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Extension can wait? Why Adrian Gonzalez extension might not make sense right now

12.05.10 at 7:06 am ET
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The Sox will want Adrian Gonzalez for years to come...but might want to wait on an extension. (AP)

The big fish is on the hook, and now needs only to be reeled in. Or does he?

The Red Sox made their trade to acquire star first baseman Adrian Gonzalez on Saturday, giving up the richest package of prospects they’ve parted with since they sent Hanley Ramirez to the Florida Marlins as the headliner in the Josh Beckett deal. It’s a landscape altering deal in many respects, but as much as the Sox love Gonzalez, they were not going to agree to such a rich prospect package without the opportunity to have an exclusive negotiating window to talk to the slugger and his agent about an extension.

Since GM Theo Epstein became the head of baseball operations in late-2002, the Sox have almost always used their key chips to get players whom they would have under contract for more than one year. That has been especially true in recent years, when the team acquired Victor Martinez and Jason Bay for two seasons of control. In ’09, when the team was discussing dealing a number of its best minor leaguers for players like Martinez, Gonzalez, Roy Halladay and Felix Hernandez during the season, it was in part because all of those players would have impacted the Red Sox in at least two seasons.

The Sox are not going to give up their top pitching prospect (Casey Kelly), their top power hitting prospect (Anthony Rizzo) and one of their top defensive prospects (Reymond Fuentes) without getting Gonzalez for several years. But, of course, the Sox have the negotiating window with Gonzalez, so they can do precisely that: Talk with the player and his agent in order to make sure that the two sides see eye to eye on his value, thus allowing the team to secure the 28-year-old’s value for the next several years.

But in at least some respects, the best course the team can take might be to agree with Gonzalez to the parameters of a deal right now, and then wait until, say, April 8 (the day of the Fenway opener against the Yankees) to announce it.

Disclaimer: This scenario is entirely speculative. But there was, at the least, this intriguing tweet from Jon Heyman of SI.com late on Saturday night:

“[The Red Sox] may be willing to do [a Gonzalez] deal without extension and may actually prefer to just talk parameters now, then watch him in spring,” Heyman wrote.

The right shoulder, on which Gonzalez underwent surgery in October and that will keep him from playing until spring training, could serve as the ostensible justification to delay a deal. The Sox could say that they simply want to see the slugging first baseman back on the field and healthy before they formalize the extension. But no one involved in the deal appears to think that the shoulder will actually be a significant concern going forward, and multiple reports suggested that Gonzalez’ physical went without a hitch on Saturday.

The real reason why the Sox might want to wait until after the start of the regular season to announce an extension, if at all possible, is financial. Specifically, the luxury tax implications for the timing of the announcement of a long-term deal are huge.

Right now, Gonzalez is slated to play the 2011 season for a bargain basement $6.2 million option. That salary would give the Sox tremendous financial flexibility to address other needs, most notably, to dip their toes in the water and gun for another big offseason kahuna, namely an outfielder along the lines of Carl Crawford or Jayson Werth.

But, for the purposes of calculating the competitive balance tax (CBT) on the Sox’ 2011 payroll, Gonzalez’ contract would no longer be calculated at $6.2 million if he signs an extension before the start of the season. Let’s say that the Sox are able to sign Gonzalez to a six-year, $132 million extension to run from 2012-2017, after the expiration of his current contract. (Again: purely speculative numbers.)

For luxury tax purposes, Gonzalez’ option and the extension would be added together. So, he would be viewed as receiving a seven-year, $138.2 million deal, with an average annual value of $19.74 million per year.

The implications would be significant. The Sox have always viewed their CBT payroll as being more significant than their actual payroll, and with good reason: If they can avoid doing so, they don’t want to pay the luxury tax.

The Sox did exceed the $170 million luxury tax threshold in 2010; every dollar they spent beyond that sum will be taxed at a rate of 22.5 percent. In 2011, the tax rate will rise to 30 percent for every dollar they spend beyond the $178 million threshold outlined in the Collective Bargaining Agreement.

If Gonzalez is playing under the terms of his current contract, it would go a long way towards helping the team avoid paying the tax in 2011. Superstar production for a $6.2 million CBT can help transform a payroll.

But if the Sox sign Gonzalez to an extension now, the team would have an additional $13.5 million in taxable payroll (again, as calculated for luxury tax purposes). That would make it very difficult — indeed, almost impossible barring a move to shed payroll — for the team to sign a Werth or Crawford while staying under the luxury tax threshold of $178 million. That, in turn, could cost the Sox over $4 million in luxury tax money. (Under a six-year, $132 million deal, it could be as much as $4.05 million.)

So what does that have to do with signing the extension after the season starts? If the extension is signed after Opening Day rather than before it, then it would not be factored into the calculation of Gonzalez’ AAV for the 2011 season. So, he would have a $6.2 million CBT hit in 2011, and then count for $22 million (or whatever the average salary is of his long-term deal) against the luxury tax threshold during the life of the extension. Under that scenario, the Sox could likely afford to hand out a monster contract to Werth or Crawford while still limbo-ing under the luxury tax threshold for next year.

Keep in mind that the Sox have frequently gone to such lengths in order to minimize their luxury tax hit. A few examples:

– The team structured its one-year, $10 million deal with Adrian Beltre to ensure that he would only count for $7 million against the CBT.

– The team waited to announce extensions for Coco Crisp (2006 for the 2007-09 seasons), David Ortiz (2006 for the 2007-10 seasons) and Josh Beckett (2010 for the 2011-14 seasons) until after the start of the season so that they would be able to minimize their luxury tax hit.

(A footnote to this idea: The Sox would, of course, be increasing their luxury tax hit for the 2012-17 seasons in this scenario, from $19.74 million to $22 million. But: 1) No one knows what form, if any, the luxury tax will take in the next Collective Bargaining Agreement, which is currently open to negotiation between players and owners; 2) The extra $2 million and change represents a fairly small increase; and 3) The Sox will have contracts for J.D. Drew ($14 million AAV), David Ortiz ($12.5 million), Jonathan Papelbon (approx. $11 million), Mike Cameron ($7.75 million), Marco Scutaro ($6.25 million), Tim Wakefield ($2 million) and Jason Varitek ($2 million) coming off the books after the 2011 season. That is a mind-boggling $55.5 million coming off the books for luxury tax purposes.)

All of that being said… It should surprise no one if Gonzalez and the Sox announce by 2pm EST on Sunday (the deadline for the negotiating window, as reported via twitter by Ken Rosenthal FoxSports.com) that they have a deal in place. This is a marriage that both parties want to enact.

BUT, if there is not an extension, it is far from a worst-case scenario for the Sox. You may hear statements suggesting that the sides are close, but that they wanted to get to know each other a bit better, and to see where Gonzalez’ health stands entering the season. But the reality is that if the Sox and Gonzalez don’t have an extension officially in place, it may just be a matter of waiting for the start of the regular season to announce it so that the team will maximize its financial flexibility to pursue other deals this offseason.

Read More: adrian gonzalez, cbt, luxury tax, payroll Print  |  Email  |  Bark It Up!  |  Digg It
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