The Minnesota Twins, Revenue Sharing and Payroll Flexibility

Over the next few months, there will be a ton of speculation here and elsewhere regarding the Twins off season plans to set up the ball club for next season and beyond. And any speculation will have to consider how much the Twins will be willing to commit to payroll in 2011. Jesse gave us an early start last week (thanks to the ALDS debacle), and to repeat, out of the gate it appears that once we consider the seven players under long term contracts ($67.75M), options and buyouts ($5.75M assuming we keep Jason Kubel and let Nick Punto go), arbitration eligible players (an estimated $20M to keep the likes of Delmon Young, Matt Capps, Kevin Slowey and J.J. Hardy) and a bunch of MLB minimum guys ($4M), we're talking about an initial payroll of around $97M, or almost exactly the same as Cot's puts the Twins 2010 payroll ($97.7M).

The conventional wisdom (at least that expressed by Jesse last week) is that the Twins will have a small amount, perhaps $10-15M on top of the baseline payroll to spend on free agents. And while I certainly hope this is the case, especially not having to non-tender any arbitration eligible players like Hardy in order to cut payroll, there are some reasons to be concerned. After the jump, I'll take a detailed look at the Twins revenues, payroll, and the impact that a reduced cut from the MLB revenue sharing fund may have on flexibility to take on additional payroll in 2011.

First, let's look at the Twins payroll (according to Cot's) compared to overall player expenses (including salaries, signing bonuses and benefits), team revenues (including funds from revenue sharing) as estimated by Forbes' 2010 franchise valuations.

We'll get to the question marks in the 2010 numbers above (not to mention 2011 speculation), but a couple points regarding the recent Twins payroll history. The Twins are pretty much consistent with the overall MLB average of spending between 50 and 55% of overall team revenues on the players. I'm not out here to debate whether this number should be higher, I'm sure that will be a topic the next time the players and owners sit down at the bargaining table. But given additional expenses (debt, etc) associated with Target Field, I think it's a fair assumption that we will see a similar percentage applied to player expenses in the future. I'd also point out the obvious, in 2010 the Twins payroll took a huge jump, over $30M, pushing the Twins from 24th highest in 2009 up to 11th in MLB last year, right in between the Los Angeles Dodgers ($94.9M) and San Francisco Giants ($97.8M).

Let's take a look at player expenses. Over the past four years, the Twins have spent an average of $16M on non-payroll expenses, including signing bonuses and benefits. In 2008 and 2009, the spending increased a bit ($23M, $18M) as the Twins cut payroll (including Johan Santana) and got even younger. I don't have detailed insight into what the Twins spent on non-payroll expenses in 2010, but starting at $20M rough average of the last couple years seems sensible considering the year is not over and we may see a foreign signing or two. This puts the total 2010 player expenses at around $118M.

Now let's talk revenue. Last year, the Twins pulled in $162M. Estimates for 2010 tend to be all over the place, but the consensus appears to be an additional $50-70M in revenue from Target Field, with the editor of Forbes expecting the number to be around $70M. Because I'm comparing to other revenue numbers from Forbes, I'll use $70M, which would push the overall 2010 revenue up to $232M. If this number is accurate, then a total of 51% of team revenues will have been spent on the players, again in line with recent history.

So we're all good to this point, and it appears with some additional revenue, or a desire to spend an extra 3-4% of revenues on the players, there may be enough flexibility to spend $10-15M on free agents. But revenue sharing throws a wrench into the numbers. MLB doesn't disclose what each team contributes or receives from revenue sharing, but in August an anonymous source leaked data from six teams (Angels, Mariners, Rangers, Rays, Marlins, Pirates). Fangraphs had an excellent article on the leaked revenue sharing data, and it appears the revenue sharing totals range from receiving nearly $48M (Marlins in 2008) to contributing $16M (Angels in 2009). Obviously, the New York Yankees, who almost certainly contribute the most to revenue sharing, and other high revenue teams were not included in the leaked data, but it does give us a few data points that allow us to interpolate what the Twins may have contributed or received. Looking at the data, it appears that around $170M is the revenue cutoff where teams above contribute, and teams below receive money from revenue sharing. I also suspect that a progressive formula may be used, where a team's $100 millionth dollar above the cutoff is taxed at a higher level than dollar one, but at a lower level for the first dollar. For the purposes of this analysis, it appears that on average teams contribute around 25% of revenue above the threshold and receive around 60% of revenue below the threshold. Applying these numbers to the Twins revenues from 2007-2009 gives us:

Given the many assumptions above, it is entirely possible that the revenue sharing estimates may be quite a bit off, but they should be good at least from a rough order perspective. As far as I can tell it appears the Twins have received a little over $60M in revenue sharing over the past three years. In 2009, the $162M revenue number included around $12M from the revenue sharing fund, which means the team's gross revenues before sharing were closer to $150M. Here's where the numbers get interesting. If we apply the Forbes estimate of an additional $70M revenue from Target Field, this puts the Twins at $220M before any revenue sharing. And based on the data that has been leaked, this would put the Twins squarely in the camp of revenue sharing contributors rather than receivers:

By these estimates, as a result of increased revenue due to Target Field, the Twins may see (or have already seen, depending on when payments are made) around a $12.5M hit in 2010, as opposed to receiving nearly the same amount in 2009. That is around a $25M difference that must be considered in any 2011 payroll calculations, a difference that may very well reduce the Twins payroll flexibility to the point where there is no additional $10-15M to spend on free agents or tender arbitration eligible players like J.J. Hardy. As a point of reference, if one puts the overall Twins revenue at $207.5 after revenue sharing, then $118M for player expenses means a total of around 57% of revenue goes to the players, and I would not expect to see this kind of allocation long term.

Of course, there is a lot of speculation in the numbers above, and I certainly hope the Twins expected revenue numbers are actually in the $230-250M range rather than $220M, as this would provide adequate flexibility to address a few needs in free agency. But I would not be surprised to see some belt tightening in 2011 as the Twins wait for a few high salaries (about $22M for Joe Nathan and Michael Cuddyer next year) to come off the books. Time will only tell.