According to Jerry Crasnick, the terms of the Phillies’ deal with Cliff Lee is as follows: five guaranteed years at $120 million (including a $12.5 million buy out) with a sixth year option worth $27.5 million. Based on these terms, below is a revised present value analysis.
Present Value Analysis if Sixth Year Option Is Exercised
| Phillies: 5 Years, $120 million | Yankees: 7 years, $148 million | ||||
| Year | Salary | Present Value | Salary | Present Value | |
| 1 | $21,500,000 | $21,500,000 | $22,000,000 | $22,000,000 | |
| 2 | $21,500,000 | $20,250,965 | $22,000,000 | $20,721,917 | |
| 3 | $21,500,000 | $19,074,492 | $22,000,000 | $19,518,085 | |
| 4 | $21,500,000 | $17,966,366 | $22,000,000 | $18,384,188 | |
| 5 | $21,500,000 | $16,922,616 | $22,000,000 | $17,316,165 | |
| 6 | $27,500,000 | $20,387,735 | $22,000,000 | $16,310,188 | |
| 7 | $16,000,000 | $11,172,839 | |||
| Total | $135,000,000 | $116,102,174 | $148,000,000 | $125,423,383 | |
Present Value Analysis if Buy Out Is Exercised
| Phillies: 5 Years, $120 million | Yankees: 7 years, $148 million | ||||
| Year | Salary | Present Value | Salary | Present Value | |
| 1 | $21,500,000 | $21,500,000 | $22,000,000 | $22,000,000 | |
| 2 | $21,500,000 | $20,250,965 | $22,000,000 | $20,721,917 | |
| 3 | $21,500,000 | $19,074,492 | $22,000,000 | $19,518,085 | |
| 4 | $21,500,000 | $17,966,366 | $22,000,000 | $18,384,188 | |
| 5 | $21,500,000 | $16,922,616 | $22,000,000 | $17,316,165 | |
| 6 | $12,500,000 | $9,838,730 | $22,000,000 | $16,310,188 | |
| 7 | $16,000,000 | $11,172,839 | |||
| Total | $120,000,000 | $105,553,168 | $148,000,000 | $125,423,383 | |
Note: Based on a nominal interest rate of 6% compounded monthly. Assumes salary paid in full each year (which favors shorter-term deal).
Source: zenwealth.com
As illustrated by the charts above, Cliff Lee has essentially taken a calculated risk on his own health. If he is able to meet the sixth-year option threshold (200 innings in 2015 or 400 innings in 2004/15), the present value of the two contracts would be separated by $9 million dollars, meaning Lee would only have to sign a $12 million deal in 2017 to come out even. Even though this structure makes the Phillies’ offer less lucrative, it is still very comparable to the Yankees’ deal, and that’s before including tax implications.
Of course, if Lee’s option doesn’t kick in, it likely means he has not lived up to the expectations of the contract, which would further imply that he would not be able to recover the guaranteed money he turned away. However, if he does earn the option, it also allows him to reach free agency one year sooner, which could have an even more significant long-term financial impact.
In summary, Cliff Lee opted for his preferred team on terms that I am sure he feels will end up being comparable to all of the other offers. Instead of trying to read to much in between the lines, those comparing the two deals would be much better off crunching the numbers.
Agree, despite the talk all over Philadelphia saying how much Lee left on the table.
If you take into account the 7.5% state and city tax differences (with Philadelphia has 3% vs NY 10.5%), the $125M with the Yankee will net $116M after tax differential – same as playing for Philly.
Will you please forward this to mikeandmike@espnradio.com – I tried to bring up the disparity in taxes making the difference not so great and the reply was that the “Yankees offered $30 million more, I think that will more than make up the difference”
This tax problem for NY teams is real.