NEW YORK — Deciding whether Juan Soto tops Shohei Ohtani for baseball’s largest contract could be in the eye of the beholder because of all the deferred money in Ohtani’s deal.
Ohtani agreed last December to a $700 million, 10-year deal with the Los Angeles Dodgers, easily exceeding the previous high set when Mike Trout and the Los Angeles Angels struck a $426.5 million, 12-year agreement through 2030.
Ohtani’s deal includes $680 million in deferred money payable from 2034-43. There are several interpretations for how to value that deal in current dollars:
1. For baseball’s luxury tax, the average annual value is pegged at $46.08 million using a 4.33% discount rate.
2. The players’ association uses a 5% rate, which puts the value at $43.75 million per season.
3. For MLB’s regular payroll, a 10% rate results in a $28.21 million per year rate.
Soto could get a contract of 10-to-15 years for $600 million or more.
His agent, Scott Boras, is not a big fan of deferred money and thinks teams might not insist on delaying the cash.
“I think it’s much less of an issue than it was before,” Boras said. “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 interest figure used for discounting to determine luxury tax value is set in the collective bargaining agreement as the federal mid-term rate defined in section 1274(d) of the Internal Revenue Code for the October preceding the initial contract year.
That rate dropped to 3.7% this offseason, which meant if Ohtani’s deal had been agreed to this month, its annual luxury tax value would have been about $49.3 million. That would have resulted in an additional $3.5 million annual tax bill for the Dodgers, who will exceed the top threshold and would pay additional tax at a 110% rate on each dollar.
MLB’s regular payrolls, which use the same rate as the one for calculating the qualifying offer price based on the 125 largest contracts, use the prime rate set by J.P. Morgan Chase on the preceding Nov. 1 plus 1%, rounded to the nearest full percentage point. That figure dropped to 9% for this offseason.
Deferred compensation must be funded by the second July 1 after the season in which it was earned, discounted to a present-day value at a 5% rate.
Los Angeles owes deferred payments just over $1 billion due from 2028-46 to Ohtani, Mookie Betts, Freddie Freeman, Will Smith, Teoscar Hernández, Blake Snell and Tommy Edman.
“It’s just trying to kick dollars down the road,” St. Louis Cardinals president of baseball operations John Mozeliak said at the general managers meetings last month.
Ohtani’s payments are two-thirds of the total owed.
“It was a unique situation for where a club was, a unique situation for a player who has very significant earning potential outside of strictly his compensation from a club,” New York Mets president of baseball operations David Stearns said. “Those other ones are much more representative of what you see in sort of standard contracts around the industry. Each organization, each ownership group is going to have a slightly different perspective on this, on how they’re calculating the returns off of that deferred compensation.”
Dodgers president of baseball operations Andrew Friedman said his team’s leadership from Guggenheim Baseball Management has the expertise to fund deferred compensation wisely.
“A lot of our ownership group are from financial background and can have that money going to work right now,” he said.
MLB proposed during collective bargaining on June 21, 2021, to put an end to the practice.
“For contracts entered into after the effective date of the Basic Agreement, deferred compensation of any kind will not be permitted,” the proposal read, according to a copy obtained by The Associated Press.
That idea was rejected by the union and not included in the five-year agreement that expires in December 2026.
New York Yankees general manager Brian Cashman thinks his team’s large resources encourage players to seek their money as soon as possible.
“We’re open to deferrals,” he said. “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.”
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AP MLB: https://apnews.com/hub/MLB
