February 6, 2012

Prospectus Hit and Run

Beware of Falling Payrolls

by Jay Jaffe

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Late last month, ESPN New York's Adam Rubin reported that the Mets are facing the largest one-year payroll cut in major-league history, at least in terms of total dollars. With owners Fred Wilpon and Saul Katz deprived of the profits they derived from decades of investing with Ponzi schemer Bernie Madoff, and struggling to find minority partners willing to provide a quick infusion of capital, the team is hemorrhaging money and facing a growing mountain of debt. According to general manager Sandy Alderson, the Mets lost $70 million last year, and made no real attempt to retain pending free agents Carlos Beltran (who was traded in midseason) or Jose Reyes (who departed for the Marlins in December). Barring even one additional midlevel signing, they could become the first team to drop $50 million in salary from one Opening Day to the next.

While doom-and-gloom hyperbole about the effects of this upon the 2012 Mets is in no short supply, few have offered historical perspective or objective data about the impact of such payroll cuts, so I've set out to provide some. This isn't as easy as one might expect, because payrolls have risen drastically over time, though their growth hasn't exactly been smooth. Since 1988, three seasons—1995, 2004, and 2009—have seen the average opening day payroll decrease from the previous year, all coming as part of multiyear stretches in which opening day payrolls grew hardly at all:

Here I'm using data from the USA Today salary database rather than from our own Cot’s Contracts—despite Jeff Euston's worthwhile adjustments to account for some fudging in the latter via pre-Opening Day cuts—because it goes back more than a decade further and because I didn't want to rebuild a spreadsheet that's been in my toolbox for years. In the graph, you can see that growth in the 1992-1996 period was largely flat; the average payroll rose just $1.8 million over a five-season stretch, hardly varying even in the face of expansion and the player strike. It rose $3.6 million over the four-year stretch from 2001-2004, and just $3.3 million from 2008-2011.

Despite the uneven growth, any look at the largest dips in straight dollar terms winds up being dominated by recent teams (all dollar values in millions):

Four of the top 20 drops occurred last year, and 10 of them during the 2008-2011 period, which doesn't tell us a whole lot—particularly if we're in search of clues as to how these teams might fare on the field. After all, only so many teams can be winners or losers in a given year, and if these teams are tripping all over each other in the standings, that doesn't tell us much.

Ranking payroll decreases on a percentage basis offers another alternative:

Perhaps it's just me, but that list seems too skewed towards the late 1990s, when cutting $10-15 million not only constituted a drastic change, but also approximated a top-of-the-line salary for a superstar, instead of some multiple of it.

In my quest to generate a more authoritative list of the biggest payroll cuts (and spikes) of the post-1988 period while controlling for the long-term rise in salaries, I considered a couple different methods of marrying both approaches. In one attempt, I combined the relative rankings in each category (dollar and percentage decreases) among the 660 teams in my data set, but that still overly favored more recent teams because of the higher dollar amounts.

In the end, I settled on a method that averaged the standard deviations of the year-to-year decreases in payroll in both percentage and dollar terms, in an attempt to connect those swings to the industry conditions under which they took place—a means of "park-adjusting," if you will. Take the Rays, who went from a $71.9 million payroll in 2010 to a $41.1 million payroll in 2011. The standard deviation in 2010-to-2011 payroll changes for all 30 teams was a record $17.3 million, reflecting a year that in dollar terms featured some relatively large cuts and gains; historically speaking, six of the 17 swings of $30 million or more in either direction took place last year. Their drop was −1.78 times that year's standard deviation. Meanwhile, in percentage terms, the standard deviation in 2010-to-2011 payroll changes for all 30 teams was 22.4 percent, which is on the low side of recent history; the size of those swings is obviously connected to the increased payrolls. The Rays' 42.9 percent drop was −1.92 times the standard deviation. Average −1.78 and −1.92 together—because I'm weighting the approaches equally—and you get −1.85. The Rays' drop was 1.85 standard deviations below the average year-to-year change of the 1989-2011 sample. Until I think of a better acronym, we'll call that the Change in Annual Payroll (CAP) score.

Here are the 20 lowest CAP scores of the era:

By and large, that is not the world's happiest set of teams, a group that posted a collective .458 winning percentage in the year of the cut, roughly the equivalent of a 74-88 season. Just three of the 20 teams finished above .500, with the aforementioned Rays the only one to make the playoffs. Once you adjust for the length of schedule—several of these teams were affected by the 1994-1995 strike—these teams did improve by a middling 0.8 wins over the year before, with three improving by more than 10 wins, and three declining by more than 10.

What follows is a run-through of the top baker's dozen on the list, because the last one is important.

