A total of $680 million — 97% of the money — was deferred until 2034-43 with no interest.
Had the Dodgers invented some kind of contract voodoo new to Major League Baseball?
“Thanks to his endorsements and other off-the-field revenue streams, he has the luxury to defer compensation,” said Michael Rueda, head of the U.S. division of sports and entertainment at Withers law firm. “But there’s always some risk.”
Political Cartoons
Part of Rueda’s job is giving financial advice to high-profile sports stars and celebrities. He said the Ohtani-Dodgers deal looks like a solid arrangement, even if there are tradeoffs for both sides.
Make no mistake, the 29-year-old Ohtani is a rich man and will be rich long into the foreseeable future, but money promised later is never the same as money in hand.
One example of Ohtani’s risk: Former Pittsburgh Penguins superstar Mario Lemieux was out about $26 million in the 1990s when the franchise was in financial trouble and couldn’t pay the money it owed the hockey legend in a deferred deal.
Things eventually worked out. Lemieux converted his deferred salary into equity with the team, then partnered with Ron Burkle to pull the club out of bankruptcy. They eventually made a windfall after selling part of their stake in 2021 — but it’s a reminder that financial circumstances can change when 20 years pass. The Dodgers were certainly a fan-drawing juggernaut in 2023, but 2043 doesn’t come for a long time. LA, after all, is only 12 years removed from filing for bankruptcy protection itself under former owner Frank McCourt.
There’s also at least some risk for the franchise: The New York Mets famously deferred $5.9 million that slugger Bobby Bonilla was owed in 2000 and — thanks to an 8% interest rate — will end up paying nearly $30 million total in annual installments until 2035. The Mets have leaned into the self-own in recent seasons, with owner Steve Cohen celebrating the July 1 payment that Bonilla is due each year.
Of course, Ohtani’s deferred pay comes with no interest. That’s a potentially monstrous savings — we’re talking billions — on a deal that could have been much more costly. Ohtani’s deal with 8% interest would come out to nearly $3 billion by 2043.
“It’s interesting to me that the deferred money comes with no interest, from what I’ve read” Rueda said. “That’s giving up a lot of money.”
Ohtani’s other potential advantage from the contract is he receives $680 million of the $700 million after he’s done playing, which means he might not be living in California, where taxes are relatively high. Depending on where he lives from 2034-43, that could lead to sizable savings.
Rueda said the issue isn’t black and white and there are lots of variables, particularly if he goes back to Japan.
“Tax is always a big part,” Rueda said. “The concept of moving to a different jurisdiction and avoiding the California state tax — yeah, that could be accurate.”
For purposes of baseball’s luxury tax, the contract is valued as a yearly addition to the Dodgers’ payroll of about $46 million instead of $70 million. Under the collective bargaining agreement, for the calculation of a team’s tax payroll the value of deferred money is discounted at the federal mid-term rate.
Arizona Diamondbacks owner Ken Kendrick — who talked about the contract at length earlier this week — said his understanding is the deal will save the Dodgers somewhere in the neighborhood of $5 million each season because of the competitive balance tax savings — the exact amount depends on how often the Dodgers exceed the tax threshold and by how much.
“They’re playing by the rules,” Kendrick said. “They got a great player, who is going to be an addition that makes them more competitive. But the economics are not so tilted in a way that puts them at an incredible advantage over the rest of us.”
Kendrick said he believes one major misconception of the deal is that the Dodgers are saving $68 million each season from 2024-33 that they can use to pursue other free agents. Baseball’s labor contract calls for the deferred money to be set aside by the second July 1 after the season it is earned, at the then-current present-day value discounted by at least 5% annually.
“They have to demonstrate that they have that money,” Rueda said. “You can’t write checks that you can’t cash.”
AP Baseball Writer Ronald Blum contributed to this story.
Copyright 2023 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
The recent contract extension between the Los Angeles Dodgers and Shohei Ohtani has raised questions about the use of deferred payments in Major League Baseball. The $680 million deal, which accounts for 97% of Ohtani’s total earnings, will be deferred until 2034-2043 with no interest. According to Michael Rueda, head of the U.S. division of sports and entertainment at Withers law firm, Ohtani’s ability to defer compensation is due to his endorsements and off-the-field revenue streams. However, there is always a risk involved in deferring payments, as circumstances can change over time. Rueda cites the example of former NHL player Mario Lemieux, who lost $26 million in a deferred deal when the Pittsburgh Penguins faced financial trouble. Nevertheless, the Dodgers’ deal with Ohtani comes with no interest, which could result in significant savings for the franchise. Additionally, Ohtani’s contract allows him to receive $680 million after his playing career, potentially avoiding high taxes in California. However, the issue of taxes is complex, and there are various variables to consider, especially if Ohtani returns to Japan. From a luxury tax perspective, the contract is valued as a yearly addition of about $46 million to the Dodgers’ payroll instead of $70 million. The deal is expected to save the Dodgers around $5 million each season in competitive balance tax savings. Despite these advantages, Arizona Diamondbacks owner Ken Kendrick believes the economics of the deal do not give the Dodgers an overwhelming advantage over other teams. It is also important to note that the deferred money must be set aside by the Dodgers according to the rules outlined in baseball’s labor contract. Overall, while the Ohtani-Dodgers deal appears to be a solid arrangement for both parties, there are risks and tradeoffs involved in deferring payments.
The article is reproduced from Source link
