Tuesday, November 13, 2007

THE $203 MILLION DOLLAR CANARD

Evidently, the Yankees have resorted to damage control yet again.

Just as King George's Court Reporters tried to discredit Joe Torre in the wake of the public outcry his ouster created, they've spearheaded the movement to depict A-Rod and Boras as greedy, venal mercenaries and to defend the Yankee Front-Office's decision, as such, to shun them.

At first Cashman Inc. wanted Yankees fans to believe that the reason the organization would spurn A-Rod, if he voided his contract, was because the Yankees would lose the $30 million subsidy the Rangers' committed to pay them through the contract's final three years. Lose the best player in baseball over $30 million-- that is, $3-million-a-year over the 10-year contract to which the Yankees planned to extend him?

Well, Cashman's argument, never especially compelling to begin with, became even more untenable once A-Rod actually opted-out. First, a few reporters revealed that the so-called $30 million dollar subsidy was really only $21 million-- because of the $30 million Tom Hicks still owed under A-Rod's former contract, A-Rod himself was entitled to $9 million of it.

What's more, once reporters began to consider the unpalatable alternatives for replacing him, Yankee fans wanted to know why $21 million-- a sum less than Kei Igawa's posting fee and Roger Clemens 2007 salary and commensurate to Giambi's '07 and '08 earnings-- should preclude the Yankees, at the very least, from negotiating with A-Rod notwithstanding.

Wasn't the business of winning more important than the Yankees' wounded pride or the so-called "credibility" with future free-agents the organization claimed it would squander if it reneged on its warning? And in any case, what credibility were they talking about? Wasn't A-Rod's situation sui generis? The Yankees don't have any other players on their payroll with opt-out clauses. And when was the last the Yankees announced before free-agency started that they wouldn't negotiate with one of their own players if he exercised this right? Answer: NEVER.

So as the Yankees' ostracism of A-Rod increasingly seemed more punitive than prudent, King George's Court, through their press agents, began to pander a few more justifications to bolster their case. The first was that by opting-out, A-Rod indicated he no longer wished to play in New York. Which, A-Rod, then, refuted through his press agents and "unnamed sources close to him" and the spuriousness of which Boras, moreover, exposed by adducing Bernie Williams' example. Was Bernie Williams, in 1998, Boras asked, was any less loyal to the Yankees by declaring free-agency and nearly signing with the Boston Red Sox? No, of course, not. Nor is Mariano Rivera for recently reminding everyone that he would consider playing for Joe Torre in LA.

So with the valence of the "Alex doesn't want to be Yankee" dwindling, the King George's Press returned to their favorite bogeyman-- the money.

Why so few baseball writers ever condemn, let alone question, the amount of money the owners earn baffles this writer? Baseball players actually work for their salaries. What contribution does an owner make? It's not as though baseball owners assume some great risk in purchasing a team. They own a closed-market business. Don't players deserve increases commensurate to the astronomical rise in profit the owner have garnered over the last decade from the advent of luxury suites, sold-out ballparks, local television networks, and a rising gate.

Still, reporters' prefer to decry escalating player salaries. So, perhaps, it wasn't surprising when the new reason they offered for the Yankees to shun A-Rod focused on the financial difference between the contract extension A-Rod rebuffed and the cost of signing him as a free-agent. A cost, Jayson Stark observed, wasn't $30 million-- the amount commensurate to the Rangers subsidy-- no, it was actually $203 million. What, $203 million? Where did that come from? Let's see.

MAD MADDEN
Bill Madden, one of King George's favorite leakers when he wishes to replace his manager and unregenerate Boras-hater (Madden calls him "The Avenging Agent"), illuminates.

