CSS Button No Image Css3Menu.com

Baseball Prospectus home
  
  
Click here to log in Click here for forgotten password Click here to subscribe

<< Previous Article
Premium Article Divide and Conquer, AL... (04/06)
<< Previous Column
Premium Article Contractual Matters: S... (03/23)
Next Column >>
Contractual Matters: S... (04/20)
Next Article >>
Premium Article Painting the Black: Lo... (04/06)

April 6, 2011

Contractual Matters

The Mets' Sunk Costs

by Jeff Euston

the archives are now free.

All Baseball Prospectus Premium and Fantasy articles more than a year old are now free as a thank you to the entire Internet for making our work possible.

Not a subscriber? Get exclusive content like this delivered hot to your inbox every weekday. Click here for more information on Baseball Prospectus subscriptions or use the buttons to the right to subscribe and get instant access to the best baseball content on the web.

Subscribe for $4.95 per month
Recurring subscription - cancel anytime.


a 33% savings over the monthly price!

Purchase a $39.95 gift subscription
a 33% savings over the monthly price!

Already a subscriber? Click here and use the blue login bar to log in.

The start of a new season is an exciting time for fans, players and front offices alike, a chance to shake off the cold weather, move on from 2010 and start fresh. No team welcomed Opening Day more than the Mets, who endured a tumultuous offseason featuring everything from a new general manager to questions about ownership’s involvement with the Bernard Madoff financial fraud case.

Despite two consecutive losing seasons in Flushing, GM Sandy Alderson—hired in October to head up the on-field renovation effort—did not make sweeping changes. Alderson inherited a club hamstrung by a number of significant financial commitments, including $105 million for just seven players in 2011, and $110 million combined over the 2012 and 2013 seasons.

The inaction in the free-agent market did not get an enthusiastic reception from many Mets fans, and the release of the annual survey of player salaries from USA Today did not help matters. The report placed the team’s 2011 payroll at $118 million, which ranked seventh in baseball and represented a drop of 12 percent from 2010.

However, the report does not include 2011 salaries for Ronny Paulino, who will earn $1.35 million but did not start the year with the team because of a PED suspension and a bout with anemia. Also excluded in the calculation are four players no longer on the roster: Oliver Perez ($12 million), Luis Castillo ($6 million), Ryota Igarashi ($1.75 million), and Gary Matthews Jr. ($1 million). That group pushes the club’s actual outlay on payroll to $142 million, which ranks fourth behind the Yankees, Phillies, and Red Sox and is a jump of more than 10 percent from the Mets’ 2010 year-end payroll of $127 million.

Alderson’s modest off-season changes were focused primarily on bolstering the starting rotation on the cheap, spending slightly more than $10 million to sign R.A. Dickey to an extension and add free agents Chris Young and Chris Capuano. Yes, this conservative financial approach lacks sex appeal. But it’s the smart play, and it actually provides Mets fans with reason to hope.

First, with the releases of Perez and Castillo, the Mets joined the growing ranks of teams who recognize a sunk cost when they see it. In economic terms, a sunk cost is one that already has been incurred and will not be altered by subsequent decisions. Both Luis Castillo’s four-year, $25 million contract and Oliver Perez’s three-year, $36 million deal had to be paid off regardless of whether those players were kept on the roster. Is it painful to see $21 million of dead money on the 2011 books? Yes. But keeping those players because of their salaries would have compounded the original mistakes and denied opportunities for young players like Brad Emaus.

Secondly, the Mets have tried a win-at-all-financial-cost approach before, with disastrous results still echoing today. In July, the club will make the first of 25 annual payments of $1,193,248 to another former player, Bobby Bonilla, whose second stint in New York ended in 1999, during the Steve Phillips administration. The Mets made a playoff run despite Bonilla, who compiled a slash line of .160/.277/.303 in 198 plate appearances, then sealed his fate with the organization by famously joining Rickey Henderson for a game of cards in the clubhouse while their teammates were losing the final game of the National League Championship Series in Atlanta.

With a contract guaranteeing him $5.9 million for the 2000 season, Bonilla was a sunk cost. Rather than absorbing the seven-figure financial hit—and creating a drag on payroll for one more season, the Mets cut a deal with Bonilla, granting him his release in exchange for his agreement to defer his salary—at eight percent interest—for 25 years, with payments beginning in 2011.

