A reminder why the Red Sox waited to lock up Adrian Gonzalez
|04.15.11 at 8:02 am ET|
The Red Sox have agreed to a seven-year, $154 million extension with Adrian Gonzalez, the second richest deal in club history, with an announcement to come Friday. (CSNNE.com was first to report the agreement.)
The timing, as Alex Speier pointed out in December, should come as no surprise.
By many accounts, the parameters for the deal were nearly in place dating back to when the Red Sox traded for the first baseman just prior to the Baseball Winter Meetings. It was a notion supported by the comments of Gonzalez’ agent, John Boggs, who said when visiting the team late in spring training that he hadn’t talked to the Sox since December, but was confident a deal would be struck at some point in April.
Boggs explained that the Red Sox wanted to be assured that there would be no lingering problems with Gonzalez’ surgically-repaired right shoulder.
“At the end of the day everything has been as expected. We sat down and discussed where Adrian is at. I just think it’s going to move very positively in the direction of probably trying to get something done sometime in April,” said Boggs in Fort Myers. “The main thing is the health issue. When he’s seen to be every day playing competitively in a championship season I think they’re going to have a degree of comfort and obviously that will be a time to probably get something done.
“Prudently probably on their part, they just want him, to see him play back-to-back-to-back-to-back, get into the season, then say, ‘OK, we’re good to go,’” Boggs added. “I would anticipate something around April. When in April, I don’t know. It could be beginning, middle, end, but that’s it. That’s really the parameters we’re looking at. If something drags it on past that, then yeah, we’ll probably have to revisit a lot of things, but I don’t anticipate that at all.”
But there was another reason, besides the shoulder, that the Red Sox waited. It was a motivation first pointed out by Speier, and it has to do the money the Sox would save by not officially inking the deal until after Opening Day due to luxury tax considerations. As Speier wrote at the time of the trade:
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.)
One big deal, no big surprise.
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