Yanks’ financial woes cause for Major League concern

By now, the Yankees current financial situation has been plastered all over the New York tabloids, and the picture is bleak. As The New York Daily News reported on Sunday, the Yankees are in the red for up to $80 million in 2005. If the Yankees follow through on their promises to cut payroll, the ramifications could be felt throughout Major League Baseball.

For the Yankees, losing money is not a new proposition. The Bombers lost close to $40 million in 2004, and because of complicated Major League accounting rules, those who own the Yankees may not have lost actual dollars due to the money made through TV. However, the Yankees as a baseball club represent a losing financial entity, and as such, the principals involved in the team want to turn red ink into black regardless of how this may play out with Major League Baseball on the whole.

On a team level, the Yankees’ losses mean an attempt at reining in the payroll. Considering the over-the-top spending from George’s win-now days from the winter of 2001 through the end of the 2004 season, this may not be such an easy task. According to Hardball Dollars, the Yankees are on the hook in 2008 for $92 million.

As Brian Cashman has repeatedly said this winter, the Yankees are trying to lower their astronomical $200-million payroll. As far back as last winter, the effects of this belt-tightening has impacted the Yankees’ ability to fill holes. Because this team was eager to land free agents such as Mike Mussina and Jason Giambi and had to do so at exorbitant costs, the Bombers could not pursue centerfielder Carlos Beltran last year when he was willing to give the Yanks a significant discount. Now, as the December meetings are upon us, the Yankees are seriously considering using Bubba Crosby and his career .253 on-base percentage as the starting center fielder next year. The cost of irresponsible contracts goes beyond the team the Yankees can field.

While fans of other teams are happy to see the Yankees struggle to land free agents and smile with glee when Cashman talks about lowering payroll back to, oh, just the $180 million level, little do they realize what a lower Yankee payroll would mean to the game. Currently, the Yankees, according to the Daily News, dole out around $75 million in revenue sharing and another $33 million in luxury taxes under the 2002 Basic Agreement. If the tenets of this agreement are upheld after they expire next year, a lower Yankee payroll could mean less money for Major League Baseball.

Currently, revenue sharing is calculated as a percentage of net local revenue. Here’s how it works, according to Basic Agreement:

Each Club contributes 34% of its Net Local Revenue to a putative pool; that pool is then divided equally among all Clubs, with the difference between each Club’s payment into the putative pool and its receipt therefrom producing the net payment or net receipt for that Club

Now, at this point, it’s tough to tell how the Yankees’ contribution to the revenue sharing plan would be affected by a decrease in payroll. Since payroll is not a part of the revenue equation, a lower payroll will have no baring on the Yankees’ revenue sharing contributions. Rather, as the Yankees raise ticket prices in an effort to offset the losses, they may end up making more net local revenue and, in turn, would have to contribute more total dollars to the revenue sharing plan. This does not mean, however, that the Yankees would be losing as much money. No one ever said the economics of baseball were straightforward.

Where Major League Baseball would feel the pinch of a lower Yankees payroll comes from the luxury tax side of the equation. Currently, the Yankees in 2005 are paying out $33 million luxury taxes. Next year, as multiple-year offenders, they’ll again have to pay about 40 percent of their total payroll in excess of the luxury tax threshold of $136.5 million. If the Yankees’ payroll decreases and their luxury tax contributions decrease as well, some of Major League Baseball’s important programs may suffer in turn.

Currently, the luxury tax – or as it is properly called, the Competitive Balance Tax – funds three different programs, according to the Basic Agreement. One program concerns player benefits. The second focuses around “projects and other efforts to develop baseball players in countries where organized high school baseball is not played.” The third is the Industry Growth Fund, a program designed “to enhance fan interest in the game; to increase baseball’s popularity; and to ensure industry growth into the 21st Century.” Here, the Yankees economics represent the biggest challenge to the financial structure of Major League Baseball. The MLB powers-that-be would, in my opinion, be loathe to see the Yankees try to cut payroll because this, in turn, means less money for this Industry Growth Fund.

Hypothetically, if the Yankees were to keep their payroll at its current projected $169 million (with many bullpen and centerfield holes), the Yankees’ revenue sharing contributions would decrease from $33 million in 2005 to just $13.5 million in 2006. While the Yankees are not the only luxury tax offenders, they are the only team paying in 2005 over $900,000 in luxury taxes. (The Red Sox owed around $860,000 this year.) If the Yankees were to decrease their payroll and their luxury tax contributions, Major League Baseball’s expansion efforts would see a significant decrease in potential funds. While it is possible for Major League Baseball to draw these funds from other sources – the Basic Agreement allows for discretionary contributions from the 30 clubs – this fund is tied in closely with the Yankees’ payroll, as were the intentions of the owners and players throughout the negotiations in 2002.

So then these convoluted economics leave baseball in a bit of a catch-22. The Yankees’ efforts to close their economic operating gap could mean more revenue sharing money. The other teams would profit and ostensibly, if the money were to go toward player contracts, a competitive balance would become a closer reality. However, at the same time, a lower Yankee payroll means less money for the Industry Growth Fund.

In the end, baseball’s zany economics set forth in 2002 seem to have taken the sport a step closer to its goal: The Yankees are no longer spending money as freely as they once were and a competitive system is falling into place. At the same time, MLB has to face the reality of less funds available for industry growth. The logic, to me, seems to be that if competitive balance is restored, games that count for more teams later in the season will provide enough industry growth to offset a smaller Yankee contribution to the Competitive Balance Tax. If this plan doesn’t fall through, baseball will once again be stuck with a strange set of economic circumstances heading into the 2006 season where a labor deal will once again dominate the headlines.

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3 Responses to “Yanks’ financial woes cause for Major League concern”


  1. 1 Sam December 5, 2005 at 3:21 pm

    Quite astute, Benjamin, and gives this uninformed “Oh, the Yankees are so rich” whiner something a bit more complex to whine about.

  2. 2 Victoria December 5, 2005 at 6:48 pm

    Very interesting and informative, as usual. I was unaware, however, that George’s so-called “win-now days” had ended at the end of the 2004 season and were in fact still not in existence today!

  3. 3 Norm December 12, 2005 at 3:24 pm

    I don’t see what the problem is here. The purpose of the luxury tax is to increase competitive balance. This can happen in two ways. First, large market teams lower payroll to avoid the tax. Second, small market teams take their luxury tax distribution and spend it on talent. The second way is far less certain since there is no guarantee distributions will be spent on payroll. The first way, though impacting very few teams, is has more predictable effects. If the Yankees, and maybe other large market teams with a future luxury tax scheme, are going to spend less, then yes indeed, we should see more balance.

    By the way, if as Ben suggests, the Yankees lower payroll, put a less talented team on the field, AND increase ticket prices, they a business morons. It’s basic economics.


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