The deferral agreement gave the Mets the perceived financial flexibility to increase payroll more than 10 percent, giving raises to core players like Mike Piazza, Al Leiter, and Robin Ventura while acquiring Mike Hampton, Derek Bell, and Todd Zeile. In the short term, the deal appeared to pay off, with the Mets winning the 2000 NL pennant.

The long-term outlook is not so rosy. When a player’s contract includes deferred money, a club often will set aside the money as it is earned, putting it in an annuity until the team has to begin making payments to the player. Short of the club opening their books, we won’t know how the Mets handled the accounting. But if the cash earmarked for Bonilla was placed in an investment vehicle of some sort, we can only imagine how that went in the wake of the Madoff scandal.

In any event, now the bill for Bonilla comes due, and given the uncertainty surrounding the Wilpons’ investments and the club’s financial condition, it’s hard to imagine the timing being worse—all the more reason that Alderson’s conservative financial approach this winter was for the best.

Jeff Euston is an author of Baseball Prospectus. 
Click here to see Jeff's other articles. You can contact Jeff by clicking here

Related Content:  The Who,  Bobby Bonilla

18 comments have been left for this article. (Click to hide comments)

BP Comment Quick Links

Sharky

Jeff, a good article and I agree with your overall take. But the true success of the Alderson regime in 2011 will (in mind) be measured by:

1) How the Mets fare in the amateur draft and whether they actually spend the money it takes to capitalize on draft picks and rebuild the farm system; and

2) How the Mets fare in the trade market (also restocking the larder, presumably trading away Jose Reyes and other players not likely to be part of a rebuilding effort).

These two items were somewhat outside the scope of your article, but seem at least as important to the Mets' long-term success.

Any thoughts on this?

Apr 06, 2011 04:24 AM
rating: 2
 
BP staff member Jeff Euston
BP staff

I agree on both points. They seemed committed to a holding pattern this past off-season, and that wasn't unreasonable. Obviously restocking the system begins with the draft in June, then possibly the trade market. They also have a little flexibility coming, so that will allow for some maneuvering.

Apr 06, 2011 22:49 PM
 
fatted

Regardless of whether deferring that contract was the right move at the time or not, it really has to be brutal knowing your team is now paying the contract of a player that hasn't been on the team for 10 years. I'm glad other teams didn't follow that model.

Apr 06, 2011 05:13 AM
rating: 0
 
xnumberoneson

The NY Times reported that Bonilla's annuity account was set up with Bernie Madoff. Oops...

Apr 06, 2011 05:19 AM
rating: 0
 
prs130

i want to read that article

Apr 06, 2011 12:38 PM
rating: 0
 
BP staff member Neil deMause
BP staff

We live to serve:

http://www.nytimes.com/2011/02/02/sports/baseball/02mets.html

(Bonilla bit is on page 2.)

Apr 06, 2011 14:13 PM
 
Greg Ioannou

The Vernon Wells trade shows that it IS possible in some cases to get out from under sunk costs. I was a little surprised that the Mets didn't swing similar trades this winter. They would have had to pitch in some money in the deals, but sure covering part or most of a sunk-cost salary is better than covering it all.

Apr 06, 2011 07:40 AM
rating: 0
 
George

Vernon Wells is a bit different in that, even though he was grossly overpaid, he was/is still a useful player. Castillo doesn't provide any value, while Perez is way in the negative.

Apr 06, 2011 08:21 AM
rating: 4
 
StarkFist

Last year Omar almost swung a deal to send Castillo to the Cubs. I believe the Mets were to get Milton Bradley. I don't remember what happened to prevent it.

Apr 06, 2011 16:58 PM
rating: -1
 
amazin_mess

That isn't true.

Apr 06, 2011 17:14 PM
rating: 0
 
ScottyB

I undertstand the whole "time value of money" concept. However, it seems that too many organizations (ahem, Mets, Dodgers, D'Backs) use this as a "buy now, pay later" approach to circumvent good financial discipline.

Apr 06, 2011 09:40 AM
rating: 0
 
Ric Size

Let me get this straight, the Mets deferred $5.9M in year 2000 to pay Bobby Bonilla $29.8M spread out over 25 years! No wonder the Mets are such a mess.

