The New York Mets, Bobby Bonilla, and Basic Economics
If you’re a Mets fan, a general baseball enthusiast, or at least can differentiate a baseball diamond from a chocolate diamond, you’ve probably heard someone quip pedantically that Bobby Bonilla is the second-highest-paid outfielder on the Mets roster (behind castaway Jason Bay). Bonilla, a switch hitter, is a career .279/.358/.472 hitter, which would arguably make him the best batter in the Mets outfield.
The problem with this, of course, is that Bobby Bonilla turns 50 on Saturday and retired after the 2001 season. He hasn’t actually been on the Mets roster since 1999. The reason why his name keeps coming up is because of a highly-publicized contract buyout from 2000.
The Mets didn’t want Bonilla on their team for the 2000 season. With a $5,900,000 salary and a 37th birthday in February, he carried little trade value (never mind the fact that Bonilla had been worth -1.5 fWAR the previous 2 seasons, despite only appearing in a total of 160 games). The Wilpons wanted Bonilla off the roster, and wanted additional financial flexibility in the interim. So they came to an agreement on his buyout:
"[S]tarting on July 1, 2011, Bobby Bonilla will remain on the franchise’s payroll for 25 years, collecting an annual salary of $1,193,248.20. Those are the terms the Mets agreed to Jan. 3, 2000, when they bought out the final year of Mr. Bonilla’s contract.– There’s No Accounting for This, Wall Street Journal (July 1, 2010)"
The $1.19M figure was agreed upon was based on two tenets:
(1) Bonilla’s $5.9M salary would be deferred until the 2011 fiscal year
The Wilpons would not owe Bobby Bonilla any compensation for 11 1/2 years, and would be free to spend the money as they wish until July 2011, at which point they’re required to pay the annual installments until 2035.
(2) In compensation for this, the money would collect interest.
According to the WSJ article I quoted above, the money would collect 8% interest in the meantime (the US Prime Rate in January 2000 was 8.5% – a nominal 5.8% interest on top of 2.7% inflation).
For the sake of discussion, I’m going to propose a third tenet:
(3) The original $5.9M sum is viewed as belonging to Bonilla, which he then invested into the Mets at the agreed upon terms.
March 28, 2012; Port St Lucie, FL, USA; New York Mets co owner Fred Wilpon in the stands during a spring training game against the Washington Nationals at Digital Domain Park. Mandatory Credit: Brad Barr-USA TODAY Sports
If you wish, you can argue that it was, in effect, the Wilpons borrowing the money from Bonilla, but either way it’s the same. What I’m establishing is that the $5.9M is, in effect, a sunk cost to Fred Wilpon; that money ends up in Bonilla’s pockets no matter the agreement. So what we’re going to do is treat the $5.9M as in a vacuum – as a deposit into an interest bearing account that collects 8% interest and begins paying out in the 11th fiscal year. At the end, Bonilla will have earned a total of $29,831,205 by the year 2035. Assuming the 2.7% inflation rate at the time he signed the agreement, the total value would be worth $16,464,019 in 2000. Not only has Bonilla effectively secured his future (and his family’s) with the annuity payments, he’s nearly tripled the year-2000 value of his contract!
This should all sound familiar, because this is how banks work. When you deposit money into a savings account, for example, you’re giving your bank the freedom to use your money for ventures they see fit (lend it to others, invest it, etc.) with the caveats that (A) your money is insured if what they do with it loses money and (B) they pay you in exchange. Those payments come in the form of interest.
The key question here is how the Wilpons invested the $5.9M (given the tumult of the Madoff scandal, among other things, discussing this could fill novels, let alone this blog post). Hypothetically, if the Wilpons were to invest the money at 8%, they would break even (they would actually profit 8.4 cents).
At this point, it becomes clear why the Wilpons would be willing to make such a deal. Were they to collect zero interest (above inflation) on the $5.9M, their liability would be the difference between the total of the payments and the initial sum – $27,565,453 – which works out to $1,102,618 per year for each of the 25 years in which Bonilla will collect. Were we to assume that value as a lump sum to be paid out in year 25 (2035), it reflects as a $10,849,247 sum in year 2000 dollars.
So that’s it. In the most foolish eyes, the Wilpons made a $10.8M gamble in January 2000 (a safer bet than Jason Bay, in retrospect). Clearly it isn’t likely that the Wilpons just let the money sit under their mattress, so let’s check the investment.
First, we know that the average (mean) inflation rate since January 2000 has been 2.5065%. We also know that the mean Prime rate (which includes inflation) since the agreement has been 5.3386%. At that rate, the Wilpons would be paying $24,497,467 out-of-pocket over the lifetime of the agreement, a year-2000 cost of $9,641,745.
However, the Prime Rate, of course, corresponds to the rate offered to the lowest-risk lendees, so it’s not necessarily accurate to assume that the Wilpons only used that rate. I don’t know enough about investment returns or the like to accurately guess what they were getting. Reports have indicated that they were collecting as much as 12% from their Madoff investments; at such a rate they would have begun to guarantee a profit by 2018. Even at a more modest 9%, their profit (in year-2000 dollars) would be north of $8.3M, and the 8.5% prime rate at the time of agreement would have netted the Wilpons a $3.7M profit in year-2000 dollars.
It’s ultimately unknown what their investment returns are, and/or how much of it was lost in the Madoff scandal. But when the worst case scenario ends up in spreading what would be, at the time, a less-than-$11M loss over 35 years, it doesn’t seem like the disaster some make it out to be.
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