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December 15, 2010

Prospectus Perspective

Cliff Lee's Choice

by Christina Kahrl

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So, about that mystery bidder. It wasn't the woman with the opera gloves wearing sunglasses indoors in the front row. Nor was it the guy in the corner wearing a fez. The rumors weren't entirely wrong—the international man of mystery this time around was somebody from the National League East. It just wasn't the Nationals' Mike Rizzo; it was the Phillies' Ruben Amaro Jr. By signing with Philadelphia for at least $120 million over five years, Lee decided you could go home again. Which, admittedly, is easy enough to say about a guy who has played for four different teams in the last two seasons.

This immediately led to two kinds of response—joy that Amaro had righted a wrong left over from last season's needless trade with Seattle, and despair in Texas and New York that they had somehow not won fair and square by mounding up the biggest possible piles of money.

To deal with the first, the Phillies have already paid their pound of flesh over that mistake. Cliff Lee was in the World Series, and they weren't. The original proposition that, if you get to employ two of Roy Halladay and Cliff Lee and Joe Blanton, somehow Lee was the one to deal, has been belatedly repaired to reach the appropriate solution. Maybe somebody from the Mariners' package received for that last, below-market season Lee was under control for will deliver value, but not as soon as Lee will now, and it's still an open question over whether their career value will pile up to something equal to one Cliff Lee campaign. You can certainly hope so because at least the question's less galling now that money has repaired the initial error.

But as for the financial side of things, the deals were closer than you'd think if you just look at the size of stacks o'cash being bandied about. The Rangers were reportedly offering $138 million over six years, the same as the Yankees were over the same length of time. However, Texas wanted to defer some portion of the deal's pay-outs, while offering “just” a vesting option for a seventh year. The Yankees also had a vesting option for a seventh season that would bring the total package to $154 million over seven years. That puts the Average Annual Values (AAVs) of the deals in the $23 million range, dropping to $22 million over seven in the Yankees' vesting package. The Phillies' flat offer was a base of $24 million over five years, and a vesting sixth that would bring the deal down to $22.5 million.

So the AAVs favor Philly if you're talking five years, while Lee's six-year compensation seems lower in Pennsylvania than in Texas or New York. But Texas' deal had all of that deferred cash, and not all states are equal when it comes to income taxes and the like. Texas has no income tax, so Lee would be losing just 35 percent of his payday to Uncle Sam, while New York's state and city taxes mound up to more than 45 percent of any offer that he wouldn't get to keep. If the Rangers were pegging their bids to the Yankees, they were being fairly sensible—they had a simple economic advantage as a matter of geography and state income tax. Pennsylvania has a flat income tax of 3.07 percent, but Philadelphia non-residents (assuming Mr. Lee remains an Arkansas resident) have to pay another 3.5 percent, so Lee is basically losing 41 percent of his paycheck to taxes. That's more than he'd have lost in Texas, but he's getting a bigger paycheck in the first five years, and apparently none of the money is deferred. Add in that vesting sixth season with the Phillies only brings the deal down into the AAV range of the Rangers' six-year offer, and that's without sorting out how much of their deal was deferred.

All of which is a long way of saying he got a trio of interesting, competitive offers. Picking between three contenders offering roughly similar packages, he chose a contender in a city he's already familiar with, in the DH-less league, in a division that doesn't have the Red Sox to deal with. And as Eric Seidman noted in his column today, he'll do so while getting to be part of a unit with a shot at history. Does that make it a good idea for Cliff Lee? Absolutely.

But does it also make it a good idea for the Phillies? Considering that this rotation, like any other, isn't locked into place forever, yes, it was, beyond the backstory. Now, just as they would have been before last winter's Lee trade, they're the easy favorites for the pennant, and as a matter of productivity, beyond projection, Lee was worth it. But the Phillies also had more payroll wiggle room over the long term than might have been readily accepted. While Doc is locked in place through 2013 (or 2014 if his option vests), Cole Hamels, Roy Oswalt, and Blanton are all only under club control through 2012, further fueling the suspicion that Kentucky Joe is going to be somebody else's innings muncher by Opening Day 2011.

