The Captain's Blog

The Dodgers opened up their wallets again this winter, but no one should be surprised. According to final payroll data reported by major league baseball, Los Angeles has retained its ranking as the game’s biggest spender for the third consecutive season.

2016 Final Payrolls

Note: Final payrolls represent actual amounts spent (salaries, benefits, earned bonuses and pro-rated shares of signing bonuses), but not AAV valuations used for luxury tax purposes.
Source: MLB release published by AP

Although the Dodgers’ $255 million payroll in 2016 easily outpaced all other teams, it also represented one of the largest year-over-year declines. Compared to 2015, L.A. trimmed nearly $40 million from its ledger, or almost two-thirds of the Milwaukee Brewers’ league-low $65 million payroll. The Dodgers’ diminished player expense also resulted in a much smaller luxury tax assessment. With a final average annual value (AAV) calculated at $252.5 million, Los Angeles’ tax bill came to almost $32 million, the third highest figure ever recorded, but a fraction of the whopping $57 million owed last year.

Year-Over-Year Payroll Changes (Final), 2016 vs. 2015
Note: Based on base salary of contract year plus pro-rated items, earned bonuses.
Source: MLB releases published by AP

Year-Over-Year Payroll Changes (AAV), 2016 vs. 2015
Note: Based on Average annual value of contracts plus pro-rated items, earned bonuses, and defined benefits of $12,953,201, which, according to AP, includes items such as health and pension benefits; club medical costs; insurance; workman’s compensation, payroll, unemployment and Social Security taxes; spring training allowances; meal and tip money; All-Star game expenses; travel and moving expenses; postseason pay; and college scholarships.
Source: MLB releases published by AP

The Yankees continued to spend in the Dodgers’ shadow, having maintained a payroll at just above $224 million for the second consecutive season. However, because the team’s AAV jumped by approximately 1%, its tax bill inched forward as well. When the Yankees remit their $27.4 million payment to the league, it will bring the team’s cumulative assessment to over $334 million, or nearly 64% of all luxury tax payments made since 1997.

Percentage of Luxury Taxes Paid Since Inception
Note: Baseball’s first luxury tax was in force from 1997-1999. The current system was instituted in 2003.
Source: bizofbaseball.com and MLB releases published by AP

The Dodgers and Yankees continue to bear the brunt of the luxury tax, but, for the first time since 1999, six teams found themselves on the wrong side of the threshold, including the Red Sox and Giants who were repeat offenders. In total, $74 million was paid into the central fund via the tax, a 12% decline from last year because of Los Angeles’ substantially lower contribution. The only other teams to come within 10% of the $189 million tax threshold were the Angels, Cardinals, Royals and Mariners, so, with the limit being raised to $195 million in 2017, the amount collected next year should continue to decline.

Year-by-Year Luxury Tax Payments by Team
Note: Baseball’s first luxury tax was in force from 1997-1999. The current system was instituted in 2003.
Source: bizofbaseball.com and MLB releases published by AP

Actual payrolls (excluding AAV adjustments) increased by nearly 5% in 2016, a deceleration compared to the 7.3% and 8.5% rates recorded in 2015 and 2014, respectively. Aside from the Dodgers’ pruning, a series of rebuilds helped put a damper on spending. The Brewers reduced their payroll by over 33%, while the Phillies and Reds followed behind at around 25%. These drastic cutbacks were offset by aggressive increases by nearly half the league. Led by the Cubs and Mets at around 37%, 13 teams increased their actual payrolls by at least 11% (compared to six teams with a cut of 11% or greater).

Yankees’ Payroll and Revenue as a Percentage of the League Total, 1999 to 2016

Note: Revenue is net of revenue sharing and stadium debt service. Payroll is based on final figures for each year released by MLB, and may not necessarily equal the amount upon which the luxury tax is based. Forbes estimates for 2016 are not released until 2017.
Source: bizofbaseball.com and MLB releases published by AP (final payroll), MLB releases published by AP (luxury tax) and Forbes (revenue)

Yankees’ Payroll/Luxury Tax as a Percentage of Team Revenue, 2001 to 2016E

Note: For 2001 to 2015, revenue is  based on Forbes projections and net of revenue sharing and stadium debt service. For 2016, estimated revenue is based on 5% growth over 2015. For 2001 to 2016, Payroll is based on final figures for each year released by MLB, and may not necessarily equal the amount upon which the luxury tax is based.
Source: bizofbaseball.com and MLB releases published by AP (final payroll), MLB releases published by AP (luxury tax) and Forbes (revenue)

With other teams spending more, and the Yankees standing pat, the Bronx Bombers’ percentage of league payroll continues to decline at a more rapid pace than its share of industry revenue. The same trend also persists when comparing the team’s player-related expenditures to its own finances. Since peaking at almost 90% in 2005, the team has gradually lowered its relative level of investment in players to just above 48% in 2015, a middling rate when compared to the rest of the league.

2015 Player Cost (Payroll+Luxury Tax) as a Percentage of Team Revenue for all 30 Teams

Note: Revenue is net of revenue sharing and stadium debt service. Payroll is based on final figures for each year released by MLB, and may not necessarily equal the amount upon which the luxury tax is based.
Source: MLB releases published by AP (final payroll), MLB releases published by AP (luxury tax) and Forbes (revenue)

How will the new CBA impact league-wide payrolls, as well as the spending habits of big market teams? Early returns over the winter suggest a re-acceleration, but, even maintaining the status quo would mean continued healthy growth in player investment. Unfortunately for Yankee fans, the Bronx Bombers have given no indication that they intend to contribute to that increase.