Posted by Eric Seidman, Fri, July 19, 2013 11:00 AM Comments: 26
A sunk cost generally refers to money that has already been committed that should not factor into the decision-making process moving forward. The monetary commitment can’t be undone and therefore should not represent any type of deterrent to other decisions that could positively impact the organization. In certain terms, however, a sunk cost can refer to an unmovable commitment, even if future cash outflows are required, if there is virtually no way of recovering the costs.
Ryan Howard’s five-year, $125 million contract is a sunk cost.
Regardless of his health or performance issues, the Phillies simply won’t be able to remove the contract from the books in a manner that actually benefits them. It’s unlikely that the severity of his injury could result in an insurance settlement down the road and it’s hard to fathom any team taking him in a trade unless the Phillies covered 95%-100% of the cost. Even at that point, Howard’s relative struggles and injury risk will prevent the Phillies from acquiring a worthwhile player or prospect in a trade. The contract is signed, the money is guaranteed, and the player isn’t going anywhere.
One idea that has been floated around recently is a restructuring of the deal that defers a chunk of the contract beyond its current expiration date. Some fans have suggested this as a mutually beneficial outcome that helps the Phillies in the short-term while honoring their commitment to a franchise face. But I’m struggling to grasp why Howard would agree to such a buyout and why the Phillies would want to commit to a relatively astronomical interest rate on deferral to make it worth Howard’s while.
The Mets famously did something similar with Bobby Bonilla over a decade ago. Bonilla had one year and $5.9 million left on his contract in 2001 and, in knowing the Mets financial difficulties, agreed to a restructuring that that resulted in a 25-yr, $29.8 million deferral. There was supposedly another part of the deal that brings the total deferred amount Bonilla will receive to $42 million long after the days that even current Mets players have retired. These cases are rare, and assuming the Phillies would have to use a high interest rate to entice Howard into this type of buyout, it would mean committing even more money on a bad contract when the team isn’t really in a bind.
Ryan Howard isn’t going anywhere. The time has come to accept this as fact and discuss ways to make the best of the situation instead of conjuring up hypothetical means of jettisoning an albatross.