Ohtani Mega Contract

[Surgnbuck]

Three interesting topics arose with this contract from listening on MLBNR and MLB Network:

1. The Dodgers quiet (for them) offseason last year was a strategic move to reduce salary cap with the intention of going after Ohtani. If true, kudos to their management.
2. The thought is that the Dodgers will make up every last bit of that contract if not more. It was already said their ticket prices have gone up, and they are looking to sell out every game.
3. The Dodgers took advantage of a system that allows contracts to be laid out indefinitely. Funny how the big market teams can get away with this, yet cried foul when the Pirates spent their money luring high school players out of college commits.

[Ecbucs]

MLB Trade rumors explains this better than me. I thought that the Dodgers would be on the hook for deferred payments long after Ohtani retires. Apparently that isn't the case. The contract for salary luxury tax purposes is based on average annual value which is much lower. I don't know who they figure this in for inflation. My guess is the 700 million figure includes all the interest Ohtani is to receive but if his entire contract was paid off in ten years then the total would be $460 million. It will be interesting to see if Soto gets this much on his next contract. One way these top contracts hurt the small payroll teams is through arbitration. A good player going into arbitration for the third year is now going to make more than the Pirates have ever paid a player.

MLB Trade Rumors explains why this doesn't circumvent luxury tax:



Earlier today, we learned that Shohei Ohtani’s $700MM contract with the Dodgers has a stunning deferral structure: he’ll earn a mere $2MM in each of the ten seasons he’s agreed to play baseball for the club, and then $68MM per year from 2034-43.

Based on what I’ve seen on social media tonight, a lot of baseball fans think the purpose of these deferrals is for the Dodgers to “dodge” the competitive balance tax (yes, t-shirts are already being drawn up). Here’s why that’s wrong.

The collective bargaining agreement has a section for calculating the CBT hit for a contract that includes deferred money. According to reports, that calculation works out to a $46MM average annual value and accompanying CBT hit for the Dodgers and Ohtani. As you can see here, $46MM tops Max Scherzer’s previous AAV record of $43,333,333.33. It’s $6MM beyond Aaron Judge’s $40MM AAV, which was the highest for a player on a deal of more than three years. The problem is the initially reported $70MM AAV. That was the first number people saw, and it gets ingrained for fans after being seen in thousands of headlines. The agent certainly didn’t mind. Though news of significant deferred money quickly followed and ESPN’s Jeff Passan narrowed it down to $40-50MM yesterday, more precise numbers weren’t known until today.

There was enough time for the shocking $700MM and $70MM figures to take hold. So it’s logical for some fans to say the Dodgers are paying Ohtani $70MM a year but “getting away with” just a $46MM CBT hit. However, I’d argue that the $70MM figure was never “real,” in that it dwarfs expectations and there’s no current indication that any team offered anything close to that AAV without huge deferrals. The $46MM AAV is what matters. Ohtani moved the AAV record forward as expected, but only by about six percent rather than an insane 62%.
MLB does have the power to stop teams from circumventing the CBT, but this doesn’t qualify. In fact, it is explicitly allowed. As Passan explained tonight, the CBA specifically says, “There shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide.” This is just my opinion, but perhaps if the deferrals led to a luxury tax AAV below $35MM or so on Ohtani, MLB might have considered it a tax dodge, but not for a record $46MM.

[JollyRoger8]

MLB Trade rumors explains this better than me. I thought that the Dodgers would be on the hook for deferred payments long after Ohtani retires. Apparently that isn't the case. The contract for salary luxury tax purposes is based on average annual value which is much lower. I don't know who they figure this in for inflation. My guess is the 700 million figure includes all the interest Ohtani is to receive but if his entire contract was paid off in ten years then the total would be $460 million. It will be interesting to see if Soto gets this much on his next contract. One way these top contracts hurt the small payroll teams is through arbitration. A good player going into arbitration for the third year is now going to make more than the Pirates have ever paid a player.

MLB Trade Rumors explains why this doesn't circumvent luxury tax:



Earlier today, we learned that Shohei Ohtani’s $700MM contract with the Dodgers has a stunning deferral structure: he’ll earn a mere $2MM in each of the ten seasons he’s agreed to play baseball for the club, and then $68MM per year from 2034-43.

Based on what I’ve seen on social media tonight, a lot of baseball fans think the purpose of these deferrals is for the Dodgers to “dodge” the competitive balance tax (yes, t-shirts are already being drawn up). Here’s why that’s wrong.

The collective bargaining agreement has a section for calculating the CBT hit for a contract that includes deferred money. According to reports, that calculation works out to a $46MM average annual value and accompanying CBT hit for the Dodgers and Ohtani. As you can see here, $46MM tops Max Scherzer’s previous AAV record of $43,333,333.33. It’s $6MM beyond Aaron Judge’s $40MM AAV, which was the highest for a player on a deal of more than three years. The problem is the initially reported $70MM AAV. That was the first number people saw, and it gets ingrained for fans after being seen in thousands of headlines. The agent certainly didn’t mind. Though news of significant deferred money quickly followed and ESPN’s Jeff Passan narrowed it down to $40-50MM yesterday, more precise numbers weren’t known until today.

There was enough time for the shocking $700MM and $70MM figures to take hold. So it’s logical for some fans to say the Dodgers are paying Ohtani $70MM a year but “getting away with” just a $46MM CBT hit. However, I’d argue that the $70MM figure was never “real,” in that it dwarfs expectations and there’s no current indication that any team offered anything close to that AAV without huge deferrals. The $46MM AAV is what matters. Ohtani moved the AAV record forward as expected, but only by about six percent rather than an insane 62%.
MLB does have the power to stop teams from circumventing the CBT, but this doesn’t qualify. In fact, it is explicitly allowed. As Passan explained tonight, the CBA specifically says, “There shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide.” This is just my opinion, but perhaps if the deferrals led to a luxury tax AAV below $35MM or so on Ohtani, MLB might have considered it a tax dodge, but not for a record $46MM.

Thank you for the very nice summary of this unique situation. I still feel that MLB must take some action to stop this nonsense. This deferral allows the Dodgers to go after additional top level talent. Correct me if I am wrong but even if it’s only a $46M hit to the luxury tax total instead of a full $70M isn’t it still shafting the smaller markets of a potential pay out?
It’s like baseball’s version of tax laws that only benefit the rich