Shohei Ohtani Deferring $680M of Contract, Which Isn’t Nice

Have you ever known exactly what you want for dinner, but you ask your friend/significant other/family what they want before eventually getting them to agree with you? That’s pretty what what Shohei Ohtani did in choosing the Dodgers. Or maybe you’d prefer to liken it to LeBron James taking his talents to South Beach. The next time I go to St. Elmo, I’m going to ask if I can pay for 97% percent of my steak several years later.

While I do believe Ohtani was legitimately interested in hearing what other teams had to say, the extent to which the unique structure of his deal helps the Dodgers is pretty telling. According to Fabian Ardaya of The Athletic, Ohtani has agreed to defer $68 million of his $70 million annual salary and have it paid out over the 10 years following the conclusion of his contract.

It could have been a nice deal if he’d have squeezed an extra million in there.

Ardaya’s source put the net present value of the deal at $46 million AAV, though Jon Becker of FanGraphs’ RosterResource initially tabbed it at a little under $44 million. Becker then clarified that a slightly lower discount rate on the deferred money would push the total up a bit, hence the $46 million. That’s a $24 million drop in AAV, which comes out to 34% of the deal.

Coupled with California’s income tax eating up nearly half of the deal, Ohtani is getting significantly less in terms of actual value than he would have with a much smaller deal paid sooner in a different state. That’s how you know he wanted to be in LA all along. The Dodgers now get the benefit of that AAV discount, which lowers their estimated CBT payroll to around $220 million. That’s $17 million below the first tax penalty threshold, $47 million less than their 2023 payroll, and $73 million less than what they carried in 2022.

In other words, the Dodgers are still big players for Yoshinobu Yamamoto and a number of other big trade and free-agent acquisitions. Surely this kind of CBT circumvention is against the rules of the collective bargaining agreement and will be voided, right? Nope, there’s actually specific language allowing for it.

According to Article XVI of the CBA, “There shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation.” If it seems bonkers that the union would have allowed this to be included, first consider that most players don’t like big deferrals because of the way they erode value as illustrated above. And since no one could have possibly dreamed of a contract that deferred nearly the entire guarantee, this wasn’t a sticking point.

I’m willing to bet it will be addressed in the next CBA, and not just because of what it means from a contract-value standpoint. Not only do the Dodgers — or other teams that may try to use this as a precedent — benefit from the AAV savings, but they will also earn interest on the deferred money while Ohtani will not be paid interest on his portion. He’ll easily be able to make any of that back in endorsements, but the same is not true for other players.

Despite what Ken Rosenthal and others believe, this doesn’t strike me as being particularly good for baseball. Unless, like LeBron, the Dodgers will get more people tuning in to hate-watch their attempt at creating a dynasty. Except that those late start times mean viewers will be leaving early just like the fans at Chavez Ravine. Wild stuff, man, wild stuff.

Update: Per Lindsay Adler of the Wall Street Journal, the union objected to MLB’s proposal to limit deferrals. That’s a matter of maintaining flexibility for players, though they probably viewed it as more of a way to annuitize earnings from their prime years into retirement. Considering how this deal is so different from any others we’ve seen before, I’d imagine this will again be a topic in the next CBA negotiations.

The other factor to consider is whether small-market teams will view this as a means by which the rich get richer. With so many broadcast deals going belly-up, the last thing some of these owners want is a reduction of their competitive balance payouts.

Update #2: The Giants made a deal that was “very comparable if not identical” to the one Ohtani accepted from the Dodgers and it’s believed he pursued the same deferred structure to all interested teams. There was another report out there that the Dodgers upped their offer by $100 million to get it done, but whether that put them past the Giants or merely evened the field isn’t known.

That comes from Farhan Zaidi, SF’s president of baseball operations, who held a conference call with reporters Tuesday evening.

“We offered what would have been the biggest contract in major league history,” Zaidi explained, via the AP’s Janie McCauley. “I’m guessing we weren’t the only team that did that.”

He went on to say that the pitch included the idea that Ohtani could offset any losses in residual value with his massive off-field endorsements. I get the sense that the massive total guarantee was less about how much money Ohtani will eventually make and more about doing something no one has ever done before and probably won’t do again for a very long time.