1. 2006 Marlins
The dismantling of the 2003 World Series winners (who had a $48.8 million Opening Day payroll) didn't happen as suddenly as some remember (myself included). While their payroll dipped 13.6 percent in 2004, it grew by 43.3 percent, to $60.4 million, in 2005. After that season, the Marlins let A.J. Burnett, Juan Encarnacion, Alex Gonzalez, Jeff Conine, and Paul Quantrill float away as free agents, while general manager Larry Beinfest made trades galore. He sent Carlos Delgado (who had signed a heavily backloaded four-year deal just 10 months prior) and Paul Lo Duca to the Mets in separate deals, traded Juan Pierre to the Cubs and Luis Castillo to the Twins, and packaged Josh Beckett, Mike Lowell, and Guillermo Mota to the Red Sox in a deal that brought back Hanley Ramirez and Anibal Sanchez. Including the midseason deal that sent Al Leiter to the Yankees, the Marlins shed the top 13 salaries from their 2005 roster. When the dust settled, the Marlins' 2006 Opening Day payroll was just under a quarter of what it had been a year earlier, giving them the record for the largest percentage drop of the era, along with the second-largest dollar drop.

2. 2004 Rangers
The Rangers carried a top-10 payroll as far back as 1996, but after signing Alex Rodriguez to a 10-year, $252 million deal in January 2001, they worked their way even higher, crossing the $100 million threshold in 2002-2003 ($105.7 million, third in the majors, and $103.5 million, fifth in the majors, respectively). The wins didn't follow; after a 71-91 season, GM John Hart (who had taken over for Doug Melvin after 2001) was forced to dismantle. He traded Rodriguez to the Yankees for Alfonso Soriano, and bid adieu to free agents Juan Gonzalez, Rafael Palmeiro, and Ismael Valdez. Including the previous summer's trades of Carl Everett and Ugueth Urbina, the Rangers shed five of their top eight salaries from 2003; of the other three, one was the untradeable and injured Chan Ho Park, the other two Rusty Greer and Jeff Zimmerman, neither of whom ever played in the majors again. Despite the cut—the largest dollar drop of the era—the Rangers did climb to 89 wins in 2004, anchored by a young and potent infield of Mark Teixeira, Soriano, Michael Young, and Hank Blalock.

3. 1998 Reds
The Reds ranked among the majors' top eight payrolls from 1992-1997, but after finishing first in the NL Central in the strike-torn 1994-1995 seasons with teams built by GM Jim Bowden, they slid into mediocrity; in 1996, owner Marge Schott was banned from day-to-day operations for statements in support of Adolf Hitler ("He was O.K. at the beginning…" yuck). During the 1997 season, Bowden had released Ruben Sierra, the team's highest-salaried player, and traded John Smiley, their third-highest salaried player; following it, Hal Morris (fifth-highest) left via free agency and Jeff Brantley (sixth-highest) was traded. As 1998 opened, the Reds ranked 27^th in payroll, with just four players making more than $1 million a year, down from 11 the season before. In percentage terms, their drop was the fifth-largest of the era, while in dollar terms it ranked 12^th. Just a year later, they would win 96 games before losing a Game 163 play-in.

4. 1996 A's
The changing of the guard arrived in Oakland following the 1995 season, after the death of owner Walter Haas in September. The team was sold to Steve Schott and Ken Hoffman, Tony La Russa departed after a decade as manager, Rickey Henderson left via free agency, and Dennis Eckersley was traded to the Cardinals. The A's had ranked seventh in payroll in 1995, and had spent the previous seven seasons in the upper half of the majors, but they slid to 26^th in 1996, and would spend the next eight years among the bottom eight, even as they emerged as an AL West powerhouse. However, it wouldn't be until October 1997 that Billy Beane took over from Sandy Alderson as general manager.

5. 2011 Royals
The 2010 Royals left the gate ranked 21^st in payroll, but while suffering through their 15^th losing season out of 16, they did flip short-term rentals like Scott Podsednik, Kyle Farnsworth, and Rick Ankiel, and cut their losses on Jose Guillen. After the season, they traded ace Zack Greinke and albatross Yuniesky Betancourt to the Brewers, sent David DeJesus to the A's, and reaped the benefit of Gil Meche's early retirement, which saved them $12 million in one fell swoop. Including the early-2010 release of Juan Cruz, they shed the top seven salaries from their 2010 opening payroll, and began 2011 with the majors' lowest obligation, just over half of what it had been a year prior. Thanks to the arrival of the promising Eric Hosmer and the maturation of Alex Gordon, the Royals won 71 games, their second-highest total since their surprise winning season in 2003.

