The Futility Infielder

Remaking the Yankees, Part VII: Adding It Up

In analyzing the Yankees offseason moves over the past couple of weeks, I've largely steered clear of any commentary about the consequences of the Yanks' spending spree, both for themselves and for the rest of baseball. I did this for several reasons:

• First, because I wanted to focus on the vacancies in their 2002 roster, their options for filling said vacancies, and the quality of the decisions they made.

• Second, because in this contentious environment, we are currently so awash in misleading financial data, that it's tough to take any analysis of baseball's finances seriously.

• And third, because if I'm nowhere near being a major-league baseball player (even a futility infielder with a sub-700 OPS) or a General Manager, I'm even further away from being an economist or an accountant. In general, money bores the hell out of me, unless it's my own we're talking about.

Nevertheless, I do feel some nagging responsibility to address the issue now that I've watched George Steinbrenner's team throw $165 million at four free agents. So bear with me as I try to weed through some of the numbers.

According to figures released last week by the Major League Baseball Players Association, the Yankees paid an average annual salary of $3.93 million to the 31 players on their August 31 roster or disabled list, leading the major leagues. This figure was 84% higher than the major league average of $2.14 million. This was the first year that the average salary surpassed $2 million, and was up 12.8% on last year's figure of $1.9 million

This was the third straight year that the Yanks have had the highest annual salary, and the seventh time in the past eight. Multiplying the average salary by the number of players on their roster and DL, we get a figure of $121.8 million worth of salaries. Back in April, ESPN reported the Yanks' opening day roster as totalling $109.8 million in salary, which barely edged out the the Boston Red Sox ($109.6 million) and Los Angeles Dodgers ($109 million) for the top spot. If I understand correctly, those opening day figures were based on average annual values of contracts rather than what the teams would actually be paying this year, but it's unclear whether the recently released figures are calculated the same way. We may be comparing apples and oranges.

This is an important distinction. Take Derek Jeter's contract, for example. Jeter signed a 10-year contract worth $18.9 million annually, so that $18.9 mil figure would be included in the MLBPA's calculations. But according to the structure of the contract, in 2001 Jeter actually received an $11 million salary, plus $2 million of a $16-million bonus which was spread over 8 years. Total salary for 2001: $13 million. You can see where this is going--a vastly inflated figure compared to their actual payments for the year. Still, according to these figures, the Yanks spent more money on player contracts than any other team.

The Yankees spend the most money because they make the most money. Forbes Magazine estimated their revenue for the 2000 season at $192.4 million, tops in baseball. The Mets were second, at $162.0 million, the Braves third at $145.5 million, the Expos last at $53.9 million. The league average was $105.9 million. According to 2001 unaudited figures released by Major League Baseball a couple of weeks ago, the Yanks' revenue was $242.2 million, again tops and about twice the major league average of $118.3 million. Montreal again brought up the rear, this time at $34.2 million. Not coincidentally, these high revenues make the Yankees the most valuable franchise in baseball. George Steinbrenner's team was valued by Forbes in the beginning of the season at $635 million, almost 40% higher than the next most valuable club, the Mets, and 241% of the major league average franchise valuation.

According to those numbers released by Bud Selig, numbers about which we should be very skeptical because of the lack of detail they provide and the accounting tricks they undoubtedly conceal, major league teams posted a $232 million operating loss in 2001, or an average of $7.73 million per team. Against all of this, the Yanks posted an operating profit of $14.32 million after factoring in revenue sharing (towards which the Yankees kicked in $26.5 million this year), making them one of only nine teams to show a profit for 2001:

Milwaukee $16.13 million

Seattle    15.48

NYY        14.32

SF         12.69

Detroit     5.66

Oakland     3.41

Cincy       2.35

Minnesota   0.54

Anaheim     0.03

A closer look at the numbers reveals that revenue sharing put the Angels, Reds, Tigers, Twins, and A's in the black, while it put seven otherwise profitable teams in the red. The Brewers, in addition to turning a profit (nice job, Bud, I mean Wendy) received a small amount of revenue sharing ($1.7 million), meaning only three teams withstood their revenue-sharing contributions and still showed a profit. Not surprisingly, the Yanks were one of those teams.

According to Selig's testimony before Congress, the Yankees were one of only two profitable teams over the past seven years, the other being the Cleveland Indians. The Yankees posted a $64.5 million operating profit from the years 1995-1999, as the Blue Ribbon Committee reported last summer (I don't have updated figures covering all seven years).

The Yankees are the wealthiest and healthiest franchise, so what else is new? Well, YES--the Yankee Entertainment and Sports Network, George Steinbrenner's new cable channel--will be carrying the Yankees games starting next season, bringing a new revenue stream of bigger and bigger local broadcasting dollars. The Yankees made $56.75 million in local broadcast revenue this year, according to Major League Baseball, 2.5 times the major league average. Estimates on what the team will earn in its first year of YES range from a low of $52 million (according to a former president of CBS Sports) to a high of $80 million (according to Doug Pappas, head of the Society for American Baseball Research Business of Baseball Committee, who maintains a site devoted to his excellent writings on the subject and who has been writing a worthwhile series on similar grounds over at Baseball Prospectus). The rich, in other words, stand to get a whole lot richer, which is why they've been spending so much money lately.

