There Are More Questions Than Answers in Bruce Sutter’s New Agreement With the Braves. Is It Better to Have Most of the Money Deferred for Tax Reasons or to Get the Money Up Front? : Anatomy of a Baseball Contract

At first, it seemed all too simple. It was widely reported that relief pitcher Bruce Sutter was to receive payments totaling $44 million over the next 36 years from his new club, the Atlanta Braves.

He would get $4.8 million in straight salary over the next six years, $800,000 a year. Then, a deferred payment account would take over. An annuity bearing a 13% interest rate would pay Sutter, now 31, $1.3 million a year until he was 67.

Or so it seemed.

Actually, further examination by The Times indicates that 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. Beyond that, however, there are many uncertainties, and the $44 million overall figure that initially was reported, which made no mention of who would receive the principal, appears too low.

The key to the contract is the interest rates. Just in the last month, the 13% rate was negotiated downward to 12.3% in post-contract refinements. The 12.3% is a guaranteed minimum for the 36-year life of the agreement, while the 13% would have been guaranteed for only the first seven years. The interest rates still can fluctuate upward, so a wide range of different total payments is possible.

If, for example, the interest rate were to remain at 12.3% for the life of the agreement, the total payments would be $47.2 million. In contrast, if the interest rate were to average 16%, the contract would return $57.3 million. And if inflation were to push interest rates to even higher levels of, say, 20%, the payments would rise to $68.2 million.

There are many other questions about such a contract. For example:

-- Is the money for the annuity really in an account or is it a phantom, to be paid out of annual team operating funds?

-- Who has control over the account, if there is one?

-- What happens if the Braves go bankrupt?

-- And the toughest question of all, what will inflation do to the real value of the contract?

There are only seven other contracts in organized baseball close to or larger than Sutter’s. All were negotiated in the last few years, so no one has yet seen the long-term effects of the big-money, deferred-payment contracts. Many of the questions being asked cannot be reliably answered at this time.

There is little question that Sutter belongs with the highest paid players in baseball. He is considered one of the best relief pitchers in the game, having finished the 1984 season with a 1.54 earned-run average. Sutter set a National League record with 45 saves in 53 chances last season. He is a five-time All-Star, a former Cy Young Award winner and has led the league in saves for five of the last six seasons.

Sutter’s agent, Jim Bronner of Chicago, described the deal as representing a risk, although he termed it an acceptable risk.

“You only have to have (Braves owner Ted) Turner make payments for 12 years, and we’ll have gotten more out of this than we might have had we taken the money all up front and tried to invest it ourselves,” Bronner said. “Bruce is well ahead of the game if he gets to 44 (one third the life of the agreement) and Turner is still paying. . . . But we fully expect it will work out for the full term.”

Not every agent, though, is comfortable with these risks.

“Everyone should assume there is a risk,” said Randy Hendricks of Houston, who recently negotiated contracts for Andre Thornton and Steve Trout. “The risk might be greater with the Braves because they are so intertwined with all of Turner’s other enterprises. If the team breaches the contract after Sutter has retired, I don’t think that much is at risk for them. Just a lawsuit, not Sutter going free agency. They might say, ‘Gee, the cash flow in 2013 is lousy and we’ll pay you 20 cents on the dollar.”’

Peter Ueberroth, the commissioner of baseball, expressed another concern. He said he is worried about contracts that deal in unfunded liabilities and hinted that further action might be taken to restrict such deals. Right now, major-league baseball has no equivalent of the National Football League requirement that money to cover deferred payments be put into a general league fund by the individual clubs. An unfunded liability is one in which the money does not have to be put up front.

However, Donald Fehr, head of the baseball players’ union, the Major League Baseball Players Assn., said his group has studied unfunded liabilities and, at present, is not particularly concerned. An unfunded liability is one in which the money does not have to be put up front.

“We assume that when clubs undertake these obligations they are making reasonably prudent investments,” Fehr said. “If we were to become convinced otherwise, then we’d probably recommend to the players that they make deals for current payments only.”

Virtually everyone interviewed emphasized that such contracts involve at best a balancing of risks and advantages.

In exchange for not having to pay taxes on the money now, players such as Sutter are willing to accept a relatively high percentage in deferred payments. This is especially critical when Congress is moving on an almost annual basis to further restrict tax shelters. But some agents think the percentage of the total deal that should be deferred should be held to a relatively low figure.

