Shohei Ohtani Is Getting Paid… Eventually
When Shohei Ohtani signed his record-setting contract on Saturday, the phrase “unprecedented deferrals” was at the forefront of the conversation. Not knowing how much “unprecedented” came out to in dollars and cents, we ran with a projection from Jon Becker based on the assumption that Ohtani would receive $400 million of his $700 million contract in deferred money.
At the time, that seemed like such a huge figure I struggled to believe it, even in the face of credible reports that at least half of Ohtani’s salary would be deferred. Surely it wasn’t possible to defer $400 million. But no, apparently the truth is even more incredible: Ohtani is taking a base salary of just $2 million a year, leaving $68 million to paid out, without interest, in each of the first 10 years after the contract ends.
Having that much deferred money reduces the value of the contract to Ohtani — he’s basically giving the Dodgers an interest-free loan for more than 97% of his salary over the next decade. The contract is literally worth $700 million, but after taking inflation and depreciation into account, it’s practically worth only $460.1 million:
FINAL, COMPLETELY CORRECT MATH:
•The discount rate is 4.43%
•The present value of the $68M is $44,081,476.50
•This makes the AAV of each year $46,081,476.50 (the above + $2M, which isn't discounted)
•The present value of the contract in total is $460,814,764.97— Jon Becker (@jonbecker_) December 11, 2023
So what does this mean?
Most important, it reduces Ohtani’s CBT hit from $70 million a season to just over $46 million, which isn’t some accounting loophole the Dodgers figured out. Paying Ohtani that money later genuinely reduces what this contract is worth to the player. And this isn’t a unique situation; Mookie Betts is deferring about a third of his salary as well, and as a result, his tax number is $25.6 million on a contract with a stated AAV of $30.4 million. Ohtani’s deal plays by the same rules, just in a more extreme fashion. (Jon wrote an explainer on the mechanics of the deferrals that can be found here.)
Spreading out the payments like this theoretically allows the Dodgers to free up cash up front to sign other free agents, with Yoshinobu Yamamoto being the obvious candidate to eat up the money Ohtani is leaving on the table.
On one hand, it’s very, very easy to understand why Ohtani would want to make it painless for the Dodgers to build the strongest supporting cast they can. Ohtani spent the first six years of his career on an Angels team that made the young LeBron’s Cleveland Cavaliers look like the 1970 Brazilian World Cup squad, in what must be a record for the most sports invoked in a single simile. It’s well known that the Angels didn’t make the playoffs in six years with Ohtani and Mike Trout; we don’t talk enough about the fact that they didn’t even finish over .500 in that span, and haven’t won 80 games since Ohtani’s rookie year.
Ohtani can also afford to let his money sit for a while. He makes tens of millions of dollars a year in marketing and endorsement money; it’s likely that a greater percentage of his income is derived from pitching commercial products than pitching baseballs.
But whenever a star takes less money for the good of the team, it’s good to ask why it’s the player’s job to subsidize the rest of the roster and not the owner’s. Particularly on a team like the Dodgers in a league without a salary cap. If I were loaning my employer $680 million interest-free, I’d want concrete assurances that the savings would go toward materially improving the company. In Ohtani’s case, that means player salaries. Because with this much money deferred, the Dodgers are apparently still below the first tax apron, even with Betts and Freddie Freeman also on the roster.
No billionaire is altruistic enough to trust with a handshake deal; if they were, they wouldn’t have become billionaires in the first place. I hope that Ohtani, who apparently came up with this whole scheme himself, understands that. If not, surely his representatives at CAA do. It’s just something to keep in mind if the Dodgers decide to flirt with the Wild Card so they can reset their tax penalties again at some point during Ohtani’s tenure, while $680 million of Ohtani’s money is sitting in Guggenheim’s checking account.
The other intriguing aspect of Ohtani’s contract structure, apart from the luxury tax implications, is that the Dodgers now have what is essentially a debt obligation to Ohtani for two thirds of a billion dollars. Even for a team as rich as the Dodgers, $680 million is a huge chunk of the franchise’s value, which raises the possibility that once Ohtani retires, he could settle the difference in exchange for an ownership stake in the team.
This is how Mario Lemieux ended up owning the Pittsburgh Penguins. The franchise icon signed a seven-year, $42 million contract with the Penguins in 1992, just as the NHL’s fortunes were booming. Over the next five years, the NHL missed half a season with the first of its now-traditional lockouts, and the Penguins were on the brink of insolvency. Lemieux, not wanting to push the team over the edge, kept letting the Penguins defer his salary, but eventually the team defaulted on his contract with more than $26 million left to be paid out.
