Shohei Ohtani Is Deferring 97% of His Contract

Eric Hartline-USA TODAY Sports

By now, you’ve probably heard that Shohei Ohtani’s $700 million contract will pay him through 2043, with Ohtani deferring an unprecedented $680 million (over 97% of his contract). The structure calls for Ohtani to earn just $2 million each year of the contract, and then $68 million a year for the 10 years following the deal.

Ohtani will inarguably be taking home $700 million via this deal, and I disagree with the notion that the contract should be described as anything other than that big number from a bottom-line perspective. But what matters, especially with regards to the Competitive Balance Tax (CBT), is the present value of the contract.

Article XXIII of the CBA concerns the CBT, and the key component for determining payrolls for CBT purposes is the average annual value (AAV) of contracts. If Ohtani’s contract didn’t contain any deferrals, his AAV would be $70 million, calculated by simply dividing $700 million by the 10 years of his contract. Where things get complicated is with deferrals. When money is deferred in a contract, the value of that money depreciates over time, and it is the depreciated value of the contract that is used as the numerator, or replacement for the $700 million, in the AAV calculation. Ohtani’s deferrals will be paid without interest, which is key for depreciating the value of the payment; interest would have increased the present value of the contract, and as such, the AAV and corresponding CBT hit.

So, how is the AAV calculated? The key numbers here are $68 million, 10, and 4.43%. The $68 million is the money deferred each year. The 10 refers to how many years each contract year is deferred for (i.e., year one gets deferred 10 years to year 11, year two gets deferred 10 years to year 12, etc.). The 4.43% is the yearly discount rate, which is the Imputed Loan Interest Rate (ILIR) referred to in Article XXIII(6)(c). The ILIR is synonymous with the federal midterm rate, and the CBA calls for using the federal midterm rate reported by Internal Revenue Service for the October prior to the contract year (i.e., October 2023 in this case); since we have no ILIR data beyond October 2023, the league uses that rate for the entirety of the contract. The 4.43% is a yearly rate, which as such is applied to each successive year, or put another way, 10 times.

This leaves the overall formula for the value of the $68 million deferred each year as:

That outputs a value of $44,081,476.50. The final step is to add back the $2 million paid each year that is not subject to a discount, giving us a final value of $46,081,476.50, which applies to the CBT each year, and an overall present value for the whole contract of $460,814,764.97. That $46 million(ish) hit to the CBT still sets a contractual record, beating the $43,333,333 that Max Scherzer and Justin Verlander’s shorter-term contracts called for, but not to the cartoonish degree that $70 million would have.

Deferrals are not uncommon; famously, Bobby Bonilla and his representatives deferred $5.9 million of his Mets contract upon his release in 1999, converting it into a $1.19 million payment every July 1 from 2011 to 2035, with the negotiated interest bringing his total payout to $29.8 million. Deferrals without interest are more common these days; Scherzer’s Nationals contract deferred half of his salary and brought the present value down from $210 million to $185 million. Current Dodgers Mookie Betts and Freddie Freeman also have large chunks of their contracts deferred, but no contract has ever been deferred to anywhere near this degree. (With Ohtani now in the fold, the Dodgers owe the trio a combined $852 million in deferrals.) While the CBA explicitly states that there are no limits on how much of a contract can be deferred or for how long, Lindsey Adler and Richard Rubin of the Wall Street Journal report that MLB has proposed limits in the past, but the union has thus far rejected those overtures. Adler and Rubin’s article also includes some further detail on how Ohtani’s income tax filing will be affected by the deferrals; Rob Mains of Baseball Prospectus also considered the tax implications in his analysis this morning.

Amazingly, the deferrals mean that, as of now, the Dodgers’ 2024 luxury tax payroll is just under $220 million, a figure that is still $17 million below the first tax line and $57 million below the threshold that would force their first draft pick back 10 spots if crossed. Having the flexibility to continue to add talent to the roster was reportedly a significant motivator for Ohtani when he and his representatives broached this contract structure with teams, with these sorts of massive deferrals factoring into all of their negotiations.





