The Dodgers’ Payroll Situation Is Far from Dire

The Los Angeles Dodgers have been incredibly successful on the field under the Guggenheim Group, winning four straight division titles and twice coming within two games of a World Series appearances. Not only does the club possess a massive television contract with Time Warner, but they’ve also drawn more than 3.7 million fans in every season under the current ownership group. The team has also been at the top of Major League Baseball payrolls — and, including competitive-balance tax money, has paid out roughly $1.2 billion in salaries over the past four years. There are rumblings that those payroll figures could come down quite a bit, with a detailed piece from Bill Shaikin in the Los Angeles Times indicating how and why payroll could be reduced.

Shaikin does a good job separating the Dodgers’ debt issues from their payroll concerns. While obviously related at some level — both matters are relevant to the Dodgers’ financial health — the one doesn’t necessarily affect the other. According to the current (and expiring) collective bargaining agreement, teams are forbidden from carrying a franchise debt in an amount greater than eight to 12 times the team’s earnings. (The exact multiplier depends on a few different factors not worth exploring here, and how earnings are calculated and why it matters are explained in this comment.) The rule exists to ensure the financial security of all MLB teams, limit outside influences, and make certain that teams aren’t in danger of going under. The Dodgers’ ownership group has been given five years as a grace period before the rule applies to them, giving them another year to address their debt.

The Dodgers, like many billion-dollar purchases, were acquired with a combination of assets that included debts. As Shaikin reports:

When Guggenheim bought the Dodgers for a record $2 billion in 2012, the new owners assumed $412 million in team debts as part of the deal. They also funded the purchase in part with about $1.2 billion in investments from insurance companies controlled by Dodgers chairman Mark Walter, as The Times reported in 2012. Boehly said then that the companies would be repaid for those investments — over time, and with interest.

While carrying a massive payroll obviously affects a club’s bottom line and the earnings of the club, it’s the debts from the purchase itself that need to be addressed under the terms of the debt-service rule. A few million dollars of payroll here and there is unlikely to make a big dent one way or another. There seems to be little doubt that Los Angeles will satisfy whatever requirements they need to meet. That does still leave the issue of payroll, however, and what will happen over the next few seasons.

Since the departure of Frank McCourt, the Dodgers’ increase in payroll has been significant, as illustrated by payroll figures for the club over the last decade, including competitive-balance taxes.

We see the huge spike after 2012, the year in which new ownership took over, with the number peaking in 2015. When a team pays out $280 million in salaries, they’re unlikely to be regarded as frugal. That said, the club’s 2016 payroll actually represented about a $50 million decrease in spending relative to the previous season. That cut didn’t have any negative consequences on the field, as the Dodgers still won the division. In an attempt to make themselves competitive immediately, the incoming ownership group had taken on a lot of dead weight in contracts. Some of those contracts came off the books after 2015, but Los Angeles still had one of the largest volumes of dead money heading into last season. Releasing Carl Crawford only caused that figure to grow.

The Dodgers have about $187 million in payroll right now, with arbitration raises pending. That means the team, which is already projected as one of the best in baseball without Kenley Jansen or Justin Turner, could make a splash in free agency and still enter the the 2017 season with a lower payroll than in 2016. While we don’t yet know what the competitive-balance figure will be for next season, we can calculates some kind of estimate. Let’s say it receives a small increase, up to $200 million, with a 50% tax for repeat offenders like the Dodgers. If the Dodgers went out and signed Jansen and Turner for $40 million next year and made no other moves, their payroll would still decrease by about $40 million next season. Now look at the salary commitments disappearing for the club over the next two seasons.

The only player here who projects to be an above-average contributor on the 2017 team is Yasiel Puig — and he might not even be on the roster come spring. Shaikin suggests that the Dodgers are looking to get to a $200 million payroll by 2017, and it doesn’t seem that difficult. Here are the total guaranteed contracts the Dodgers have pending over the next few years.

After 2018, which could offer a free-agent class including Bryce Harper and Manny Machado, the only significant guarantee the Dodgers have on the books is Clayton Kershaw, although he has an opt-out for that year. Joc Pederson isn’t arbitration eligible until 2018 and Corey Seager won’t get his first million-dollar salary until the following season. Even then, their contracts will be limited by the arbitration process.

While there’s been talk recently that the Dodgers couldn’t afford to sign Kenley Jansen and Justin Turner, that doesn’t seem to be the case after examining the hard data. Indeed, the team could sign both players and retain plenty of flexibility for the future. The team could easily dip below the $200-million threshold by 2018, effectively resetting the competitive-balance tax if it still exists in the next CBA (a strategy the New York Yankees appeared determined to employ before abandoning it after the 2013 season). That plan could save the franchise hundreds of millions if they do choose to supplement their young team with stars following the 2018 season.

A decrease in Dodgers payroll over the next couple seasons might be timed to follow the debt-service rule mandated by MLB. An examination of the data, however, suggests that such a decrease in payroll might also just represent sound baseball strategy — and potentially ready the club for a major increase in spending for 2019. At this point, it wouldn’t be surprising to see the team return closer to the $300-million mark in a few seasons. Given the influx of money to MLB teams, and the financial health of baseball — as well as the club’s continued success at the gate and potential resolution with regional cable providers — a $300 million payroll isn’t crazy. For the Dodgers, it might be their best strategy as their young, cheap stars lead the team for the next few seasons.