Major League Baseball Finances, Part 2 The Boston Red Sox

Introduction

In an earlier piece, I examined Major League Baseball (MLB) finances. It was notable that the Boston Red Sox, normally viewed as one of the successful big-market teams, appeared to be in financial straits. That is, after deducting last year’s ticket and TV revenues from payrolls, only $25 million remained. This was less than any other team and could easily have been used in other team expenses. Of course John Henry, the principal owner, could pay for “overages.” But unsurprisingly, Henry said that in 2020, payrolls have to be dramatically reduced to get under the luxury tax limit. In what follows, I look at the Red Sox situation with thoughts on how it might all work out.

The Luxury Tax

In part to reduce the financial differences among teams, MLB every year sets a luxury tax payroll threshold. For teams whose payrolls exceed this threshold, taxes will be imposed: a club exceeding the Competitive Balance Tax threshold for the first time must pay a 20% tax on all overages. A club exceeding the threshold for a second consecutive year pays 30% percent, and for three or more straight seasons of exceeding the threshold pays a 50% luxury tax. The threshold for 2020 will be $208 million.

The Boston Globe reported that:

Henry said that in 2020, the Red Sox “need to be under the luxury-tax threshold and that was something we’ve known for more than a year now.” Werner later clarified that it was a strong preference rather than an absolute.

I quote further from the Globe:

In 2018, when the threshold was $197 million (with tax rates at the three thresholds of 20%, 32%, and 62.5%), the team spent past the third and highest threshold in a championship season. In 2019, with a luxury tax threshold of $206 million (with tax rates of 30 percent, 42 percent, and 75 percent), the team will spend over $240 million, incurring roughly $12 million in taxes, but staying below the highest tier of $246 million. In 2020, the team wants to get below the first luxury tax threshold of $208 million (when the tax rates would be 50%, 62%, and 95%).

Spotrac reports the Red Sox Luxury Tax payroll at $218,783,333, or $10,783,333 over the threshold.

Table 1. – 2020 Competitive Balance Tax Totals

Source: Spotrac

Contract Categories

In MLB, players are separated into three categories:

  • Pre-arbitration players;
  • Players eligible for salary arbitration; and
  • Free agents.

These categories are based on the player’s service time (i.e., the number of years and days of major league service a player has in their career). A team has the contractual rights to a player until that player has six years of service time and becomes a free agent. A pre-arbitration player will generally be a player who has less than three years of service time while a player who has at least three, but less than six years of service time will be eligible to enter the salary arbitration process.

Effectively, this means that for the first 3 years, most players get paid a little more than $500,000 each year. The next 3 years payment will be negotiated/arbitrated based on their first 3-year performance. And after that, they are “free agents” to go wherever they want.

With this as background, let us consider in detail the Red Sox case.

Table 2 provides contract data on batters. In 2020, they have commitments to Devers, Bogaerts, Martinez, Vazquez, Chavis and Pedroia totaling $63 million. Regarding the other players, I would like to see them retain Holt at same price as last year. I do not see them chasing Benintendi and it is time to part ways with Bradley and Leon.

Table 2. – Red Sox Batters

The real question of course is what to do with Betts. Before answering that, it is worth looking at the pitcher situation. Here the committed monies are staggering. And this is the case with the health of Price, Eovaldi and Sale all questionable. But there have been a couple of pleasant surprises: Workman and Rodriguez have established themselves and worth their salary bumps. Barnes and Hembree are also not too expensive.

Table 2. – Red Sox Batters

Source: Baseball Reference

The real question of course is what to do with Betts. Before answering that, it is worth looking at the pitcher situation. Here the committed monies are staggering. And this is the case with the health of Price, Eovaldi and Sale all questionable. But there have been a couple of pleasant surprises: Workman and Rodriguez have established themselves and worth their salary bumps. Barnes and Hembree are also not too expensive.

Table 3. – Red Sox Pitchers

Source: Baseball Reference

The Red Sox have made contract commitments to 6 batters and 7 pitchers totaling $154 million, leaving $54 million before hitting the salary cap. And as I suggested earlier, Suppose the Red Sox pick up Holt for $3,575,000, leaving $50 million before hitting the luxury tax cap.

Conclusion – Mookie Betts

Suppose that all but 1 of the remaining 26 players were paid $500,000. That would cost $13 million, leaving $37 million to offer Betts while still remaining under the luxury tax cap. That should be enough to make the Hot Stove League quite interesting.

The content above was saved on the old Morss Global Finance website, just in case anyone was looking for it (with the help of archive.org):
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