As such, when the Penguins filed for bankruptcy, Lemieux was one of their largest creditors. He had the debt converted into a piece of the team, and put together a group of investors to buy the team and settle its debts. Twenty-two years and three Stanley Cups later, he sold his majority stake for $350 million. (As a Philadelphia Flyers fan, I wake up every morning and curse Lemieux for not allowing the Penguins to go out of business. Perhaps, 30 years from now, as-yet-unborn Giants fans will feel the same about Ohtani.)
Will the Dodgers go bankrupt before Ohtani’s deal is up? No, surely not. That’d be preposterous. Unthinkable. The Dodgers would never, ever go bankrupt. But it’s a fun hypothetical to entertain.
Deferring this much money, knocking a $700 million contract to a $46 million tax number, laying the groundwork for Ohtani to hold an ownership stake, all of this feels shady somehow. It isn’t, really, but this is a good opportunity for us to re-evaluate how we look at contracts.
Because none of this would feel icky if the details of the deferrals had come out along with the headline number. This isn’t really a $700 million contract, it’s a $460 million contract, and should be considered as such. With Betts, or any number of big Washington Nationals contracts with lots of deferred money, we talk about the sticker price of the deal. But if deferrals cause these contracts to depreciate so badly it has a significant effect on the luxury tax, perhaps we’d be better off using the adjusted figure.
Looking at this deal as a 10-year, $460 million contract, it seems like even more of a bargain for the Dodgers, who would be lucky to have Ohtani at any price. It’s the biggest contract in the sport, even adjusted for all the accounting voodoo, but not by as much as originally thought.
That leaves me somewhat concerned about the future of the top end of the free agent market. The best players set an informal ceiling on what teams are willing to offer free agents and, by extension, pre-free agency extension candidates. When Trout and Betts re-signed before hitting free agency, it damaged the free agent market at least a little; if the two best players in baseball make X and Y, why should a team offer another player more? For that reason, some players — Max Scherzer and J.T. Realmuto are two recent examples — make a point to hit free agency and max out in order to reset the market.
Does 10 years and $460 million for Ohtani really reset the market that much? I don’t know.
There are two reasons not to panic. First, Juan Soto is going to be a free agent in 11 months. Ohtani is a unique player with unique and frequently inscrutable desires, who led a unique free agent process that resulted in a unique contract. Soto is an MVP-caliber outfielder with Scott Boras as his agent. There will be nothing mysterious and unprecedented about his contract, except perhaps the dollar amount involved.
Second, Ohtani didn’t actually sign a $460 million contract, he signed a $700 million contract. Deferrals be damned, Boras and every other player agent is going to argue that $700 million is the new top of market. And as a result, they’ll probably have more success in getting their clients paid than if Ohtani got less money on a more normal time frame. This is why, when the issue of limiting deferrals came up in the last CBA negotiation, it was the players who objected, not the owners.
It’s possible that Ohtani’s contract will be used as a model to defer huge chunks of salary for other players, but I think that’s unlikely. First, putting that much money into a future debt obligation makes sense for a rich team with comparatively stable ownership, but not every ownership group is going to want to have that liability on the books, particularly if a sale is possible in the next decade.
Second, most ballplayers don’t make as much as Ohtani does in endorsements. They wouldn’t defer this much money because they, like the song says, need cash now.
Moreover, who would you give that money to? After Soto, the top of the free agent market is probably going to calm down. Taking position players who played last season at age 25 or younger, only two of the top 15 are under team control for less than four more years: Soto and Bo Bichette. Of the other 13, seven have already signed long-term contracts with their current clubs. And that’s far enough down the pecking order that we’re waiting for the likes of Bryson Stott and William Contreras to hit free agency in November 2027.
We already have a good idea of where guys like Bichette, Stott, and Contreras fit in the free agent hierarchy, because players like them hit the market every year. Not Soto, and certainly not Ohtani, which is why I’d be hesitant to use Ohtani’s situation as a precedent worth fear-mongering over.
And ultimately, if deferring that much money is what Ohtani wants, and it’s allowed because the MLBPA asked not to have it regulated, that undermines the case that this is a pressing labor issue.