One of the things wrong with baseball right now is the ill-structured revenue sharing agreement, a result of the 1995 strike settlement, which allows teams receiving luxury taxes paid by the likes of the Yankees to pocket those dollars rather than reinvesting them in player salaries. But just as wrong is that the Yankees are allowed to maintain their huge local revenue advantage unchecked. As it's structured right now, teams do not share their local broadcast revenues, despite the fact that it takes two teams to tango on the Madison Square Garden Network or YES. A revenue-sharing solution which requires teams to contribute some percentage of local revenues (AND prevents those receiving revenue sharing from merely pocketing the income) is one of the most commonly offered solutions to the current revenue disparity problems.

It remains to be seen whether the owners will get hip to this idea, as it makes much more sense than a salary cap. Given George Steinbrenner's public support for Bud Selig but his just-as-public disdain for revenue sharing ("I'd rather send a million dollars to Save the Whales than to the Pittsburgh Pirates," he's been quoted as saying), it will be some measure of Selig's sincerity in tackling the problem if he shows the courage to try to reach inside of George's pocket himself.

You can stop laughing now.

In the wake of the Yanks' wave of free-agent signings last week, ESPN offered up a headline which read "Yank payroll closes in on $150 million." The story--mostly about YES--included a sidebar which listed the average annual value of Yankee players' contracts, along with estimates for their unsigned younger players. The total reported there was $147 million--an astronomical number. But it's also one that simply isn't true. Those numbers do not take into account the salary structures of several of the Yanks' top contracts, as I hinted at above. Derek Jeter and Jason Giambi, for example, both have heavily back-loaded contracts. While ESPN reports the averages as $18.9 million for Jeter and $17 million for Giambi, the truth is that Jeter will receive "only" $15 million in 2002 including signing bonus, and Giambi only $10.8 million (on the other hand, they will be receiving respective salaries in 2007 of $20 and $21 million). These figures are taken from a contracts page which lists the year-by-year structure of nearly every long-term contract. Using these figures (which include the structure of bonus payments), as well as what's been reported this week, we come up with a much different estimate of the Yankees payroll. In creating the table below, I've averaged out bonuses over the life of the contract unless they were otherwise indicated, and I've used ESPN's estimates for unsigned players, denoted by an asterisk:

              2002               ESPN

          Base + bonus  total    AVG

Jeter     13.0 + 2.0    15.0    18.9

Giambi     8.0 + 2.8    11.8    17.0

Mussina    9.0 + 2.0    11.0    14.8

Clemens    7.8 + 2.5    10.3    15.4

BWilliams  12.0         12.0    12.5

Pettitte   8.5 + 1.7    10.2     8.5

Rivera     7.45 + 2.0    9.45    9.9

Ventura    8.25          8.25    8.0

Posada     8.0*          8.0     8.0*

Karsay     3.0 + 4.0     7.0     5.75

Hitchcock  5.0           6.0     6.0

White      4.5           5.5     5.0

OHernandez 4.0*          4.0     4.0*

Stanton    2.5           2.5     2.58

Mendoza    2.5*          2.5     2.5*

GWilliams  2.0           2.0    

Vander Wal 1.55          1.55    1.92

AHernandez 1.0           1.0     1.0

Soriano    1.0*          1.0     1.0*

Spencer    1.0*          1.0     1.0*

Henson     1.0           1.0     2.83

Johnson    0.5*          0.5     0.5*

-------------------------------------

                       130.55  147.08

As you can see, those are two very different figures--a 12.7% difference. What's interesting is that the righthand column of approximate annual values is what the MLBPA uses to calculate revenue-sharing figures, rather than basing them on actual payments due.

There's no getting around the fact that the Yankee payroll is extremely high. So far, they've been the most active team in the free-agent market, and while teams have paid lip service to cutting payroll, questionable mid-level signings have abounded. Many of the top free agents--Barry Bonds, Juan Gonzalez, Chan Ho Park, for example--remain unsigned, with their respective suitors keeping a very low profile. Right now the Yanks are getting all of the exposure and taking all of the heat.

For what it's worth, I would like to point out that with the exception of the Karsay signing, the Yanks haven't really broken any new ground, contract-wise. Jeter's contract is still about $6 million per year lower than Alex Rodriguez's. Giambi's contract is one of the top five in terms of average annual value, and it's probably going to become a millstone over the second half unless he stays in shape and very productive. What is new ground is the number of players the Yanks have who will be making over $10 million a year--five or six, depending on which method you use.

Right now the Yanks are clearly in a class by themselves when it comes to spending. There's no doubt that losing the World Series and shedding mid-priced mediocrities has opened their checkbooks wider than if they had won the Series. Whether they'll be the only team in that stratosphere come opening day remains to be seen.

As I said before, I'm not an economist. I highly recommend anybody who's got even a passing interest in the finances of baseball read Doug Pappas's writings--there's a man who understands where the money comes from and where it's going much better than I do.