Mega Deals

It’s that time of year again, Spring Training has begun and we’re under a month away from opening day in baseball, not that you’d know it with the single digit temps we’re experiencing here.  As many of you know I am a huge baseball fan and with my Red Sox coming off a world series championship the 2019 season can’t begin quick enough!  While I know not all of you are baseball fanatics, the sport can be a very interesting one to look at from a statistical standpoint and a finance standpoint.

Some of you may recall the Bonilla Day Weekend Word we originally sent out a couple years ago, if not check it out here: Bonilla Day.  I won’t go into full detail, but in that blog post we go over how Bobby Bonilla deferred his $5.9 million contract and turned it into 25 payments of $1,193,248.20 and what it would have taken for him to get there if he was in the market.  Over the past couple years in baseball there have been a plethora of $200+ million contracts making Bonilla’s $5.9 million a drop in the bucket, but these contracts aren’t indexed for inflation. So, while $200+ million is an ungodly amount, as time goes on these players will likely see a decrease in their spending power.

Just last week Bryce Harper signed the largest contract in MLB history, 13 years, $330,000,000. We thought it would be an interesting experiment to see how Bryce’s historic contract would stand the test of time.  Since the contract details were just announced we were able to plug those details in, and with historical inflation of 2.39% Harper’s $330,000,000 acts more like $282,479,534 or 85% of his contract value after you factor in inflation and that isn’t even counting taxes!   Another interesting case is Harper’s old teammate Max Scherzer. 

In 2015 Scherzer signed a 7-year deal worth $210 million, if we use the same process as above, Scherzer’s $210 million acts more like $191.2 million (91% of listed value), but there is a caveat.   Scherzer deferred half of his salary until the end of the first 7 years. Which means that instead of getting paid for 7 years his $210 million gets paid out over 14 years.  In that case we see the value drop to $176.7 million (84% of listed value). To bring it all full circle we wanted to see how great of a deal Bobby Bonilla received 20 years ago.  It turns out that by deferring the final year of his contract he was almost able to double his $5.9 million salary in terms of net present value.

We approached this because it seemed like a simple experiment, “How much of a player’s contract is eroded by inflation?”  It ended up being a lot more enlightening because it showed us the true power of inflation over longer term periods.  In this case it ate up 15% of Harper’s purchasing power in just 13 years. While I don’t think any of us are out there signing mega deals to be the next baseball superstar, we can easily see how damaging inflation can be to a retirement plan over time even at modest inflation rates.