After so much excitement over the stated value of the deal, it’s definitely a little disappointing to find out that the truth is more mundane. But it turns out nothing about Ohtani can be normal, not even his contract structure.
Michael is a writer at FanGraphs. Previously, he was a staff writer at The Ringer and D1Baseball, and his work has appeared at Grantland, Baseball Prospectus, The Atlantic, ESPN.com, and various ill-remembered Phillies blogs. Follow him on Twitter, if you must, @MichaelBaumann.
Oh come on. A guy got literally everything he wanted–the largest contract in baseball history, on a team that wins buckets of games every year, his team can still sign a bunch of players, and he doesn’t have to move–your thought is that you’re concerned over the top of the free agent market? I love it. Everything they say about Ohtani is true. This is what getting your way looks like. He was never going to get $700M without a huge amount of it getting deferred, he was always going to get a contract “value” of about this size after he blew out his arm.
What happens to all that deferred money of Ohtani Wander Franco’s in 2031 and the Dodgers cancel the remainder of the contract under the personal conduct clause?
Unless there’s actually a serious personal conduct issue, he sues, and the lawyers get all that money, and then the Dodgers have to pay up anyway.
Most importantly even if something were to void the contract midway, the debt for the deferred payments when the contract was binding would not go away; it might be terminated, but it would only be void without those payments if Ohtani somehow entered into it fraudulently. He’d still get his deferred 68m for each of the years he completed and the pro-rated part of the year when it went off the rails.
It doesn’t make a damn bit of sense to NPV “deferred” payments but to not NPV any multiyear deal. Why should the Dodgers get taxed on Ohtani at his NPV number, while the Yankees don’t get to NPV Judge’s deal, for example?
Ohtani’s $460m NPV translated into a more pedestrian superstar 10 year deal would be $582m-ish.
Yeah, I like to think it’s more of a “concerned that top end FA will have to defer income because the CBT is so stupidly constructed” more than “concerned that players are getting what they want,” but the feel is a bit muddled.
I bet MLBPA loves it too since it means the Dodgers still have cash and CBT space to give MORE money to their members right now.
I also think a lot of owners might hate it because a lot of fans are going to think “my team had $2M/yr to pay Ohtani!”
“He was never going to get $700M without a huge amount of it getting deferred, he was always going to get a contract “value” of about this size after he blew out his arm.”
Wow, completely clueless.
The starting offer for Ohtani was already at around $450M with the 5 known finalists (Dodgers, Angels, Blue Jays, Giants and Cubs) in the sweepstakes.
In other words, Ohtani easily could’ve gotten a contract worth much more than $460M (without deferrals) if he wanted.
[Baggarly] Giants president Farhan Zaidi confirms Shohei Ohtani visited SF. He was offered what would have been the biggest contract in MLB history early in the process. Giants then took their feedback and boosted offer to match what they wanted.
[Slusser] The Giants were all-in. Zaidi said that the team jumped out immediately with what would have been the biggest deal in the history of the sport, and in every subsequent discussion, acceded to Ohtani’s wishes.
“To show the level of commitment that we had from our ownership group, really every financial target or request that was made from their camp was met and was met pretty quickly,” Zaidi said.
[Passan] when he finally agrees to a deal, the number, sources said, will surge well beyond $500 million. One source said he believes Ohtani will receive a contract for at least $550 million. Another said the bidding could reach $600 million.
[Ardaya] The previously unreported deferrals were said to be suggested by Ohtani himself as the negotiations vaulted the figure towards $700 million, the person briefed on the terms told The Athletic.
It’s not a meaningful liability if they have to escrow the money now (which the CBA requires).
I’d assume if they don’t put the cash into the account at specified dates, they are in default and then it gets really interesting. I have no doubt they’ll just file the cash away, happily earn some sweet interest, and then make the payments from the account when the time comes.
I doubt even a team as wealthy as Dodgers are sitting on $700MM cash, this is always coming out of the future revenue stream or some type of borrowing from other assets.
Thanks for raising what to me is the obvious elephant in the room, that Ohtani has a secret agreement in place to convert his deferred money into an ownership stake. This isn’t like Lemieux, who had no other recourse to recoup what he was owed, this is a means to circumvent the understandable rule against players owning part of the franchise they play for.
I’ve been saying this for a couple days, but here’s the thing about it: It can’t be anything more than a smile and a nod and an understanding that they are creating the circumstances that would permit that when he retires.
