THE CHERRY ON TOP
You don't have to be an accountant to get through the sports pages these days, but it helps. Take the confusion over the contract that former Brigham Young quarterback Steve Young signed two weeks ago with the USFL's Los Angeles Express. It was ballyhooed as a 43-year, $40 million deal, and, viewed one way, that's an accurate description. Seen another way, however, those figures—both years and dollars—are inflated.
Strictly speaking, Young's contract with the Express is only a four-year deal—that's the length of time he's committed to play for the team—guaranteeing him salaries, bonuses and an interest-free loan during that period totaling $5.9 million. In addition, the Express agreed to buy an annuity that will give Young deferred payments totaling a princely $34.5 million by 2027. The payments will start at $200,000 in 1990, remain at that level until 1999, then escalate to a $3.173 million payout in the final year. By adding the $34.5 million to the compensation Young will receive during the next four years, you come up with the $40 million figure that made the headlines. (SI's story on Young in the March 12 issue said he received a $36 million package, including $30 million in deferred payments; those figures were provided by Young's lawyer, Leigh Steinberg, who later revised them upward.)
Payouts from the annuity are indeed a form of deferred compensation from the Express. But the annuity might just as easily be thought of as a long-term investment the club has made for Young. Financial experts say that the Express would have had to pay only $50,000 or so in 1984 to produce the $3,173 million that Young's annuity will yield in 2027; the team paid about $2.5 million for the entire annuity. This outlay—but not the revenue it will generate—is part of the Express's investment in Young.
It might be safest to say that Young has a four-year, $8.4 million contract—$5.9 million in direct compensation plus a $2.5 million annuity. How does this compare with the four-year, $6 million contract extension the New Jersey Generals have given Herschel Walker? In announcing that deal last week, Generals owner Donald Trump claimed that it was actually superior to Young's. His reasoning: Walker's compensation, if astutely invested, could yield more than Young's deferred payments.
Whether up-front income is preferable to deferred income is a matter of opinion. Chris Neubert, a Boston financial consultant who handles investment planning for the clients of sports agent Bob Woolf, asks, "Is it better to get money over a short period of time or stretch it out? I'd rather have the money now, because I think I can get more out of it." Of Young's so-called $40 million contract, Neubert says, "I might have said that Larry Bird [a Woolf client with a seven-year, $15 million contract] had a contract worth $30 million, if I'd projected all the investments it would realize. But that isn't a fair thing to say. He signed for x amount of money. Who really knows how much money he will realize in his investments with that amount?"
Other financial experts look a bit more kindly on deferred income, especially when it takes the form of annuities. "One possible reason to use deferred compensation is that young people can't handle a lot of money," says Herman M. Schneider, a senior tax partner of the national accounting firm of Coopers & Lybrand. "And annuities are very conservative investments. They pay a guaranteed rate." Richard Bass, first vice-president of Walter Kaye Associates, Inc., New York insurance brokers, says, "Athletes are used up and thrown out. You hear many horror stories about their finances. It's important that they have guaranteed income. Annuities are a prudent strategy."
Ironically, Steinberg, Young's lawyer, says that he ordinarily prefers his clients to take as much money as possible up front "and go ahead and invest it." But he also says the Express's offer of an annuity to Young was one he couldn't refuse. "The deal was predicated on upfront dollars, and the Express added the annuity on top of it," says Steinberg. "The annuity was the cherry on top."
JOHN LAW, OLYMPIAN
No sooner did TV comic David Letter-man arrange to make his late-night program the official talk show of the U.S. Virgin Islands Olympic team (SCORECARD, Jan. 9) than everybody seemed to want to get in on the act. A bunch of school kids in Germantown, Wis. subsequently designated themselves as the official fifth grade of the 1984 Winter Olympics, and, almost as improbable, a recently posted sign on an automobile lot in Savannah identifies the proprietor as the official used-car dealer of the L.A. Games. Sometime real soon this particular joke will grow stale, but not before proper note is taken of the T shirts and sweat shirts that the Los Angeles Police Academy store is selling, for $6 and $13.25, respectively, to cops, their families and friends. Across the chest is the inscription LAPD, OFFICIAL POLICE DEPARTMENT OF THE 1984 SUMMER GAMES.
ON THE RUN