Shohei Ohtani has picked his team. The young phenom is heading across town to play for the Los Angeles Dodgers on a deal that was finalized (we think) yesterday. The total pact is listed as 10-years/$700 million. Th $700MM guarantee makes his contract the largest ever given in professional sports surpassing the $674MM deal that soccer legend Lionel Messi signed with FC Barcelona for the 2017-21 La Liga seasons. Unlike that Messi (and ultimately messy) contract though, this one is for a longer period and includes substantial deferred money. That’s where Ohtani’s deal is causing waves, both among fans and among those who cover the game for a living. Ohtani’s deal includes significant deferments. In fact, more than 97% of his contract is deferred money.
A few quick notes about deferments:
Deferments are not just “free money”. Not as such. And, thanks to the Arizona Diamondbacks (among other factors) deferments must now be pre-funded.
From the CBA: “Deferred compensation obligations … must be fully funded by the Club, in an amount equal to the present value of the total deferred compensation obligation, on or before the second July 1 following the championship season in which the deferred compensation is earned.”
The CBA goes onto define what “fully funded” means: “the Club must have funded, for the duration of and without interruption in each year, the current present value of the then outstanding deferred payments, discounted by 5% annually.”
In other words, starting July 1, 2025 the Dodgers will be making $68 million deposits to the escrow account. Then, when the time comes to start paying Ohtani the deferred money in 2035, he’ll get one lump-sum payment of $68MM every year on that date, instead of the money spread out over equal installments across an eight month season. The part where the Dodgers need to pre-fund the deferments is important to the upcoming conversation, so keep it in mind.
What the deferred payments do allow the Dodgers to do is, to avoid the rapid escalation of their competitive balance tax hit. Because MLB contracts are no longer taxed on base AAV, the Dodgers get to be hit with a competitive balance tax hit that is based off of the “actual monetary value” of the deal - with $68MM in 2045 viewed as being roughly $46MM now by the league and the tables used. That $24MM difference in cap hit is a very big difference in the amount of taxes the team will have to pay to the league. It also allows them to add additional free agents without the hit getting even higher still. If, for instance, they sign Yoshinobu Yamamoto to a deal that pays $23MM per year, they are still paying less in tax for the combination of Ohtani and Yamamoto together than they would be paying for Ohtani alone without the deferment. And therein lies the rub.
So where, if anywhere at all, does baseball go from here? Will MLB allow blatant tax dodgers like this continue, or will they take a stand against them in the next round of CBA talks? What’s more, what sort of reasonable solutions are available to a league like Major League Baseball?
What Might Financial Fair Play (FFP) Look Like for MLB?
Those familiar with the sport of professional soccer will be familiar with the concept of financial fair play. It is not a perfect system by any stretch of the imagination. However, it does provide a pathway for small and mid-market teams to play in the same pool as the big fish and it also at least makes an attempt to mitigate the benefits of having deep-pocketed owners with no team revenue. (That last part still needs work, but is at least a work in progress that is getting better.)
In short, and without all the jargon involving how things are calculated, FFP is a team expense limiter that functions over a rolling three-year period. Each year, around the same date (we’ll call it July 1st since that is the key date for MLB) a snapshot is taken over the finances for the previous three years. The total of those finances have a limit to them in how much money a team is allowed to lose in a three-year period. Any team that loses in excess of that amount over the period is then penalized. Additionally, there are restrictions on how much money ownership can directly inject into the team in order to support the team’s spending. In real application that means that just because Newcastle United is owned by Saudi Arabia does not mean the Magpies get to spend $1BN on payroll every year, even though ownership could clearly afford such an expense.
What does that look like for MLB though? Well, here’s one way it could work.
- MLB goes back to calculating AAV by dividing the raw contract dollars by the length of the contract. No “relative value” assessments need to be made. 10 years/$700MM comes out to $70MM AAV. If MLB was doing this now, I sincerely doubt anyone would care about the Ohtani contract.
- Keep the competitive balance soft cap in play, setting it around $250-300 million AAV. This combined with rule number one would eliminate most gripes, but it still doesn’t do enough to help smaller teams play in the top end of the market.
- Set a reasonable limit for the FFP. That would have to be a number hashed out by the MLBPA and ownership during CBA negotiations. For the purposes of this exercise, just to keep things in definable terms, let’s say the limit is set at $50MM. That would mean that, over a three-year period, the snapshot has to show the team did not lose more of that in aggregate in the period.
