April 6, 2011

Contractual Matters

The Mets' Sunk Costs

by Jeff Euston

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The start of a new season is an exciting time for fans, players and front offices alike, a chance to shake off the cold weather, move on from 2010 and start fresh. No team welcomed Opening Day more than the Mets, who endured a tumultuous offseason featuring everything from a new general manager to questions about ownership’s involvement with the Bernard Madoff financial fraud case.

Despite two consecutive losing seasons in Flushing, GM Sandy Alderson—hired in October to head up the on-field renovation effort—did not make sweeping changes. Alderson inherited a club hamstrung by a number of significant financial commitments, including $105 million for just seven players in 2011, and $110 million combined over the 2012 and 2013 seasons.

The inaction in the free-agent market did not get an enthusiastic reception from many Mets fans, and the release of the annual survey of player salaries from USA Today did not help matters. The report placed the team’s 2011 payroll at $118 million, which ranked seventh in baseball and represented a drop of 12 percent from 2010.

However, the report does not include 2011 salaries for Ronny Paulino, who will earn $1.35 million but did not start the year with the team because of a PED suspension and a bout with anemia. Also excluded in the calculation are four players no longer on the roster: Oliver Perez ($12 million), Luis Castillo ($6 million), Ryota Igarashi ($1.75 million), and Gary Matthews Jr. ($1 million). That group pushes the club’s actual outlay on payroll to $142 million, which ranks fourth behind the Yankees, Phillies, and Red Sox and is a jump of more than 10 percent from the Mets’ 2010 year-end payroll of $127 million.

Alderson’s modest off-season changes were focused primarily on bolstering the starting rotation on the cheap, spending slightly more than $10 million to sign R.A. Dickey to an extension and add free agents Chris Young and Chris Capuano. Yes, this conservative financial approach lacks sex appeal. But it’s the smart play, and it actually provides Mets fans with reason to hope.

First, with the releases of Perez and Castillo, the Mets joined the growing ranks of teams who recognize a sunk cost when they see it. In economic terms, a sunk cost is one that already has been incurred and will not be altered by subsequent decisions. Both Luis Castillo’s four-year, $25 million contract and Oliver Perez’s three-year, $36 million deal had to be paid off regardless of whether those players were kept on the roster. Is it painful to see $21 million of dead money on the 2011 books? Yes. But keeping those players because of their salaries would have compounded the original mistakes and denied opportunities for young players like Brad Emaus.

Secondly, the Mets have tried a win-at-all-financial-cost approach before, with disastrous results still echoing today. In July, the club will make the first of 25 annual payments of $1,193,248 to another former player, Bobby Bonilla, whose second stint in New York ended in 1999, during the Steve Phillips administration. The Mets made a playoff run despite Bonilla, who compiled a slash line of .160/.277/.303 in 198 plate appearances, then sealed his fate with the organization by famously joining Rickey Henderson for a game of cards in the clubhouse while their teammates were losing the final game of the National League Championship Series in Atlanta.

With a contract guaranteeing him $5.9 million for the 2000 season, Bonilla was a sunk cost. Rather than absorbing the seven-figure financial hit—and creating a drag on payroll for one more season, the Mets cut a deal with Bonilla, granting him his release in exchange for his agreement to defer his salary—at eight percent interest—for 25 years, with payments beginning in 2011.

The deferral agreement gave the Mets the perceived financial flexibility to increase payroll more than 10 percent, giving raises to core players like Mike Piazza, Al Leiter, and Robin Ventura while acquiring Mike Hampton, Derek Bell, and Todd Zeile. In the short term, the deal appeared to pay off, with the Mets winning the 2000 NL pennant.

The long-term outlook is not so rosy. When a player’s contract includes deferred money, a club often will set aside the money as it is earned, putting it in an annuity until the team has to begin making payments to the player. Short of the club opening their books, we won’t know how the Mets handled the accounting. But if the cash earmarked for Bonilla was placed in an investment vehicle of some sort, we can only imagine how that went in the wake of the Madoff scandal.

In any event, now the bill for Bonilla comes due, and given the uncertainty surrounding the Wilpons’ investments and the club’s financial condition, it’s hard to imagine the timing being worse—all the more reason that Alderson’s conservative financial approach this winter was for the best.

Jeff Euston is an author of Baseball Prospectus. Follow @JeffEuston
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