“I myself would prefer to blend the two and not put such emphasis on the annuity,” said agent Bob Woolf of Boston, who represents basketball star Larry Bird. “If someone said to me, ‘we want to defer 55% of the contract into an account over which you have no control’ (a precise description of the Sutter deal), I don’t think I could live with that. Fifteen or 20% would be a different story.”

Woolf called the Sutter contract “dangerous . . . obviously dangerous . . . I’m not trying to denigrate Ted Turner or anybody, but it’s extremely dangerous.”

But Bronner responded that putting off taxation to a later date may alone justify taking a certain risk. “If the government changes to a flat tax in the next few years as the experts are talking about doing,” he said, “Sutter will get a windfall, because he’d be paying at a lesser percentage rate than the 50% that prevails now.”

Neither the Braves, nor Bill Bevins, the Turner Broadcasting Co. executive who negotiated the contract on behalf of the club, would discuss the Sutter deal. Team spokesman Wayne Minshew explained, “It’s definite club policy not to comment on any contracts with players. We never do.”

But Bronner--who negotiated the deal with his partner, Robert Gilhooley--agreed to several interviews, as did several other prominent agents who had seen the Sutter proposal during the negotiating stages.

Bronner would not agree to make Sutter available for an interview.

According to the agent, these are the salient features of the Sutter contract:

--In addition to the $4.5 million in salary, the Braves are committed to making 30 years of annual payments after the six-year salary period has elapsed, as if they had in fact established an annuity for Sutter.

--But the Braves are not in fact obligated to put the money aside now. The annual payments will be based on the theory that they have indeed put aside a total of $5.5 million on a pre-established schedule in the six years. Not all the money would have to be committed at the outset, so not all would be gathering interest for the full six years. If they funded the annuity in this way, according to the 12.3% interest rate agreed upon, the fund would have increased to $9.1 million at the end of the six years and, according to the minimum interest rate, would fund annual payments of $1.12 million. But the Braves could choose to put nothing aside and fund the payments out of operating expenses.

--The interest rate of 12.3% is, in most all contingencies, fixed for six years, but then could float upward. So, depending on the rate, the actual required payments may be more than $1.12 million a year. Bronner says this protects Sutter, since if inflation increases, the interest rate will probably rise, and the real value of his payments will be protected.

--Sutter will have no control over any accounts the Braves may establish to fund the annuity, and he will not be a secured creditor against the club, but a general creditor, thereby having a secondary claim in case of bankruptcy. If he had control or if the funds were segregated for his benefit, then he would be subject to immediate taxation on those amounts, a disadvantage the deal is specifically designed to overcome. There is speculation, though, that the Internal Revenue Service plans to take a hard look at Sutter’s contract or one like it.

--Similarly, the club may purchase an insurance policy to guarantee the eventual annual payments. But if Sutter were to insure himself against possible default, he would open himself to taxation.

--Taxes will be owed on the annual payments when Sutter actually receives them, just as the club can deduct them as a business expense only when they are actually made to him.

--The principal of the fund after the next six years, the $9.1 million whether it is a phantom fund or not, will go to Sutter or his heirs in 2020 at the conclusion of the contract, at which time taxes will have to be paid on it.

--The contract is guaranteed in the sense that even if Sutter were injured on the first day of spring training and never able to play again, he would still be entitled to receive the full amounts called for, for the life of the contract.

--If the Braves are sold, the new owners would have to assume the contractual obligation.

--Sutter cannot be traded without his consent. If he does agree to a trade, the amounts still owed may--but not necessarily will--be prorated to the new club.

--The contract calls for six years of pitching. If Sutter wants to continue pitching after that, a new contract, perhaps containing additional annuities, will be required, and Sutter could leave the Braves and become a free agent, even while collecting on the Braves’ annuity.

--The commission paid by Sutter to the Bronner-Gilhooley firm, Speakers of Sport, Inc., on the contract is less than $500,000, although Bronner declined to give an exact amount.

In discussing the contract, Bronner said the Braves had wanted it structured the way it is because they were interested in deferring their liabilities and also their tax deductions. He said Sutter was willing to accept this because he will have a good cash flow with his $750,000-a-year regular salary in the next six years. In addition, Sutter will be collecting on annuities of undisclosed size from an earlier contract with the Chicago Cubs and he felt that for him this kind of deal actually constituted less of a risk than taking a larger amount of money now.