There's more, of course. As far as near-term budgeting, both Jimmy Rollins and Raul Ibanez are free agents after 2011, potentially subtracting another $20 million from the payroll. Some of that will go toward replacing (or re-signing) both or either, but it isn't like either player has been turning on the gas with at-the-plate production en route to their free agency. Domonic Brown is years away from arbitration, assuming he takes over as the everyday right fielder, so that's another $7 million that was already back in the kitty once the Phillies were Werth-less. Life after Jamie Moyer and J.C. Romero? Another $12 million to play with on a club that already has most of its major components locked into place, so even with the gains in some player's individual compensation packages, that was a lot of money going back into the budget. Beyond next year's budget, it'll only take $1.5 million to buy back the additional $11 million they won't have to pay Brad Lidge to alternate saves accumulation and mound combustion in 2012.

The number of applecarts upset by this latest surprise in winter activity are outnumbered by the number of re-fired ambitions as far as what this means in the AL. Maybe the Yankees weren't needlessly distracted by noisy Jeter drama, but Brian Cashman is now wearing a Hot Stove sombrero if you consider Lee, Jayson Werth, and Carl Crawford as this winter's must-have additions for the front-rank contenders. Now the Yankees' rotation is back down to CC Sabathia, Phil Hughes, whichever flavor of A.J. Burnett shows up next year, and Andy Pettitte's Hamlet-like pondering of the attractions of retirement. Oh, and Jobamarama Drama, which is always simmering.

You can bet the Red Sox don't mind this situation in the least, not just because they're beginning to look like the favorite to win the division, but also because they have enough ammo in terms of talent in the organization to interfere with an easily-anticipated pinstriped effort to land Zack Greinke. If the Yankees don't get Greinke, they may be limited to chasing after any one of a number of mid-Rotation Innings Masticators or League-Average Inning Munchers as you see fit. Maybe the Phillies will gleefully yield Kentucky Joe as a consolation prize.

The AL West might also be hissing with a collective sigh of relief, because the Rangers sans Lee are far from easy favorites over an Angels team that should have Kendry Morales back and bopping, as well as an A's team that might have an improved lineup as well as the better rotation. Without Lee, the Rangers probably won't win 90 games, and if the division's back down to something like an 85-win standard, maybe even the maladapted Mariners can stop getting defensive and get serious about their own opportunity to get back into the mix. And if the Yankees are weak while the Rays seem to be in what might be politely referred to as transition, maybe the league's wild card is in play for the teams that don't win the Central. Hell, worst-case scenarios for the Yankees might even inspire dreams of relevance to the post-season picture in cities unused to the experience, like Toronto or Baltimore, while the Rays hardly need be counted out already. Maybe everybody in the league matters. Well, OK, not the Indians, and the Royals only by virtue of what they do or don't do with Greinke. Still, there's now some daylight beyond the annual expectation that the AL East owns two playoff spots.

Of course, there's a lot of winter left before we can really fire up those kinds of previously improbable ambitions. In the meantime, you can bet on Brian Cashman's commitment to strangling those dreams in the crib, long before they have legs of their own to walk on. But the number of options open to him have been radically circumscribed because of how this winter has played out. For all of the bleating over big-market muscle crushing hope and faith everywhere west of the Hudson, elective choices from the off-season's top trio of free agents have made all the difference, since only one—Crawford—put himself into the overwrought Red Sox/Yankees death match, while Lee and Werth both steered clear.

The Yankees and Rangers don't have to worry about being entirely disappointed, however. They successfully resolved one free-agent duel between themselves without any help from an aspiring Comrade Buttinskis: in a two-team showdown, the Bombers successfully signed Mark Prior, leaving the Rangers to feel the pain of rejection. Anyone willing to lay odds on the chances he throws more innings in pinstripes in the majors than Bob Sykes?

Christina Kahrl is an author of Baseball Prospectus. 
Click here to see Christina's other articles. You can contact Christina by clicking here

Related Content:  A's,  Cliff Lee

28 comments have been left for this article. (Click to hide comments)

BP Comment Quick Links

Sacramento

Remember the DHL commercial with Kenny Lofton from a few years ago? I think they need to do a new Cliff Lee version.