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JV19
2 months ago

No chance this contract structure isn’t addressed in the next CBA

dangledangle
2 months ago
Reply to  JV19

Agree, there needs to be clear rules in place about deferrals. It’s interesting that due to the interest rate spike they got a much bigger discount that in previous years.

RCmember
2 months ago
Reply to  dangledangle

It seems like there are clear rules in place about deferrals, and those are the rules under which this contract is being implemented. I get that people may not like it, but the rules are pretty clear and well defined.

sadtrombonemember
2 months ago
Reply to  RC

I would say both you and JV19 are correct here. Definitely allowed under the rules…for as long as those are the rules.

bstolemember
2 months ago
Reply to  sadtrombone

I don’t understand why people think the existing rules are such a big issue here. The discount formula to account for value of deferrals is pretty fair, and spreading the payroll hit over the 10 years of the contract for a 29-year-old Ohtani seems like a fairly standard contract term. This is not like the NHL where teams were tacking on very obviously fake years onto the term of contracts to game the cap.

Sarachim
2 months ago
Reply to  bstole

I doubt other teams are fussed about the CBT angle. The bigger problem is that LA now gets ten years of a free superstar on top of all their other advantages, which is not great for other teams that were hoping to maybe win a World Series at some point.

Then, after that, LA has ten years of massive dead money on their payroll. If revenues and salaries keep growing at historic rates, then by the late 2030s $68mil won’t be a huge amount of money for a large market MLB team and LA will be fine. But if the league as a whole isn’t doing well (say, because cable TV revenues have dried up), then LA could be in real financial trouble, and might even require a bailout from other teams. And if other teams are forced to follow LA’s example to remain competitive in the short term, then the league as a whole could be set up for disaster the next time pro baseball goes through a lean period.

tmthjdbmember
2 months ago
Reply to  Sarachim

No idea why this has been downvoted. I think players should get paid when they play and these crazy deferrals are a Ponzi scheme hugely beneficial to owners but gift-wrapped as Shohei being a “team player.” $70 million today is worth a lot more than $2 million today and $44 million later, beyond even the discount rate factor. LA can afford it (CBT be damned) and Shohei is worth it. Why did he have to be the gracious one to save the poor owner here? I don’t like it.

Dave T
2 months ago
Reply to  tmthjdb

This was a negotiated contract with financially sophisticated parties on both sides. Ohtani’s agents and other representatives certainly understand this structure, and if Ohtanit doesn’t than those people aren’t doing their jobs.

There’s a very important and obvious point: from the Dodgers’ perspective, $700 million paid under the terms of this contact are are absolutely *not* the same as paying Ohtani $70 million per year for the next 10 years. The notion of applying a discount rate to future payments is business/finance 101.

formerly matt w
2 months ago
Reply to  Sarachim

You have a point, but I bet that barring a massive crash the Dodgers’ worst case scenario is “$68 million of dead money means a cash crunch where the league forces them to do some salary dumps” instead of “$68 million of dead money means they don’t make payroll.” If the LA team isn’t making enough money to cover the $68 million, then the rest of the league is going to be in bad enough shape that they probably couldn’t put a bailout together.

cartermember
2 months ago

What is payroll going to be when this hits anyway? Assuming things go about as they have it should easily clear 500m for large market team. This would be akin to having a Chris Davis under salary for Orioles, probably. Maybe slightly exaggerated but unlikely by much. Certainly wouldn’t be as damaging as the Angels paying Pujols/JHam a few years ago.

bstolemember
2 months ago
Reply to  Sarachim

It’s not free in any sense: They will be putting something like $400m in escrow for Ohtani over the next decade, while also taking CBT hit of $46m/yr. And then it won’t be anywhere near that much dead money, if any, because again all that paid into escrow.