Contracts cannot violate Major League Rule 20(e) which forbids active players and managers from having an active or future ownership interest in the franchise they are part of without the commissioner’s authorization. So Ohtani can’t have a written stipulation about converting to future ownership, or any sort of binding agreement.
What he can do is enter into a situation where both parties will be significantly incentivized to do that when he retires – the Dodgers to retire the debt without paying the money, and Ohtani because he’ll have so much money that he’ll be into the “investing in things like minority sports franchise stakes” stage of richness.
Any binding agreement would make this whole contract require Manfred’s approval. Converting it in 10 years might also require that, but it’ll be far easier to get for a retiring player than as a potential market-changing compensation structure change.
Oh, it’s definitely not in writing. But if he’s not a part owner of the Dodgers within a year of retiring, I’ll be stunned.
This reminds me of how lots of people were falsely assuming some secret agreement between the Angels and Ohtani when he first signed, to circumvent international signing bonus limits or whatever.
You are over-thinking things. The Dodgers aren’t selling secret ownership stakes eleven years in advance.
The contract is a slap in the face to Ohtani’s current co-workers, all the players in the future possibly harmed by his taking this deal (An unprecedented player, one of the best pitchers and hitters in MLB at the same time, and his contract represents only a 5-10% AAV increase over the largest contracts, IF inflation is as expected) and it is a disrespect to the players who fought for the free agency system.
One could argue that this contract is more exploitative than a rookie contract, taking into account Ohtani’s unique and overwhelming value. If he thinks the Dodgers have any loyalty to him beyond the revenue he is supposed to bring in, the joke is on Shohei while Dodgers ownership laughs all the way to the bank.
I appreciate the stridency! But you seem to assume he had the leverage to get more than a 5-10% increase over previous contracts despite his current injury and the possibility that he will never return as a high-level pitcher, and I personally doubt that. We’ve all been getting very hyped about how Ohtani is a unique unicorn, totally unprecedented in MLB history. That’s true on one level. But on another, more boring level, he is a player with projections and aging curves and injury risk, and there’s a fairly well-established market price for expected future production. Teams aren’t going to forget that just because Ohtani is so cool.
I do appreciate your point, but Ohtani is a “unicorn” off the field as well. There is no player capable of bringing in the amount of revenue and interest that he does. He is worth way more to the Dodgers than just his baseball value. And they get it all for essentially free for the next 10 years.
I’m failing to see how this contract negatively affects anyone.
It negatively affects the state of California and its other taxpayers, which won’t get tens of millions in tax dollars despite Ohtani clearly earning that economic value while in California.
It negatively affects other teams that are disadvantaged by not distorting their contracts this way to lower their CBT numbers. Those teams will seek to balance this by striking similar deals with star free agents. You may see this as a good thing, but I’m not so sure – deferring 95% income as a mutual player/team tax avoidance strategy seems like a shell game to me.
Deferred compensation is not some new concept cooked up for baseball. The CBT numbers are not distorted. They are what they are. Would you feel better if it was announced as a $460 million contract? Because that is basically the same thing.
Why didn’t Ohtani take the $460M contract, then? It would have the same impact on the Dodgers’ ability to win, and the same economic value to him, plus would increase his current cash flows.
I think the reason he didn’t is because he (or his advisors or whoever) wanted to derive a different economic benefit – tax avoidance. They get the post-tax value of a larger contract, and the Dodgers get the CBT value of a smaller one.
The most likely reason is what Michael discusses here – converting it into a non-cash asset at the end (eg team equity), as Ohtani makes so much money in endorsements that he doesn’t need his salary (his estimated yearly income from endorsement when he was with the Angels was 40-50m per year, and that’s probably gonna go up now)
That still amounts to the same tax dodge. He makes money (that he later converts to equity) from a CA-based franchise, he pays taxes to CA for almost none of it.
How will the State of California be able to paid its enslaved fire fighters?
Cool response, very topical. I hope in solidarity you refuse to pay your taxes to stick it to them.
Don’t live in California – but I will sure do my best!
Ohtani isn’t going to dodge taxes on this, he earned it in the state of California and state of workplace is enough to need to file CA state income taxes. There is no tax dodge for “I live in Japan now!!! HAHA” when you earned the money from a California employer.
