Bonds's Deferred Money

I posted most of this (I am an inveterate tweaker, so actually, I've added a bunch of new stuff now... :^) on Lefty's the other day and thought I would post it here as well, since I've never really discussed this issue in great detail here. The issue is where is Bonds's deferred money coming from and what is this mysterious other "bucket" of money the Giants are funding the money from that is not this year's payroll.

Where is the Other Bucket?

The main crux is that the old CBA does not require the team to fund deferred salaries for about 2-2.5 years, then the team must put up the deferred amount, at its present (discounted) value, at that time, then presumably that amount will accrue interest and reach the $5M when it is due. I presume that this clause was not changed materially in the new CBA, a copy of which I have not seen yet.

I think that there's two ways to interpret the "other bucket" issue.

One is that they have been adding the amount paid into this fund from each year's payroll, an amount reduced by the $2M exemption for the first deferment, then each year reduced by the amount of the discounted amount, which I think would roughly be about $1M.

The other is that the Giants, instead of bumping up the budget for the payroll each year, absorbed the payments within the growth of their revenues each year, while keeping everything else static.

Either way, it could be semantics. The money for the deferral due this year is not from this year's budget because contractually, the CBA demands that the Giants fund an account specifically for Bonds deferral a couple of years before it is due. However, they could be funding in this year's budget the deferral from the 2005 season, if I understand the legalese in the CBA correctly, but not the deferral for the 2002 season, which is usually how the question is phrased.

Giants Thoughts

My take would be that the Giants did not want to raise the payroll each year and set the expectation with fans that payroll will rise constantly and with huge leaps, as they were not certain that revenues would continue to be strong, both once Bonds retire and once the original charter contracts ended.

This jibes with my past calculations of the Giants payroll based on player salaries and comparing it to the total publicized budget amount, as I've always left out the deferments (a reported Giants insider said to do this at Fanhome long ago), and the only way I could make the total of salaries be close to the budget was to subtract the full deferments. The actual total was significantly higher and I would adjust salaries based on when trades were made and partial season's worth of play. If the Giants were allocating any of their payroll for deferments, then I was still be off by a fair bit the past few years, as $4M would go each season to fund Bonds deferment plus all the other deferments done for Alou and others.

So therefore I think that they absorbed the deferrals with the increases in revenues. I assume there was some boost from the contractually slight increases in ticket prices to charter seat holders plus the standing room tickets they sold plus the increases in advertising rates. But then they were offset by increasing contributions to the "poor clubs" revenue sharing fund, payments to keep the Expos afloat, and decreasing interest expenses from their ballpark loan, among others. But all together, I think revenues rose, allowing the Giants to dip into this "other bucket", and kept the announced payroll budget relatively low so that should revenues take a hit (Camden's revenues eventually dropped a lot, after opening plus should the team happen to suck too badly and lose attendence), any reductions to the reported payroll will be minimized by these other "buckets" of spending.

In accounting terms, they created separate accounts to handle the deferred salaries for each player, and thus their "payroll budget" never budged much over the past few years while they labeled this new outflow of money, say, "deferred contracts". Of course, when you get to the P&L, the payroll will be the much higher figure with the deferred salaries subtracted as expenses, but then a balancing entry would be made in the liabilities section to account for the new debt they owe. Sorry, I know there's a missing step somewhere to balance everything nicely and foot the entries, but that's the limit of my accounting terms that I can recall, though I think that is basically correct.

Managing Expectations

If I were running the Giants, this would make sense business and public relations-wise. You defer money to future years where you expect more revenues. Meanwhile, you manage the fans' expectations by announcing that the payroll budget isn't changing much or at all for a number of seasons, so that if revenues do dip - for whatever reason - they can keep the budget up at the "same" publicized level, so that fans don't think that the team is cutting back and rattle the bars of the cage louder.

Some fans may and have wondered where all the money is going, but it is publicly known that the Giants have a number of big drains on their revenues - the park's mortgage, the revenue sharing (which rises each year), paying in to run the Expos, plus paying in to buy the Expos - so they can obsfucate what they are doing exactly with their money, which most private companies want to do anyway.

And the Giants do that by publicly keeping the budget about the same each year. Can you imagine what fans would say if the true amount was given each year and it climbed high and then the Giants had to reduce it due to declining revenues? Actually, we don't have to imagine, last season Sabean set off a mild maelstorm of consternation and protest among some Giants fans when he announced that the payroll would be reduced some. Don't know if that caused the Giants to change their minds but they then ended up keeping the budget the same amount after all.

Saving for a Candlestick-like Day

So it would make sense - kind of like how public companies smoothed out their earnings in the past so as not to disappoint investors and, more importantly, the security analysts who say "aye" or "nay" on whether to invest in the company - for the Giants to "smooth" out their publicly released payroll budget, so that the Giants are covered in future years should revenues do fall short and they need to cut back, but they cut back on this "other bucket" instead of the public payroll budget figure, keeping it boosted high in lean years, should they come to pass.

Afterall, it was not all that long ago that the Giants could not draw huge crowds to see their games. It would make sense to save for a rainy day in whatever fashion you can, whether by having larger operating profits, as Forbes has reported during the 2000's, or this "other bucket" so that the budget can seem to be static, when it varies depending on the deferred money. Should the revenue shortfall come, they can reduce the budget while keeping the public figure the same, plus dip into their accumulated profits of the past 5-6 years, should they need to go that far. It is all about managing expectations.