Sarachim
2 months ago
Reply to  bstole

That’s a good point- I wrote the comment above before I read elsewhere that most of Ohtani’s salary is going into escrow. And formerly matt w is also right that “Dodgers fail to make payroll” is such an extreme worst-case scenario that’s it’s not really plausible. Ohtani’s contract isn’t going to any damage to team/league finances on its own. I think it only becomes dangerous if other teams start copying it, and race each other to the bottom in deferring expenses to boost short-term contention.

Lanidrac
2 months ago
Reply to  Sarachim

Who says the Dodgers are setting aside most of the deferral money in advance? If that were true, then why do they need to make such massive deferrals in the first place to help the team spend more this offseason (and the next 9 to come) rather than just signing him to a conventional 10-year deal for around $460M?

Last edited 2 months ago by Lanidrac
Spahn_and_Sain
2 months ago
Reply to  Lanidrac

The CBA says:

ARTICLE XVI (p89)
“Deferred compensation obligations incurred in a Contract executed on or after September 30, 2002 must be fully funded by the Club, in an amount equal to the present value of the total deferred compensation obligation, on or before the second July 1 following the championship season in which the deferred compensation is earned.”

https://www.mlbplayers.com/_files/ugd/4d23dc_d6dfc2344d2042de973e37de62484da5.pdf

kick me in the GO NATSmember
2 months ago
Reply to  Sarachim

This is fair!

Jason Bmember
2 months ago
Reply to  Sarachim

LA now gets ten years of a free superstar”

Uh, no. He is getting paid $2MM a year with the rest deferred but the cap hit is closer to $46MM a year. Not even sort of close to “free”.

computersBaseball
2 months ago
Reply to  bstole

Because the Dodgers and Ohtani are mutually incentivized to help each other avoid taxes (luxury tax and state income tax, specifically).

Otherwise, they’d sign a 10/$460M deal and Ohtani would get more cash flow sooner.

bstolemember
2 months ago

Ohtani is definitely avoiding state/federal taxes, but that’s something all MLB owners also love to do! And in no really meaningful way are the Dodgers actually avoiding luxury tax: the $46m/yr it’ll count against their payroll for CBT purposes is a very fair present value calculation of what they’ll eventually pay Ohtani. When they pay him the $68m in 20 years, it will be worth less. And the money in escrow will have accumulated returns.

fjtorres
2 months ago
Reply to  bstole

I was wondering if anybody would bring up the tax angle.

California taxes 13.3% so Ohtani is saving $6M in ’24 and probably more in ’25 and beyond. (That $68B deficit isn’t going away at just 13%.) Over ten years that adds up to $60M. Not peanuts.

Neither is the $60M+ Ohtani makes each year outside the ballpark. The $2M he will be reporting (minus the state and 37% federal tax bite) will leave him with with a million “walking around money”.

(“It’s good to be King.” Better to be Ohtani and a free agent.)

Deferring the contract money until he stops playing and the “other” income goes away is simply good financial sense. He doesn’t need it now and deferring is smart money management. He has people for that and the tax savings will just about cover them. Because as the politician said, “a million here, a million there, pretty soon it adds up to real money.”

Ohtani earned what he gets. I won’t begrudge him a penny.
He didn’t make the rules for the game, either game. He just plays it as best he can.
End of story.

computersBaseball
2 months ago
Reply to  fjtorres

He’s earning economic value in California and likely paying taxes on almost none of it while benefitting from taxpayer funded infrastructure and living in an expensive state he wants to live in. It’s “smart”, but I think baseball would be smart to prevent this kind of incentive structure.

computersBaseball
2 months ago
Reply to  bstole

The fact that rich people like to avoid taxes in my opinion doesn’t mean baseball should permit them extra avenues to do so. Ohtani is rich enough already to essentially just opt out of paying state taxes. Great for him, not as great for those that have to pay normal CA taxes on non-deferred income.

The Dodgers ARE avoiding luxury tax, because they are enabling Ohtani to derive the economic benefit of a larger contract through this tax avoidance strategy (this is like a 10/$550M contract for Ohtani in terms of post-tax dollars), while they only pay luxury tax for the $460M contract.

hofisajoke
2 months ago

likely this massive deferral means than he took less money to play for the dodgers, since it was reported he had multiple 500+ million offers.

as for the legal tax dodge, I’m not a fan.

