The Chicago Cubs True Financial Picture heading into 2019

It has been reported in various places over recent days that the Cubs might have some financial concerns related to the current free agent market.  The Cubs are already projected to be over the first luxury tax threshold of $206 mil, which carries a 20% penalty on any overage.  The second tier, or luxury surtax, states that any amount spent between $226 million and $246 million will be taxed at a rate of 12%.  There is also a third tier, charged on any amounts spent over the $246 million figure, which comes in at a whopping 42.5% penalty.  When teams exceed these limits in multiple seasons, the penalties increase exponentially, where in year 3 the penalties are 50% tier 1, 12% tier 2, 50% tier 3.  Given all of this information, it makes sense that some would speculate how the Cubs might be concerned with spending too much.  However, the reality is the Cubs have the ability to spend money aggressively again this coming season, and I will show you why I believe that they will.

The recent retention of SP Cole Hamels, by picking up his $20 million option for 2019, triggered another move where the Cubs traded LHP Drew Smyly to the Rangers.  Smyly is scheduled to earn $7 million, plus incentives.  Immediately, the rhetoric that was thrown around hinted at the Cubs needing to shift money to make a roster move.  I’m not going to pretend that the money shuffling wasn’t partly due to the Cubs front office being diligent with their budget.  But the move was also made because the Cubs have starting pitching depth, especially from the left handed side.  SP Cole Hamels, SP Jon Lester, SP Jose Quintana, SP Kyle Hendricks, SP Yu Darvish, SP Tyler Chatwood (I know… ), SP Mike Montgomery.  That doesn’t even consider the many starting pitching depth options that the Cubs will have in Iowa this coming season.  That’s right… there are minor league pitchers who have developed in the Cubs organization ready to pitch in the Major Leagues.  Prior to an injury, SP Adbert Alzolay was on the cusp of making an appearance in the Majors in 2018.  Instead, we got to see a small amount of Duane Underwood.  After a down season for Jen-Ho Tseng, he didn’t get the call from the minors, but he’s an option and could always rebound.  Prospect Trevor Clifton made his debut in Iowa midseason in 2018, with some good numbers to show for it.  He’s certainly a good candidate to get a call up.  RHP Duncan Robinson made 2 late season starts in Iowa and would also be a nice candidate in a pinch.  Just throwing out those names, that gives the Cubs 12 names for starting pitching depth.  Not all of these prospects will work out, but why spend $7 million on Smyly when you have multiple capable pitching prospects to fill in as the 8th depth starting pitcher?

The Cubs haven’t debunked any of the financial struggles commentary with anything they’ve put out to the public in recent days.  But let’s rewind to all of the previous offseasons in recent memory.  Prior to 2015, there was no early indication that the Cubs were going to pursue free agent Jon Lester.  Rumors began to get stronger just before Christmas, when they signed C David Ross as a precursor, Lester’s favorite catcher.  Lester was in high demand and the Cubs swooped in to beat out Boston and several other teams, when nobody expected them to be serious contenders.  The next offseason the Cubs became even more aggressive, signing Ben Zobrist in early December and then trading Starlin Castro to make room for him.  At the time, everyone assumed there was no money left to replace Dexter Fowler’s bat in centerfield, because the Cubs “HAD” to move Castro in order to afford Zobrist.  Then a few short days later the Cubs signed Jason Heyward, beating out the Cardinals and a few other teams clamoring for his services.  Flash forward to spring training and a surprising $9 million was available when Fowler himself decided to return to the team.  The Cubs moved OF Chris Coghlan to clear the roster space needed the next day.    In 2017, after winning the World Series, the Cubs didn’t spend much money in free agency, only signing a few fill-in veterans.  The one big weakness they filled was by trading Jorge Soler to get Wade Davis, to fill the closer role.  Entering free agency last season, the Cubs pounced on SP Tyler Chatwood early, to jump the market.  2018 performance aside, Chatwood was signed for what was thought to be a reasonable deal, considering he was 27 years old and had success while pitching in Colorado.  Again, the assumption was this signing would take the place of departing Jake Arrieta.   The Cubs also signed RP Brandon Morrow, to take the place of Wade Davis.  Just in 2018, those two signings cost the Cubs $22 million.  Two months later, the Cubs made one more push for a top starting pitcher, letting the market come to them.  They tried to bring back Arrieta, but he rejected the deal that they ultimately gave to Darvish.  Taking on that additional $20+ million, they spent $40ish million ahead of a season where we were led to believe the payroll was tight.  The payroll was tight heading into 2018, but not because the Cubs couldn’t afford the money they were paying out.  Referring back to the beginning of this article, the luxury tax penalties are more punitive each year you exceed the thresholds, consecutively.  In 2018, the Cubs front office made the decision to dip under the tax threshold, as did several other teams, to restart the clock.  That was specifically because they planned all along to enter this free agency period with a purpose.

