In the year 2000, the New York Mets baseball team owed player Bobby Bonilla $5.9 million. The Mets didn't want to pay, so the team and Bonilla's agent renegotiated the contract. Instead of the original payment, Bonilla now receives $1,193,248.20 once a year from 2011-2035 on July 1st, popularly known as "Bobby Bonilla Day."
Did the Mets act wisely? It depends.
If the Mets invested $5.9 million in 2000 at 8% interest and paid Bonilla his annual $1,193,248.20 from 2011-2035, they would come out exactly even by 2036:
Here is another way to look at it. Assuming an 8% discount rate, the Mets would have needed to invest $511,763.70 in 2000 to pay Bonilla in 2011, $473,855.28 to pay him in 2012, etc., for a total of $5.9 million:
On the other hand, if the Mets only earned 7% on their initial investment, they would have had to pay out an additional $13.35 million by 2036:
How about 9%? At this rate, the Mets would come out on top, with an incremental $21.1 million left in the bank after Bonilla's final payment in 2035:
It seems silly now that a baseball team would pay a non-playing player over $1 million annually for 25 years, until that player is 72 years old. But the Mets are a business and know what they are doing. From a financial perspective, they bet that they could earn 8% a year (i.e., an 8% discount rate) on the money they saved by deferring Bonilla's salary payments.
Was that a good bet? In retrospect, no. Easily available benchmarks have fallen well below that amount. For example, the S&P 500's average gain from 2000 to 2022, when it grew from 1450 to 3800, was only 4.4%. Things could change between 2000 and 2022, but so far it looks like Bonilla got the better deal.
But it is hard to fault the Mets because things looked much different in the year 2000. The Federal funds rate (risk-free) was 6.5%. And across the 20th century, stock market returns averaged 10.4% a year. And as a major business, the Mets might have access to private investments that could easily earn above 8% annually. Other considerations, such as taxes or an immediate need for additional funds in 2000, may have also played a factor. From this standpoint, assuming 8% for Bonilla was reasonable.
Was Bobby Bonilla Day a bad idea for the Mets? Not really. They bet on interest rates based on sound assumptions at the time. In addition, Bobby Bonilla Day gives baseball fans something to remember and celebrate every year. Add intangibles like this one, and the analysis changes.
Want to play with these numbers on your own? Download the Excel file here: