For the last several years, the Yankees’ relative fiscal austerity has been the dominant theme of the offseason. Not so this year, obviously. The Yankees once again flexed their financial muscles to reach a nine-year, $324 million agreement with ace righty Gerrit Cole. In my reaction to the deal yesterday, I briefly touched on the payroll implications of the deal.
Even still, this is worth its own post. Cole significantly changes the landscape for the Yankees and will have financial ramifications not just in 2019 but for years to come. Let’s get right to it.
The Yankees’ 2020 Payroll
Back in October, I took a look at the payroll situation heading into the offseason. After accounting for all of the various contributing factors, I estimated that the Yanks were running a $209.2 million payroll as of October 24. A few things have changed since then in addition to Cole signing, so let’s run through the same exercise again:
- Guaranteed Contracts: $179.6 million* (figures via Spotrac)
- Arbitration: $34.6 million (based on MLBTR estimates)
- Pre-Arbitration Players: $4 million (figure via Cot’s Contracts)
- Retained Salary: $26.1 million (Jacoby Ellsbury)
- Benefits and 40-man: $17.25 million (figures via Cot’s Contracts)
*Bear in mind that the guaranteed contracts here are assessed against the CBT hit, not their actual value. I’ll explain that more in a minute, but the above figure is about $7 million less than the Yankees will actually pay the players in 2020. For this exercise, that doesn’t really matter, though. About $168 million is assessed for tax purposes.
Add this all up and you get about $261.5 million in payroll entering the 2020 season as of December 12, 2019. That’s a significant increase over two years ago, when the Yankees cut $50 million in player salary after losing Game 7 of the ALCS to the Astros. In 2018, they ran a $166 million payroll, which brought the team under the threshold and reset their penalties.Anyway, this is all subject to change. There are a few x-factors here.
The first is that the Yankees are not done building their roster. They will need to find another outfielder, and possibly another infielder and bullpen arm. None of the pieces they acquire here will likely be heavy-hitters in terms of salary, but it does all count. It’s worth thinking about.
The second is that the Yankees will try to move J.A. Happ, as we’ve covered here. His 2020 salary and CBT hit is $17 million so it makes sense the team is shopping him. The team will likely pair him with a prospect to unload this contract–as this is not the NBA, I do find this a bit silly, but whatever–and hope to get someone to eat at least some of this money. Stay tuned here, but this probably the biggest x-factor here.
Finally, the Jacoby Ellsbury situation is another major variable. The Yankees are engaged in a dispute with Ellsbury over the payment his 2020 salary (at least). That would free about $21 million and change off the CBT threshold. That’s a lot!. It’s the fourth-highest CBT assessment on the roster, actually. It’s easy to think this will matter, but the dispute won’t be settled anytime soon. I wouldn’t count on it mattering at all for 2020, but I do have to mention it because it is there.
CBT Thresholds and Penalties
With that in mind, it’s time for a very quick reminder of the thresholds and penalties for the Competitive Balance Tax (CBT), known as the luxury tax. Here are those thresholds for the 2020 season, assessed by the average annual value of a player’s contract, not the value of one season:
- First Tier: $208 million
- Second Tier: $228 million
- Third Tier: $248 million
The penalties are a bit convoluted but fairly straightforward. Teams who exceed the limit for the first time pay 20% rate on every dollar spent over the amount, teams who exceed the limit two years in a row pay a 30% tax–this will be the Yankees in 2020–and teams who do so three or more years in a row are pay a 50% tax.
Teams over the second tier are subject to an additional 12% tax and teams who exceed the third tier are subject to an additional 42% surcharge for the first year over and 45% each year thereafter. Crossing the final threshold also results in a team’s highest pick in the Rule 4 draft moving 10 spaces back.
These penalties sound harsher than they are. I mean, the Red Sox–who are desperately cutting payroll to avoid this scenario–paid only $13 million in actual dollars last year. That’s just $1 million more than the Yanks are paying DJ LeMahieu, for example. It’s always worth keeping that in mind when we talk about this. It’s not as bad as it seems. It really isn’t.
It’s pretty clear where the Yankees sit here. Right now, they’re right up against the third-tier of the penalties. Even if they stay below that area, which they’re trying to do, the Yankees will certainly be a repeat offender. There’s no way to avoid it. So, here is what their penalties will be: they’ll pay a 30% tax on every dollar over $208 million, a 42% tax on every dollar over $228 million, and about $75 or so for every dollar over $248 million. If they exceed the third threshold–which they will, barring any additional moves–their 2020 first round pick moves back ten slots.
For what it’s worth, Hal Steinbrenner indicated that while he doesn’t want to exceed that third-tier, he will if he has to. (At least for 2020.) That is real! I am not betting on it, though. I’m certain they’re doing whatever it takes to move Happ. If they do that, even if they add Gardner and make a few marginal upgrades/additions, they’ll most likely sit below the $248 million threshold. If we know anything, we know that the Yankees are on top of all of this. I mean, if I can figure it out, so can they.
In the long-term, their outlook is actually fine. After 2020, they have $36 million of free “space”, as Paxton and Tanaka’s deals are expiring. In fact, there are few deals extending beyond 2022, with only Aaron Hicks, Giancarlo Stanton, and Gerrit Cole are under contract right now for that years. There’s a team option for Luis Severino and plenty of arbitration-eligible players then, but the Yankees are clearly in a good place in the long-term, from this point of view. This does not even factor in the expiration of the Collective Bargaining Agreement, which will likely change this all entirely and provide greater so-called flexibility.
Of course, they know all of this. Gerrit Cole did not come cheap, but he also did not limit them moving forward. Remember, we heard a lot about how Giancarlo Stanton’s deal inhibited the team. Look at how that turned out.
UPDATE (5:20 pm): The Yankees, of course, made a move right after I published this. The post above has been edited to reflect Brett Gardner’s contract and is current as of 5:20 pm on 12/12/19.