Teams know exactly which players become free agents in which seasons, for several seasons out.  Good teams plan their payrolls to target key free agents they might want a shot at.  The Cubs were always quite aware that this was the free agency year of Bryce Harper and Manny Machado.  Theo Epstein has often commented on how you have to strike when a generational talent is available, regardless of timing.  It’s not every year a 26 yr old superstar becomes available.  He ALWAYS keeps some powder dry for those moments.  If he’s been planning for this offseason over the last 3+ years, why would that be any different now?  I know what you’re thinking…  payrolls change and maybe the money is truly not there for the Cubs to make a significant signing like this.  I disagree.

With healthy raises for arbitration eligible players factored in, I would estimate that the Cubs payroll will fall into the $216 million range.  Since that is over the first threshold, the tax would come out to around $2 million.  Let’s say they sign a player to a contract of around $35 million per year, in 2019 the tax would be about $13.8 million.  All in, the total season would cost around $265 million in salary costs, including this new contract.  That would surpass the Cubs highest previous payroll by closet to $60 million per season.  Seems like a stretch, I know… But let’s take a look at their revenue situation.  In 2017, it has been reported that they made $457 million in revenue.  That includes money from a low end TV deal that will expire after 2019.  Their payroll in 2017 was $188 million.  Even factoring in another $100 million for ‘other expenses’, annual profit in the season AFTER they won the World Series was $150+ million.  I don’t have the 2018 revenue figures, but even if it dipped in year two, post WS win, in all likelihood the Cubs took in a profit of $100+ million dollars in 2018.  The Ricketts family could very well be paying off debt service from the purchase of the Cubs with that profit, and not truly pocketing that money.  They could also be using that money to help fund the renovations and the Hotel building across the street.  Using revenue figures reported in Forbes magazine in 2018, and assuming the Cubs spend an extra $100 million annually on ‘other expenses’, I believe the Cubs have made $980 million in profit since 2012.   Renovations to Wrigley Field have been estimated at $850 million, but that figure includes the cost of the new hotel across the street.  They’ve also spent another $21.7 million purchasing rooftop buildings, 11 out of 16 around the park.  Hotel and rooftop revenue is not part of the Cubs revenue figures.  Oh, and the Ricketts family purchased the Cubs for $900 million…   I am sure I am missing something, so I’d be willing to bake in an error factor of about $200 million on their profit calculation over all that time.  So I think it is fair to say that they’ve made a profit of around $700 million since 2012.  Renovations and purchases of land related to the hotel and rooftops all have lending vehicles in place, so cash flow is probably in pretty good shape.

I think I’ve established that the Cubs have the ability to digest a big signing, at least for the 2019 season.  But what does a big signing like this cost the Cubs over the course of the next 8 seasons, tax-wise?  Well, here’s where things get really interesting.  After the 2019 season, the Cubs have $53.8 million in salary falling off the payroll, with Zobrist, Hamels, Cishek , Strop, Kintzler , and Duensing becoming free agents.  Their payroll for 2020, with that annual $35 million taken on this offseason, would come to $230mil.  Again, I factored in generous raises for all arbitration eligible players.  The first tax threshold is $208 million, and the penalties go up in year two.  Given all of these factors, I estimate the 2020 luxury tax bill to be about $6.2 million.  So in 2019 the tax would be $13.8 million, and 2020 the tax would be $6.8 million.  The hope at this point would be that some of the home grown pitchers could slide into the slots vacated by Hamels and the other bullpen arms.  Zobrist becoming a free agent at age 39 probably isn’t someone that needs to be replaced at a high cost, given roster depth.  Worst case, there is some room to stay in the same salary range in 2020, if a free agent is needed to fill a hole on the team.  In 2021, things change drastically.  Jon Lester, Tyler Chatwood, Jose Quintana, Kyle Hendricks, and Brandon Morrow all become free agents.  The bright side here is the payroll drops drastically, below the new luxury tax threshold of $210 million, to roughly $153 million.  Barring other random injuries or regression, the assumption is the everyday lineup is still built from the core of young hitters that are all still under contract.  The pitching rotation may consist of Yu Darvish, Mike Montgomery, Trevor Clifton, Adbert Alzolay, and any number of younger pitchers in the system currently.  If not, there is roughly $57 million to play with while still allowing for the team to dip below the luxury tax line to reset the tax percentages in future years.  From 2021-forward, I cannot project roster and budget decisions, because there is just too much unknown.

