Beware, Plan 189 Has Hidden Costs

We've all heard just about enough about Hal Steinbrenner's mandate to bring next year's payroll below the $189 luxury-tax threshold. Baseball Prospectus estimates the current payroll at $228 million, so a 17% decrease would be needed to reach the magic number. So far, the debate has centered on whether the Yankees can make such drastic cuts while fielding a playoff-quality team.

One issue that needs to be explored is the hidden costs of such drastic cuts. These hidden costs could arguably offset the savings from cutting payroll and re-setting the luxury tax. Plan 189 could backfire by not producing the net savings Steinbrenner wants but causing the Yankees to field a sub-standard team.

The financial advantages of coming in below the luxury-tax threshold are evident. Next year, the maximum tax rate will rise from 42.5% to 50% and, as persistent luxury-tax offenders, the Yankees would pay the maximum rate. If they come in under the threshold next year, however, the luxury tax rate would re-set and they would pay only a 17.5% rate for exceeding the threshold in 2015. If one assumes a $228 million payroll for 2014 and 2015, the Yankees would pay a luxury-tax bill of $39 million. If they come in under the threshold next year but have a $228 million payroll in 2015, their bill would be $6.8 million, a savings of more than $32 million. They would also save $39 million in payroll in 2014 so the total savings would be $71 million.

Let's look at the downsides. Most agree that it would be difficult for the Yankees to come in under $189 million next year while fielding a competitive team, especially if Alex Rodriguez's suspension is reduced. They have too many needs and too much money tied up in multi-year contracts for declining players, not to mention the need to break the bank to re-sign Robinson Cano.

The first area to suffer would be attendance. According to ESPN, the average attendance at the Stadium this year is 40,387, down from 43,733 in 2012 and 45,107 in 2011. That's a significant drop. Assuming conservatively that the average fan generates $150 in revenue for his/her ticket, concessions, parking and souvenirs, a drop of 1,000 in attendance means a loss of $150,000 in revenues. For 81 home games, that works out to a loss of $12.2 million. A drop in attendance of 5,000 fans per game would generate a revenue loss of $61 million. The drop in attendance this year was mitigated by the fact that even though the team was not as talented as in past years, it provided a long and exciting race for the second wild-card spot. Rodriguez's return and Jeter's returns also generated fan interest. If next year's team is out of the race early, one can expect a more pronounced drop in attendance.

The second thing to suffer would be ratings on the YES network. The N.Y. Post has reported that ratings are down about 39% this year. That is a considerable loss of revenue and could get worse next year.

The third thing to suffer would be ancillary revenues, such as for the sale of jerseys and other memorabilia. A winning team with exciting players generates more ancillary revenue than a losing team with journeymen players. Chris Stewart jerseys, for example, do not fly off the shelves. Steinbrenner anticipated a revenue spike when Rodriguez passed Willie Mays on the all-time home-run list. If Rodriguez's suspension is upheld, however, that could not occur until 2015 and, if it ever occurs, would not be greeted as enthusiastically as Steinbrenner expected because the Biogenesis scandal has tainted Rodriguez's milestones in the eyes of many.

These hidden costs may be why Steinbrenner is waffling. "Is our goal 189 next year? Yes, but only if I'm convinced that the team I see we put together is a championship-caliber team," he said earlier this year.

The difficulty is that we do not know what Steinbrenner's motivations are. If his motive is strictly financial, he may decide that the luxury-tax savings aren't worth the hidden costs. While no one would describe Steinbrenner as a baseball guy, he is a businessman and understands revenue offsets. On the other hand, if his family plans to sell the team in the near future, he may decide that a mediocre team with its financial house in order is more attractive to potential buyers than a good team with an exorbitant payroll and big luxury-tax bill. Only time will tell.

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