That’s not true – deferred income received 10+ years after accruing it is not taxable in the original state. This is a federal IRS rule. So long as he establishes residence in Florida or Japan, he’ll only pay state taxes on the 3% of his salary that is not deferred.
Then I guess one should try, because it is not clear to me how, if one were sane, one would argue anything close to this without one getting laughed out of the room before one finished one’s sentence.
It’s totally possible the Dodgers will be making a 40-80x return on his $2m salary that then compounds. That’s greater than almost any rookie contract.
I enjoy the dishonesty of only mentioning the $2 million contract and not, you know, all that deferred money that he’ll be paid.
You realize he agreed to this contract right? This was his idea.
Yes, which means he is likely benefitting in some way, either via an undisclosed future ownership stake or simple CA state tax avoidance (worth tens of millions on its own).
CA state income tax avoidance is worth it. As you say, it’s worth tens of millions.
CA currently has a maximum rate of 13.3%, which, given his other income, Ohtani would be paying on the entire amount deferred.
If we accept that the deferred amount has an “actual” value 44 million a year, then he’s getting out of 5.85 million in taxes for each of the ten years of the deal. (Almost 60 million total.)
Fangraphs crowd sourcing had him getting 10 years at 45 million a year, instead he got 10 years at 46 million a year with an additional 5.58 million in tax advantages.
I’m not seeing this as a bad deal at all for Ohtani or hard to explain. He does not need the money now, so he can afford to defer if doing so is to his advantage, he’s getting roughly market interest for 10 years PLUS a 13.3% bonus courtesy of collecting the money when his residence is not in CA.
I’m not entirely sure that deferring income avoids the tax obligations, because the services for which it is compensation occur in CA. But I am mot now, nor have I ever been a tax lawyer or accountant.
I’ve heard it claimed, specifically in regard to this contract, that CA income tax does not apply to deffered compensation taken out of state. I’m taking that at its word since I do not pay CA income tax and thus have no real knowledge of how it works.
I’ve been a tax lawyer, and states can generally only tax nonresidents’ income from sources within their state. As a California resident, Shohei Ohtani would be taxed on all income he receives.
As a California non-resident, Ohtani would be taxed only on income from sources within the state. Deferred compensation from the Los Angeles Dodgers would be a source within the state.
In other words, there’s no way for Ohtani to avoid California state income taxes completely on his compensation from the Dodgers.
Doing some more digging, it looks like Ohtani’s contract is structured to be a non-qualified deferred compensation (NQDC) plan. In which case, he may be able to avoid state taxes on on the deferred compensation to the extent that he’s a non-resident of the state. Due to federal laws governing NQDC, only his state of residence would be able to tax him on the income.
Even if he stayed in California, it would free him from the income taxes levied on professional athletes by other localities (aka jock taxes), so there are tax benefits to Ohtani on this structure even if he doesn’t use it to avoid state income taxes.
Certainly a great tax avoidance strategy if you can afford it in the short term, which very rich folks like Ohtani can.
That economic value, however, was derived in California, not Florida. Ohtani won’t put proportional money back into the taxpayer-funded infrastructure he is benefitting from.
The reality is that Ohtani’s ability to truly sign a 600-700m contract blew up the day his UCL did, and this is an entirely reasonable contract for Aaron Judge plus a pitching career with significant long-term durability and injury concerns.
“he’s basically giving the Dodgers an interest-free loan” No. The interest is just included in the top-line number.
Overall I enjoy Michael’s writings, but his understanding of the finance side of the things is quite suspect. Just last week, Michael wrote that Gonzales has a positive trade value since Braves can trade him by eating part of the salary.
Yeah, a useful alternate way to frame the contract is “Ohtani signed for 10 years/$460 million but agreed to loan the Dodgers $44 million/year at 4.43% [the discount rate], to be paid back in 10 years.”
I don’t get this. How is Ohtani “taking less money”? He’s only taking less than we all thought he was taking based on the totally irresponsible initial reporting, not less than some other amount that we know was offered to him. I have to assume that the actual negotiation with the interested teams topped out in the neighborhood of $460M paid conventionally, and then after that they had a talk about how to structure the payments. How is this “less”?
If that’s the case, why do it at all? How is it different from 10/$460? Dodgers have to put the value in escrow so it’s not even like it’s saving them actual cash outlay.