Dec 15, 2010 00:00 AM
rating: 3
 
nschaef

Will we be able to see any assessments along the lines of how the team will likely hold up performance-wise? It's an aging group, with some players having some spotty histories - either recently or a few years ago - and I was interested to see a BP perspective on that. Kevin Goldstein hinted at potential pitfalls to Cliff Lee in a blurb the other day, for example.

The financial situation isn't as bad as I really had thought, although I still think this is a touch optimistic.

Dec 15, 2010 05:28 AM
rating: 2
 
jarydzel

When you factor in state income taxes, don't you have to add that states where they play try to collect for the games played? Texas doesn't have state tax but 81 games a yr are played where there is a state tax, smoothing out the overall state income tax effect.

Dec 15, 2010 06:47 AM
rating: 2
 
nateetan

Some states have laws that explicitly tax out-of-state players for games played there, but not all.

Dec 15, 2010 07:03 AM
rating: 0
 
ScottyB

My wife is a theater actress. When she was on national tour, she had to file income tax in every state in which she performed (and hire an accountant to keep it all straight). Very complex. There are virtually no states that do not soak out-of-state workers, as they have no effective way to represent themselves to a state legislature.

In baseball, this whole state tax thing is very overstated- perhaps Mr. Lauria could interview an accountant about it.

Dec 15, 2010 09:59 AM
rating: 3
 
BP staff member Eric Seidman
BP staff

I'm an accountant. One of my former Professors was actually Controller of the Phillies from 1997-03 and told us about how when interleague play first started things were really crazy because teams were playing in cities they had never before played in and getting all of the tax withholdings applied was a pain in the butt. He said Rico Brogna called him one night at like 2 AM because they had accidentally withheld way too much from one of the AL cities.

Dec 15, 2010 10:18 AM
 
ahemmer

I'm also an accountant. Most states with major sports teams have something called the "jock tax." Basically, those states can collect income tax on any players that visit cities within the state to play a game.

Lee would not necessarily have no state income tax while playing for the Rangers. Since he would be living in Arkansas, Arkansas would be charging him state income tax even though Texas didn't. Many states have rules like that. For instance, I live in Iowa. If I crossed into Illinois to work, my income would be taxed at Illinois state rates, and be remitted to Illinois. Iowa would also go after me for Income tax, but I would get a credit for what I paid Illinois, so my Iowa liability would be little to none. If Illinois had no income tax, I would have to pay Iowa for the state tax that I didn't have to pay working in Illinois.

Dec 15, 2010 11:58 AM
rating: 2
 
amazin_mess

I'm not an accountant, but I play one on TV.

Dec 15, 2010 17:54 PM
rating: -1
 
ScottyB

Eric- perhaps you or Jeff could write an article about the tax implications of contracts- states, deferrals, etc. This would be interesting, and also would help sports fans better understand an important part of contracts.

Dec 15, 2010 14:14 PM
rating: 3
 
BP staff member Eric Seidman
BP staff

Yeah, that could be fun. I'll have to look into a bit more.

Dec 16, 2010 08:30 AM
 
BP staff member Christina Kahrl
BP staff
(11)

It would be a useful addition, so consider this my 'amen' on the subject. ;)

Dec 16, 2010 09:59 AM
 
fatted

I do love Cliff Lee and I love that he wants to come back to Philadelphia, but it does seem that the calls of him leaving "10's of millions" from Monday at midnight when it was first announced were a bit premature. He may left some money on the table (and the 7th year), but getting $24 million a year is still right up there.

Dec 15, 2010 06:53 AM
rating: 3
 
Hoff

wait, you switched from talking about the 2012 budget to the 2011 budget.

the question still remains, how much will the phils actually spend. they've got 103% capacity at the stadium and no plans for their own network, and they've made the playoffs 3 years straight. According to cots they're looking at around 165-170 million in payroll this year, a bump up of 20 from last. And while they're going to shed some payroll probably, what their ultimate target is unclear. Next year includes 115 million, before picking up oswalt or paying hamels. Those would add 25-30 million, and bring you back to 140 million. Lose blanton and you're back to 130, but you still need a short stop, outfielder, ryan madson, and you've got a decision on lidge. So either this team is heading permanently to the 150 million dollar level of payroll, or things are verry tight in 2012.

