Dodgers plan to stay under luxury tax threshold, document prepared for potential investors indicates
The Dodgers plan to keep their player payroll below the level that would require a luxury tax payment for at least the next four years, according to a document prepared for potential investors that was reviewed by the Los Angeles Times.
By cutting payroll this year to the point where they were not assessed a tax, the Dodgers also reduced their tax rate for future years. However, if they do not wish to pay the tax at all, the Dodgers could be hard-pressed to sign any top free agents this winter, including coveted outfielder Bryce Harper.
The Dodgers spent $195 million in player payroll this year, when they advanced to the World Series for the second consecutive season after winning the National League West for the sixth time in their six full seasons under the ownership of Guggenheim Baseball Management.
Under the projections prepared for potential investors, the Dodgers would spend $185 million on salaries in 2019 and 2020, $191 million in 2021 and $196 million in 2022.
The Dodgers’ payroll projections are not binding. One high-ranking team official called the figures a “forecast,” and another said he would be “shocked” if the player payroll did not top $200 million next season.
The luxury tax would be assessed on any team that spends $206 million in 2019, $208 million in 2020, and $210 million in 2021. The 2022 threshold has not been set.
At a news conference last week, Dodgers president of baseball operations Andrew Friedman deflected a question about whether the team would be willing to pay the luxury tax next year.
“It’s not something that we’ve really gotten into at this point,” he said. “More than that, there’s no question that we have plenty of resources to win a World Series next year. There’s no question about that. The talent on hand, and the flexibility to do that, is definitely there.”
The Dodgers last Friday signed Clayton Kershaw to a three-year contract with an average annual value of $31 million, tied with David Price of the Boston Red Sox for the highest such figure among major league pitchers. Kershaw can earn as much as $4 million more per year in incentive bonuses.
“You would expect the Dodgers to have one of the highest-payroll teams in baseball,” Kershaw said before the season ended. “You would expect, since we got under [the tax threshold] this year, the club would be able to spend for a few years after that.”
It is uncertain whether the Dodgers could reduce their payroll to $185 million next season. If catcher Yasmani Grandal and pitcher Hyun-Jin Ryu each accepts his qualifying offer, and if the team extends salary arbitration to seven players — the six arbitration-eligible players on the postseason roster, plus injured shortstop Corey Seager — the Dodgers’ payroll would stand at about $190 million for 16 players.
That figure does not include players not yet eligible for arbitration, including pitchers Walker Buehler and infielder Max Muncy. Those players would be paid near the $555,000 minimum.
The Dodgers have explored selling a minority share of the team for at least two seasons. The document reviewed by The Times provides potential investors with management projections of the team’s revenues and expenses. Those revenues and expenses can change over time. For instance, World Series appearances in back-to-back years have enabled the Dodgers to sell tickets, merchandise and concessions for games they could not be certain they would play before the season started.
“It’s a projection that presumably is made in good faith,” said an investment banker not involved in the Dodgers’ negotiations to sell an ownership stake. “If, two years from now, Mike Trout becomes available and they decide to break the bank for Mike Trout? It’s not binding, in that sense.”
The document was prepared before the 2017 postseason, when the Dodgers generated additional revenue by advancing to the World Series for the first time in 29 years.
For the 2017 season, the Dodgers paid $290 million to cover payroll and the luxury tax.
Nonetheless, in 2018 the Dodgers hit the $195-million payroll targeted in the document, enabling them to avoid paying a luxury tax for the first time in Guggenheim’s six full seasons of ownership. The Dodgers lost at least $100 million in each of the first four full seasons under Guggenheim, including a $200-million loss in 2015, according to the document.
The document showed potential investors how management intended to reverse the team’s financial course, including by reducing payroll below the level of those first full seasons. The projections call for the Dodgers’ revenues to increase from $591 million in 2019 to $695 million in 2022.
The Times asked for Tucker Kain, the Dodgers’ chief financial officer and managing director of Guggenheim Baseball Management, to explain why the business model presented to potential investors showed that the team does not plan to spend above the threshold in the near future, even as revenues increase.
“Unfortunately, we have to decline the interview request,” Dodgers spokesman Steve Brener said.
The Dodgers long have made clear their business model under Guggenheim: Spend freely at first to accelerate the replenishment of a barren talent base in the major and minor leagues, then build a perennial contender through player development, emphasizing depth and financial flexibility over continued free spending that could result in a roster overloaded with old, expensive and unproductive players.
On Jan. 15, 2014 — less than two full years into Guggenheim’s ownership — the Dodgers signed Kershaw to a seven-year contract extension that guaranteed him $215 million. With this season over, Kershaw leveraged an opt-out clause in that deal into the new three-year deal.
The Dodgers did not sign any of the 14 major league players who have signed free-agent contracts of at least $100 million since the initial Kershaw extension. The list, compiled from an ESPN database, includes players that returned to their old teams or signed with new ones.
The Dodgers’ largest contract in between the two Kershaw deals was the $80-million agreement it struck to retain closer Kenley Jansen, and only after ownership agreed to match the five years offered by the Washington Nationals.
Tony Clark, the executive director of the Major League Baseball Players Assn., said he would be concerned if a large-market team kept its payroll under the luxury tax threshold for an extended period of time.
“Any time a club isn’t doing everything it can every season to compete for the World Series title, it’s a concern to players who are always doing what they can to be on the last team standing,” Clark said.
Baseball commissioner Rob Manfred said the league did not mandate that the Dodgers keep their payroll below the threshold this year, or in any future year. He said any such mandate would be a violation of the league’s collective bargaining agreement and said each team determines its own payroll.
“I think the payroll threshold is a very high number,” Manfred said. “If I’m a Dodger fan, I’m concerned about one thing: Am I competitive on the field? High payroll, low payroll, they have managed to be competitive.”
The Dodgers are in compliance with the league’s rules on debt service, Manfred said. Guggenheim had taken advantage of a provision in the collective bargaining agreement that affords new owners five years to satisfy the debt rules.
“We don’t try to regulate payroll through the debt service rule,” Manfred said. “We try to get to financial stability. There are other ways to get there. The Dodgers had a plan, and they stuck to it. Probably the most amazing thing about it is that they had a lot of high-payroll guys, they worked their way into a young team and got to real financial stability, and throughout the whole time they were competitive. That is no mean feat.”
Manfred said Dodgers fans should not be concerned about an investor document that shows revenues would rise while payroll would remain largely flat.
“Numbers in a presentation, to me, are a lot less meaningful than that ongoing commitment to being competitive,” Manfred said. “I believe that’s where the Dodger ownership group is.”
Follow Bill Shaikin on Twitter @BillShaikin
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