The big news in MLB this morning is the leftover conversation surrounding Shohei Ohtani's contract details. Apparently Ohtani had asked for his contract to include a significant amount of deferred money, which helps lower the competitive balance tax implications for the team.
Though Ohtani signed a deal for 10 years and $700 million, he'll only be paid $2 million in cash each year for the next ten years. The remaining $680 million will be deferred to the following ten years, 2034-2044, where he'll be paid $68 million annually.
The competitive balance tax accounts for each player's average annual salary, rather than their cash payments. The benefit to the Dodgers is that instead of having Ohtani count for $70 million against the tax, the number will be much lower.
The math is a bit wonky, but essentially they use the net present value of the contract to determine the tax hit when considering contracts with deferrals. Thanks to Ohtani's decision to defer so much money, the number for tax purposes will be roughly $46 million per year.
That's a massive difference for the Dodgers, who feel the relief of nearly $30 million per year that won't affect their luxury tax bill. The reason why Ohtani was adamant about taking deferrals is that it leaves more room for the Dodgers to sign additional players over the life of his contract without worrying as much about the tax hit.
As they're currently constructed, the Dodgers are projected to be just under the first CBT threshold of $237 million. The Dodgers have paid the tax three years in a row, meaning that every dollar they spend over the $237 million limit gets taxed at 50%.
Thanks to Ohtani's deferrals, the Dodgers can add another high-end player or two and still only be in the 50% range, rather than closer to 100% or more.
It's a bit of a strange circumstance, but these types of contract deferrals are specifically allowed by the Collective Bargaining Agreement. Using the time value of money, it would seem that deferring money would hurt players more than teams, but given Ohtani's unique marketing value and merchandising income, he certainly won't be strapped for cash.
Would the Athletics consider using these types of deals?
It's not clear whether this is a strategy that Oakland Athletics' owner John Fisher would ever submit to. The Athletics have just $34 million in cash commitments in 2024, and they have zero guaranteed salaries in 2025 and beyond. They don't have any contract deferrals that they're contracted into, nor do they have any players on multi-year deals.
Many Athletics fans have speculated about Fisher selling the team after attempting to up their valuation and get a new ballpark in Las Vegas. MLB owners implemented a sell tax after the announced relocation vote, however, which stipulates that Fisher would have to pay a significant fee to the other 29 owners if he were to sell the team within a certain timeframe after moving the Athletics to Las Vegas.
Given that he's basically locked into owning the team for another decade or so, would the Athletics try this kind of free agent deal? It still seems unlikely given the fact that they would need consent from the player to do so.
Ohtani has such unique marketability and such massive sponsorship revenues that it makes him almost a standalone case. Other players have accepted large contract deferrals in the past, but not nearly at this magnitude.
It's certainly possible that the Athletics would sign a free agent and include contract deferrals in the deal, but I wouldn't hold my breath expecting it to become the norm. Even if it helps the team's cash expenditures in the short-term, it locks them into guaranteed payments in the future.
With so much up in the air about the Athletics relocation process, it's hard to see Fisher wanting to lock himself into long-term expenses when he's so adamant about spending the absolute minimum on the team at present.