I Beg to Defer – The New Math in MLB
The Mets, not Bobby Bonilla, ended up way ahead in the deferred payments game.
I am not an accountant nor do I play one on TV. I have all I can do to balance a checkbook and try to figure out my cell phone bill each month. Having made those admissions as my disclaimer I can now talk about the new math in Major League Baseball in regards to the real value of some player contracts. Chris Davis recently signed a 7 year $161 million contract with the Baltimore Orioles. In actuality Davis will receive $127 million for his services. WHAT? Who moved the cheese? Cue the old Abbott and Costello “Who’s on first” routine. The numbers are correct and they are real. The calculation method is called Net Present Value or “NPV”. It is used when teams make a contract with a player and both parties agree to defer payments in the future instead of paying all of the money during the course of the contract. As we all know money loses value over time. That is all well and good when we are discussing the modest earnings that most of us enjoy. However, when you are talking about the impact on people earning tens of millions of dollars over many years then we are talking about something quite different. Imagine this scenario if you will for all of us in the former category and not the latter. Once again I will remind you of my “disclaimer”. Let’s say you earn $100,000 a year at your job. You spend 10 years there and you never receive a raise. In year one of your employment your $100,000 is worth $100,000. What is your $100,000 worth in year 10? I think it is worth $70,000. If your salary never changed and the cost of living increases at a rate of 3% a year then that is a 30% increase in your living expenses in 10 years. You would actually be being paid less by your employer as time went on not more for your efforts. Meanwhile that same employer was likely raising its prices for the goods and services that they provide to compensate for those same cost increases. The Orioles and Davis have agreed to defer $42 million of his contract to be paid out from 2023 to 2037 after his 7 year contract has already expired. The loss in value estimates of what that money will be worth in the future make $161 million = $127 million. I am sure Chris Davis’s agent, Scott Boras, gets his 10 % up front though. He actually does understand money better than all of us. I have to provide credit to Dave Cameron of FANGRAPHS for explaining all of this in his article. You can view his breakdown of the contract by clicking on the link http://www.fangraphs.com/blogs/the-value-of-deferred-money-in-the-chris-davis-deal/
This portion of my article will try to make Met fans feel good about the deferred payment arrangement the Mets made with Bobby Bonilla in 2000. By now most of you know that the Mets are paying Bobby Bonilla $1.2 million a year as a deferred payment arrangement so they could buy out the remaining $5.9 million that he was owed and release him in 2000. The deal was structured in such a way where the first annual payment was not due until 2011 and would continue for 25 years. That would add up to the Mets paying Bonilla $29.8 million for a $5.9 million obligation. Whoa Nellie! Who’s on first? Hold your horse’s bean counters everywhere! This was a shrewd business move by the Mets that only a team run by Fred Wilpon could figure out. The Mets actually received the better end of this deal on multiple levels. Stay with me on this one but it is true. The Mets did not make the first payment to Bonilla until 2011 so over 10 years went by that the Mets had use of the $5.9 million. Remember what we discussed before about money losing value over time? That $5.9 million was worth nearly $2 million less 10 years later in actual buying power had Bonilla received it in a lump sum. Bonilla will not receive it in a lump sum though. He will receive it in annual payments over 25 years until 2035. That makes the value significantly less because of all the years that will have passed and the cost of living increase’s reduce the buying power of that money. That is not even the best part yet. Cork Gaines from Business Insider has pointed out what could have happened to the money by both parties if it was invested and let grow over time. You can look at the chart and a better explanation here http://www.businessinsider.com/mets-bobby-bonilla-deal-smart-2015-7. By the end of the last year of the last payment to Bonilla he could lose nearly $10 million by taking the payments vs. getting a lump sum. The Mets on the other hand would have made $14 million on their $5.9 million investment before the first payment of $1.2 million was even due to Bonilla in 2011. By the year 2035 the Mets would have been $8.9 million ahead of the game. You can’t make it up folks. There is a reason why I am writing blogs and people like Fred Wilpon are millionaires. This may be the best part of all in regards to the Bonilla deal. It is likely that the deal landed David Wright right into the Mets laps. Yes the Mets all-time best offensive player was a byproduct of all this deferring! The Mets freed up $5.9 million by deferring the money owned to Bonilla. They used that money to pay the $5.75 million due to Mike Hampton in 2000 when he was acquired via trade from Houston. Hampton was a main reason the Mets won the pennant that year as he pitched outstanding in the playoffs. When Hampton left for free agency in 2001 the Mets were granted a compensatory pick in the first round of the draft. That pick was the 38th selection overall and was a high school infielder from Virginia named David Wright. Ted Berg of USA Today explains all this in his article http://ftw.usatoday.com/2015/07/new-york-mets-bobby-bonilla-contract-2035-deal. So the Mets saved millions and landed one of there all – time great players in the process. This is absolute genius in my mind!
I have connected all the dots here for you. Looked at several different sources, added some of my own common sense thoughts that you may or may not agree with and at the very least I hopefully entertained you for a few minutes. I will say one thing though in closing. If anybody tells me that deferred payments are a bad idea I have my response ready….. “I beg to defer”.
A View From The Bench 