Pick your favorite explanation from
-Tax chicanery: state income tax avoidance and/or preference to pay future income taxes to Japan instead of California
-Dumb guy’s idea of what a smart guy would do: Ohtani didn’t really understand the details of the CBT, wrongly believed he was giving the team a significant CBT advantage, and the Dodgers, knowing it to be inconsequential, just played along to be nice
-Bragging rights: for the rest of his life, Ohtani gets to claim that the biggest top-line contract number in sports is his on the imaginary high-score rankings
Or maybe he’s thinking that after his playing career ends he won’t have the same outside endorsement income.
I’m thinking it’s this one. He probably has learned nicely how to live on $30-40M a year or whatever, and now he gets to…roughly forever.
If stable/smooth income through his retirement were the goal, he obviously could’ve structured the contract in the conventional way and then had someone else invest his money for ten years, instead of effectively having the Dodgers do it for him. Of course you may be right, but if so, this would just be the dumb-guy version of money management and would make me seriously doubt the quality of advice and representation he’s received.
If Ohtani isn’t in a situation where the Dodgers give him an ownership stake to payoff the deferred money after his ten year contract is done, is it possible that by moving to Japan starting in year eleven (or some other location outside California) that he’d be exempt from paying California’s top tax rate of 13.3% on the remaining $680 million he’s owned? If so, that’s $90,440,000 he wouldn’t be paying to California’s state franchise tax board.
Is that math really correct? Doesn’t Ohtani get $68m per year after the ten years are over and not just one lump sum of $680m after year ten? If it is the former, the discount is even greater for deferment year 12, even greater in deferment year 13, etc. Not sure how CBT handles the deferment math but that tweet just doesn’t seem mathematically correct unless the $680m is paid out as one lump sum after year 10.
If he gets $68M per year in years 11 – 19, with. 4.43% discount rate, assuming payments uniformly paid out each year, I get a present value of $357.68M for the deferred payments, plus $20M for years 1 – 10, making the value of the contract $377.68M.
Maybe the CBT calculates the value of deferred payments differently than standard net present value math (or my math skills are just off?)
Right, this was my point below. The present seems to be the year it is paid, so each payment is discounted for 10 years at the rate.
The CBT calculates it differently. The way that present value is being used in the article is slightly off depending on how you’re thinking of it. It might be more helpful to think of it as something different like “contract present value”. The way I’d describe the difference is just how we think of a contract with no deferrals, i.e. Aaron Judge’s contract. Judge’s contract technically had a present value of about $304 million at this same 4.43% discount rate, but we all understood his “CPV” was $360 million. The way the CBT and all of us understand a non-deferred contract’s “CPV” is actually like a PV calculation with a 0% interest rate. For a contract with deferrals, the CBT looks at how much is being deferred from each individual year and then reframes it in our easier-to-digest “CPV” view. So Ohtani’s CBT hit for each of the ten years is made up of two distinct parts: $2 million that he is paid that year, and $68 million discounted 10 years at a 4.43% rate ($44,081,476.50). The two parts are added together for each year and we arrive at our old friend, the “CPV” view of a 10 year $460,814,764.97 contract.
Ah, OK, that makes sense. Thanks for clearing that up. Guess it does make sense in a way since CBT doesn’t do NPV calculations on the non-deferred years.
What you guys are doing is discounting the money too far in the future, because the earnings in year 10 of the contract do not get ‘depreciated’ for being 9 years out from the start; they only get depreciated for the 10 years between when they are earned and when he actually gets them
So everything is 10 years out and the interest rate isn’t re-calculated- the CBA fixes it to the month before the offseason began (Oct 2023) for the entire contract term, hence it is a fixed 4.43%
Yes, the 70m in 2033 is worth less than the 70m in 2024 to begin with. But that money isn’t devalued, because there’s no contract with a 680m signing bonus that gets it all up front. He would never have had interest-earning potential on the year 10 payment until he earned it, so no devaluation applies, even if it won’t be worth 70m of 2024 dollars when he earns it.
It’s the former, but the entire contract for CBT purposes is discounted based on the prime rate the month the offseason started (Oct 2023)
Check out Jon Becker’s post it is comprehensive.
That math is not correct.
