The Yankees’ spending freeze was expected to thaw this winter. With two of baseball’s brightest young stars on the market and reportedly eager to shine in the Bronx, almost everyone assumed at least one would be wearing pinstripes. Conventional wisdom was wrong. In fact, the Yankees didn’t even make a formal offer to Bryce Harper and Manny Machado. Free agency, it seems, has become too rich for the team with the highest revenue in the game.
Although some fans will undoubtedly feel betrayed by the Yankees’ refusal to spend at levels commensurate with the league average, the team’s reluctance to invest in elite free agents has become a well telegraphed aversion. Throughout the winter, Hal Steinbrenner bemoaned the team’s operating costs and warned about the need to save up for the future commitments that will be needed to retain the team’s young core. No one should take Steinbrenner’s first lament seriously because the high cost of operating in New York is greatly mitigated by the tax-preferred financing and anti-trust protection that have helped the team’s enterprise value balloon. But, what about the appeal to future cash flow? Is the Yankees’ reluctance to spend on free agents justified by the looming cost of retaining its own star players?
To effectively evaluate this claim, we first need to identify the players the Yankees hope to extend. Since Steinbrenner’s comments were made, the team inked Luis Severino and Aaron Hicks to long-term, team-friendly deals, so that leaves Aaron Judge, Gary Sanchez, Miguel Andujar and Gleyber Torres as young stars who have the potential to command exorbitant salaries as their careers progress. How exorbitant? The chart below attempts to put a price tag on the team’s new core four.
Projecting the Future Cost of the New Core Four
Note: Current service time records are Bryant at $10.85mn, Betts at $20mn and Donaldson at $23mn. Blue shading represents arbitration eligible years. Torres has four years of eligibility, but a free agent contract after year three is assumed.
The forecast above begins with the assumption that Aaron Judge will earn record breaking salaries based on service time through his arbitration years, and then sign a five-year/$160 million contract at age-31. The other three members of the new core four are then projected to earn a discounted amount of Judge’s payout. Could Sanchez, Andujar or Torres earn more? Perhaps, but it also possible one or all will earn less, as the estimates above are predicated on all four players being super stars.
With the cost of extensions established, we can now combine that amount with established guarantees as well as reasonable estimates for benefits and 40-man roster obligations. Finally, to make this exercise relevant to the past offseason, Harper’s AAV is added into the mix, allowing us to see whether he and the core four could co-exist over the next 10 years.
Yankees’ Projected Payroll Commitments, 2019-2028
Note: See here for full 2019 projection. Benefits begin with $14.5 million in 2019 and increase by $0.5 million in each season. 40-man commitments are $1.5 million through 2023 and then $2.5 million thereafter. Label at the top of each column is the number of 25-man players under contract.
At first glance, the chart above seems to support the Yankees’ contention. As early as 2021, the Yankees’ AAV could be $177 million with only 11 players under contract. However, it’s important to remember that in order to arrive at that figure, we have assumed a best case scenario for the development of the team’s young players and given the Yankees no benefit in terms of team favorable extensions. Also, we have yet to make any assumptions about the revenue side of the equation.
Yankees’ Projected Payroll Commitments vs. Projected Revenue, 2019-28
Note: Projected revenue is based on 3% annual growth off of Forbes 2017 estimate of $619 million.
Source: Forbes (revenue), proprietary
Since 2004, the Yankees’ annual revenue growth has averaged about 7%, but, to be conservative, the model above assumes 3% per year. At that rate, the team’s revenue would increase from $619 million in 2017, as estimated by Forbes, to $857 million by 2028. As a result, the percentage of projected commitments to revenue would plummet from 38% to 11%, giving the Yankees plenty of spending capacity over the next 10 years.
Yankees’ Future Spending Capacity Based on Projected Revenue and Commitments
Note: Capacity is assumed to be 46% of revenue, or the league average rate in 2017. Source: Forbes (revenue), proprietary
Maybe the Yankees have hidden expenses that make operating the team prohibitively expensive, even in spite of the market advantages they enjoy? Or, perhaps the Yankees have good reason to forecast a decidedly more negative revenue outlook? Under those very pessimistic assumptions, the Yankees could credibly argue that they’re current spending levels are commensurate with their purported dedication to fielding a winning team. Otherwise, their reasons for not spending are just excuses meant to hide the fact that the team’s priority is profit, with winning simply being a means to that end, and therefore only of value to the extent it yields an acceptable marginal return. For many fans and even media, it may be hard to accept that the Yankees are no longer big spenders dedicated solely to winning championships, but the financial facts are compelling. And, as long as both give the organization a free pass, they’ll probably keep passing on free agents.
Leave a Reply