What that means is, had the Yankees signed Beltran for $100 million (the price they say Boras offered), the real cost to them, including the luxury tax, would have been more like $140 million -- something the Yankees acknowledge factored into their decision.
"We just couldn't afford to get a deal done," Yankees General Manager Brian Cashman said. "We're paying an extra 40 cents on the dollar."
As things stand, the Yankees, with a payroll in excess of $200 million and almost certain to rise, already are staring at a luxury tax bill of nearly $30 million for 2005. Combined with their expected revenue sharing payments, the Yankees could be forking over $100 million to support poorer teams.
"If [the Yankees] didn't have to pay the luxury tax, it might have been a different story," said Boras, Beltran's agent. "As it was, for them to pay [Beltran] $17 million a year, it's actually more like $24 million. I would say it certainly was a parameter that created an issue in their pursuit of the player."
The Yankees' revenues (estimated by the league to be $315 million) and franchise value (estimated by Forbes Magazine as $832 million) dwarf those of any other baseball team. The Boston Red Sox, the Yankees' bitter rivals, are next, at $220 million in revenues and a franchise value of $533 million.
However, beginning late last fall, rumors began circulating within baseball that the Yankees' financial picture involved bigger concerns than the amounts of their revenue sharing and luxury tax payments. At last month's owners meetings in Phoenix, the rumors grew in strength. The Yankees, according to some owners, were carrying significant debt and were out of compliance with the debt service rule. Thus, like all offenders, they were subject to sanctions -- including, potentially, the loss of their share of a pool known as the central fund and exclusion from owners' votes -- if they did not get into compliance by the end of 2005.
Selig, in a telephone interview, would not speak specifically about the Yankees' financial situation. But he said, in general, about baseball's new economic system: "Do I think the changes have affected how teams have been run? Yes, I do."
However, an ownership source from another team said the Yankees "are clearly in violation" of the rule. "True, so are a lot of teams," the source said. "But they're the Yankees."
One source who attended the owners' meeting, where Selig gave a slide presentation detailing which teams were in and out of compliance, said the Yankees were in the category of teams currently out of compliance with the rule, but on track to be in compliance by the end of 2005.
Confronted with this claim, Levine said brusquely, "We're in compliance with the debt service rule," and declined to elaborate.
One source with knowledge of the Yankees' finances, who spoke on the condition of anonymity, downplayed the rumors, saying the Yankees' total debt was close to $100 million. "That's very little debt, relative to the value of the franchise," the source said, "and they could wipe it out by writing a check. People overestimate this issue."
A Push for Compliance
Even though Selig's powers to penalize teams that are out of compliance with the rule do not begin until after the 2005 fiscal year, league officials say he has been vigilant about forcing teams to be "on a trajectory," as one source put it, toward compliance.
That source said it would be logical to assume the Yankees were dissuaded from signing Beltran, in part, by the threat of the debt service rule -- in other words, that an extra $23.8 million in payroll commitment to Beltran in 2006 (his $17 million average annual salary plus the 40 percent luxury tax) would have pushed them out of compliance with the rule for that year.
The debt service rule, championed by San Diego Padres owner John Moores and modeled on similar rules in the loan industry, ties the amount of debt a team is allowed to carry to its cash flow, defined by the acronym EBITDA (earnings before interest, taxes, depreciation and amortization).