The Ohtani Contract

I’ll get back to the usual fantasy baseball content soon (I’m 5 drafts in at this point), but for now, there’s some accounting in my baseball and, well, that’s pretty fun to dig into. Cash deferrals are nothing new in MLB, but both the degree and the context of the deferrals makes this contract pretty singular in MLB history. I’m going to look at that the impact this contract has from a few different perspectives. I think it covers most of the common questions, but if you think of an aspect I didn’t cover that’s interesting, let me know. (FYI, I know the math isn’t exactly right, but it’s materially correct)

Summary: Shohei Ohtani signs for 700M for 10 years of playing for LAD. The $700M will be paid out in payments of $2M per year from 2024-2033 and then $68M per year from 2034-2043.

Cash Value Impact:

Contract perspective: Depending on the interest rate you want to use, this contract has a “net present value” of $256M (at 7%) to $390M (at 4%) in 2023. Now, every multi-year deal has a NPV that’s under the contract value, so if this were a conventional contract, what would it have been at that NPV? 365M (at 7%) to 480M (at 4%). Below is my math on each for the 4% numbers. Basically Ohtani signed a contract that was right around the 10/450M that we basically thought he would, it’s just structured in an unprecedented way. This contract allowed Ohtani to claim he’s the highest paid athlete in history and allowed LAD to not actually pay him $700M.

Ohtani perspective: Yeah, he could’ve gotten $500M from another team paid out over 10 years, but what does he care? He has a ton of money and will make more in endorsements annually than he can spend regardless. The NPV on a $500M contract paid out evenly is $405M at 4% and $350M at 7%, so he might’ve left $20-100M in current value on the table taking these deferrals. LAD is required to escrow the cash within two years of it being earned under the terms of the CBA, so there’s no real risk of loss for Ohtani here. If MLB goes bankrupt, we’ll have bigger problems than Ohtani’s bank account.

Dodger perspective: They get a $500M player for less. They get to keep their cash for now and pay it out later when it’s worth less. They get to pay less in CBT taxes. They have more cash to spend on players (as if lack of cash was ever a real problem). There’s no reason why LAD would not want to defer cash payments as long as possible. Needing to escrow the cash does dull the cash flow effect a bit, but like I said, it’s not like they lack for cash in the first place.

Competitive Balance Threshold Impact: So until last week, I wasn’t aware that the salaries used to calculate the CBT were adjusted for the net present value of deferrals. This gets us to a CBT number of $46M for Ohtani (NPV $68M 10 years from now is 44M + 2M annual salary), so LAD saves 24M against the tax (as if they were ever going to pay Ohtani $70M/season).

The reality of this deal is that Ohtani wasn’t going to get $700M in “real money” from anyone, so that 24M of CBT “savings” is just a headline. It’s like when that $200 sweater goes on sale for $70. No one was ever really going to pay $200 for the sweater, so you’re not really getting a 65% discount. LAD did get a $100 sweater for $70 though, and that’s pretty good.

State Income Taxes: My limited knowledge of taxes and state income taxes leads me to believe the following to be true. Most every state has different tax rules and rulings around deferred compensation. I’d imagine most states that have an income tax are going to want their piece of Ohtani’s $430,000 hypothetical game checks ($70M / 162 games), regardless of when he gets actually paid the cash and certainly CA will. I wish Ohtani’s lawyers the best of luck avoiding the taxes on salary earned but not yet paid.

MLB Impact: LAD got a player that they were always likely to get. Ohtani’s desire to win consistently seems to have drove this decision. I’d imagine being the highest paid athlete in the history of mankind helped make it easier as well. Organizational commitment to winning has been a driving factor in free agent decisions since the beginning of free agency. This isn’t a story about a big market buying a player; it’s about a player buying into an organization to accomplish his goals and being willing to leave money on the table to do it. In my opinion, anything that shows organizations that winning is important is good for the game. Having the biggest players in the biggest markets and on the biggest stages is how you grow the casual popularity of the game as well. As much as I love the Royals, hiding Ohtani in Kauffman Stadium for 81 games a season would be a waste of his abilities.

Fantasy Impact: It’s fine. He’s in a great lineup. They’ll score a lot of runs. Barring injury, Ohtani is probably a 1st round pick for the next 5 years, maybe more. I don’t like it for Will Smith at all. Ohtani taking 80% of DH PAs is another reason for Will Smith to hit less. Smith also gets to hit in a top lineup in MLB, so on a per PA basis, he’s still great, but if he’s only playing 125 games a season, it limits his upside a bit. It’s like Sean Murphy in ATL. As long as Ozuna is hitting, he’s going to lose DH PAs on days he’s not catching. It’s a small factor, maybe costs them 50 PAs in a season.

Personally, I was kind of disappointed there weren’t incentives in the deal based upon innings pitched or MVP votes or other circumstances that would escalate his pay, activate/vest options or create a player opt out. The J-Rod deal had basically all of them in it. Any of those would’ve really turned this into a mess and taught us even more about obscure CBA accounting clauses. I’m also glad this happened on a lazy Monday in December and not on a day where there was a 15 game slate waiting for me the next day.