Madden's premise is that A-Rod now will cost any team he signs with a minimum of $300 million. The reason: the total extension package the Yankees were prepared to offer A-Rod would have netted him at least $300 million. According to Madden, an extension for A-Rod that retained the terms of the old contract would have looked as follows: (See NY Daily News, "Just Shea No," November 11, 2007

'08-'10 Rangers Contract $91 million ($32M for '08, $32M for '09, $27M for '10)
'11-'17 Yankees' Extension $203 million ($29 million per year for 7 years)

TOTAL NET WORTH TO A-ROD = $294 million


STARK NUMBERS
Following Madden's logic one-step further, ESPN's Jayson Stark purports to account for this $203 million premium the Yankees now would have to pay to sign A-Rod. To his credit, Stark's calculations account for an additional variable many other commentators missed. A-Rod, potentially, costs the Yankees more than any other team, apart from the Red Sox, because the Yankees' current payroll exceeds the luxury tax threshold. As such, the Yankees would have to pay a 40% surcharge on A-Rod's annual salary if their pay roll exceeds $155 million for 2008, $162 million for 2009, $170 million for 2010, and $178 million for 2011.

Accordingly, Stark calculates the "$203 million difference" as follows:

A STARK EXTRAPOLATION
Yankees Proposed Extension: 5 years, $145 million
Rangers' Contract: 3 years, $81 million
A-Rod's Take: 8 years, $226 million (28.25M per year)
Yankees' Luxury Tax Premium: $226m + ($226m * 40%) - ($30m TX subsidy)
Total = $287 million

A-Rods' Demand: 12 years, $350m
Luxury Tax: ($350m * 40%)
Yankees' Total Bill: $490 million
Total Difference for Yankees = $203 million


But before we address the two basic fallacies Stark's analysis betrays, let us update his calculation with the figures Madden provides. Remember: Madden reveals, on the one hand, that (1) the Yankees were prepared to offer A-Rod a full 7-year extension, not just five; (2) that the Yankees only receive $21 million of Hicks' $30 million outstanding obligation; and on the other (3) that Boras, despite demanding $350 million, could accept a minimum of $300 million for A-Rod and still claim a victory.

Stark's Numbers with Madden Addendum
Yankees Proposed Contract Extension: 7 years, $203 million
Rangers' Contract: 3 years, $81 million
A-Rod's Take: 10 years, $284 million (28.4M per year)
Yankees' Luxury Tax Premium: $284m + ($284m * 40%) - ($21m TX subsidy)
Total = $377 million

A-Rods' Minimum: 10 years, $300m
Luxury Tax: (300m * 40%) = $120m
Yankees' Total Bill: $420 million
Total Difference for Yankees: $43 million

Now, $43 million is not exactly $203 million. But let's concede for the sake of argument that Boras already has a suitor willing to pay his ransom of $350 million and the Yankees would have to match it to retain A-Rod. (Under such a circumstance the Stark difference would rise from $43 million to $113 million.) The problem is that two assumptions still plague Stark's argument. One of which is spurious, another of which is indeterminate.

STARK FALLACY
Stark's extrapolations assume (i) that the Yankees' payroll will exceed the luxury tax threshold for the entire duration of A-Rod's contract and (ii) that following the expiration of the current labor agreement which runs through 2011, the owner and player will renew the luxury tax. The corollary assumption to which is that the Yankees payroll for the last six years of A-Rod's contract ('12-'17) still will exceed the height to which the new labor agreement raises it.

(This is to say nothing about another flaw in Stark's argument. The Yankees receive some percentage of the luxury tax they pay to defray the cost of the new stadium they're building.)

Stark's first fallacy subsumes its second. Evidently, Stark didn't look beyond the 2008 season in assuming the Yankees would exceed the luxury tax threshold throughout the duration of A-Rod's next contract. Because had he, he would have come to a more equivocal conclusion.
After the 2008 season, the Yankees will discard the following contracts:

1) Giambi $22 million
2) Abreu $16 million
3) Mussina $11 million
4) Pavano $11 million
5) Farnsy $5.5million
6) Pettitte $16 million (provided he doesn't retire this year)

Total Lost after 2008 season = $81.5 million

(I will assume that the loss of other players beyond the players listed above following 2008 will off-set the increases the Yankees will incur from the rise in salaries of arbitration-eligible players like Wang and Cano)

ESPN calculated the Yankees 2007 payroll to be $195 million http://sports.espn.go.com/mlb/teams/salaries?team=nyy