6. 1997 Pirates
Of the Pirates' 19 consecutive losing seasons, the 1997 team ranks as their best in terms of wins (78) and division rank (second), and they did it with a roster that left the gate with the majors' lowest payroll at $9.1 million. The 1996 Bucs had begun the year at $21.2 million, with seven players making more than $1 million. Late in the year they traded two of them, Denny Neagle to the Braves (netting Jason Schmidt) and Charlie Hayes to the Yankees (for whom he would catch the final out of the World Series). In the winter they shipped three of them—Carlos Garcia, Orlando Merced, and Dan Plesac—to the Blue Jays in a nine-player deal that brought back Craig Wilson, and the other two—Jay Bell and Jeff King—to Kansas City in a deal for Smiling Joe Randa. The squad held first place through the All-Star break, but was just 47-47 on their last day in the catbird seat, and never saw .500 after game 136. Their 57.3 percent drop ranks as the second-largest of the era.

7. 1992 Indians
The 1991 Indians set a franchise record with 105 losses while ranking 22^nd in payroll, with five players making more than $1 million. During the year they traded Tom Candiotti, their most expensive player, and after the season they traded Greg Swindell, and let their other millionaires—Chris James, Doug Jones, and Eric King—depart as free agents. Though they had the game's lowest payroll in 1992, the team had already begun laying the groundwork for the mini-dynasty that would emerge later in the decade, as Kenny Lofton (acquired from Houston in a trade for Willie Blair) joined Sandy Alomar Jr., Carlos Baerga, and Albert Belle in the lineup, and the team improved by 19 games. The team's 54.9 percent drop ranks as the third-largest of the era.

8. 2009 Padres
The Padres posted four consecutive winning seasons and made two playoff appearances from 2004-2007 despite payrolls in the bottom half of the league, but they slipped to 99 losses in 2008. Owner John Moores' divorce proceedings forced Kevin Towers to begin slashing payroll in mid-2008, as Greg Maddux and Randy Wolf were traded, and Jim Edmonds was released. That winter, franchise icon Trevor Hoffman departed as a free agent, as did Michael Barrett, and Khalil Greene was traded. When the 2009 season opened, the Padres had undergone a $29.9 million cut, the seventh-largest of the period.

9. 2003 Indians
From 1995-2001, the Indians made the postseason six times, but in the midst of a 74-88 season in 2002, general manager Mark Shapiro concluded that rebuilding was in order. He traded away top starter Bartolo Colon (seventh in salary) in June, receiving Cliff Lee, Brandon Phillips, Grady Sizemore, and Lee Stevens from the Expos, and sent off Chuck Finley (second in salary) in July, as well as pricey relievers Paul Shuey and Ricardo Rincon. After the season, Jim Thome, the team's highest-paid player, departed as a free agent, as did Charles Nagy (fourth) and Jaret Wright. The resulting $30.3 million drop represents the era's sixth-largest. Not until 2007 would they make it back to the playoffs.

10. 2007 Nationals
In July 2006, Major League Baseball sold the Nationals to the Lerner family, ending a four-and-a-half year saga during which they were the wards of the other 29 teams. The 2006 Nationals ranked 20^th in payroll at $63.1 million, and during the year they traded Livan Hernandez, their second highest-salaried player. After the season, they traded Jose Vidro (third), and let Alfonso Soriano (first), Jose Guillen (fourth), and Ramon Ortiz (seventh) depart as free agents, and from year to year went from 12 players making at least $1 million, to six. They didn't suffer for it in the standings; they improved by two games to 73 wins, and climbed to fourth place in the NL East, the only time in a seven-year stretch they made it out of the cellar.

11. 2002 Devil Rays
The 1998 expansion team's early efforts to buy respectability bore no fruit. The Devil Rays ranked 10^th in payroll in 2000 at $64.4 million, with the high-salaried likes of Wilson Alvarez, Greg Vaughn, Vinny Castilla, Juan Guzman, Roberto Hernandez, and Fred McGriff—all making more than $5.9 million—on the books if not on the field. Guzman threw just 1 2/3 innings for the Rays in 2000-2001 while making $12 million, while Alvarez missed both 2000 and 2001 at a cost of $18 million. Hernandez was shipped to the Royals in January 2001, but the rest remained on the payroll when the team pushed off that spring, still ranked 19^th at $57.0 million. They released Castilla in May, traded McGriff in July, and by the following Opening Day had the majors' lowest payroll, with just four players making more than $2 million, none of whom—Vaughn, Alvarez, Ben Grieve, and John Flaherty—were much good, which helps explain why they lost 106 games.