Apr 06, 2011 10:37 AM
rating: 0
 
irussma

Uh, yeah. That's why Steve Phillips is no longer a GM.

Apr 06, 2011 11:38 AM
rating: 2
 
doncoffin
(422)

The real kicker is that the Mets deferred Bonilla's salary at 8%. In 2000, the AAA corporate bond rate was about 7%. Now, it's around 5%. The 8% instead of 7% decision costs them about $200K per year. If they'd bought a safe annuity in 2000 with a one-time payment of $5.9 Million, at an appropriate rate of return, the whole thing's a wash...the only real issue, if they'd been conservative about stashing the $5.9 Million, is how Bonilla wanted to take it...the cost to the Mets is the same, either way.

Unless they buy into a Ponzi...

Apr 06, 2011 13:58 PM
rating: 1
 
Ric Size

Why wouldn't you just pay Bonilla's 2000 salary instead of buying an annuity with a one-time payment of $5.9 million? It was a sunk cost. Deal with it and move on.

I completely agree with irussma that Steve Phillips was/is clueless.

Apr 06, 2011 15:37 PM
rating: 0
 
ischreck

Why? Well, if someone was promising you a 15% return on your $5.9 million, you get to pocket a 6% return. So the Bonilla deal helped the Wilpons make money. It is an excellent example of why the trustee has accused the Wilpons of turning a blind eye - - it was too good a deal to be true.

Apr 07, 2011 03:51 AM
rating: 1
 
ischreck

Oops. You pocket a 7% return. Even more unbelievable!

Apr 07, 2011 03:52 AM
rating: 0
 
Ric Size

You don't do this, because what people promise you, and what you really get, are two different things. This is what happens when people try to get too cute with somebody else's money.

Apr 07, 2011 05:29 AM
rating: 0
 
You must be a Premium subscriber to post a comment.
Not a subscriber? Sign up today!
<< Previous Article
Premium Article Divide and Conquer, AL... (04/06)
<< Previous Column
Premium Article Contractual Matters: S... (03/23)
Next Column >>
Contractual Matters: S... (04/20)
Next Article >>
Premium Article Painting the Black: Lo... (04/06)

RECENTLY AT BASEBALL PROSPECTUS
Fantasy Article My Model Portfolio: Framing Decisions Around...
Fantasy Article Dynasty Dynamics: TINO Does Arizona, 2015
Pebble Hunting: The Case For Shaming the Cub...
Every Team's Moneyball: Texas Rangers: Short...
Every Team's Moneyball: Atlanta Braves: Shor...
Prospectus Feature: All Spin Is Not Alike
Premium Article Baseball Therapy: The Most Important Player ...

MORE FROM APRIL 6, 2011
Premium Article Prospects Will Break Your Heart: An Embarras...
Collateral Damage: Minor Threats
Fantasy Article Fantasy Focus: Clash of the First-Timers
Premium Article Painting the Black: Looking Up in South Flor...
Premium Article Divide and Conquer, AL East: Pass the Taters
Fantasy Article Fantasy Beat: Value Picks in the Outfield
Fantasy Article Fantasy Beat: Will Erik Bedard Be Valuable A...

MORE BY JEFF EUSTON
2011-05-24 - Premium Article Contractual Matters: The Orioles' Roster Rou...
2011-05-06 - Contractual Matters: Screen Test
2011-04-20 - Contractual Matters: Supporting Stow
2011-04-06 - Premium Article Contractual Matters: The Mets' Sunk Costs
2011-03-23 - Premium Article Contractual Matters: Six-Figure Blues
2011-03-16 - Premium Article Contractual Matters: AL Central Payroll Proj...
2011-03-09 - Premium Article Contractual Matters: NL Central Payroll Proj...
More...

MORE CONTRACTUAL MATTERS
2011-05-24 - Premium Article Contractual Matters: The Orioles' Roster Rou...
2011-05-06 - Contractual Matters: Screen Test
2011-04-20 - Contractual Matters: Supporting Stow
2011-04-06 - Premium Article Contractual Matters: The Mets' Sunk Costs
2011-03-23 - Premium Article Contractual Matters: Six-Figure Blues
2011-03-16 - Premium Article Contractual Matters: AL Central Payroll Proj...
2011-03-09 - Premium Article Contractual Matters: NL Central Payroll Proj...
More...