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That the Marlins are backloading Giancarlo Stanton’s contract in order to go out and sign players now is a nice story. It might also be true—there’s fair reason to doubt it, given the Marlins’ dubious history when it comes to spending—but giving him $6.5 million in 2015 rather than the $25 million average annual value of the deal frees up space to make a better run in 2015.

And Stanton is saying all the right things. At his Wednesday press conference, the takeaway line was “We’ve got to trust that we are all in it to win it,” a trust that seemed to be all but gone when Stanton was sniping at his own front office after the post-2012 liquidation sale.

So it’s a nice sentiment that this is where the money is going. But even if they never sign a sole free agent this offseason, the Marlins are also saving tons of money just by rearranging it.

Yes, there’s inflation – the actual currency type of inflation rather than the baseball salary type. That’s been the focus of much of the effort to coax this figure down from the $325 million sticker shocker. It’s also been used to put this in the context of Alex Rodriguez’s $252 million deal, which because it was signed in 2000, is actually worth more in today’s U.S. dollars than Stanton’s deal.

If you consider inflation to be 2.4 percent as in the link above, the contract would indeed be worth $277 million given the salary breakdown at Cot’s MLB Contracts. The contract, if it had been set at $25 million every year for 13 years and adjusted for inflation, would be $283.7 million, so the effect of the backloading would be $6.7 million in current pre-tax dollars.

But while considering inflation is nice when talking about purchasing power, the real value of backloading this contract, which is worth well into the eight figures to the Marlins, is so much more than inflation.

If you’re Stanton, you want the money now not because inflation is going to happen—that actually doesn’t matter at all if you’re just saving the money. But you want the money now because you can grow that money at a rate considerably higher than inflation as we know it in the United States in the 21st century. That’s true of the team as well. Not only can they use the money to sign other players, but even if they revert to their Fishy ways, they can grow that money at well above two percent.

At what rate should this money be discounted? Well, if that were an easy question, investment bankers wouldn’t drive nice cars.

But for the sake of getting to the point, we’ll use a rate of 10 percent, which is almost exactly the geometric average annual return of the S&P 500.

A hundred dollar bill today could be invested, and based on historical returns, it would be expected to be worth $110 in a year. So a risk-neutral party would be indifferent between getting $100 today, $110 next year or $121 two years from now. (I’ve already written on how baseball players aren’t really risk neutral, but a guaranteed nine-figure deal brings a player much closer to that point than, say, Jonathan Singleton without a major-league contract would be.)

Anyway, instead of simply adjusting for inflation, the discount factor for future dollars multiplies by 1/(1.1)t where t is the number of years into the future.

And that’s where the impact of the backloading really starts to be felt. On the right is the contract if it had been just $25 every year with the AAV discounted by the yearly discount factor. On the left is the actual contract, which comes out $20.8 million short in present value.

Year

Discount factor

Salary ($M)

Discounted salary ($M)

AAV ($M)

Discounted AAV ($M)

2015

0.91

6.5

5.9

25

22.7

2016

0.83

9

7.4

25

20.7

2017

0.75

14.5

10.9

25

18.8

2018

0.68

25

17.1

25

17.1

2019

0.62

26

16.1

25

15.5

2020

0.56

26

14.7

25

14.1

2021

0.51

29

14.9

25

12.8

2022

0.47

29

13.5

25

11.7

2023

0.42

32

13.6

25

10.6

2024

0.39

32

12.3

25

9.6

2025

0.35

32

11.2

25

8.8

2026

0.32

29

9.2

25

8.0

2027

0.29

25

7.2

25

7.2

2028

0.26

10*

2.6

TOTAL

325

156.8

325

177.6

*Buyout alternative to a $25 million 2028 salary.

The backloading killed about 12 percent of the value compared to a flat pay schedule, so if this really was Stanton’s idea to help the team grow, it’s a big sacrifice.

And if the concession to this was really the opt-out clause, it’s almost impossible for that to be made up through the opt-out.

In fact, for the opt-out after the 2020 season to make up for the backloaded-ness in present value terms, it would have to be pretty big. Not the 31.1 million per year that it would take had this not been adjusted for present value to get him back to the same spot that the backloading does. But actually, over seven years of constant salary, it would have to average $38.4 million per year because of the discounting of future earnings.

Putting some value on the no-trade clause mitigates that difference somewhat, but the no-trade is actually hampered by the backloading anyway.

Of course, this is likely an oversimplification of the negotiation. There’s nothing to say the teams were ever deciding between $25 million every year and this format, and it’s quite possible that he wouldn’t have received $325 million had it been the $177.6 million in present value instead of the $156.8.

It’s not just a matter of building now, though. It’s real decrease in value.

Precedent would show that if Stanton is terrible in year 10 and making $32 million, we’re all laughing at the Marlins. But the fact is, backloading is actually good for the team, even if it’s for 25 years.

