It’s July 1st, which means that the New York Mets have to make a yearly payment to a baseball player who hasn’t played for them in 20 years. In 1999, the Mets signed Bobby Bonilla to an ill-advised contract. Bonilla, 36 years old at the time, was on the downside of his career, and it showed (he hit .160). After the season they cut him, but still owed him $5.9 million. Rather than pay him immediately, they negotiated a deferred payment scheme. Bonilla would get nothing for ten years, then payments of approximately $1.2 million a year for the next 25 years (2011-2035).
Every year Mets fans get to grumble and moan about how the team is paying over a million dollars to a 57-year old who last donned their uniform two decades ago. It fits in nicely with the “incompetent Mets management” and “overpaid pro athletes” memes that are popular in the sports world.
But was it really a bad move? The deferred payments are based on 8% interest, and that’s not an unreasonable assumption for long-term investments. Assume the Mets took that $5.9 million and invested it for 10 years (2000-2010), then started drawing from that investment pool every year for the following 25 years. If the yearly return on investment was 8%, they’ll come out even (versus paying the money to Bonilla up front). Most reasonable long-term investment strategies will give you around 8% on average, so it really wasn’t that bad of a move.
Except. At the time, the Mets ownership felt that making a deferred payment at 8% interest was an especially good deal, since they were making double-digit returns with their current investments. Run by a fellow named Bernie Madoff.
Oops.