Washington Nationals Sign Max Scherzer
The Washington Nationals have reached an historic deal with ace Max Scherzer that will pay him a total of $210 million for seven seasons of service, but will pay the money out at $15 million a year for 14 years. Reportedly, the contract has been drafted so as to take advantage of Washington D.C. tax law to save Scherzer as much as $20 million in taxes, and the deal saves the Nationals about $25 million compared to paying the same amount over seven years.
I’m generally not a huge fan of Scherzer’s agent Scott Boras, but I think he hit a home run with this contract. He got what looks like a maximum package for Scherzer, and Scherzer gets the kind of security he had obviously hoped for.
No matter how much money a ballplayer makes, quite a few of them still find ways to piss through it, thanks to mega-homes (and property taxes) for themselves and their family members, children born to multiple mothers and the resulting child support obligations, divorces, automobile collections, hangers-on, etc.
In fact, more than a few professional athletes who had successful and lucrative careers end up nearly broke and struggling in the years between their early 40’s and age 45 or 50 when they can start to draw on their player pensions. The more money you make, the more money you tend to spend, and it’s quite a come-down to go from making $10 or 20 million a year to less than $100,000 in as little as a year or two.
Scherzer has now assured himself that he will be making $15 million per through age 45. That’s the kind of security even most professional athletes can only dream about.
Needless to say, relatively few players have the foresight to make these kinds of deferrals during their professional careers. In 2000, Bobby Bonilla and his agent worked out a deal with the Mets to defer $5.9 million owed to Bonilla, to be paid as $1.19 million a year for 25 years commencing in 2011.
Bonilla’s career ended in 2001, and I don’t know if he had any financial problems in the decade before the deferred payments kicked in. However, he’ll be getting more than $1 million per through age 72, by which point he will already have had to start receiving his Social Security and players’ pension payments starting at age 70. One can only hope that Bonilla lives a long life to take full advantage of the way he has set up his golden years.
The players with the foresight to defer income to later years when their careers are over are most likely the players who least need to do so, since they likely have the foresight to make substantial and prudent investments during their playing careers. Even so, the tax benefits of spreading out free agent contracts over a lifetime are only too obvious.
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Burly's Baseball Musings 
January 20, 2015 at 2:22 pm
I think it’s funny how some sites are trying to claim that the contract isn’t as impressive as it initially looks. Yes, the value of money is reduced by paying it later but it’s still presently worth at least 25M/yr. That’s huge money.
Interesting point about spreading the money out because players have typically pissed away their fortunes. Another point in this is that Scherzer might be able to move to Florida after his career ends and avoid paying state income taxes on the delayed payments which would save him money.
January 21, 2015 at 3:10 am
Yeah, that’s a good point about moving to a state without an income tax after his career is over. There are quite a few states with no income tax, although Florida, Texas and Nevada are probably the ones most former ballplayers would elect to live in.
During a player’s career, players all pay state taxes in many, if not all, states in which their team plays games during the season on a pro-rated basis, because all of the states with income taxes want to get their cut of the enormous salaries MLB, NBA, NFL and NHL players make. Accountants must make a fortune figuring out what each player owes to each state he played in during the season. The good news for the players is they can’t be taxed for the same money twice, at least insofar as state taxes go, so they presumably pay lower tax rates to many states than they would pay if their huge incomes were earned entirely in one state.
If Scherzer were to move to Florida, Texas or Nevada after his playing career ends, but before the $15 million a year in salary payments end, it’s an open question whether other states could still make claims for income taxes, since a very good argument can be made that the money was still “earned” for playing games in their states in the first seven years of the contract when Scherzer was playing and that payment for that work was merely deferred with interest to a later date. Needless to say, Boras will refer Scherzer to a high-powered tax lawyer if there is any argument to be made that this post-career payments are “earned” solely in states with no income tax.
In any event, spreading the salary out over more years necessarily means that more of the money will be taxed at less than the top marginal tax rate (state and federal) than would occur if Scherzer got $185 million in the seven years of the contract.
At any rate, it’s good to see a 30 year old making the most sensible and prudent long-term decision, rather than the “glory” of getting as much as fast as possible. Many elite players seem to treat their free agent contracts as a kind of “report card” showing just what great players they are, rather than focusing on contract terms that best provide them with the ultimate security they claim to desire.
January 21, 2015 at 3:19 am
BTW, the very first free agent case was all about deferred compensation. Catfish Hunter negotiated a deal with Oakland A’s owner Charlie Finley that would pay Hunter $100,000 payable as $50,000 over the course of the 1974 season and $50,000 paid into an annuity by the end of the season that would be paid to Hunter after his playing career was over. Hunter did this upon the advise of his attorney, mainly because there were substantial income tax savings to be had by this arrangement.
What Charlie Finley didn’t realize at the time he agreed to the contract was that Hunter’s deal would have negative tax consequences for the A’s, because the team would not be able to write off all $100,000 of Hunter’s compensation in 1974, but instead would only be able to write it off as the monies were ultimately paid out to Hunter.
When Finley realized his mistake, he reneged on the contract. Hunter pursued binding arbitration before a neutral arbitrator appointed jointly by the teams and the players’ association. The arbitrator naturally ruled in favor of Hunter, because Finley flat out breached the contract, and granted Hunter the right of free agency, because of the A’s breach.
January 21, 2015 at 4:07 am
Speaking of players who have pissed away unbelievable amounts of money, I have to think Alex Rodriguez is on that list. While he is the most highly compensated professional baseball player in history and will probably remain so for at least the next decade, I’ll bet dollars to donuts that he’s spent a lot more of his millions than you might think.
For example, I would bet that Rodriguez has spent well more than $10 million on attorneys and publicists since the beginning of 2011 trying to beat back the various PEDs allegations against him, and that’s probably just the tip of the iceberg of people who make a living off ARod.
The mother of his two children filed for divorce in 2008. He had a pre-nup agreement, but you can’t pre-nup child support obligations for your kids. Child support obligations are usually proportional to the bread-winner’s income. ARod may have joint custody, but a ballplayer isn’t doing much looking after the kids during the playing season.
ARod earned no salary in 2014 and presumably lost all or substantially all of his endorsement deals for good. It’s doubtful his spending habits changed all that much during the last year.
Rodriguez reportedly had a penchant for high-end prostitutes and otherwise dating the kinds of women you don’t take to Appleby’s or the Macaroni Grill. He owns a Mercedes dealership in Houston that probably isn’t able to bank on his name the way it once did.
Rodriguez still has $61 million coming to him on his contract. He better find a way to save some of it, because I doubt his earning potential will be great between the end of his playing career and his eligibility to begin collecting his pension at age 50, and its kind of hard to imagine ARod ever clipping coupons.