Reaction to the Yankees’ attempt to lower payroll below $189 million has continued unabated. This afternoon, two different Yankees’ blogs (TYA and RAB) addressed a recent article by Joel Sherman suggesting that the Yankees extend Alex Rodriguez’ contract in order to lower the average annual value and, as a result, draw closer to the $189 million magic number in 2014 (the second part of Sherman’s proposal might sound familiar because I wrote the same thing last week). Following is a more detailed look at the potential benefit of an Arod extension.
Arod’s Current AAV (2014 to 2017) vs. Sherman’s Hypothetical Proposal
|$mn||Current AAV||Sherman’s Proposal|
Source: Cot’s Contracts and NY Post
The basic premise of Sherman’s proposal is the Yankees should convert the uncertain milestone payments in Arod’s contract into a guaranteed $14 million extension in 2018. By structuring the extension as a new five-year deal beginning in 2014, the team would trim its annual payroll by $7 million. However, the previous CBA includes language that would significantly reduce this gain. Below is the relevant passage from Article XXIII, Section G (3) (h/t to RAB commenter “Needed Pitching”).
The Average Annual Value of such new Contract shall be increased or decreased, whichever is applicable, by the figure arrived at by subtracting the amount of Salary that has been attributed under the rules of this Article XXIII to a Club in previous Contract Years under the Contract that is being replaced from the amount that was actually paid to the Player by a Club in those Contract Years.”
What this complicated language basically means is if a player signs a new contract in the midst of an existing deal, his team must determine whether it allocated an AAV that was either too high or too low during the previous years. For teams that are nowhere near the luxury tax threshold, this calculation is a mere formality, but for the Yankees, it has significant implications.
AAV of Arod’s Contract If the Deal Was Terminated After 2013
Source: Cot’s Contracts
If Arod’s current deal was terminated in 2013, he would have been paid $186 million over six years, creating a real AAV of $31 million. In other words, the Yankees payroll over the last six seasons would have been under-reported by $3.5 million per year ($31 million minus the previous AAV of $27.5 million). Unfortunately for the Yankees, that total of $21 million doesn’t just simply disappear. Instead, it would get tacked on to Arod’s new deal. As a result, the real AAV of Sherman’s hypothetical contract extension would be $24.8 million, which, although a meaningful savings, would be much less than originally suggested.
Real AAV of Sherman’s Proposed Extension
Note: Sherman proposes an extension worth $100 million, but he left out a $3 million bonus payable in 2014.
Source: proprietary calculations
The X-factors in this equation are Arod’s performance bonuses. If the Yankees’ third baseman achieved all five homerun milestones (660, 714, 755, 762 and 763), he could earn an additional $30 million ($6 million for each milestone). However, performance bonuses are not factored into AAV. Instead, they are considered salary in the year in which they are earned. As a result, if Arod achieved a bonus, it would increase his luxury tax number to $33.5 million for that season ($27.5mn AAV plus $6 million bonus). Unless the Yankees are determined to drive their payroll below $183 million, the team’s budget tightening would go for naught if Arod hit number 714 in 2014. With only 85 homers to go until he ties the Babe, can the Yankees afford to take that risk?
As the RAB and TYA posts both pointed out, the Yankees would not only have to overcome the CBA to exact a savings, but they’d also have to pass the Commissioner’s smell test. What’s more, the MLBPA might not agree that a $14 million extension is a fair tradeoff for the $24 million in potential bonuses likely to remain after the 2013 season. However, these obstacles seem tiny in relation to the financial toll that could result if Arod’s bonuses are allowed to threaten the Yankees’ efforts to lower payroll below the $189 million threshold. There are still two more years to decide the optimal approach, but chances are, if the Yankees want avoid paying the luxury tax in 2014, they’ll have to extend Alex Rodriguez beyond 2017.