The present value of $68 million deferred from 2024 until 2033 with a 4.43% discount rate compounded annually is, in fact, $44,081,476.50. But not every year’s payment is being deferred for 10 years. The future present value of each deferral has to be calculated independently, since 2025’s salary is only being deferred 9 years; 2026’s salary is only being deferred 8 years, etc. So the future present value of the deferred money for each year is:
2024: $44,081,476.50
2025: $46,034,285.91
2026: $48,073,604.77
2027: $50,203,265.46
2028: $52,427,270.12
2029: $54,749,798.19
2030: $57,175,214.25
2031: $59,708,076.24
2032: $62,353,144.02
2033: $65,115,388.30
So, adding those together, the current future present value of the deferred money contract compared to the $700,000,000 nominal value is $539,911,523.76, plus the $20,000,000 in undeferred money gives a present value of the contract of $559,911,523.76. Which is a lot more than $460,814,764.97.
No you need to bring each of those payments back 10 years to get what they would be worth 10 years prior. The wording of “PV” is kind of strange in that they aren’t actually bringing the value back to 2024 (aka Present) they seem to be bringing the value back to the year it is due so the PV of the 2043 payment as of 2033, which would be 10 years at 4.43%. if you do that with each payment each one is discounted for 10 years – so they each come out to be $44,081,476 (plus the $2mil actually being paid each season, so $46mil each year). Again, I think “PV” is pretty confusing here but I guess this is what they mean.
Ok, I didn’t read that there would be a 2043 payment – I had read that he was getting $2 million per year from 2024-2033, and then a lump sum payment of $680 million in 2034.
Still have to change your reference years. The $68 million that is being deferred in the second year is just that, money being deferred from 2025 to 2035. So you have to discount each of the years by 10, giving you the same CBT for each of the ten years.
Have you seen reporting to that effect anywhere? My understanding is that the $680 million is being paid out in one lump sum in 2034.
IS the discount rate used for these contracts collectively bargained or otherwise set by the league on an annual basis, so there is some standardization to the luxury tax calculation?
Yes.
I’m getting old and unenthusiastic, but anyone else chuckle that much of the [predictable] internet fan reaction is along the lines of “well, clearly, we need a stronger salary cap.” How are we collectively so easy and dumb? Didn’t Chomsky or someone explain the manufacturing of consent nearly half a century ago? The [heavily publicly funded] sports world and its fan – so free, so brave – rhetoric seems so detached from reality and insanely anti-labor. There’s a whoooooole lot of Cubs fans alone who see *Ohtani* as a villain or heel, that he used his media to spread lies…All of it seems like reactions from a lost, powerless population only willing to poop on each other because the actual issues are untouchable, going after them would be too costly to a way of life (forever growth and socialism for wealth and capitalists) that we’re fully dug in on
i dunno man i just like that he socks big dingers and throws 102
this is a wendy’s
This entire episode has really illustrated what a high percentage of otherwise-intelligent seeming baseball fans and commentators are financially illiterate.
If Ohtani’s salary was backloaded to be $2M for each of the first 9 years and $682M for the 10th year, it would be $70M AAV for CBT purposes. These kind of backloading games are not supposed to get you a luxury tax advantage.
But if you just backload it a bit more, to be $2M for each of the 10 years, and then a $680M payout over some period right after the contract ends, the AAV is much lower.
Just seems like the CBA should be amended to address it.
If you are correct about the luxury tax structure, then the problem is the first part of it. The value of 2 M/year for 9 years followed by 682 M on year ten is FAR LESS than a contract for 70 million a year for ten years and should have a smaller luxury tax hit.
The goal is for the luxury tax to accurately reflect the actual value of the contract. And in Ohtani’s case, it’s working as intended.
The value of the contract (assuming stable interest rates) is almost exactly the same as a current contract of 46 M/year for ten years, which is what the luxury tax hit is. Everything working as expected and intended.
I don’t love that it’s a mass tax avoidance mechanism (for both Ohtani and the Dodgers). Ohtani is clearly earning that money in California, but he now doesn’t have to pay taxes on 97% of it, because he’s wealthy enough already to opt to defer it.
That seems at the very least against the spirit of income tax law, and it means that taxpayer-provided infrastructure that Ohtani benefits from will not be funded by him.
The owners have tried to place limitations on it, but since 1997 the CBA has included specific language that there is “no limitation on the amount or percentage of salary that may be deferred in a Uniform Player’s Contract”, and the union has refused to bargain that language away for other perks because they knew this day was coming 🙂
But he isn’t getting a $680M payout in year 11. He’s getting $68M a year for ten years. In effect he has a 20 year contract for $700M. Gosh, silly Dodgers! They’re costing their team an extra $11M per in tax.
