Article: The Structure of the Shohei Ohtani Contract Can't Hurt You

[Matthew Trueblood]

When is $700 million not $700 million? When it's less. However, that doesn't mean it's only $460 million, either. And by the way, what is 'only' doing in that sentence?

Image courtesy of © Kiyoshi Mio-USA TODAY Sports

After a couple days spent finalizing the details and clearing the necessary roster spots for the Los Angeles Dodgers, Shohei Ohtani's megadeal became official Monday. In the process, reporters laid out the particulars of the deferral structure that was alluded to in less exact terms on Saturday, upon the first reports of the deal. Ohtani will only be paid $2 million per year for the 10-year life of the contract. Then, for the following 10 years, he'll receive a staggering $68 million per year.

As a result of that extreme structure, Ohtani's deal has an annual average value of just over $46 million, for luxury-tax purposes. That set of a torrent of outrage on Twitter, wherein the Dodgers were accused of all manner of manipulation of the tax. Many wailed that the MLB Players Association has been derelict in allowing this to become a legal deal, and that the loophole it represents is sure to cause greater friction in the next round of negotiations for a collective bargaining agreement. The general feeling seems to be that, whether legal or not, ethical or not, the Dodgers got away with something here.

It's just not true, and it's tiresome that people are so insistent that this is a problem. We can explain the confusion, easily enough. Since the deal was initially reported as $700 million over 10 years (and after some sloppy initial reporting by a few people who specialize in the math around these types of deals), it's causing the weirdest case of reverse sticker shock in human history as fans come to grips with the fact that the Dodgers will only face that $46 million in annual weight on their competitive-balance tax payroll.

All the trouble there is in your head, though. Even as the deal was first announced, every major reporter stressed that there were major deferrals involved. This is the most extreme deferral structure in modern baseball history, but it's just a slight exaggeration of the terms everyone should have envisioned in the wake of the initial news. The contract was never going to be worth $700 million in real, present value. We knew the deferrals were going to be the majority of Ohtani's salary, which meant that the actual deal was falling right in the range everyone expected before the eye-popping 7s hit our eyeballs on Saturday afternoon: comfortably north of $500 million, but south of $600 million.

While the league and the union have an agreed-upon interest rate they apply to deferrals and a formula for the CBT hit of a deal, we don't have to accept that net present value figure as a simple statement of the value of the contract. To Ohtani, who doesn't need to sweat the time value of money because he makes upward of $40 million per year through endorsements and other off-field income streams, this structure is worth much more than $460 million. He has a chance to limit his tax liability for the $680 million that will be paid after the contract ends, by moving out of California to any number of potential tax havens. He also has a chance to borrow against that money even before he actually receives it, if necessary, and thus invest and add to his mountains of cash.

It just doesn't matter that much, to him, when he's paid. Nor should it matter much to fans of other teams. The Dodgers derive a small advantage here, because the extremity of these deferrals pushes that CBT hit down, but even by that calculation, Ohtani will be the highest-paid player in baseball, with a cushion of over $2 million on second place. If the deferrals were more along the lines we expected, the hit would be something like $53 million. That difference is small. It can buy the Dodgers an extra platoon bat or setup man each year, but it's small potatoes, really. The fact that they will be making such a small actual outlay to Ohtani during that time certainly helps, but only for bean counters. The CBA's rules penalizing big-market teams for repeatedly exceeding the CBT (especially the second, third, and fourth thresholds) will still be there. 

For most of the next 10 years, the Dodgers will have their first draft pick pushed back 10 spots. For most of them, they will lose international free agency spending power. They will pay high tax rates on their overages, and their overages will not be inconsiderable. This coming year, they'll lose two of their top five draft picks and a significant chunk of their IFA money--with the latter becoming especially restrictive if Roki Sasaki succeeds in convincing his NPB team to post him to MLB next winter. These impacts will be felt, even if they're getting an apparently tremendous bargain in the short term on Ohtani. Then, they'll have to pay him $680 million while (almost surely, given the unique demands and physical stresses of the unique thing he does) he retires to somewhere beyond the reach of the American IRS. 

It's fine to be mad that the Dodgers went so much further than the Cubs were willing to. It's fine to feel that the system is rigged, and that the league should revisit revenue-sharing rules to give more teams a chance to compete with the elite earners in the biggest coastal markets. Let's just stay focused on those real concerns. The particular structure of this deal doesn't make things as easy for the Dodgers as many have claimed, and it's not a circumvention or a subversion of anything. It's just a radical solution to the problem of paying a player $700 million.

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