Shohei Ohtani's eye-popping 10-year, $700 million contract left some wondering 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 much of his salary, the Dodgers could do just that.
According to a source, Ohtani will defer $68 million of his average salary of $70 million, an idea that came from Ohtani himself. That means he will earn $2 million per year from the Dodgers over the life of the contract (a total of $20 million).
The deferrals – totaling $680 million – will begin in 2034 and last until 2043, a source said. Starting in 2034, Ohtani will receive $68 million per year from the Dodgers until 2043.
This was all agreed within the framework of the collective agreement, which states that there are no restrictions on the amount of deferred funds.
“Article XVI – Deferred Compensation” of the CBA states:
There are no limitations on the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation that may be provided for in a uniformed player's contract.
According to 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 top earner off the field, it was “an easy decision for him,” the source said.
This contract design is intended to give the Dodgers more financial flexibility in the short term, but also reduce the burden of 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, although more big moves are expected to be on the way.
A team's Competitive Balance Tax number is determined based on the average annual contract value of each player on the 40-man roster, plus any additional player benefits. If no money were deferred, the AAV on Ohtani's contract would be $70 million. However, amounts deferred outside the contract term will be calculated at their current value.
Since the value of a dollar depreciates over time, for CBT purposes the contract has a today's value of about $460 million, considering that much of it has been deferred for more than a decade. Therefore, with Ohtani's contract, the Dodgers will take a CBT salary hit of approximately $46 million per year over the next 10 years. Essentially, Ohtani offered to defer so much money so that the Dodgers would have payroll flexibility and continue to build a winning team.
“Shohei wasn’t worried about the exact AAV,” the source said. “Just that it helped with flexibility.”
We have experienced delays in signing a major contract in the past, but never to this extent. For example, when Max Scherzer signed his seven-year, $210 million contract with the Nationals before the 2015 season, half of the money ($105 million) was deferred. As a result, the AAV for CBT purposes fell from $30 million to approximately $28 million. The deal called for the Nationals to pay Scherzer $15 million per year (the deferred money) from 2022 to 2028.