No, as “fake contract years” to lower AAV are disallowed, and MLB would block that contract. Your “$11M extra in tax” scenario is a false one.
It’s not 20 years / $700M, it’s 10 years / $700M, with $680M deferred over a 10 year period. They are completely different.
That was sarcasm.
Why don’t teams give contracts that are enormously front-loaded? Then the NPV of the contract is greater but they pay a relatively lower luxury tax.
Because they would lose on the time value of money (as you said, NPV of the contract is greater) and gain nothing luxury tax wise over a completely balanced contract.
Half the stories I’m reading tell me that it was Otani’s idea to do these deferrals in order to ensure that LAD saves money that can be spent to obtain a more competitive roster because gee gosh golly Otani just wants to win that much.
The other half of the stories tell me that no, actually, this has no unfair impact on the CBT and actually LAD doesn’t save much money at all because it all has to go in escrow anyway and if you are suspicious about any of this you just don’t understand the future value of money, you dummy.
If there’s no edge in this for anybody, why do it? As far as I can tell at this is purely a (state) tax dodge?
As I’m reading more and more, it seems like this is the deal everyone expected him to get in terms of total value, just structured differently. It seems like the reasons for structuring it this way instead of a normal way are all PR: the PR value of calling it a $700 million deal, the biggest in sports history, and the PR value of saying Ohtani is sacrificing something to give his new team more room to add players around him.
Exactly. If it wasn’t a state tax dodge, he would have signed a conventional 10/$460M deal, or a 10/$500M one if one was on the table. He’d derive the same economic value, the Dodgers have the same CBT hit, and he gets cash flow sooner.
Consider that things like surpassing the Messi $694 contract and the money-where-your-mouth-is demonstration of his priority on winning might be things that are valuable to Shohei Ohtani, both financially and otherwise, because the man already makes 40-50m a year in off-field revenue and his salary isn’t nearly as important to him as it is to every other major leaguer.
Someone posted the top 3 endorsement earners in MLB last year yesterday. It goes
Ohtani 40m
Judge 5m
Trout 5m
No one else has the capacity to not care about when they get their salary like Shohei Ohtani does.
The question is whether it’s a good thing that Ohtani can use that leverage to avoid paying $50M+ in state taxes. Most taxpayers aren’t rich enough to defer their income to avoid taxes.
The advantages:
Dodgers get a big cash flow advantage for 2 years
Ohtani might be in position to convert it to non-monetary benefit when the contract is up (like ownership)
Ohtani gets the media attention of having a bigger number than the Leo Messi 694m deal, which will be valuable for his off-field income
The Dodgers get Ohtani at what is honestly a fairly reasonable CBT figure.
Ohtani gets to make an enormous statement about how much he values winning to the rest of his organization and other people interested in potentially playing with him
None of these are huge advantages, but they’re all advantages.
Frankly, I love the idea of players buying their way into ownership when their playing career is over. It allows them to still be competitive by proxy and they’d be more invested in their team’s success than corporate ownership who sees a team only in terms of a balance sheet.
Dodgers have a significant trend with the Guggenheim group of bringing in ‘face of the franchise’ minority ownership, too: Magic Johnson fronted during the acquisition, and a couple years ago they added Billie Jean King as well
It’s exactly the kind of thing they would want to do; they also like to keep their icons around forever, as you can witness by Sandy Koufax still showing up to games, and Tommy LaSorda and Don Newcombe showing up at the stadium on the regular into their 90s.
As well they should – that’s how you build a culture. That’s how you bridge to future generations. Continuity is frequently underrated in that it’s almost always discussed in terms of roster construction, which is a short-term view.
“This isn’t really a $700 million contract, it’s a $460 million contract, and should be considered as such.”
What the hell are you talking about? That Judge’s $360M contract should be considered as more like a $290M contract?
For posterity, 4.43% is the most clueless discount rate imaginable. Out of the last 50 years, it’s been the discount rate for about 8 months. The discount rate, 10 days after this ahem, reporting, is 3.8% and falling. Futures markets put it in the twos by next summer. Wait six months and you’ll read the astonished reporting here: $46M/yr deal is now $55M! Probably every year for the next 20 years. By any market based approach the NPV of this thing is well over $500M. I need to spreadsheet to see what it would take for the NPV to be $60M/year, but I bet 5 years at the zero lower bound (like we just had) would do it.
Who is leaving money on the table then?