Shohei Ohtani’s wild $680 million deferred contract with Dodgers, explained

Shohei Ohtani’s wild $680 million deferred contract with Dodgers, explained

Shohei Ohtani signed the largest contract in sports history, and also one of the most bizarre. The newly-inked 10 year, $700 million deal with the Los Angeles Dodgers is the highest-dollar total ever given to an athlete, but for the next decade Ohtani will only earn $2 million per year — deferring $680 million of the contract, and it’s all within the rules. Ohtani will get paid his full $700 million, but by waiting to get his payments he’s helping the Dodgers lower a historic tax payment.

So, how is it that the biggest international superstar in the game is signing with one of MLB’s richest clubs, yet only making $2 million a year, why is he making so little, and what does this mean for the future of baseball?

What exactly is the Ohtani contract?

Reports about Ohtani’s contract are correct. He did sign a 10 year, $700 million deal — however, he’s getting almost none of this money while playing. The Athletic reports that an unheard of $680 million of the deal is being deferred until after 2033, making Ohtani the cheapest superstar player in Major League Baseball by a mile.

Starting in 2034 he’ll earn $68 million per year until 2044, when the contract is then paid off.

For comparison, the Yankees are set to pay Aaron Judge $40 million in 2024 — twice what Los Angeles will pay for a decade of Ohtani play in a Dodgers’ uniform.

Deferral isn’t a new concept

Pushing money out beyond a player’s tenure is something we’ve seen in baseball before. Heck, it’s the heart and soul of “Bobby Bonilla Day.” A hilarious sports holiday commemorates when the cash-strapped Mets reached an agreement with Bobby Bonilla in 1999 to delay paying him the $5.9 million owed on his deal for a decade, and in exchange pay him $1.19 million a year from 2009 until 2035.

The Dodgers also have other players currently on deferral as well. Most notably Mookie Betts, who signed an 12-year deal in 2021, deferred $115 million of his contract until after it ends in 2033. The essence of deferral was to make it a way for smaller clubs to offer large, competitive contracts to superstar players — without the financial impact of needing to find the cash up-front. In theory this would allow them to stay competitive, but now the deferral system is increasingly being subverted by the richest clubs as a way to put a stranglehold on baseball.

Why did the Dodgers need to defer the money?

As it stands the Dodgers are one of the richest teams in baseball, second only to the New York Yankees. That doesn’t quite tell the whole story though, and that’s where this gets murky.

Despite leading MLB in attendance with over 47,000 fans attending each game, and earning a league-high $196 million a year in broadcast rights — the Dodgers have been spending money at an enormous rate too. A 2023 Forbes list posted the team’s operating income at $14.3 million, which ranked the team 19th in cash earned.

This is entirely due to their $240 million payroll, but more importantly it subjected the team to MLB’s luxury tax, referred to as the “Competitive Balance Tax.” It works similarly to the luxury tax in other sports, however rather than being a static figure for going over the league-mandated soft cap, it increasingly penalizes teams for staying over the cap.

The first year a team is over the cap they are assessed a 20 percent tax for the amount they’re over, the second time this jumps to 30 percent, and if a team exceeds this amount for three or more years in a row it skyrockets to 50 percent. If a team manages to reduce its payroll below the threshold then the timer restarts, meaning the next time they go over they will start at the year one penalty.

In 2021, 2022 and 2023 the Dodgers paid a Competitive Balance. As it stands the Dodgers are currently at an estimated $227 million. If Ohtani made his full $70 million it would cause the Dodgers to blow past the cap threshold and be subject to a massive tax bill.

More importantly a full payment to Ohtani would have pushed the Dodgers into a level three tax penalty, in which a team’s first round draft pick spot is penalized 10 positions by being $40 million or more over the soft cap. The team still might not avoid this depending on how aggressive they are in the pitching market, but a cheap Ohtani deal at least aids that process.

And Ohtani is okay with this, why?

Shohei Ohtani is 29-years-old and in his prime. However, this 10-year deal is likely the last “big one” of his career. More important than the money however is winning, something Ohtani hasn’t been able to do for his entire MLB career in Anaheim.

The Angels were below .500 every year of Ohtani’s tenure. Now he wants to win. Any pitch to be competitive with the Dodgers likely included the need for him to be flexible in his salary demands, in order to keep the rest of the team paid and afloat. If Ontani wants to win a World Series then taking less money is required, and he’s happy to do it.

That said, it’s bizarre he made no further demands. As it stands, yes, he’s set to make a ludicrous amount of money — but it’s wholly unusual to have no rider on the deferral to make it subject to interest or inflation. Instead he’s essentially taking much less money by pushing out the vast majority of his cash until a decade from now.

This all sounds like a scam, is it a scam?

Well it is, and it isn’t. There are a lot of factors at play and arguments to be made here as well. Everything the team is doing here is 100 percent allowed under the rules. The Dodgers are allowed to defer as much money as they want, because in the end they are still paying the player.

However, there’s no doubt the Dodgers are subverting the Competitive Balance Tax and fielding a much more expensive team than shown on paper. Everyone knows this team should be paying massive amounts of tax, but likely won’t have to thanks to deferring money on the Ohtani deal.

Unlike the NBA, luxury tax funds aren’t dispersed to the rest of the league. In basketball this means that the most cash-strapped clubs directly benefit from the richest going over the cap. However, in MLB the tax funds aren’t distributed to teams, so nobody is effectively losing out on money by the Dodgers doing this.

Instead, the money is put in a fund to pay for player benefits and assist with the “growth of the game,” something the Dodgers would argue they’re already doing by putting Ohtani in a major media market on a team that will make the playoffs and increase exposure for baseball.

Even if it’s allowed, that doesn’t mean this is right

The biggest element of this deferred money is that the Dodgers (and other rich clubs) have the safety to do it. They know that whether it comes due in a three years, five years, or a decade from now they will have the ability to pay deferred costs because the solvency of their club in a major market will be safe.

This can’t be said for smaller teams in struggling markets. These clubs can’t afford to risk deferring $68 million a year without knowing the economic climate in 2033 and beyond. This innately gives big markets a mammoth competitive advantage over smaller ones, as they can keep kicking the can down the road on new deals where other teams can’t.

The only check and balance for this is supposed to be the Competitive Balance Tax, but if players and agents are happy to accept deferrals then it’s a non-issue. Teams will be able to field rosters three and four times the value of their competition, while on paper looking like they’re at parity.

This system needs an overhaul, but there’s no good way to do it

The current MLB collective bargaining agreement runs through 2026, so nothing can change until then — but even at that point it’s difficult to see a path forward. Players want to keep earning record-setting contracts, agents want to keep negotiating them, and the only way that happens is through deferral.

MLB needs its powerhouse clubs in major markets to stay strong for the health of the sport, even if that comes at the expense of its smallest ones. Until a creative solution is reached this problem will only continue to become more pronounced.

That doesn’t stop Shohei Ohtani being a $700 million man — even if that won’t happen for another 10 years.

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