- Teams found in violation of FFP are then penalized. Second violations come with steeper penalties. Third violations come with administration (see McCourt and the Dodgers). In soccer, the harsh penalty (so far) is a points deduction in the standings. As baseball has a different system for the standings, that wouldn’t work as well. But a first violation could still be painful. A team could lose a first pick (no protections) in the upcoming draft. Furthermore, total free agent spending could be restricted, perhaps even entirely turned off for the team for the period from the end of the World Series until the first game of the season. The specific penalties are less important here than their existence and the need for those existing penalties to come with actual bite to them.
- Allow teams to still defer money. However, when that deferred money is finally paid, that money counts against FFP in the years it is paid out.
- Owners are restricted from adding no more than $10 million of their own money to offset expenses (or whatever number the league comes up with)
In the case of Shohei Ohtani and the Dodgers, the above proposal looks something like this:
- Shohei Ohtani gets a contract for 10-yr/$70MM.
- Ohtani elects to defer all but $2MM/yr
- For the next 10 years, the Dodgers are hit with a competitive balance tax number of $70MM, however...
- For the next 10 years, they are only hit with a $2MM FFP hit, but...
- For the following 10 years after that, while they take zero competitive balance hit, they do take a $68MM FFP hit.
This sets up a scenario in which everybody wins (as much as can be the case without hard caps on everything). Ohtani gets his historic payday and gets to play for the team he is best-suited to go to. The Dodgers get the benefit of splitting up the financial and competitive balance hits, leaving them more flexible to continue pursuing free agent talent. MLB still gets to hold the line on a competitive balance limit that they can tax the team for going over - those tax dollars would also apply to the FFP calculations made every year. With the bigger tax bills being paid, more money makes its way back into the pool for smaller teams to make use of to sign their own talent.
Now, this has all revolved around the Dodgers so far. The Dodgers are a bad example of a team this benefits though, as the Dodgers are much like my beloved Manchester United. They could full pay Shohei Ohtani’s contract up front, like a normal, non-deferred contract, and they would still remain in the black financially. The biggest win the Dodgers (and Ohtani for that matter) get out of this structure is that there are more theoretical dollars to be spent on yet more big-name talent to hep supplement adding the biggest name in the sport.
But what about a mid-market team, say Arizona or St. Louis? What does this look like for them? Well, that depends on how the new contract is structured. However, it does open the door for such teams to play with big money deals. Say Arizona shelled out this deal. Say also that Arizona has been running a profit for the last few years. With having just gone to the World Series on a budget payroll, that’s a safe assumption for this exercise. Arizona could then have made a similar offer to Ohtani and even pulled some of the payments forward. As long as any total losses suffered by the team for 2024 did not outweigh the profits from 2022-23 combined the team would still be in good standing. Say they take a second, smaller loss in 2025. Again, so long as the total losses from 2024 and 2025 do not go over the profits of 2023 (when the team went to the World Series and increased revenue) they are still in good standing. Then, as long as they get back under the allowed losses before the 2026 FFP tabulation, they remain in good standing. This allows teams to use winning games and marketing stars to thrive. On the other end of the spectrum, teams like the Athletics (or the Marlins, or even the wining Tampa Bay Rays), who took too many losses, despite zero massive expenditures, would be placed in administration and ownership would be moved on, the same process that directly led to where we are today with the Dodgers.
This is a crude outline of how FFP would work. It is far from a perfect solution. It does however, address some of the current loopholes being decried. It also steers well clear of the notion of salary caps, a complete non-starter for any negotiations with the MLBPA. This method would still allow large teams to spend like large teams. However they would find less cover to do so. They would take hits on multiple fronts. Thus, they would have to balance that against future plans to make big splashes. As long as team’s, no matter the size, pay full freight in taxes that’s about as fair as a system can get. On the flipside, it encourages smaller teams to become more aggressive. They need solid analytic teams in place and need to make the right gambles at the right time, but the path will be paved for them in gold bricks. Lastly, it stops owners like Steve Cohen or the Guggenheim Group from reaching into their Cayman Island bank accounts to put their thumbs on the scale when it comes time to calculate FFP.
The league would still be plagued by haves and have-nots. But at least there would be devices in play at both the top and bottom of the financial scale to incentivize teams more toward the middle. At the very least, such a system would make Shohei Ohtani cashing in on his international superstardom a topic to be celebrated, rather than one to be loathed, mostly because the “wrong team” benefitted.