That was a long-winded way of spelling out the worst case scenario of signing a big free agent in 2018.  $20 million dollars in taxes over the first two seasons…  That’s it…  This estimate doesn’t factor in the new TV deal the Cubs will pursue soon, expecting to increase those revenues significantly.  That also doesn’t cover moves they can move to decrease that tax amount, one of which was the move to dump Smyly’s salary.  There is even more that could be on the horizon…

Given language in Jason Heyward’s contract, this will be the first season he does not have full no-trade protections to prevent the Cubs from considering moving him.  He does have the ability to block trades to 12 unknown teams, but that still leaves plenty of options.  I know his contract is not attractive, but that won’t stop a discussion between teams that might have their own bad contract, perhaps even a pitcher, that they’d like to move.  Maybe the Cubs would be willing to include prospects in return for a team to take on a portion of his salary.  Maybe the Cubs will eat half of the money to clear him off the books.  There was a strategic reason the Cubs structured his contract to have the no-trade protections loosened, starting this offseason.    I am completely speculating here, but the San Francisco Giants have been mentioned as previous suitors of Heyward.  They currently have holes in their outfield, and a veteran team that isn’t poised to rebuild.  They also have some older pitching depth, with high dollar value salaries, that they might want to move, including a former closer in Mark Melancon.  To rearrange some room in the outfield, and redistribute payroll a bit, the Cubs and Giants could make a Jason Heyward/Tyler Chatwood/Brandon Kintzler for Jose Cueto/Mark Melancon.  Cueto will miss the 2019 season due to Tommy John surgery, but will have 2 more seasons of control after that, with a team option in 2022.  Melancon is signed through 2020.  Heyward is signed through 2023, and Chatwood is signed through 2020.  The money lines up closely, and would allow the Giants to redistribute some dead salary this season for an outfielder they could definitely use.  Melancon is coming off an injury plagued season, but has proven closer chops that will only help the bullpen.  Cueto gives the Cubs some starting pitcher depth, swapping out Heyward’s sunk-cost contract.  If he comes back with success, it’s a good thing.  If not, the money was already spent.  At worst, he gives them a veteran body for the rotation in 2021, when 3 of their best starting pitchers all become free agents.

I’m not saying the Cubs are going to sign Bryce Harper, though I feel they SHOULD.  There was a strategic reason to dip under the tax threshold in 2018, to reset the tax.  The front office has shown that when they make a free agent move, those moves are typically not telegraphed, so often the baseball media does not represent their intentions well.  This front office also understands when an opportunity to acquire a supreme impact player at the beginning of his prime, they have to do whatever they can to get it done.  The inability to sign a big-time free agent and absorb a nominal tax expense will not be what prevents the Cubs from doing so.  There is a difference between trying to balance rosters and budgets responsibly and being limited financially to do something that can have a meaningful impact on your team.  Under Theo Epstein and while the Ricketts family has owned the team, the Cubs have always been methodical in how to approach each season, with plans and contingencies in place to cover every scenario.  I believe them when they say there is no artificial ceiling on how much they spend.  What I don’t understand is why their comments and a minor transaction has created the narrative that they are cash strapped.  There are always pieces of information that nobody but the parties involved know, but someone should be calling out the facts of the financial situation the Cubs face in 2018 and beyond.  I got tired of waiting and did it myself…

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