I think my gut says that at some point they're going to be cutting salary in a much more aggressive way. That means that hamels, oswalt, rollins, might not return.

Dec 15, 2010 07:00 AM
rating: 1
 
ostrowj1

I wouldn't say that the Phillies have exhausted their revenue opportunities. I imagine Phillie fans will be seeing a nice increase in ticket prices in the near future.

One thing that I have not seen mentioned in any of these contract discussions is the (in my opinion) real risk that we will be seeing greater than normal inflation in the next few years. A few years at 5-8% inflation can make that 7th year on Werth and Crawford's contract look a lot better (note that better != good).

Dec 15, 2010 09:22 AM
rating: 0
 
fantasyking

I'm still struggling to see how he left any money on the table. Assuming his 6th-year option vests, he'll get over $24MM of AAV for 6 years, which is clearly the BEST offer on the table, not the worst.

And then all you have to believe is that he will sign a deal for around $13mm or so in year 7, and he will have made out better with this deal over all 7 years than he would have with TEX or NY.

Dec 15, 2010 08:34 AM
rating: 0
 
ostrowj1

Maybe it is more accurate to say that he is leaving *guaranteed* money on the table.

Dec 15, 2010 09:17 AM
rating: 2
 
ScottyB

...or, his arm falls apart in year 4, and he gets $0 once his contract runs out

Dec 15, 2010 10:54 AM
rating: 0
 
BP staff member Christina Kahrl
BP staff
(11)

Oh, I think if Mark Prior's still getting deals, Cliff Lee might still get one if he wanted to keep pitching. ;)

Dec 15, 2010 13:03 PM
 
ScottyB

Yes, but Prior's not getting $27 million anytime soon

Dec 15, 2010 18:45 PM
rating: 0
 
fantasyking

He doesn't need to get $27mm. He probably only needs to get $8mm to $13mm in 2017 (or less if his 2016 option vests), to make this deal a winner over the Yankee's offer.

Consider two scenarios:
1. He pitches through 2015 and his 2016 contract vests at $27.5mm. He will earn $147.5m over the first 6 years in Philly. The Yankees offered $148mm over SEVEN years, all he needs to do is make >$500,000 in year 7, and the philly deal is better.

2. He gets hurt in 2014 or 2015 and his option doesn't vest. The Phils buy him out for $12.5mm in 2016. Now he has made $132.5mm through 6 years. He needs to make >$15.5mm in 2017 to bring the total value up to the Yankees offer of $148mm, right? WRONG. No one ever talks about net present value with baseball contracts, but it's relevant here. Because the Phils are offering a higher AAV for the first 5-6 years of this deal, the NPV of their deal (in December 2010) is very competitive with the Yankees' NPV, even without a nickel in year seven. Assuming a 15% discount rate (maybe that is too high), the NPV of the Yankees full deal is $102.6MM. The NPV of the Phillies deal is $98.7mm -- even assuming he gets bought out at $12.5mm in 2016 and doesn't get paid in 2017. So he just needs a contract of ~$8mm in 2017 to break even, and as noted by others, that doesn't seem very farfetched.

Dec 20, 2010 11:39 AM
rating: 1
 
louisbarash

In a deal like this, I think total contract value is more important than AAV. Lee is entering his 33 year old season and will be entering his 40 year old season after six years of this deal. There will have to be a huge amount of inflation for him to get a $20 million contract at that point. He has probably left many millions on the table.

One has to wonder about the Phillies hitting. Five players (Howard, Werth, Victorino, Utley, Ibanez) accounted for 108 home runs last season, 2/3 of the Phillies total. Of those, only 33 were by right handed hitters, with Werth getting 27 of those (Victorino had six against lefties). (Domonic Brown of course adds nothing there, and the only righty in sight who might get a few more HRs with more playing time is Ben Francisco.) Ibanez is 38 and his OPS dropped over 100 points last season. Polanco is 36 and hit six home runs -- not enough from a corner IF and not out of character for Polanco. Rollins is their "youngster" on the left side at 32, but his last two seasons he has a BA over 25 points below his previous career average, with peripherals to match. No Phillie (other than Werth) had an OPS over 860 last season.

