Calculating Yankee savings with the new payroll budget

The Yankees’ goal to put payroll under the salary cap in 2014 has garnered a fair amount of criticism. With payroll in 2013 at $228 million, this means that a team struggling to compete for a playoff spot this season would need to cut $40 million in salaries for 2014. Leaving aside what that roster would look like, determining how much money the Yankees will save is a difficult undertaking. There is the easy part, the money saved in salaries and the luxury tax payments (called the competitive balance tax in the current Collective Bargaining Agreement) from 2014-2016. Then, there are the more difficult calculations: implications from revenue sharing and the potential impact of decreased attendance.

Before we determine how much the Yankees will save, we need to make a few assumptions. First, the Yankees will move down to a $188 million payroll in 2014. Then, they will up the payroll to current levels in 2015-2016. The biggest savings occur in 2014. They experience the immediate $40 million savings from discounting payroll. If they go above the luxury tax levels in 2014, they are subject to a 50% tax on the amount they exceed tax level as a multiple repeat offender. If the Yankees keep payroll at $228 million in 2014, going $40 million over the tax level results in a $20 million charge. The total savings for the Yankees in 2014 is $60 million.

In 2015, assuming a payroll of $228 million (won’t 2014 be a fun winter), the Yankees would again be subject to the luxury tax. However, having gone under the tax level in 2014, they would no longer be classified as a repeat offender. As a first time offender, they would be subject to a 17.5% tax instead of 50%. Their tax would now be $7 million instead of $20 million, resulting in a $13 million dollar savings for 2015. In 2016, their tax level goes up to 30%. They would pay $12 million as opposed to $20 million resulting in an $8 million savings in 2016.

The grand total saved in salaries and luxury tax payments alone from 2014-2016 is $81 million.

Getting under the tax level in 2014 also affects revenue sharing, but those numbers are a bit more speculative. I recommend reading Wendy Thurm’s piece here at Fangraphs for a good breakdown on revenue sharing. Major League Baseball takes 48% of net revenue and divides it among all teams. Net revenue includes ticket sales, concessions, and local television contracts. Stadium costs are subtracted to determine the net revenue to be divided.

The revenues are not divided equally. All teams contribute 34% of their revenue. That amount is pooled together, and then divided equally among all teams. These numbers are used as example only and are not factual, but if the Yankees’ net revenue were $200 million, 34% of that amount is $68 million. If 34% of the combined net revenue for all teams is $1.5 billion, that means each team is to receive $50 million. Under the first part of revenue sharing, the Yankees would contribute $18 million to teams whose net revenue is under the $50 million figure that all teams receive.

The first calculation only includes 34% of baseball’s net revenue. A total of 48% of net revenue is divided. The final 14% is divided in an entirely different manner. Every team is given a performance factor. Eleven teams receive a positive percentage. Those teams’ percentages added together reach 100%. Each team pays a certain percentage of the 14% remaining to be distributed. The Yankees performance factor is the highest in baseball at %27.1. Three teams have no performance factor. They do not pay into or receive any money from the final 14%. The remaining 16 teams all receive money from the 14% pool. The Kansas City Royals have the highest negative performance factor at 9.1% in 2013.

The Collective Bargaining Agreement identifies 14 large market clubs that may forfeit some of their revenue sharing money. Those teams are the two franchises in New York, Los Angeles, Texas, and Chicago as well as Toronto, Boston, San Francisco, Philadelphia, Washington, and Atlanta. The CBA is essentially saying these are the teams who should be making more than the average team and it would not be fair to give those teams more than they are earning. If a large market team is supposed to receive more money than they contribute, they forfeit a percentage of the surplus money. In 2013, that figure is 25%, rising to 50% in 2014, 75% in 2015 and 100% in 2016. That money gets returned to the teams with a positive performance factor, each receiving money according to their factor. As the team with the highest performance factor at 27.1%, the Yankees would stand to receive a decent chunk of change.

The distribution in the previous paragraph does have conditions. Luxury tax offenders for five years like the Yankees are ineligible for the refund. Just like with the luxury tax, the clock can be reset with one year under the tax level. In 2014 and 2015, the Yankees would be eligible for 100% of their refund. If they go over the tax level in 2015 and 2016, they would be entitled to 75% of their refund in 2016 as a two-time repeat offender.

Determining how much money the Yankees will receive is admittedly speculative. We do have a few pieces to guide us. Last season, $400 million changed hands between haves and the have-mores. First, among the big market teams, three have a negative performance factor: Toronto (8.3%), Washington (4.1%),and Atlanta (3.2%). In a normal year, these teams receive a portion of the final 14% of net revenue that is redistributed. That alone takes the Yankees effective performance factor from 27.1% to 25% as far as what they pay in. That does not represent all of the potential savings. Looking through that list of big market teams, Washington, Toronto, and Houston are candidates to receive more money than they put in. The Yankees had expected to reap considerable rewards from these funds. If even $50 million out of that $400 million went to big-market clubs, the Yankees would receive around 7 million in 2014, close to 14 million in 2015, and another $10 million in 2016.

Unfortunately, the landscape has changed somewhat since the Yankees' original budget goals were announced. Teams like Toronto and Washington have made big acquisitions and become successful. Although attendance is down throughout baseball, Toronto and Washington have seen some of the biggest increases making them less likely to be payees in 2014. Fewer payees means less money for the Yankee refund. Atlanta has seen a small increase in attendance after bringing the Uptons into the fold. Most of the other big-market teams already print money and contribute more than league-average. The White Sox could potentially provide the Yankees some refund. The wild-card is Houston. The Astros are drawing very poorly as they attempt to be rebuild and would be an ideal candidate to contribute to the Yankees refund. However, the Astros just signed a gigantic television deal kicking in this year that averages $80 million dollars per year. If not completely eliminating money Houston receives over their percentage of revenue, it at least minimizes it. The potential savings the Yankees thought they were getting could end up being very small on the revenue sharing front.

With every reward, there are risks. For the Yankees, the risks are two-fold. Their odds of making the playoffs are somewhat slimmer. The Yankees receive 20% of gate receipts for the first three games of any Division Series, and the first four games of the ALCS and World Series. For any other postseason games the Yankees participate in, the Yankees receive 42.5% of the gate receipts. Lowering payroll lessens the chances of making the playoffs in 2014 which should be a consideration in the Yankees decision. The much bigger consideration is attendance.

Compared to this point last year, MLB attendance is down an average of 1,203 fans per game (Non-Marlins attendance is only down 868 fans per game). The Yankees have lost an average 2,573 fans per game. Discounting around 1500 lost seats for weather and economy, that still leaves 1,000 fans per game staying away due to performance and front office perception. At $64 per ticket, that’s a little over 5 million in lost revenue this year. If they lost another 5,000 next year, they would take a hit close to $26 million dollars, which seems like the worst case.

The Yankees are about to save a lot of money if they go forward with the plan next year. Absent bringing in new talent at the trade deadline, fans are likely in for two disappointing seasons. It is not that $189 million is not enough to compete. It certainly is, but the Yankees have already invested a lot of those funds poorly. The Yankees had holes after last season and chose either not to fill them or fill them only partway. Patience may be a virtue, but it’s not in most Yankee fans’ vocabulary. Cheap, under-performing, overpaid, and stingy are the words in Yankee fans’ vocabularies that will be used feverishly over the next 15 months. Winning is the only cure.