One key difference between Bronner and several of the other agents interviewed involved the placing of a value on the Sutter contract.

Bronner spoke of an “equivalent value” of $13.6 million--the $4.5 million in salarie, plus the theoretical $9.1 million base upon which the annual payments will be made after the six years. He said he particularly takes exception to suggestions made in the press that the recent Rick Sutcliffe contract, which was reported at about $9.5 million, is worth more than Sutter’s contract and that Sutcliffe has thus become the highest paid pitcher in baseball.

Sutter’s contract, Bronner insisted, “is just plain the biggest.”

Others challenged Bronner’s $13.6 million valuation. Dick Moss of Los Angeles and others said the important valuation involves present value and they contended the deferred amount is not presently worth anywhere near $9.1 million. Moss said it should not be valued at more than $5.5 million, making the present value of the Sutter contract $10 million. And Sutcliffe’s agent, Barry Axelrod of San Diego, said Sutter’s contract should not be valued at more than $10 million--the cash the Braves may put into it in the next six years. By this calculation, Sutcliffe would certainly be getting more per year than Sutter, since his contract is for five years and Sutter’s is for six.

Two other issues between Bronner and some of the other agents involved his willingness to accept such a high percentage of the total compensation in deferred payments and his relative optimism that the Braves in particular and baseball in general will maintain the financial viability over the next 36 years necessary to pay off the contract.

Sutcliffe’s contract is structured on a radically different basis than Sutter’s, since there are no deferred payments.

Bronner said the Cubs, because of their recent success, have high profits and are eager to take present tax deductions and wanted to pay the money up front. But Axelrod said the up-front payments serve his client’s interests too--better than a deferred payment plan would.

“Part of the entire package we worked out for Rick (Sutcliffe) is an annuity, or series of annuities or insurance policies, that will pay Rick a lot of money down the line,” Axelrod said. “But we determined we wanted to own that annuity. There are some negative tax consequences involved. You have to buy it with after-tax dollars. But we chose not to want to let them (the Cubs) have control. We wanted to own our annuity policies. We just felt more secure.

“We think we have worked it out by using the proceeds from the ($2.5 million) loan to purchase some of the annuity. That is going to create for Rick an annuity that pays $900,000 a year beginning in 12 years. He is 28 years old. That will pay him for 35 years, interest and principal. That amounts to $31.5 million.”

Axelrod pointed out that in addition to the annuity, Sutcliffe plans to put some of his up-front money from his contract into real estate, stock investments and bonds. “It will be a huge amount of money down the line,” he said.

Axelrod also said that “each team we dealt with would have chosen to have an annuity policy, not give it to Sutcliffe.

“I see what Sutter did as some degree riskier than what we did in Rick’s case but whether it’s 0.2% riskier or 50% riskier, I don’t know,” he said.

Moss joined Axelrod in prefering to get as much money as possible up front.

“It’s better to take the money now, even with paying taxes, and make prudent investments,” he said. “I happen to believe that. I felt a little differently seven or eight years ago when inflation wasn’t so bad.”

Agent Tom Reich of Los Angeles (no relation to this writer), who represented Dave Parker among others, also questioned accepting as much as Sutter did in deferred compensation.

“You’ve got to make a judgment on how much you put at risk,” he said. “I like to establish several pools for payout to the player--perhaps $1 million in municipal bonds in addition to a pool of deferred compensation, some real estate investments, a money market account. I don’t like to be dependent on one pool. . . . You need to maintain a balance between liquidity, security, borrowability and so on.

“On one side, there is liquidity and borrowability. On the other, there is income stream and tax advantages but risk of loss. Deferred compensation has a very significant role. But I would have put only about 20 to 25% of this package into annuities.”

Reich added: “Perhaps they (Bronner and Gilhooley) couldn’t have put (the deal) together on that basis. That’s their call.”

He also said that a deferred compensation package he put together several years ago for Parker with the Pittsburgh Pirates was secured through real estate, but that the league will no longer permit such deals.

Bronner, told of Reich’s remarks, said that Sutter already has established various revenue pools through an earlier four-year contract with the St. Louis Cardinals, which he said had brought his client about $1 million a year.

“Given the fact that you’re building a shelter from taxation and that’s been limited by all these recent tax changes, it makes some sense to defer some money,” Hendricks said. “Then, you don’t have all your eggs in one basket.”