Spahn_and_Sain
2 months ago
Reply to  hofisajoke

This was a reported 700+ million offer.
The ‘reported offers’ are always raw dollar figures and not accounting for inflation/deferrals they’d’ve been there too, just in different proportions.

mikejuntmember
2 months ago
Reply to  dangledangle

There ARE clear rules! The clear rule is “There is no limit on how much compensation may be deferred under a uniform player contract”. This is verbatim from the CBA. If ownership wants to change it, they’re gonna have to bargain something back.

fjtorres
2 months ago
Reply to  mikejunt

Ownership has no interest in changing that.
(Remember Bonilla.)
Does the union?

coolcoolcoolmember
2 months ago
Reply to  fjtorres

Care to back that up? The article you’re commenting on includes a link about how the owners have tried to change it several times

fjtorres
2 months ago
Reply to  coolcoolcool

And after “trying” they give it up.
What makes you think they care enough about it to trade something for it?
In negotiations you often ask for stuff you don’t care about to give the other side a “win”.

Don’t need to go further than this year’s UAW negotiations: they asked for 40 hour pay for a 4 day;32 hour workweek, a 20% pay raise *plus* a 20% increase in hiring.
A non starter and they knew it. The pay raise was a stretch–they eventually settled for 16% over several years. For 40 hours work.
Ford management could thus go to stockholders with a %win” in “saving” the 40 hour work week and thus sell the 16% pay raise.

Last edited 2 months ago by fjtorres
Nasty Nate
2 months ago
Reply to  JV19

Why? Which side would object to it?

mikejuntmember
2 months ago
Reply to  Nasty Nate

As Jon says in this article, Lindsey Adler and others have reported that ownership has tried to cap deferrals in previous CBA negotiations but the union has declined because the ability to do this gives players significant flexibility.

They have *actively protected this*.

Nasty Nate
2 months ago
Reply to  mikejunt

Thanks, I didn’t see that part.

tmthjdbmember
2 months ago
Reply to  Nasty Nate

I also don’t think it makes sense on the players’ part, except as future income potential like an annuity? Aren’t there very good financial managers these guys can hire to take care of that problem without relying on team owners to do it for them? are as low as they’ll ever be…

kick me in the GO NATSmember
2 months ago
Reply to  tmthjdb

Bobby Bonilla would disagree.

fjtorres
2 months ago
Reply to  tmthjdb

An annuity it is.
Money they can’t (easily) lose.
When you have big money everybody wants a piece of you and a lot of them are very clever. Safer to put it where even you can’t get to it. Bet MC Hammer wishes he did that.

darren
2 months ago
Reply to  mikejunt

good info, thanks!

fjtorres
2 months ago
Reply to  mikejunt

Were the owners serious or just posturing to give the union a “win”?

darren
2 months ago
Reply to  Nasty Nate

Exactly. Why wouldn’t both the players and the teams want the option of structuring deals this way if it appealed to both sides?

As for the CBT, the Dodgers are paying the equivalent of a 10/460 deal and getting taxed for a 10/460. No problem there either.

v2miccamember
2 months ago
Reply to  Nasty Nate

Players would definitely object to it. A player like Ohtani, currently in his theoretical prime, can earn a significant amount of additional income via local, regional, and national endorsement deals. So, for him, it makes sense to defer significant portions of his MLB salary during a period where he can easily compensate for it with alternative revenue streams. Right around the time those endorsement deals begin to decline in both quantity and value, he moves back an MLB salary generally reserved for players at the peak of their free agency value. Its really a win/win for Ohtani.

nevinbrownmember
2 months ago
Reply to  JV19

cry more

filihok
2 months ago
Reply to  JV19

1) the CBT is a tool to reduce player salaries

2) IMO, the CBT should be based on present value for all multi year deals.

3) The reason that they aren’t is that that would decrease the CBT value and make it a less effective tool

4) good for the players for keeping the PV factor for deferred money.