The Athletic has live coverage of Shohei Ohtani’s first Dodgers press conference
Sometimes $70 million a year isn’t exactly $70 million a year.
The best way to think about Shohei Ohtani’s wild and unusual contract with the Dodgers might be as a $700 million, 20-year deal, rather than a $700 million, 10-year deal.
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And from another lens — the CBA’s own calculation of discounted present value — he’s making about $46 million a year for those 10 years, per three people briefed on the formula.
How does this thing work?
Although Ohtani signed a deal that will have him play for the Dodgers for 10 years, he’s going to receive 97 percent of his money in the following 10 years.
As first reported by The Athletic’s Fabian Ardaya on Monday, the Dodgers are to pay Ohtani just $2 million per season for the next decade, through 2033 — the period he’s actually playing for the team under this contract. Then in the following 10 years, starting in 2034, he’s to receive one lump-sum check for $68 million every July 1. There’s no variation in either set of payments, no front-loading or back-loading — $2 million flat for one decade, then $68 million flat the next. And Ohtani agreed not to charge any interest on those deferred payments.
2024-2033: $2 million each year
2034-2043: $68 million each year.
Is this even allowed? How?
Yes, such massive deferrals are legal. Baseball’s collective bargaining agreement makes that explicitly clear.
“There shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation …” the relevant section in the CBA begins.
The owners wouldn’t mind getting rid of the deferrals, though. In past rounds of bargaining, including the most recent in 2021-22, they proposed eliminating deferred compensation, but the players wanted to keep it to allow for flexibility.
So with all that deferred money, is $700 million really $700 million?
The CBA actually provides a rubric for estimating what Ohtani’s deal is arguably worth in light of all those deferrals.
Were Ohtani making $70 million over 10 years with no deferrals, he would count each year as a $70 million hit against the Dodgers’ luxury tax figure. But the interest-free deferrals change the calculus.
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The CBA prescribes a method for calculating a player’s luxury tax salary in those instances, and it does so by approximating the “discounted present value” of the deal.
It’s one way of estimating, when interest rates are taken into consideration, what the contract is actually worth annually. And per people briefed on the deal, that figure is $46 million for Ohtani. One could therefore argue he’s on something closer to a 10-year, $460 million contract, once interest rates and the deferrals are worked in. (The interest rate used this offseason in MLB and the MLBPA’s calculations is 4.43, people briefed on the process said.)
Why would he do this?
Ohtani is said to have seen a slew of benefits in the structure: It gives the Dodgers payroll and luxury tax flexibility to add more talent. It’s also said to have the potential to provide him some tax benefits — particularly if during the period he is drawing $68 million he is living in Japan, rather than California. But the specific potential tax advantages weren’t immediately clear.
That $46 million figure is also still a record in average annual value.
Are the Dodgers going to swim in a bathtub of money until 2034?
The Dodgers can’t actually hold on to all the deferred money for 10 years, though. They’ll have to start putting a lot of money aside for Ohtani no later than 2026.
“Deferred compensation obligations … 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,” the CBA reads.
The CBA goes on to say that “fully funded” means “the Club must have funded, for the duration of and without interruption in each year, the current present value of the then outstanding deferred payments, discounted by 5% annually.”
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So, what about the Bonilla of it all?
Bobby Bonilla will collect his final check from the New York Mets on July 1, 2035 — 36 years after his final game with the club. It’s the most famous deferred contract in the history of the sport, or at least it was. After all, Ohtani will collect the first of his hefty deferred payments the year before Bonilla’s ends.
It’s not uncommon for players to agree to defer money until after the expiration of their deals. Max Scherzer’s 2015 free-agent deal with the Washington Nationals included significant deferrals, allowing him to be paid in his offseason home state of Florida rather than in Washington, D.C. for tax reasons. Scherzer’s former teammate, Stephen Strasburg, also has deferrals in his seven-year, $245 million deal with the Nationals.
OK, so what do the Dodgers do with this?
Well, they still have holes to fill, notably with their pitching staff. The club has been engaged in trade discussions on pitchers such as Tampa Bay’s Tyler Glasnow and Chicago’s Dylan Cease, and they’re expected to meet with free-agent Japanese right-hander Yoshinobu Yamamoto.
In terms of the luxury tax threshold, the structure of Ohtani’s deal is immediate. Using Cot’s Contracts’ projection of the Dodgers’ 2024 payroll, it’s the difference between them being under or above the first threshold of $237 million. Their luxury tax figure, using the estimated average annual value of about $46 million, is projected at $222.5 million, rather than $246.7 million. While no one is expecting the Dodgers to remain under the first threshold, it’s breathing room to make other significant moves this winter.
Have the Dodgers done deferred money before?
Yes. In fact, both of their existing long-term deals worth nine figures (a 12-year, $365 million deal for Mookie Betts and a six-year, $162 million deal for Freddie Freeman) each include significant deferred money.
But not like this. Compared to Ohtani, just 31.5 percent of Betts’ deal (a total of $115 million) is deferred, to be paid out at varying rates from 2033 to 2044. Freeman’s deal consists of 35.2 percent deferred money, and will also be paid out without interest in annual installments from 2028 to 2040.
The deferred bill will feature some crossover between the three players, with the Dodgers owing the trio a combined $857 million from 2033 to 2044 — including $83 million in deferred compensation in 2038 and 2039 as well as $84 million in 2040.
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(Photo of Shohei Ohtani: Wendell Cruz/USA Today)