While we’re on the subject of laughing at a team, naturally we can’t finish a discussion of time value of money without a Bobby Bonilla mention. Bonilla was owed $5.9 million for the 2000 season, but instead, he got $1.19 million every year from 2011 to 2035. That series of payments nominally $1.19M x 25 = $29.75M, discounted back to 2000 at 10 percent, would be worth $1.32 million in 2000 or less than a quarter of what Bonilla was actually owed for that season. The Mets did fine.

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ssimon
11/20
Ten percent guaranteed earnings was Madoff's sales pitch. Indeed, between January 1, 2000 and September 30, 2011 -- the Bonilla window? -- tthe S&P 500 index provided a total return of -4.48%, including reinvestment of dividends. As with most things Mets, what sounded good in theory failed miserably in practice.
zacharylevine
11/20
Good point on the Mets' timing, and what happened to their finances in the 21st century is something altogether different. I did mean in the process rather than the outcome, but that's a good warning that you point out that consistent returns are an exercise here, not a promise. (I wouldn't hold up well in jail, so I needed to say that.) Also, I was thinking about using an 8% discount to account for the fact that returns over the measured period do tend to be decreasing, and the difference there is $19M, so not enough to substantially change the point of needing to account for something larger than inflation. -Z
bmmillsy
11/20
Hi Zach, Thank you so much for putting this out there. I get rather annoyed with the nominal value thrown around all over the place. One thing that seems strange to me is using 10% here, but not noting that it's the nominal rate. Why not adjust that for the inflation rate, and get the real valued PV? After all, even if we expect 10% yearly return on the S&P over the next 15 years, we also expect inflation to be above zero. Even the quick and dirty (Interest - Inflation) calculation would be helpful here. Also, I'm glad you mentioned Bonilla. I go through this example in my Sport Finance course (with slightly different paramters).
bmmillsy
11/20
I'll note that maybe your implication is that the real return on S&P has been 10%, but that seems awfully high to me.
kvamlnk
11/24
http://www.moneychimp.com/features/market_cagr.htm Provides a calculator for Compound Annual Growth Rates for the S&P 500. [1871 - 2013] is 9.07%. 10% is pretty optimistic. The Vanguard S&P Index fund (admiral shares) which incurs real world expenses has a return of 5.94% since its unfortunately timed debut on 11/13/2000. I know this is just an exercise in playing around with basebal salary numbers and not investment advice, but 10% is high for an assumed growth rate.
afelton
11/21
The S&P return is so high because it is a risky investment compared to, say, bonds. The liability is guaranteed so the team should use a risk-free rate to match its assets to its liabilities. If you use the Treasury yield curve to discount the contract it is not nearly quite this deal. This is a hot issue in pension accounting at the moment. e.g. http://www.economist.com/blogs/buttonwood/2013/05/pensions-0
onegameref
11/21
Can we all agree that Loria and his financial people know what they're doing? We may not like how he runs things from a performance perspective, but his financial decisions and deal making have been pretty good from his bottom line perspective. I suspect he will be laughing his way to the bank at some point when he sells the franchise. Thanks to afelton for bringing pension finance into the discussion. I come here to get away from my day to day business of pensions, but it's nice to know the applications of pension finance rear their heads in other venues once in a while. I was reviewing our CAFR just today.
BurrRutledge
11/22
So funny. I, too, was going to challenge the premise of a 10% return. I would expect a more realistic alternative would be to take a blending of returns for stocks, bonds, bills, commodities, real estate, etc., and adjusting for inflation and taxation on gains. This also accounts for a survivor bias, as some investments must be written off as total losses but are not typically accounted in the traditional 'historic returns' calculations ( as investors in certain notorious firms of the past can attest is a real risk). I believe the return of ~4% on investment is a benchmark for the past century. But back loading is still the right decision for the Marlins. Just not quite as much as implied in the analysis... Fun read.
mhmckay
11/23
Dude, I am a finance professor at Brandeis University, and you would get a failing grade in my class. Using the Annuity Present Value formula on Bonilla's contract decision, 25 payments of $1.19 million discounted at 10% annually has a present value of $10.8 million. Bonilla did fine!
bmmillsy
12/01
I agree here on treating the annuity like a lump sum in 2035 is wrong. But your analysis is also incorrect. You must realize that Bonilla waited 11 years before beginning to receive his 10.8 million in PV. So you need to backdate the 10.8 million PV of what I am assuming to be 2011 dollars, to 2000. Basically, the annuity is equivalent to a lump sum in 2011 of $10.8 million is what you're saying with the 10% annual nominal rate (and again, we're for some reason leaving aside the real rate here) So you could treat your 10.8 million PV of the annuity as a lump sum in 2011, backdate it 11 years to 2000, and we end up at (10.8)/(1.1^11) = $3.79 million But we know that the real interest rate is probably lower, which means this was much closer to the $5.9 million in 2000 dollars that he was owed and everything seems to work out fine for both sides (leaving aside the Madoff investment issue, of course).