Shohei Ohtani’s $700 Million Contract Is a Masterpiece of Financial Engineering

The Los Angeles Dodgers won the biggest free agent sweepstakes of all time. For the next nine years, it will cost them roughly what it would have cost to rent a midrotation starting pitcher for one season.

Shohei Ohtani will wear Dodger blue next April. Ohtani’s six years with the Los Angeles Angels, not far from the Dodgers’ home in Chavez Ravine, were famous for two things: the joint brilliance of Ohtani and fellow future Hall of Famer Mike Trout and the Angels’ cataclysmic inability to convert the two of them into a competitive team. The 2023 team briefly looked as if it would make a change before everything fell apart spectacularly.

The conclusion Ohtani reached from his time in Anaheim is now clear: that nothing matters as much as winning does. And so the Dodgers will benefit from a contract that appears (and frankly is) enormous, but is actually so comically team-friendly that it strains credulity that the Major League Baseball Players Association would even allow it. But it does make sense in satisfying each side of the contract’s top priority. The Dodgers’ desire to make a good deal and Ohtani’s desire to join the most consistent winning franchise in baseball have merged to form an awe-inspiring contractual arrangement worth “$700 million.”

After Ohtani announced Saturday that he would join the Dodgers, details of the deal started to leak. The reporting consensus was that Ohtani’s deal included major salary deferral. That’s not an uncommon structure in big MLB deals, as owners look to keep short-term costs low and allow inflation to make their money less valuable by the time they have to spend it. But Ohtani’s deal takes this dynamic to its logical extreme, as the biggest free agent contract in American sports history meets the most exaggerated backloading format anyone has ever conceived. The Athletic’s Fabian Ardaya reported on Monday that Ohtani’s 10-year deal, worth $700 million, would see him collect only $2 million a season until after the deal concludes. The rest will arrive without interest, Ardaya reported, between 2034 and 2043.

In other words, Ohtani will issue an interest-free loan of nearly his entire salary for more than a decade. That will free up cash flow for the Dodgers while lowering the team’s obligations under MLB’s competitive balance tax. That tax applies to big-spending teams like the Dodgers, as a collectively bargained incentive to hold salaries down and give smaller-market teams (but really just cheaper owners) a better chance to compete without making a big financial effort. Ohtani will be fine. He has been the face of baseball in his native Japan for years, and he has recently become the same in the United States. His endorsement earnings are enormous, estimated in Ardaya’s report at $50 million a year. That allowed Ohtani to not quite work for the Dodgers for free but to accept an employment agreement worth nowhere close to what $700 million indicates. Sports economists will have a field day figuring out his new contract’s present-day value.

A stock reaction to this reporting on Monday afternoon was: How is that legal? Well, it’s right there in the collective bargaining agreement between MLB’s players and owners, the one they struck up after a lockout in 2022. “There shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation” in MLB contracts, it says. The Dodgers don’t even have to have all that deferred compensation funded until years from now. The piper will need payment, but it will be a while. The world might end, or the Dodgers might get sold first. And Ohtani might be living somewhere other than California, so he might pay less in taxes.

In the meantime, the Dodgers will pay about $20 million over 10 years for the best baseball player alive. ESPN’s Jeff Passan reports that in competitive balance tax terms, Ohtani’s deal will count for $46 million, not $70 million, per season. That will save L.A. millions in tax penalties while Ohtani is on the roster, though the deal is so big that it’s not right to see the whole thing as a tax dodge. He won’t pitch in 2024 while he mends an elbow injury, but he will eventually give L.A. one of the best arms in the league. He will immediately join first baseman Freddie Freeman and outfielder/superutility player Mookie Betts to form one of the most fearsome lineup trios of all time. And the Dodgers, who are not shy about spending actual upfront money on players, will have more room to keep doing that. To their credit, the club realizes that Ohtani is an investment in fan support as much as he is a (very long-term) expense.

It is somewhat shocking that the rest of MLB was fine setting up the conditions that allowed this deal to take place. Players are going to dislike it for an obvious reason: Ohtani accepting such a drastic portion of his compensation in deferrals will give teams ammunition when they ask other players—all of them inferior to Ohtani—to do the same. Many owners might be pissed too, insofar as a deferral like this one provides a model, albeit with strings attached, to a supersize payment total for players.

The latter theory has origins in other sports. In 2010 the NHL’s New Jersey Devils gave a $102 million contract to goal-scoring winger Ilya Kovalchuk. The sticker price was a lot, but the stunner was the term: a 17-year pact that Kovalchuk, then 27, was never going to play all the way out. The franchise built the contract that way so that Kovalchuk’s salary cap hit would be lower. A furious league office fined the Devils and took away some draft picks because New Jersey had committed a grave sin against sports’ ownership class: It had devised a creative way to enhance a player’s salary.

Baseball has no salary cap. Commissioner Rob Manfred would object loudly to anyone who claimed that the competitive balance tax, which the Dodgers are skirting here, has functioned as one. But the Dodgers now have a path to give more players more money while also snapping up Ohtani, and who knows what their down-the-road obligations might be because of Ohtani’s deferrals? The current CBA runs only through 2026. The sport could look much different by the time Ohtani needs to get his cash. Players might be angry about the money Ohtani will have to wait to get, and other owners might be angry that the Dodgers are giving it to him. Baseball’s owners aren’t a monolith, and some will be offended merely at the notion that the Dodgers got a player they’d never dare try to get for themselves.

None of that is the Dodgers’ problem, though. They’ve pulled a coup, and their fans will get to watch one of the most exciting athletes ever for the next decade. Ohtani has been more generous to his new employer than he had to be, but such is life when you’ve just spent six years drawing favorable comparisons to Babe Ruth while never once appearing in the postseason. Ohtani languished on a team that never deserved him. Now he will star for one that barely has to work to afford him.