Explaining the unprecedented deferrals in Ohtani's Dodgers deal
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Shohei Ohtani’s stunning 10-year, $700 million contract made some wonder whether the Dodgers would be able to continue signing more stars to surround the two-time American League MVP on the field.
Thanks to Ohtani’s offer to defer a majority of his salary, the Dodgers may be able to do precisely that.
According to a source, Ohtani will be deferring $68 million of his $70 million average salary, an idea that came from Ohtani himself. That means he will be earning $2 million per year from the Dodgers ($20 million in total) over the life of the contract.
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The deferrals -- which total $680 million -- will begin in 2034 and carry through 2043, a source said. Starting in 2034, Ohtani will receive $68 million per year from the Dodgers, ending in 2043.
This was all agreed upon within the parameters of the Collective Bargaining Agreement, which states that there are no restrictions on how much money can be deferred.
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“Article XVI – Deferred Compensation” of the CBA states:
There shall be no limitations on either the amount of the deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide.
Per the source, Ohtani “had been educated on the implications and process of deferrals and felt it was the right thing to do.” Given his status as the game’s highest earner off the field, the source said it was “an easy decision for him.”
By structuring the contract in this way, the idea is to give the Dodgers more financial flexibility in the short term, but also ease their burden relative to the Competitive Balance Tax (CBT). For 2024, the CBT is $237 million, and with the structure of this deal the Dodgers would currently be under the CBT threshold, though it is assumed more big moves are on the way.
A team's Competitive Balance Tax figure is determined using the average annual value of each player's contract on the 40-man roster, plus any additional player benefits. If there was no money deferred, the AAV on Ohtani’s contract would be $70 million. However, any money deferred outside the term of the contract is calculated using its present-day value.
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Because the value of a dollar decreases over time, the contract has a present-day value of roughly $460 million for the purposes of the CBT, given that so much of it is deferred for more than a decade. Therefore, the Dodgers will have a CBT payroll hit of roughly $46 million per year for the next 10 years from Ohtani’s contract. Essentially, Ohtani offered to defer this much money in order for the Dodgers to have payroll flexibility to continue building a winning team.
“Shohei wasn’t concerned about the exact AAV,” the source said. “Just that it helped with flexibility.”
We’ve seen deferrals in the past when signing a big contract, but never anything to this degree. For example, when Max Scherzer signed his seven-year, $210 million deal with the Nationals prior to the 2015 season, half of the money ($105 million) was deferred. As a result, the AAV dropped from $30 million to roughly $28 million for the purposes of the CBT. The deal called for the Nationals to pay Scherzer $15 million per year (the deferred money) from 2022 through 2028.