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Baseball's Financial Reins Bringing Yankees to Heel

Rules Drawn in 2002 Beginning to Have Effect

By Dave Sheinin
Washington Post Staff Writer
Friday, February 4, 2005; Page D01

NEW YORK -- For months, it was almost universally accepted around baseball that Carlos Beltran, the immensely talented, 27-year-old center fielder who entered free agency this winter, would sign with the New York Yankees. The Yankees needed a center fielder to replace the aging Bernie Williams. They had the most money and, almost without fail, had made a habit in recent years of acquiring any player they wanted, no matter the cost.

But when Jan. 11 dawned, it was the crosstown New York Mets holding a news conference to announce the signing of Beltran to a seven-year, $119 million deal, with the Yankees not even making an offer. That same day, the Yankees introduced lefty Randy Johnson, their latest acquisition, in a separate news conference. In addition to not making an offer for Beltran, the Yankees say they also turned down a last-ditch pitch from agent Scott Boras that would have delivered Beltran to them for about $100 million over six years.

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The Yankees' disinterest in Beltran, which team officials said was at least partly for economic reasons, sent shock waves throughout the game.

Rival teams and league officials noted with discreet satisfaction that, for the first time, the impact of economic rules written into the 2002 basic agreement between baseball owners and players appeared to have succeeded in reining in the Yankees' spending.

Yankees officials acknowledge that they were constrained by two of the changes adopted three years ago -- revenue-sharing and a penalty against high-spending clubs known as the luxury tax. "We had priorities this winter -- primarily, improving our starting pitching -- and we feel we met those priorities," Yankees President Randy Levine said. "We're like every other team, even though our revenues are larger than other teams'. We're conscious of revenue sharing and the luxury tax."

But others around the league say that another, lesser-known part of the 2002 agreement -- a measure called the debt service rule that limits the amount of debt a team can carry -- might be causing the Yankees, and several other teams, to more fundamentally rethink their free-spending ways.

"There's a real rude awakening coming for them," said one high-ranking official from another team, who like others interviewed for this story spoke on condition of anonymity. Referring to Yankees owner George Steinbrenner, the official said, "Starting in 2006 [when the debt service rule goes into full effect following a three-year grace period], he won't be able to fund these $200 million payrolls any more."

Leveling the Field

Reining in the Yankees' payroll spending and ridding the industry of its ballooning debt were two of baseball's primary goals when Commissioner Bud Selig and his lieutenants risked a debilitating work stoppage and pushed through a series of economic measures designed to improve the sport's financial picture and competitive balance.

Although the measures in the 2002 basic agreement stopped short of the egalitarian system championed by the NFL and NBA, baseball's increased revenue sharing and a more severe luxury tax bargained with the powerful players' association shifted more of the sport's resources from the richest teams to the poorest. Though the basic agreement never said so specifically, the new measures were designed largely to bring the Yankees -- whose revenues and payrolls increasingly dwarfed the competition's -- back to the pack.

While the two measures were aimed at increasing competitiveness, the debt service rule specifically targeted the industry's debts, mandating "fiscal responsibility," as league officials put it, among individual teams. The rule limited the amount of debt a team can carry by tying it to its cash flow.

However, whether intentional not, the debt service rule has had another effect: Since player payroll is by far a team's largest expense, many debt-ridden teams found the best way to get in compliance with the rule was to shed payroll and limit spending. Although Yankees officials say the team is not in violation of the debt service rule, many in the game are now connecting the Yankees' fiscal restraint this winter to potential concerns over the sanction.

In 2004, under the formula laid out in the basic agreement, the Yankees paid about $88 million for the right to earn and spend as much as they did that year -- $63 million in revenue-sharing payments spread among other teams, plus a $25 million luxury tax bill. That fee represented 30 percent of the Yankees' payroll spending above the league-wide threshold of $120.5 million.

Combined, the revenue sharing and luxury tax consumed more than a quarter of the Yankees' estimated revenues of $315 million.

In 2005, the Yankees, as a third-time luxury tax-payer, will see their luxury tax rate rise to 40 percent on payroll above the new threshold of $128 million -- a figure they long ago blew past. Their trade for Johnson last month shot their 2005 payroll above $200 million, making them the first team in history to exceed that figure.

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