By now, you have likely heard about the remarkable way in which Shohei Ohtani and the Dodgers have split up his record 10-year, $700 million contract so that it won’t cost the Dodgers anywhere near the $70 million AAV toward luxury tax that you might think it would at first glance.
In an effort to enable the Los Angeles Dodgers to continue spending around stars Ohtani, Mookie Betts and Freddie Freeman, Ohtani agreed to defer all but $2 million of his annual salary — $68 million of his $70 million per year — until after the completion of the contract. The deferred money is to be paid out without interest from 2034 to 2043.
The deferrals also give Dodgers extra freedom navigating the competitive balance tax, or luxury tax as it’s called. For CBT purposes, the expected average annual value on the contract is said to be about $46 million per year, people briefed on the terms said. The $46 million average annual value is still the highest in MLB history, topping the $43.3 million average annual value Max Scherzer received in agreeing to a three-year deal with the New York Mets in 2021.
Ohtani can do this in part because of his unique status in professional sports. He’s estimated to take in as much as $50 million a year in endorsement and other non-playing income.
If you’re interested in the calculations for the luxury tax, they’re based in part on the current and future value of the deal and interest rates. This is the best calculation I’ve seen:
FINAL, COMPLETELY CORRECT MATH:— Jon Becker (@jonbecker_) December 11, 2023
•The discount rate is 4.43%
•The present value of the $68M is $44,081,476.50
•This makes the AAV of each year $46,081,476.50 (the above + $2M, which isn't discounted)
•The present value of the contract in total is $460,814,764.97
The “present value,” in the end, isn’t that much bigger than the $426.5 million deal Ohtani’s former teammate Mike Trout signed with the Angels.
I’ve got thoughts and questions here.
First, why can’t any team do this with any player who’s willing? The answer probably is the ancillary income that Ohtani has. Most players likely aren’t willing to give up 90 percent of their current income and shove it a decade into the future. Still, perhaps a player might be willing to defer half his current income. Even a third would help out teams trying to stay under the luxury tax. On the other hand, from a current MLB player:
I’ve watched too many post-apocalyptic movies and shows to defer any money that far into the future. (I’m also not good enough at baseball to have the option to do so)— Brent Rooker (@Brent_Rooker12) December 12, 2023
You can be sure that this sort of thing is going to be discussed when the next CBA comes to the table after the 2026 season, because the current CBA has no limits on the amount of contract money that can be deferred. MLB doesn’t have a salary cap, as do the other three main North American sports, so the luxury tax (formally called “competitive balance tax”) is supposed to rein in spending by owners. It does, to a major extent, it’s a de facto salary cap. But Ohtani and the Dodgers have found a loophole bigger than Los Angeles to drive this contract through. It’ll be interesting to see if other teams try something like this.
The other thing I wanted to talk about here is the impact this has on the Dodgers and other teams competing with them. L.A. has won 10 division titles in the last 11 seasons — and finished second with 106 wins in the year they didn’t win the NL West over that span. In the 10 seasons over that 11-year stretch that were full 162-game seasons, the Dodgers won at least 91 games in all of them and won 100 or more games five times, including the last three seasons.
Ohtani, who won’t pitch in 2024, is going to replace J.D. Martinez as the Dodgers’ DH. Martinez had a pretty good year in 2023, batting .271/.321/.572 with 33 home runs in 113 games. That was good for 1.9 bWAR, say that’s about 2.5 bWAR in a full season. Ohtani was better than that, batting .307/.416/.661 with 44 home runs in 134 games as a DH in 2023. As a batter than was a 6.0 bWAR season. So, the Dodgers have theoretically added four wins to their team with Ohtani. So what? They’ll win the NL West by 20 games instead of 16?
L.A. still needs to add to their pitching staff and perhaps, with Ohtani deferring all this money, they’ll be able to. But even winning the division and having a bye into the postseason guarantees nothing. In the 11 seasons mentioned earlier, the Dodgers have gotten as far as the NLCS just five times, made the World Series three times and won it once (and yes, they probably should have won it twice, one of the losses being the Astros’ cheating win).
But that means they’ve lost a division series six times, including three times when they won 100 or more games in the regular season. With 12 teams now in the postseason, it’s become even more of a crapshoot, with just about any team that makes it being able to win a best-of-five division series. There’s been a World Series participant each of the last three years that hasn’t won 90 games, and one of those teams won the whole thing.
So if the Dodgers think signing Ohtani will guarantee them World Series wins, they probably should think again. Sure, it’ll make them a lot of money, but come October they’re on a blank slate with 11 other teams.
This deal will have repercussions down the road not just for the Dodgers, but for baseball in general. I’m not sure those are good repercussions, either. As always, we await developments.
(And we still don’t know the name of Ohtani’s adorable dog.)