So let's estimate their 2008 and 2009 payrolls, should the Yankees change their mind and sign A-Rod. In 2008, with A-Rod, the Yankees payroll would rise as follows:

1) + $1million Posada's Contract
2) + $4.5million Mariano (I assume Rivera re-signs for 3 years at $45 million)
3) +$1 million Abreu
4) +$1 million Pavano

Total Increase w/o A-Rod = app. $8million

A-Rod Increase = $14million ($30 million '08- $16 million)

Aggregate increase for '08 = $8million = $14million = $22 million

  • Estimated 2008 Yankee payroll with A-Rod = $215 million
  • Estimated 2009 Yankees payroll with A-Rod = $215 - $81 (expiring contracts) = $134 million

Which means, all else being equal, the Yankees would be about $28 million under the luxury tax threshold for 2009. Two implications follow: (i) if the Yankees don't incur the luxury tax after 2008, the cost differential of signing A-Rod on the open market versus extending his contract drops to little more than the $21million Rangers' subsidy and (ii) that even with paying A-Rod $35m-per-year, the Yankees potentially would have about $28 million dollars at their disposal to spend on Johan Santana, before MLB would assess a luxury tax in 2009.

CAN THE YANKEES AFFORD A-ROD?

In fact, should the Yankees change their mind, A-Rod's contract, along with Posada's, Rivera's, and Jeter's, would remain the only long-term contracts the Yankees would have to pay past 2009, when the Yankees' luxury tax threshold would rise to $170 million and in 2011, to $178 million.

So can the Yankees afford A-Rod? It's difficult to evaluate definitively, of course, because the Yankees, like every other major league team, don't have to account publicly for their revenue and indulge in creative book-keeping to minimize the profits they declare. Still, the Yankees enter a new stadium in 2009 with 60 corporate luxury boxes and suites and seats throughout the ballpark whose prices many estimate will rise from 75% to 400% in addition to commanding "a licensing fee" surcharge for season-ticket holders. Whether they maximize this earning potential will depend on whether fans fill the ballpark and spend their money on concessions and souvenirs, which in turn, will hinge, in the long-term, on whether the Yankees win.

So, once again, can the Yankees afford to re-sign A-Rod? To which a Talmudic answer seems most apropos: i.e., Can the Yankees afford not to?

5 comments:

Kalel9 said...

Good article. It should have been clear to anyone that the future payroll for the Yanks would be down as the deals youn pointed out were retired. There is absolutely nothing rational stopping the Yanks for filling the hole at 3B with the best player on the market.

Old Goat said...

Its great to see some fans out there get it with the A-Rod situation. Far too many of them have swallowed the Yankee spin machine take on this and are villifying the best player in the game.

If the Yankees maintain their course of action, or rather inaction on A-Rod, they just might be repeating history. Harkening back to the time when the Yankees let Reggie go and they languished in 5th place. Not an auspicious way to close out Yankee Stadium nor open the new glamour palace.

The one hope is that King George instead of the bopsie brothers, Hank and Hal, makes a move to sign A-Rod and allows it to be his parting gift to Yankee fans. King George has stated that letting go of Reggie was one of his biggest mistakes. Letting go of A-Rod would make that look silly.

I now have a new site that I will be checking in on. Good solid reasoning. Thanks!

Matthew S Schweber said...

Thanks guys.

I couldn't agree more with both of you.

As I argue in my previous post, "Why The Yankees need A-Rod," I think the Yankees Front-Office is deluding themselves if they think they can win next year without A-Rod's production or a reasonable facsimile of it.

And the former option excels the latter option because any player who could approximate A-Rod's production, like Miguel Cabrera, would obligate the Yankees to decimate the very farm system they only recently replenished in order to acquire him.

Let's hope the Yankees' current stance on A-Rod is nothing more than a clever negotiating ploy.

scorecard said...

Yo Matt:
I am glad to see you are employing your writing for productive purposes.

Giradi is the best choice, however.

Email me (first initial, last name at gmail).

KR

Matthew S Schweber said...

I would be happy to oblige and to E-mail you 'scorecard', but I need to know who you are first.

Kevin, is it you? Or is that you, Keith?