Fitzpatrick: What Ohtani’s deferred contract means for baseball
Latest LA Dodgers addition Shohei Ohtani’s deal is worth 700 million dollars, but he won’t see 97 percent of it until 2034. Image: MLB on Fox
December 12, 2023
By Trevor Fitzpatrick
Canadian Baseball Network
Almost every hardware and furniture store has a “buy now, pay later” deal. Now, the Los Angeles Dodgers have one as well.
The buzz around Toronto and Canada as a whole were through the roof before two-way sensation Shohei Ohtani made his decision to sign with the Dodgers.
There was a time when it seriously felt like he might end up north of the border.
Unfortunately, it wasn’t meant to be. On top of Ohtani not signing with the Toronto Blue Jays, there has been some speculation that the Blue Jays may have just been a bargaining chip all along.
Regardless, the Dodgers got their player on a historic deal. Ten years,
$700 million. The previous best? Ohtani’s former teammate Mike Trout at $426 million over 12 years.
Just revealed on Monday though by Jeff Passan on X, Ohtani won’t be seeing 97% of that money until 2034. He’ll be making $2 million dollars a year for 10 years, then paid $68 million a year from 2034 to 2043.
That ranks Ohtani as the 17th highest paid athlete on the Dodgers squad in terms of expected 2024 payout. That’s the magic of deferring a contract.
These types of contracts are nothing new to baseball. In fact, they gave us “Bobby Bonilla Day,” which rolls around every Canada Day.
The New York Mets bought out Bonilla’s contract in 2000 for $5.9 million, but didn’t pay him right away.
They instead opted to pay him back in yearly installments of $1.2 million per year starting back in 2011. They’ll keep paying him until 2035.
These types of deals have been becoming more and more popular throughout the major leagues. In fact, Ohtani’s new teammate and Team Canada WBC representative Freddie Freeman is signed to one himself.
Other big names on deferred deals include Max Scherzer, Stephen Strasberg, Francisco Lindor, Jacob DeGrom, and Christian Yelich.
With the image of Ohtani’s contract painted a bit smoother, let’s dig deeper into some of the questions you may have.
Why are these deferred deals gaining traction in MLB and not other sports?
For starters, it’s nearly impossible to pull off in the NFL and NHL. The two have hard salary caps that the MLB doesn’t.
These caps would require a team to strategize well in advance if they were to defer a payment since It would directly contribute to their cap when they eventually have to pay.
Other leagues also have a key component that MLB doesn’t. A cap on deferrals. The NBA limits them to 25 percent of a player’s salary, ensuring that they don’t have a situation like the one MLB is dealing with now.
Does MLB not have a rule against backloading a contract this heavily?
None at all. In the current Collective Bargaining Agreement between MLB and the MLBPA, there’s no limit as to how much money can be deferred.
The current CBA is in effect until 2026, so we may see some changes then, but that’s not for a while to come.
What advantages can a team get from deferring a contract?
In almost every case of this happening, it comes down to two factors. Tax savings and spending money.
Starting with tax, MLB uses Competitive Balance Tax as a “substitution” for a hard cap. In 2024, teams paying their 40-man roster more than $233 million will be subject to the CBT.
When it comes to Ohtani’s contract, MLB has calculated its value to now be $460 million for CBT purposes. Essentially, the Dodgers are saving upwards of 35 percent on tax.
It’s an interesting loophole that only baseball has and one that not many teams are exploiting. With this latest move though, more teams could jump on the bandwagon during this current and future free agencies.
That brings us to spending money. Simply put, saving on tax and paying a star less per season opens up opportunities to sign other players with the money saved.
Will the Dodgers feel the effects once those Ohtani deferred payments start knocking in 2034? Absolutely. Will they care that much in the present? Probably not with all the savings that they find themselves with now.
MLB’s biggest draw is fine with making only two million dollars a year?
While no one can think or speak for Ohtani, he is expected to earn $50 million in endorsements next season according to Bob Nightengale of USA TODAY.
That could have played a big role in him being willing to take such a large short-term pay cut.
Will other players really follow suit and sign deferred deals?
One benefit that we haven’t talked about yet for players is financial security. According to FOX Business, 78% of athletes go broke after retiring.
Deferred contracts can help combat this by forcing athletes to be more responsible with their money. Getting payments well after retirement can help athletes not fall into pitfalls of poor spending.
If there’s anything that this Ohtani signing has proven, it’s that there is certainly more than one way to structure a contract. While not every player will be willing to defer money, others will.
How does all of this affect the Blue Jays?
The free agent market has just been shaken like it never has before. As the Blue Jays scramble to enter the bidding for other players, they’ll have to keep in mind that some offers submitted by other teams this season and in future may not be conventional.
Looking towards that future, 2026 is going to be an important year for the Jays. First, the current CBA is set to expire that year. The current CBT reducing loophole displayed by the Dodgers may be locked away by then, but if it’s not, there’s a lot to consider.
Vladimir Guerrero Jr. (Montreal, Que.), Bo Bichette, and Chris Bassitt will all hit the open market that year. If all three continue to play at a high level, the Jays may want to make some moves financially to offset the cost of re-signing all three players if that is still their plan by then.
Does this affect players at levels of baseball below the Majors?
Somewhat. For players in the minors or looking to enter an upcoming draft pool, it’s something to think about.
The reason for sitting on the fence on whether or not it affects younger players is because sitting on the fence is all that players at the lower levels can really do when it comes to contracts.
A player needs six years of Major League service time before they can become a free agent. By then the CBA will likely have changed, meaning that contracts might not be able to be structured in the same way.
While it’s certainly worth thinking about, players are better off making it to the Major Leagues before worrying about future contracts.