With Hal Steinbrenner's mandate to bring payroll under the $189 million luxury-tax threshold next year, it's not too early to take a look at the difficult job facing GM Brian Cashman this winter. It will be tough for Cashman to meet this goal while fielding a competitive team.
The Luxury Tax
(Mets' fans can skip this section. As long as the Wilpons own your team, you will never have to worry about the luxury tax).
A team is taxed a percentage of every payroll dollar it spends above the luxury-tax threshold. The CBA calls this the competitive-balance tax and it is designed to discourage lavish spending by wealthy teams.
Next year's threshold is $189 million. In addition to salary, a club's payroll includes items like performance bonuses, benefits and non-cash compensation and changes with in-season trades and acquisitions. Multi-year contracts are averaged over their life, regardless of what the player earns in a given year.
The Yankees' 2013 payroll is estimated at $230 million. If their payroll exceeds $189 million next year, they will be taxed at a 50% rate for the excess. This is the maximum rate and applies to the Yankees because they are persistent luxury-tax offenders, having exceeded the threshold every year since its inception. This year, the Yankees' luxury-tax bill is $18.9 million. If their payroll stayed the same next year, it would be $20.5 million.
If the Yankees bring their payroll under $189 million next year, however, the luxury tax resets. They would pay no luxury tax next year. In 2015, they would be treated as first-time offenders and be taxed at a rate of 17.5%, not 50%, for every dollar over the threshold. In other words, if they can bring their payroll under the threshold in 2014, it will be much cheaper to exceed it in 2015.
Hal Steinbrenner's fixation with the luxury tax is understandable. Over the last five years, the Yankees' luxury-tax bills have been $18.9 million, $13.9 million, $18 million, $25.7 million and $26.9 million. To Steinbrenner, it seems that the balance sheet trumps the won-loss record. However, if the price of staying below the threshold is a mediocre team, one may question whether decreases in other revenues, such as ticket sales, will offset at least some of the luxury-tax savings.
How The Yankees Stand in 2014
Cashman's work is cut out for him. The main obstacles to getting below the threshold are existing multi-year contracts for declining veterans and pending free agency and arbitration for key players.
A lot of money is tied up in existing contracts for fading veterans: Alex Rodriguez ($27.5 million); C.C. Sabathia ($22.75 million); Mark Teixeira ($22.5 million); Ichiro Suzuki ($6.5 million); Alfonso Soriano ($5 million); and Vernon Wells ($2.4 million). With Wells and Soriano, their prior clubs agreed to pick up part of their salaries for this year and next, reducing the luxury-tax hit considerably. The figures above do not account for bonuses for career milestones. For example, Rodriguez would earn a $6 million bonus if he ties Willie Mays at 660 home runs and that bonus would count as salary in the year he hits his 660th home run.
The total above is $86.65 million, nearly half of the threshold. Rodriguez is the wild card. If his 211-game suspension is upheld before the start of next season, his $27.5 million will come off the books, but the Yankees will have to find a new third baseman. If the suspension is overturned or reduced, all or part of his salary will remain on the books. If Rodriguez's arbitration hearing drags on through the winter, it will make it even more difficult for Cashman to plan for 2014.
Free agents are the next issue.
Robinson Cano will be a free agent at the end of the season. He is the Yankees' best player, is in his prime and is the star of this year's free-agent class. Hopefully, re-signing him is a priority for the Yankee brain trust. Cano can expect to get a contract worth $20 million to $30 million per year. How vigorously the Dodgers pursue him may determine whether he stays in the Bronx and, if so, the amount of his salary. If Cano gets a $25 million salary for next year, the payroll will increase to $111.65 million if Rodriguez is still on the books.
Derek Jeter's contract has a $9.5 million player option for next year. If Jeter chooses to opt out, he will seek more than $9.5 million. The last round of contract talks between Jeter and Cashman were acrimonious and one suspects that Jeter has neither forgiven nor forgotten. If Jeter accepts the $9.5 million option, the payroll would increase to $121.15 million if Rodriguez stays on the books.
The next free agents are integral parts of the rotation: Andy Pettitte and Hiroki Kuroda. This year, they earned $12 million and $15 million respectively. Either or both may retire, or Kuroda may want to play elsewhere. However, if they return at their current salaries, the payroll increases to $148.15 million if Rodriguez stays on the books.
Curtis Granderson is another free agent. He currently earns $15 million. Given this year's injury-shortened season, it is unclear what type of free-agent offers he will get. The Yankees will probably make him a qualifying offer so they would get a draft pick if he leaves. If he accepts the estimated $14 million qualifying offer, however, the payroll would increase to $162.15 million if Rodriguez stays on the books. If they negotiate an extension, the amount would be higher.
Some free agents will leave without qualifying offers. These include Phil Hughes, Joba Chamberlain, Kevin Youkilis, Lyle Overbay, Travis Hafner and Mark Reynolds. It is unclear what the Yankees will do with Boone Logan, although the recent call-up of Cesar Cabral may provide a clue.
The arbitration-eligible players whom the Yankees will want to keep are: David Robertson ($3.1 million), Brett Gardner ($2.85 million), Ivan Nova ($576,000) and Michael Pineda ($528,000). All four will seek raises, but Pineda's injury history may enable the Yankees to work out a reasonable deal with him. It is unclear what the Yankees will do with their other arbitration-eligible players, such as David Huff, Shawn Kelley, Chris Stewart, Francisco Cervelli and Jayson Nix.
The pre-arbitration players are Dellin Betances, Manny Banuelos, David Phelps, Adam Warren, Austin Romine, Preston Claiborne, Vidal Nuno and Eduardo Nunez. The Yankees can keep them for $500,000 to $1 million each.
The number that should raise concern is $162.15 million: the sum of the existing long-term contracts and the conservative estimate of what it will cost to keep the three free agents they want to keep. This would leave less than $27 million for the four arbitration-eligible players they want to keep and the rest of the roster. If Rodriguez's 2014 suspension is upheld, however, the total amount available would jump to more than $50 million. That's a difficult, but not impossible, goal. The Tampa Bay Rays, for example, have a total team payroll of about $57 million.
What They Might Do
One might be tempted to hope that Kuroda, Granderson or Pettitte retires or leaves as a free agent because it would free up $10+ million. If more than one leaves, it would free up even more. The problem, though, would be finding comparable replacements who fall within the budget. All are productive players who would be difficult to replace.
Perhaps Cashman will try to follow this year's script and pick up veterans unwanted or released by other clubs. I call this the Emma Lazarus approach ("Give me your tired, your poor, your huddled masses"). Cashman's record in this area, however, has been checkered. For every Alfonso Soriano, there has been a Kevin Youkilis, Travis Hafner or Vernon Wells. This approach can fill gaps in the roster, but one cannot count on it to build a winning team.
One might be tempted to suggest loading the roster with younger pre-arbitration players. The difficulty is that none of the Yankees' top prospects appears ready for full-time major-league duty in 2014. Trades are possible, but the luxury tax makes pre-arbitration players more valuable than ever. Moreover, as has been seen this year with Romine, Manager Joe Girardi seems reluctant to play rookies regularly.
Signing any impact free-agents seems to be out of the question for 2014 because of their cost. Of course, if Cano were to leave, one would expect a big signing, if for no other reason than to humor the fan base.