Holy shit. Might do more analysis on this at some point, but no way in hell were the Cubs gonna meet this price. A day after Jon Morosi made a huge gaffe by reporting that Shohei Ohtani was en route to Canada, Jeff Passan broke the news that the megastar has signed a 10-year, $700 million deal with the Dodgers. That is the largest contract in the history of professional sports in terms of the total guarantee, though Lionel Messi’s four-year, ~$674 million pact with FC Barcelona was far greater in terms of value.
Passan also noted that the deal includes significant deferrals of most of Ohtani’s salary, which was reportedly his idea, lowering his CBT hit and allowing the Dodgers to keep building around him. I had been under the impression that this kind of circumvention was against the rules, but have learned that deferrals lower the net present value of the deal, which is the actual number used for union valuation and CBT calculation.
I still don’t completely understand how that’s possible, so maybe I’ll add to this once I figure it out.
As much as I wanted the Cubs to get Ohtani, I can’t even feel bad about them not making this work. Then again, hella deferrals would have made things easier. This should kickstart the market in a big way, so it’s time for Jed Hoyer to start reeling in some of those lines he’s had in the water.
Update: Rather than writing up a whole separate piece on the topic of net present value as it pertains to average annual value and the competitive balance tax, but that’d only appeal to a very small niche. In short, it’s a matter of factoring in the time value of money by discounting money paid out in the future. For instance, Max Scherzer‘s seven-year, $210 million deal with the Nats featured $105 million in deferrals that pay him for seven more years.
You can go look at the math if you like, but the overall impact was around $18.6 million in total, or roughly $2.65 million annually. I have no idea how Ohtani’s contract is structured and wouldn’t be able to figure out the NPV even if I did, but I think it’s safe to say the Dodgers will get a nice little savings on the AAV. Here’s more from Passan.
I’m going to explain why Shohei Ohtani’s $700 million contract with the Los Angeles Dodgers will not equal $700 million in terms of MLB accounting or the present-day value of the deal.
When money in a contract is deferred, the competitive-balance tax number — the luxury tax — is…
— Jeff Passan (@JeffPassan) December 9, 2023
This feels to me like something that shouldn’t be allowed, but it makes sense that it’s kosher according to the CBA because owners love being able to kick money down the road and players don’t often go for big deferrals. As such, it’s typically a moot point. Now that it’s under such a bright spotlight, however, I could see some changes coming in the next CBA.
The last aspect of this I’d like to discuss, and I know how weird this sounds when talking about a guy who is being guaranteed $700 million, is that it’s further proof that Ohtani isn’t all about the money. I’m guessing anyone who is either pissed off or confounded by that concept isn’t reading at this point anyway, so I’ll continue for the rest of you.
Most players would prefer to get paid as much as possible over as short a span as possible because of inflation. In the end, the massive windfall for Ohtani is more about creative accounting meant to eventually get him to a value that will probably be in line with earlier projections. He’s also getting the everliving crap taxed out of him in California so that erodes the hell out of the total. If it was truly about money, he could have gotten more in total by signing elsewhere for a much lower guarantee.
On top of that, the Dodgers get more payroll flexibility to keep building championship contenders. I’m very interested to find out exactly how this thing is set up and where the AAV falls because this is truly incredible no matter your opinion of the situation as a whole.
Update #2: Jon Becker is a giant MLB contract nerd and his breakdown of how the deferrals could impact Ohtani’s AAV is the best you’re going to see. The figures are all hypothetical at this point, of course, but the level of detail here means it should work out to be pretty close to accurate based on current reporting. The tl;dr version is that the value of the deal before taxes comes to around $610 million.
That’s still an astronomical $61 million AAV, so it’s not like the Dodgers are somehow getting Ohtani at half price or even close to it. Hell, they might not end up having him at all if we end up with a Carlos Correa redux. The deal still hasn’t been officially acknowledged and Dodgers officials declined to comment when asked whether Ohtani has taken a physical.
Update #3: A very contrite Becker apologized for his initial projections and provided updated calculations to show that Ohtani’s deal might amount to something more like $43 million AAV. This further proves the notion that Ohtani isn’t in it just for the money, though it feels like it should be a violation of the CBT. Thing is, the collective bargaining agreement has no limits on how much money can be deferred for how long.
It’s entirely possible the deal is not structured per Becker’s hypothetical scenario, but it’s also possible that Ohtani is leaving hundreds of millions of dollars on the table while the Dodgers get a whopping discount on AAV.