12. 2008 A's
The 2006 A's represented Billy Beane's high-water mark in that the 93-win club was the only one that also won a playoff series. The following winter, despite Barry Zito's departure, Beane loaded up for a $79.4 million payroll, most notably by adding Mike Piazza, and by absorbing the salary increases of several homegrown players. The gambit didn't pay off, and as the 2007 A's sank to 76 wins, Beane began dismantling. Milton Bradley and Jason Kendall (their highest-paid player) were traded in midseason, Bobby Kielty was released, and Joe Kennedy and Esteban Loaiza were lost via waivers. After the season, Piazza departed, while Marco Scutaro, Nick Swisher, Mark Kotsay, and Dan Haren were traded, the latter for a haul that included Brett Anderson and Carlos Gonzalez. The $31.4 million drop ranks as the fourth-largest of the era.

13. 2011 Rays
Not only are the Rays the only team among the top 20 cuts to make the playoffs, they're one of just three in the top 50 to do so (the 2009 Cardinals, at −1.33, and the 1995 Red Sox, at −1.06 being the others). In 2010, the Rays' management had gone the extra mile, boosting payroll to a franchise-record $71.9 million; days after owner Stuart Sternberg claimed that no $7 million closer was likely to show up, the team traded for Rafael Soriano and his $7.25 million salary. Early in the year, the team released Pat Burrell, their third highest-paid player, and after a 96-win season in which they won the AL East, they shed Soriano, Carl Crawford, Carlos Pena, and Dan Wheeler via free agency, and traded Matt Garza and Jason Bartlett. Despite the fifth-largest dollar drop of the era at $30.9 million, the Rays made the playoffs again thanks to the Red Sox collapse and their own ability to replenish from within via rookies Jeremy Hellickson and Desmond Jennings, not to mention bargain basement finds like Casey Kotchman and Kyle Farnsworth.

Where do the Mets fit into this? Without full data for the other 29 teams, we can't calculate the standard deviations by which to measure them, but suppose that the ESPN figures hold, and their Opening Day payroll falls to $90.7 million. That would represent a $52.1 million drop (first in the post-1988 era), and a 36.5 percent drop (24^th). If we plug those numbers into last year's standard deviations, we get −3.01 on the dollar side (second only to the 2006 Marlins), and −1.63 on the percentage side (tied for 24^th), for an overall CAP score of −2.32. That would place them fourth in the rankings above, narrowly missing third. It's worth remembering, however, that their big cuts threaten to increase the size of both standard deviations, which could bump them a couple of rungs further down the list.

The 2011 Mets left the gate with the seventh-largest payroll, the 14^th straight year in which they've ranked in the top 10, but the first time since 2002 they were outside the top five. They finished 77-85, and without Beltran and Reyes, they may well finish below that in 2012, since neither player has been replaced by anybody approaching star caliber; matching the .458 winning percentage of the teams above might be an accomplishment. While the farm system is much improved on the pitching side, it isn't set up to offer much in the way of near-term help, particularly for the offense.

Looking down the road, for the 18 teams for whom we have data in the season following the big cuts (i.e., not the 2011 ones), things improved only slightly, from a .458 winning percentage to .465. None made the playoffs, though the 1999 Reds lost a play-in, and the 2010 Padres weren't eliminated until the final game of the season. The only other team to reach .500 one year after such cuts were the 1992 Astros, who finished right at the mark. Those 'Stros featured young Jeff Bagwell, Craig Biggio, Darryl Kyle, and Luis Gonzalez, and slightly older Steve Finley and Ken Caminiti, all of whom would help them emerge from the slashed payroll doldrums to become contenders.

Two years into the future, the situation for those teams improved considerably, via a collective .494 winning percentage, and three playoff teams; the 1996 Padres and 2000 White Sox won their respective divisions, while the 2007 Rockies won the NL wild card (after a wild Game 163 play-in) and ultimately the NL pennant. Furthermore, the 1993 Astros, 1994 Indians, 2000 Reds, 2005 Indians, and 2008 Marlins all topped .500, while the 2010 A's finished right at that mark. Three years later, those teams (17 of them, without a crystal ball to foretell the 2012 Padres) dipped back to a collective .483, with just one team, the 1995 Indians, making the playoffs. The 1994 Astros, 1999 A's, 2001 White Sox, 2006 Blue Jays all finished above .500, but five other teams won fewer than 70 games.

None of which is to say that these teams shouldn’t have cut so drastically; such drops in payroll are generally a symptom of a larger problem, not the problem itself. Such would appear to be the case for the Mets, who have rough sledding ahead, barring breakout seasons from some of their younger players, and rebounds from the likes of David Wright and Jason Bay, two players whose improvement might just as easily make them desirable trade commodities and vehicles for further payroll cuts; they cost a combined $33.4 million this season. As to what the other side of the coin—the teams with the largest payroll increases since 1988—looks like, I’ll be back with that in the near future.