I love a good story proving the value of annuities.
“Annuity” simply means something regularly paid annually, in its original sense. And Bobby Bonilla Day celebrates anannual payment. Huzzah!
I will combine elements from both posts to celebrate both July 1 (Bobby Bonilla Day… okay, it’s also Canada Day… but I’m not Canadian, located in Canada, or obligated to provide Canadian content. So Bobby Bonilla it is) and July 4!
The details and value of the Bobby Bonilla deal
One detail that will be below, too:
Here is the 2020 coverage of Bobby Bonilla day.
Let’s grab the CNN piece on the deal: He hasn’t played in MLB in nearly two decades. One team is paying him $1.2 million a year until 2035
He hasn’t picked up a professional baseball glove in 19 years but he’s still picking up a paycheck — and a hefty one at that.
It’s July 1, which for New York Mets fans means it’s Bobby Bonilla Day.
The former slugger retired in 2001 with the St. Louis Cardinals, but he has been collecting a check of nearly $1.2 million from the Mets every year on July 1 for almost a decade.
The deal is part of a contract negotiated by Bonilla’s agent Dennis Gilbert, which will pay Bonilla $1,193,248.20 every year until 2035. Bonilla, a former All-Star who last played with the Mets in 1999, will be 72 when his contract with the team expires.
How was Gilbert able to secure such a sweet deal for his client? They can both thank disgraced financier Bernie Madoff and Mets owner Fred Wilpon.
The Mets wanted to part ways with Bonilla in 1999 but he had $6 million left on his contract. Wilpon believed he was getting a huge return on his investments through Madoff but the Mets owner turned out to be a victim of Madoff’s infamous Ponzi scheme
Instead of paying Bonilla outright, Wilpon opted to defer payments so that the money could be unwittingly invested into Madoff’s Ponzi scheme.
Gilbert negotiated with the team to defer payments until 2011, with an 8% annual interest rate.
As noted back in 2016, a friend asked me to check the calculations, and I did. You can see the calculations in this spreadsheet.
Yes, it was 8%. If we assume the Mets don’t default on the deal, and they haven’t thus far, then Bonilla got a guaranteed 8% return for 35 years (though the value of the remaining payments, obviously, will diminish. This is an annuity certain, not a perpetuity.)
For an appropriate comparison, look at 30-year Treasury rates. In 1999, those rates were less than 6.5%. The last time the 30-year rate was 8% was in the early 1990s. Dang, Bobby got a good deal.
Video celebration of Bobby Bonilla Day!
Short video (<2:30) on Bobby Bonilla Day and a couple other players:
CBS Sports made a bobblehead picture representing Bobby Bonilla at 72 years old, when he gets his final payment from the Mets.
Hey now, 72 is a bit young for a cane with tennis balls. Nice pension, nevertheless.
More on the value of annuities and high rates
If that was a dumb deal for the Mets to make, then valuing public pensions at 8% in 2000 was also a dumb deal.
The median valuation rate used for public pensions was 8% from FY2001 – FY2010. In recent years, the valuation rates have come down, but the spread between those rates and Treasury rates of similar durations have gotten ginormous. And some do still value at 8%.
Guaranteeing 8% interest for 35 years?
That’s a damn valuable guarantee.
To give you an idea — If I put in $1000 today, and earned 8% for 35 years, I would end up with: (1.08)^35 * 1000 = $14,785.
Almost 15 times the original amount. Of course, with a deferred annuity as Bonilla had, less and less of the principal gets that guaranteed 8% amount, but the first ten years was pure accumulation — (1.08)^10*1000 = $2,159 — the money more than doubled in that period.
Other people got even better deals
The worst has got to be the one the Atlanta Braves have going with Bruce Sutter. Allow me to quote from a lengthy LA Times article from 1985 – the year that this monstrosity was set up:
“Sutter will receive a $750,000 salary for each of the next six years and a minimum of $1.12 million a year for the remaining 30 years of the contract. In addition, he will get the $9.1 million in so-called “principal” at the end.”
Let’s spell that out:
1985-1991: $750,000 each year (6 years)
1992-2021: $1.12 million every year (30 years)
2021: $9.1 million, which represents the ‘principal’ dollars that were supposedly placed in a 12.3% interest-bearing annuity back in 1985.
By those numbers, that adds up to $45 million over the 36 year life of the deal. Bonilla’s deferment arrangement totals only $29.8 million.
The LA Times piece is written all about the ‘risk’ to the player, but frankly, most of the risk seems to have been on the club. The interest rates in that era were crazy-high, and could have escalated within the contract’s terms. At this point, of course, the minimum 12.3% figure looks like a steal for Sutter.
Bruce Sutter is getting his payout next year. Ooooh, I can’t wait!
While many public pensions are essentially offering annuities at 8%… the 12.3% one Bruce Sutter has is eye-popping, though. This deal is partly a deferred annuity, and yes, getting a lump sum after the end of the period is common in deferred annuities.
Let me make a similar quick calculation as I did for Bobby Bonilla — 12.3% for 36 years – let’s say I put in $1000 at the beginning
$1000*1.123^36 = $65,114
That is quite a lot more than merely 15 times the original amount.
Seriously, a high rate annuity is valuable. God bless these baseball players and their agents for demonstrating the value of annuity payments!
There is nothing more American than negotiating the best deal you can.
Speaking of being American….
Happy Independence Day!
Some of my favorite patriotic videos:
Make Mine Freedom! (1948)
Please stand for the national anthem (only appropriately sung by opera singers who can actually hit the notes.) This is Renee Fleming at the Super Bowl in 2014, accompanied by the Armed Forces Chorus. [You may have to click through to YouTube]
I loved what Tom and Lorenzo had to say about Fleming here:
We LOVED this. She’s like a couture superhero. We kept waiting for her to hit the final note and then fly off into the night. A fabulously bold look that also managed to bring some class and glamour to the proceedings.
If only she were on the stage of the Met Opera, she could definitely have taken flight.
A recording of the Broadway show Hamilton is hitting streaming video today, I understand. Here is a montage from the Public Theater:
And let’s remember the king(dom) we left behind:
Aw, poor King George. It wasn’t really his fault.
Happy original Brexit!