The Los Angeles Dodgers signed the most prized free agent in MLB history, Shohei Ohtani, to a record-breaking contract worth a staggering $700 million over 10 seasons.
Although the contract value is tremendous, the early reports were Ohtani had unprecedented deferrals that would bring the total value and competitive balance tax (CBT) figure down to around $50 million.
The idea was Ohtani’s to allow the Dodgers to continue building a competitive team around him by increasing cash flow and lowering penalties when the club goes over the CBT threshold.
As part of the agreed to deal, Ohtani is going to defer all but $20 million of his contract, which will now pay him $2 million per year over the next 10 years before it begins paying him $68 million per year for 10 years beginning in 2034, according to Fabian Ardaya of The Athletic:
In an effort to enable the Dodgers to continue spending around stars Ohtani, Mookie Betts and Freddie Freeman, Ohtani agreed to defer all but $2 million of his annual salary — $68 million of his $70 million per year — until after the completion of the contract. The deferred money is to be paid out without interest from 2034 to 2043.
Although the average annual value of a deal is normally the figure used by MLB to calculate payroll figures, the deferrals drop that number for Ohtani from $70 million to around $46 million:
For CBT purposes, the expected average annual value on the contract is said to be closer to $46 million per year, the person briefed on the terms said.
In 2024, the first CBT threshold is set for $237 million before rising to $241 million in 2025 and $244 million in 2026. As it currently stands, the Dodgers are roughly $17 million before the first threshold.
Teams are charged penalties based on how far over the threshold they are and for how long they have been over. The first year of being over is a 20% tax on all salaries over the threshold, which goes up to 30% the following year and 50% in any year beyond.
In addition, there’s also a surcharge for clubs that exceed the threshold by $20 million of 12%, which goes up to 42.5% if exceeded by $40 million (45% for each consecutive season) and 60% by $60 million or more.
Clubs that are $40 million or more above the threshold also have their highest selection in the next Draft moved back 10 places unless the pick falls in the top six. In that case, the team will have its second-highest selection moved back 10 places instead.
Did Dodgers break any MLB rules on deferred salary to Shohei Ohtani?
Although deferring that much of a contract is unprecedented, the MLB and Players Association Collective Bargaining Agreement states there are no limitations on how much of a contract can be deferred.
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