Bronner said he is convinced there is little danger the Braves will ever be unable to fund this and other contracts. If the team were to go bankrupt, he expressed confidence that organized baseball as a whole would step in and assume the team’s obligations. Some of the others said that over the long term no one can be sure what will happen.

“How well do you predict the sport will maintain its popularity?,” asked Hendricks. “Would I bet on the United States Football League? Noooo. Baseball is better. But I will say that the longer you go forward on deferral, the greater the risk. I’m not concerned about 10 years, but if someone comes up with a deal that goes to 2030, I’m leery.

“Suppose in 1940 someone had told you that Studebaker, the railroads and many other businesses would go belly up, and others, such as American Motors, fade? I tell my clients, it’s a risk that they had better calculate.”

Woolf said: “I’ve lived through the demise of the World Football League, the American Basketball Assn., the World Hockey Assn., because the salaries rise at such a rate that the encumbrances overwhelm them. Even in baseball, it’s ultimately going to prove impossible to sell these teams with all the deferred liabilities they will have. Believe me, despite what anybody says, it represents an incredible danger in organized sport.”

Reich said, “At this point, there’s a lot of concern about losses in baseball. In the overall sense, the sport is still very viable. There is a tremendous difference, however, in the viability of the various clubs. A deferred compensation deal is a credit analysis. This is an unsecured loan. You are betting on the viability of both the sport and the franchise. . . . If the Seattle Mariners went bankrupt tomorrow, it’s clear the system would absorb the liabilities. But that’s not to say this will still be the case in 5 or 10, not to mention 25 years.”

Moss, however, said that while “there’s always some risk (of the clubs not being able to pay out the big contracts) I don’t think it’s a major risk.

“Baseball is so basic and sound,” he said. “If it goes under, probably America will go under.”

Bronner said he does not know what financial state baseball is in, but he noted that baseball has a rule that clubs must maintain substantial assets to pay their liabilities.

He also cited an article by sports columnist Dave Kindred in the Atlanta Constitution as an illustration of why Sutter’s contract is a good business investment by the Braves. The article said that if Sutter had just one good year in Atlanta, he would attract enough additional fans to Braves games to more than pay for his entire contract, (providing, that is, that the Braves fund the annuity in advance).

“I’m proud of our contract,” the agent said. “It breaks new ground (in baseball), and it does so with a company that has more stability than the U.S. Football League. . . . The risks are really very minimal.”

SUTTER COULD MAKE . . .

Interest Rates How Much Projected Over Sutter Would Total Value 30 Years Make Per Year of Contract 12.3% $1,119,300 $47,179,000 13% $1,183,000 $49,090,000 14% $1,274,000 $51,820,000 15% $1,365,000 $54,550,000 16% $1,456,000 $57,280,000 17% $1,547,000 $60,010,000 18% $1,638,000 $62,740,000 19% $1,729,000 $65,470,000 20% $1,820,000 $68,200,000

BASEBALL’S RICHEST PLAYERS

Length Annual Player, position Team Contract Salary Dave Winfield, outfield N.Y. Yankees 10 Years $2 million Gary Carter, catcher N.Y. Mets 7 Years $1.8 million Mike Schmidt, third base Philadelphia 5 Years $2 million George Foster, outfield N.Y. Mets 5 Years $2.05 million Rick Sutcliffe, pitcher Chicago Cubs 5 Years $1.9 million Rickey Henderson, outfield N.Y. Yankees 5 Years $1.75 million Keith Hernandez, first base N.Y. Mets 5 Years $1.7 million Fred Lynn, outfield Baltimore 5 Years $1.36 million Steve Garvey, first base San Diego 5 Years $1.32 million George Brett, third base Kansas City 7 Years $900,000 Bruce Sutter, pitcher Atlanta 6 Years $750,000

Total Player, position Contract Dave Winfield, outfield $20 million Gary Carter, catcher $12.6 million Mike Schmidt, third base $10 million George Foster, outfield $10.25 million Rick Sutcliffe, pitcher $9.5 million Rickey Henderson, outfield $8.75 million Keith Hernandez, first base $8.5 million Fred Lynn, outfield $6.8 million Steve Garvey, first base $6.6 million George Brett, third base $6.3 million Bruce Sutter, pitcher $4.5 million

Note: All salary figures do not include bonuses or deferred payments.