the deal is not committal to 2014 or falls into their future budget constraints.

Are the Yankees placing themselves in a position to fail by becoming so enamored with the idea of not paying the competitive balance tax? Would the team eclipsing the mark be such a detriment to the Yankees’ new business model?

First we need to examine exactly what is at stake for the Yankees. They’ll be paying 50 percent tax on the difference of their actual club payroll (as the Collective Bargaining Agreement calls it) and the threshold. The actual club payroll is the total of all salaries on the 40-man roster based on average annual value, plus bonuses and 1/30 share of player benefits costs. Concurrently, the Yankees would be sacrificing potential refunds from the revenue sharing plan which they are not completely eligible for up front because they are among the largest 15 markets in MLB.

The key is the tax would get “reset” if the Yankees could find a way to get below the threshold. It would go all the way down to 17.5 percent if they crossed the threshold in 2015 should they erase the tax in 2014, plus they would qualify to get some of the revenue sharing refund. Let’s investigate what it would cost in tax penalties to the Yankees in varying scenarios if they chose not to get below the threshold in 2014.

The figures for bonuses may be high and the player benefits number is rounded to $12 million for ease of reading sake and is derived from the maximum 10% increase allowed for 2014 over 2013’s already established figure. The total taxes to be paid out do not exactly scream out bankruptcy fears do they?  Each of these scenarios is actually less than the Yankees will deal with in 2012 where they’ll be around $220 million for their actual club payroll. When we learn that the YES Network alone is valued around $3.4 billion based on the equity stake that News Corporation paid to become a 49 percent partner in the regional sports network and could be worth $3.8 billion in three years we should wonder why the Yankees are so concerned.

I’m all for the Yankees trying to look for more economical ways to run their business. Unfortunately, the top four salaried players (which includes what I assuming Cano will be making) will be earning well over $20 million AAV for the remainder of the collective bargaining agreement which ends with the 2016 season. Additionally, the salaries preclude the Yankees from assuming they can move the parties to another team in the future especially without maintaining some of the burden.

The money that is potentially lost in revenue sharing refunds is arbitrary because it is based on revenue that has not been generated by the entire league including what the Yankees have to pay into the system which is admittedly significant (27.5 percent of revenue). There is a potential for more money in their pocket for sure (anywhere from $15 million to $28 million returned through 2016 based loosely on the 2011 revenue of $439 million), but again, in the grand scheme of things we are talking small figures for a team which is valued at $1.85 billion according to Forbes 2012 Business of Baseball calculations (using 2011 revenue and profit figures).

This does not account for the estimated value of the Yankees share in the YES Network that comes in at about $850 million (the Yankees will own 25 percent of YES which is said to be valued around $3.4 billion). The Yankees are also going to net two separate payments from the transaction totaling $400 – $500 million when the deal commences (it requires MLB approval). The network is a cash cow and will only continue to grow – if the Yankees remain the Yankees — meaning a team which invests in players to put a championship team on the field each and every season.

The point is the Yankees are generating serious money outside the revenues generated from baseball on the field and is not subject to any penalties. Their estimated earnings of $85 million in fees in 2012 from YES will be compounded 7 percent annually until the deal ends in 2042. These revenues from YES are free and clear of any tax or revenue sharing rules set forth by the CBA.

This money is what allows the Yankees to spend the exorbitant amounts that they do and since it is not going away anytime soon the Yankees can sustain any revenue sharing deficiencies and still ultimately end up in the black when all their investments surrounding the team are combined.

This brings us back to the initial question. Are the Yankees worrying too much about the competitive balance tax payments and loss of revenue sharing refunds? Couldn’t the Yankees lower their payroll thus saving money up front while still crossing the threshold? Lowering the actual club payroll in 2014 to $200 million saves about $20 million from 2012 and costs them just $5.5 million in taxes yet allows a payroll of $188 million versus $178 should they go beneath the threshold resulting in a net savings of $15 million. That is certainly better than staying the current course of a $210 million payroll but it is not changing things so dramatically.

Will these guys still be around in 2017? Rodriguez is still on the Yankees books, Jeter would be 42 at the start of that season. (Image: Tom Szczerbowski-US PRESSWIRE)

It is realistic to imagine that the next CBA will have a whole new set of thresholds and the Yankees will be in a much better position because of leveled spending plus the assumed departure of Jeter, Sabathia and Teixeira. Sorry, Rodriguez will still be on the books. It seems to me that 2017 would be the opportune time for the Yankees to be looking to get below the threshold, which could be close to $200 million by then, and not have to make sacrifices they seem to be willing to endure now. If the Yankees are more diligent in the number of $20 million-plus salaries they hand out over the next three seasons they will be in a prime position to be very close to the threshold come 2017 without forfeiting the ability to go after the best talent now.

The Yankees are right to try to create a balance of homegrown talent through the drafts and international signings or through young talent received in trades. But, the idea that they have to sacrifice potential higher-priced yet high reward free agents to save cash that doesn’t scratch the surface of what they earn “all-in” seems to be a risk not worth taking.

Sure, the Yankees can get below the threshold as I was able to demonstrate separately, though it will take some clever maneuvering. The Yankees also run the risk of allowing other teams to build as their revenues increase and they re-invest in their teams (e.g., Toronto Blue Jays).

Money has always been a weapon the Yankees have been able to leverage against other teams. It has allowed them to build and sustain championship caliber teams which in turn maintains old fans and creates new ones and grows the Yankees brand. The idea of not spending on a free agent or making a trade for a higher priced talent could potentially be the downfall of the streak of playoff appearances which would ultimately bring apathy among fans that are spoiled by years upon years of success.

If the Yankees experience a streak of non-playoff years, the revenues start to decline including those produced from the YES Network. Is saving $5, 10 or even $20 million worth damaging a money generating machine? In order to keep the cash cow happy, it requires the investment, one the Yankees should not deplete in the dramatic fashion they have told us they will. I would tell the Yankees to go ahead and drop the payroll some, but forget about a threshold which could ultimately have an effect contrary to what they’re trying to accomplish.