For those who are not familiar with Bonilla's current contract with the Mets here is a brief breakdown. The Mets decided it best to buy out the remaining $5.9 million dollars of Bobby Bonilla's contract in January 2000. Instead of paying him the $5.9 million dollars at the time, they struck a deal where payments would be deferred until 2011. Commencing in July 2011, Bobby Bo is to receive $1.19 million per year until the year 2035. To the naked eye the Wilpons got taken to the cleaners on this deal. While they could have paid him $5.9 million to go away, they now owe him a grand total of almost $29.83 million. Bonilla certainly loved the deal: "That beautiful thing," he said. It certainly is a nice deal for a professional athlete with many expenses to be paid in distributions over such a long period of time. It also allowed Bobby's taxable income to be spread out over a long period of time rather than paying a greater amount in the lump sum. Also, when digesting this information, keep in mind that this is a very special circumstance. 99.9% of the population can not afford to defer income for 10 years and allow their employer to collect income on what is essentially now an investment.
Let's take a look at the Mets' possible thinking when formulating such a buyout.
- A dollar today is worth more than a dollar tomorrow. $5.9 million dollars in the year 2000 can not be compared to $29 million in 2035. What was a gallon of gas in 1975? What is a gallon of gas today? Pretty vast difference from a percentage standpoint. When structuring Bonilla's contract, the Wilpon's assumed an 8% interest rate, which was actually half a point below the prime rate at the time. While interest rates have plummeted due to the recent recession, 8 percent was fair at the time given the prime rate. I direct you to the spreadsheet below. You can see that using a discount rate of 8% would have the Mets actually come out on top by about $16,000 in terms of REAL dollars as opposed to nominal dollars. You can adjust the interest rate by 2 basis points in either direction and it doesn't make a huge difference. Essentially, by using simple present value calculations, the two options are a wash.