This is not to say the Phillies, with that rotation, aren't favorites to win the NL. But I don't think this signing really rectifies the mistake of letting Lee go in the first place. Last year -- when everyone was a year younger and they still had Werth -- was the year when Lee added the most value. Given how far they went without him, he clearly looks like he could have been the difference maker in the NLCS. But this year's Phillies offense will not be as good as last year's and the likelihood is that it gets worse over the remaining seasons of Lee's long term deal.

While you can argue that Lee's deal was a "bargain" compared to market value, and it seems clear that Werth was overpaid by the Nationals, I am not sure that over the life of these contracts the Phillies wouldn't have been better off with Werth.

Dec 15, 2010 10:14 AM
rating: 4
 
Sophist

If we're talking over the life of Lee's contract and not just 2011, things are uncertain, but only 4 players are under contract in 2013: Lee, Doc, Howard, Utley. Two of the biggest offensive question marks, Ibanez and Rollins, are in the final year of their deals. Considering they have two position players and Doc locked up for 2013, spending $20M on another high quality pitcher is probably a better use of resources.

As for 2011, Phils allowed 640 runs last year, their best run prevention year by a long shot in the CBP era. That's 33 starts from Doc and Hamels, 31 from Kendrick, 28 from Blanton (who was awful until August), 19 from Moyer, 12 from Oswalt, and a bunch from here and there (Vance Worley types) They also lost Madson for a significant length of time and Lidge was ineffective until late Summer. With a full season of Oswalt and Lee, I'd take the under on 640 RA in 2011 by a fair margin.

I wonder just how many runs this team has to score next year. But keep in mind, among all the doom and gloom about these 31-32 year-olds, that they finished 2nd in the NL in RS in 2010, and that's with a lot going wrong (starting with Utley playing in 115 games).

Dec 15, 2010 11:49 AM
rating: 0
 
Sophist

And if you figure they can scratch out at least 730-750 runs per year, and the pitchers perform as most expect, you're talking about a playoff team (730 RS, 610 RA, is a 94 win Pythag. projection). There's a lot of debate about what matters in the playoffs, if anything, but I'd rather spend $20M on a SP than on a OF bat.

Dec 15, 2010 11:53 AM
rating: 3
 
Schlom

Cot's Baseball Contracts has Lee's vesting option in 2016 as $27.5m while above you say that the 6th year would bring down the AAV of the contract. Which one is right?

Dec 15, 2010 15:42 PM
rating: 0
 
Mr. Cthulhu

It is a $27.5M option, with a guaranteed buy out of $12.5M. That $12.5M is included in Cristina's calculation of average value (as it should be since the money is guaranteed). So, even though the option is technically a $27.5M option, because the Phillies are required to pay Lee $12.5M it is really a $15M option (bringing down the AAV).

Dec 15, 2010 18:56 PM
rating: 1
 
BP staff member Christina Kahrl
BP staff
(11)

Exactly right. ;-)

Dec 15, 2010 21:52 PM
 
greenfrog

How about Jose Bautista, Mark Rzepczynski (or Zach Stewart), and Jason Frasor for Domonic Brown (+ maybe a lesser prospect)? In exchange for the highly touted (but still unproven) Brown, the Phillies get:

- An athletic, versatile, home-run machine w/ high OBP who also happens to be a good RF (with a cannon for an arm). In other words, the perfect replacement for Werth - if you believe in his transformation in 2011 (most Jays fans do)
- A solid late-inning reliever with good peripherals, providing bullpen depth
- A cheap, promising starter with #2/3 upside (Stewart) or #4/5 upside (Rzep)
- Two or three draft picks for Frasor (likely a Type B next year) and Bautista (Type A or B) after 2011

In exchange, the Jays get more young, high-upside talent to help with their (thus far impressive) rebuilding project.

Dec 15, 2010 20:04 PM
rating: -1
 
Sam F

Shouldn't we look at the inflation in MLB total revenue when comparing contracts? I'd love to see an article discussing growth in league-wide revenues in the last 10 to 15 years, including TV and other revenue streams that are booked outside the revenue-sharing umbrella but accrue to team ownership groups, to what extent the player salary share of those revenues has kept pace, and how to evaluate present-day contract values for past and future years in that context.

Dec 16, 2010 16:50 PM
rating: 0
 
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