By now, we have heard far too many times about how the Yankees need to get under the $189 million threshold (a figure which includes not only MLB salary, but also benefits such as health insurance, for the entire 40-man roster) by 2014. Given the huge legacy contracts that the roster has to deal with, this isn’t an easy task to accomplish while still trying to be the best team on earth. Unless of course, you try some contract shenanigans. On that note, Joel Sherman:
The Yankees’ goal is to slice payroll while still filling the roster with stars that keep the win total and fan interest high. As counter-intuitive as it seems, the answer could, of all things, be to extend Alex Rodriguez’s contract after the 2013 season, and extend Robinson Cano and Curtis Granderson now.
Keep in mind when it comes to multi-year contracts, the average annual value is used for luxury tax purposes. So we already know the 2014 value of Rodriguez ($27.5 million), CC Sabathia ($24.4 million) and Mark Teixeira ($22.5 million) equals $74.4 million. Add Derek Jeter’s $8 million option and the roughly $10 million each team is charged for items such as insurance and pension, and the Yankees would have less than $100 million to assemble the rest of the roster and stay under $189 million.
Sherman no doubt has been talking to baseball people about this. The Yankee luxury tax number is calculated by the average annual value (AAV) of the contract. AAV is a pretty simple calculation – $$ / Years, with potential performance bonuses automatically counting toward the numerator.
Sherman’s plan? Guarantee Alex Rodriguez an extra year on his contract, while eliminating his performance bonuses. The outcome is net neutral in terms of value, but increases the denominator. Rodriguez would end up with an AAV around $20 million. He applies the same logic to Robinson Cano and Curtis Granderson – by extending them early, the Yankees could use their 2012 and 2013 salaries to dilute the AAV. Both would allow the Yankees to pay market price, but lower their luxury tax hit.
Joel Sherman points out that even these ideas raise some red flags in talks with the MLBPA and Bud Selig’s office. They worry about “circumvention” from teams. I have no idea what kind of sanctions Selig would propose if the Yankees started to get really creative. Fans of the New Jersey Devils reading can’t hear the word “circumvention” without thinking about the Ilya Kovalchuck contract. The details:
The Devils will absorb an annual salary cap hit of $6 million — the average amount per season. However, Kovalchuk will remain on the books through the 2026-27 season.
Kovalchuk will earn $6 million each of the next two seasons, $11.5 million for the following five seasons, $10.5 million in the 2017-18 season, $8.5 million for the 2018-19 season, $6.5 million in 2019-20, $3.5 million in 2020-21, $750,000 the following season and $550,000 for the final five years of the unprecedented deal.
The Devils tried to pay their young star huge dollars while in his prime, then slowly wound down the contract over time, but somehow pulled off a reasonable $6 million cap hit. Unfortunately, the NHL did not let this deal go down. They rejected the contract and eventually the Devils settled on a different one with a $6.66 million AAV. As a penalty, the Devils lost two first-round picks. We (Devils fans) are still just a bit bitter about it, since other teams had been allowed to get away with similar tricks.
Since we have no idea what Bud Selig’s office will threaten the Yankees with, let’s pretend for a second that the current CBA gives him no real teeth to enforce the “circumvention” standard. What could the Yankees do to be real creative?
- Don’t just extend Alex Rodriguez one year. Arod wants to win. It is in his interest to free up as much luxury tax room for the Yankees as possible. The Yankees could just start adding years of $500,000 salary to his contract, on the handshake deal that Alex actually retires when he is 42 or 43. Potential savings? Just one or two years to the denominator nets the Yankees about $5 million.
- Play with Derek Jeter’s final year. Derek Jeter’s $51 million, 3-year contract with a player option carries an AAV of $14.75 million if his vesting clause fails. In that case, Jeter can exercise an $8 million option. The Yankees could work out a deal where Jeter declines his option, receives a $3 million buyout, and then re-signs for $5-6 million. Potential savings? Assuming the buyout counts toward the luxury tax, about $6 million.
- Get creative with Opt-outs. Want to see some real contract shenanigans? How about this one. The Yankees sign Cole Hamels to a 7-year, $90 million contract. Hamels gets paid $20 million in each of the first three years, and $30 million over the final 4 years of the contract. Hamels would be able to opt out after 3 years. The contract’s AAV is just $12.85 million, and you’d assume that unless he is badly injured, Hamels would leave for greener pastures after the 3rd season. Potential savings? It depends on the exact contract (and the contract you compare it to), but I’d say you could easily find $5 million here.
- Think about Michael Pineda. This more of a long term thing than for 2014, but the keeping the roster consistently under $189 million will require some very creative accounting. Say Pineda pitches like an ace this year. What do you do? Why not give him a monster extension. If you slowly scaled his salary up, you could end up for 10 years of Michael Pineda (or some other talented young player) for a pretty small AAV, even while he’s being paid at free agent levels. Huge, obvious risks apply.
When the NHL implemented their salary cap, they put severe limits on the kinds of contracts that teams could sign players to in order to prevent these kinds of shenanigans. But MLB allows all sorts of weird options and opt-outs in their contract structures. Selig’s office picked a real fight by going so clearly after the Yankees with the new luxury tax, draft, and international signing rules. Its time to fight back. The Yankees should push the envelope, find loopholes, and break the CBA.
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Sherman’s interpretation is wrong, at least according to my understanding of the CBA. If the same rules for extensions from the last CBA apply to this one, any new deal the Yankees reach with Arod would come with a penalty attached because his contract was front loaded. That would more than half the potential savings suggested by Sherman.
Basically, renegotiated contracts would only be beneficial if the players is coming off a back loaded deal.
I don’t think that Sherman’s interpretation is wrong. If he is wrong, the potential for AAV shenanigans goes off the charts. What if you extended Robinson Cano right now? Would his tiny 2008-2009 salaries count toward the AAV of the new contract? If they did, the Yankees would just sign every rookie to a long term contract, then extend them when they get to free agency.
the rule wouldn’t apply in Cano’s case, because the guaranteed portion of his original contract is over, and club option years count on their own, not as part of AAV.
True, the difference between the amount paid to ARod in the original deal and the amount actually taxed in the original deal would be added to the calculations to determine AAV of the new deal. The AAV in the Sherman scenario would become 24.8M from 2014-2018.
Makes sense, but if you used my suggestion (tack on a few years at the MLB minimum, handshake out a retirement deal with Arod, or even place in an Opt-out), you would be able to start lowering the denominator big time.
true, but I don’t think the commish would allow such obvious circumvention to stand. I suspect an arbitration panel would rather easily determine that this should not be allowed.
I suppose no harm in trying though.
Interesting to see how all this plays out. I think Cole Hamels is going to cost someone much more than 7 years & $90 million though even with an opt out.
If anyone’s interested, I have run the numbers here: http://tinyurl.com/6odb5ov
Also, with all due respect to Sherman, we talked about extending Cano and Granderson here over a week ago: https://yankeeanalysts.com/2012/02/is-it-time-for-the-yankees-to-extend-robinson-cano-and-curtis-granderson-38823
Maybe he read your post?