Will Juan Soto top Shohei Ohtani’s lucrative contract? The answer may hinge on the intricate calculations surrounding Ohtani’s deal, particularly the deferred payments involved.
Last December, Ohtani secured a staggering $700 million, 10-year contract with the Los Angeles Dodgers, surpassing the previous record held by Mike Trout and the Los Angeles Angels, who had set a $426.5 million, 12-year agreement through 2030.
Among the notable aspects of Ohtani’s contract is the $680 million in deferred payments, which will be disbursed from 2034 to 2043. This unique structure invites various interpretations when assessing the deal’s current value.
Scott Boras, Ohtani’s agent, expresses skepticism towards deferred money, suggesting that teams may prefer immediate compensation. He stated, “I think it’s much less of an issue than it was before. Deferral as a mechanism for me, is it: Will it impede my ability to get the greatest asset I can acquire? And the answer to that is, I don’t think they’re going to want to do anything that impedes their primary pursuit and goal.”
The collective bargaining agreement sets the interest rate for discounting luxury tax value based on the federal mid-term rate, as outlined in section 1274(d) of the Internal Revenue Code. This offseason, that rate fell to 3.7%, meaning if Ohtani’s deal had been finalized this month, its annual luxury tax value would have reached approximately $49.3 million. This scenario would have resulted in an additional $3.5 million annual tax burden for the Dodgers, who would surpass the top threshold and incur a 110% tax on each dollar over that limit.
For MLB’s regular payrolls, the same interest rate applies, calculated using the prime rate set by JPMorgan Chase plus 1%, rounded to the nearest whole percentage point. This rate has dropped to 9% for the current offseason.
Deferred compensation must be funded by the second July 1 following the season in which it was earned, discounted to a present value at a 5% rate.
The Dodgers currently owe over $1 billion in deferred payments from 2028 to 2046, which includes obligations to Ohtani, Mookie Betts, Freddie Freeman, Will Smith, Teoscar Hernández, Blake Snell, and Tommy Edman. Ohtani’s share constitutes two-thirds of this total.
Andrew Friedman, the Dodgers’ president of baseball operations, has confidence in his team’s ability to manage deferred compensation effectively. He noted, “A lot of our ownership group are from financial backgrounds and can have that money going to work right now.”
During collective bargaining discussions on June 21, 2021, MLB proposed to eliminate deferred contracts, a suggestion that was ultimately rejected by the players’ union and not included in the five-year agreement set to expire in December 2026.
Brian Cashman, the general manager of the New York Yankees, believes that the team’s substantial resources may lead players to prefer immediate payments. He commented, “We’re open to deferrals. A lot of times players are less open to doing deferrals for us than they are for maybe other markets, but if we can do stuff that benefits us, of course we will.”
