The Captain's Blog

Major League Baseball has released official final payrolls along with the average annual value calculations used to determine the luxury tax, and once again, the Yankees sit near the top of each list. With a payroll of just over $208 million and tax bill approaching $16 million, the Bronx Bombers look like big spenders, but each figure represents not only a gradual decline, but continued progress toward the team’s goal of getting below the luxury tax threshold in 2018.

Yankees’ Payroll and Luxury Tax Payments, 2001, 2003-2017

Note: Final payrolls encompass the 40-man rosters and include salaries, incentive bonuses, and pro-rated shares of signing bonuses, present value of deferred payments, buyouts and other cash payments and non-cash compensation.  These payrolls ARE NOT AAV valuations used for luxury tax purposes. 2018E assumes Yankees spend up to, but not beyond the $197 million luxury tax threshold.
Source: MLB release published by AP

In real terms, the Yankees’ $208 million payroll was the lowest since 2006, and its luxury tax bill of $15.7 million was the lightest levy since 2011. What’s more, when compared to the 2013 peak in both measures, the decline is much more substantial. That shouldn’t come as a surprise, as the Yankees have long been trying to get below the luxury threshold. It’s taken longer than expected, with a few bumps along the way, but after six years, the Yankees finally seem poised to achieve that goal. But, is the organization’s focus on cost control justified?

Yankees’ Financial Snapshot, 2003-2016

Note: Revenue for each team is net of stadium debt and revenue sharing.
Source: Forbes.com

Yankees Expected Rights Fee Payments from FOX, 2013 to 2042

Note: Amortized upfront payment is based on $584 million payment from FOX to the Yankees pursuant to initial equity investment. 

Since early during the last decade, the Yankees have enjoyed impressive revenue growth. The most recent Forbes’ estimate pegs the team’s net income (after stadium debt and revenue sharing payments are made) at $526 million for 2016, and with a lucrative TV deal guaranteed through 2042 and the proceeds from six home playoff games in October, that should increase significantly in 2017. A quick back of the envelope calculation incorporating a 5% bump and $30 million in post season proceeds (a conservative estimate based on a discounted amount of the $36 million the Yankees refunded in 2015 for unplayed ALDS and ALCS tickets) brings the team’s 2017 net revenue to $582 million. That figure would dwarf the Yankees’ $208 million payroll and put the team’s relative investment in player costs below 40% for the first times since at least 2001.

Yankees’ Payroll/Luxury Tax as a Percentage of Team Revenue, 2001 to 2018E

Note: Revenue is based on Forbes calculations and 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. 
For 2017E, revenue is Forbes 2016 calculation increased by 5% + $30 million in estimated post season revenue.
For 2018E, payroll is set at the $197 million limit and Forbes 2016 calculation increased by 8% with no post season contribution.
Source: bizofbaseball.com and MLB releases published by AP (final payroll), MLB releases published by AP (luxury tax), Forbes (revenue), proprietary

Not only are the Yankees spending less compared to their own standard, but the team’s share of total league payroll has also declined precipitously. Although it’s true that the Yankees’ revenue has not grown as fast as the league over the last few years, that drop off has been much less pronounced than the team’s waning payroll investment (and could reverse when 2017 figures are calculated). In any event, the Yankees still maintain a significant financial advantage over every other team, including the Dodgers, but they have decided to use it less.

Yankees’ Payroll and Revenue as a Percentage of the League Total, 1999 to 2017

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 2017 are not released until 2018.
Source: bizofbaseball.com and MLB releases published by AP (final payroll), MLB releases published by AP (luxury tax) and Forbes (revenue)

Revenue keeps going up. Payroll keeps going down. In any other year, the Yankees would have no grounds for cutting payroll that wasn’t purely financial. This year, however, is different. With much better players looming on the 2018 free agent horizon, the benefit to cutting payroll in the current season is truly significant, as illustrated in the snapshot below.

Payroll Scenario Analysis Based on Yankees’ 2018 CBT Status

Scenario 1: Yankees’ keep 2018 payroll under $197 million and then sign at least one big free agent in 2019.

Scenario 2: Yankees’ sign two more free agents, bringing 2018 payroll to $240 million. In 2019, the Yankees sit out of the FA market and offset expiring contracts with raises.

Scenario 3: Yankees’ sign two more free agents, bringing 2018 payroll to $240 million. In 2019, the Yankees then sign at least one big free agent.

Turning the numbers above into a narrative, the Yankees’ decision is basically this: sign Mike Moustakas and Alex Cobb this year, or choose from among Bryce Harper and Manny Machado next year? Based on the player choice alone, the latter seems like a much better option, but when you consider the Yankees would save almost $80 million over the two years, it becomes a no brainer. Of course, the Yankees could sign big free agents in both years, but doing so would come at an exponential cost. In other words, as long as the Yankees intend to get below the limit in 2018, thereby resetting the 2019 tax rate from 50% to 20%, and then spend significantly on one or more of the impressive free agents next winter, it makes perfect sense for them to be frugal this off season (a luxury further afforded by the many productive players currently under team control). Otherwise, their belt tightening is just another step away from the franchise’s traditional commitment to winning.