Deferred Payments
Dec 9, 2023 17:51:16 GMT -5
benogliviesbrother, scottysmalls, and 6 more like this
Post by wcsoxfan on Dec 9, 2023 17:51:16 GMT -5
There was quite a bit of discussion regarding deferred contracts upon Ohtani signing his 700mil deal, so hopefully this thread can separate the discussion (for those uninterested) along with helping anyone who is unsure of how the deferments work regarding the Collective Bargaining Tax thresholds.
The current CBA allows for 5% (assuming interest rates don't exceed 7%) compounded interest in calculating the value of deferred payments. This means that a player with 10mil of deferred salary in 2024 (at 2024 value) who will be compensated in 2034, will actually receive 16.289 (estimated) million. It may seem slightly strange to look at it this way though because we're used to seeing it the other way around.
A player agent will report the above contract/payment at $16.289mil because it looks better for themselves AND it creates a better headline for sports reporters, but for CBT purposes it would count for only $10mil.
There have been some calling shenanigans on the deferred payments as a way to manipulate the CBT, but in reality they're a way to manipulate the headline. The player, agent and team all know the real value (in current dollars) of the contract and this will be reflected upon the CBT calculations at the end of the season by MLB. This is public information but is often overlooked because it doesn't make the initial headline (but it has with Ohtani, which makes this an exception in the reporting). So the trick is on us the fans and not the CBT.
As a warning: although I have done some accounting in my past, I am not a CPA and am in no way would consider myself a professional in this field. For those interested in the nitty-gritty, or who wish to form their own opinions, please read the below taken directly from the 2022-2026 CBA (the following excerpt is regarding deferred compensation directly, but there is more regarding this subject within the CBA - link below). Also, I haven't done this in a while, so let me know if I made a mistake with the math or in any other area.
www.mlbplayers.com/_files/ugd/4d23dc_d6dfc2344d2042de973e37de62484da5.pdf
The current CBA allows for 5% (assuming interest rates don't exceed 7%) compounded interest in calculating the value of deferred payments. This means that a player with 10mil of deferred salary in 2024 (at 2024 value) who will be compensated in 2034, will actually receive 16.289 (estimated) million. It may seem slightly strange to look at it this way though because we're used to seeing it the other way around.
A player agent will report the above contract/payment at $16.289mil because it looks better for themselves AND it creates a better headline for sports reporters, but for CBT purposes it would count for only $10mil.
There have been some calling shenanigans on the deferred payments as a way to manipulate the CBT, but in reality they're a way to manipulate the headline. The player, agent and team all know the real value (in current dollars) of the contract and this will be reflected upon the CBT calculations at the end of the season by MLB. This is public information but is often overlooked because it doesn't make the initial headline (but it has with Ohtani, which makes this an exception in the reporting). So the trick is on us the fans and not the CBT.
As a warning: although I have done some accounting in my past, I am not a CPA and am in no way would consider myself a professional in this field. For those interested in the nitty-gritty, or who wish to form their own opinions, please read the below taken directly from the 2022-2026 CBA (the following excerpt is regarding deferred compensation directly, but there is more regarding this subject within the CBA - link below). Also, I haven't done this in a while, so let me know if I made a mistake with the math or in any other area.
www.mlbplayers.com/_files/ugd/4d23dc_d6dfc2344d2042de973e37de62484da5.pdf
ARTICLE XVI—Deferred Compensation
There shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide.
Deferred compensation obligations incurred in a Contract executed after December 31, 1985 but before September 30, 2002 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 third January 1 following the championship season in which the deferred compensation is earned. Deferred compensation obligations incurred in a Contract executed on or after September 30, 2002 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. For purposes of this Article XVI, full funding of the present value of deferred compensation obligations shall mean that 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. If the prime interest rate in effect at The J.P. Morgan Chase Bank on the immediately preceding November 1 is 7% or higher, the Parties shall meet and confer regarding this Article XVI discount rate and may, with due notice to the Clubs, amend such discount rate effective the next succeeding July 1.
Notwithstanding the above funding requirement, each Club shall be entitled to an annual deductible amount of deferred compensation which need not be funded for Contracts executed before December 11, 2011. Such deductible amount shall be applied to the aggregate of Uniform Player’s Contracts executed during a given Basic Agreement period before December 11, 2011, and shall be in an amount equal to the lesser of $2,000,000 or the present value of the total deferred compensation obligations owed by a Club pursuant to Uniform Player’s Contracts executed during a given Basic Agreement period before December 11, 2011. The deductible amount applicable to Uniform Player’s Contracts signed during a given Basic Agreement period before December 11, 2011 is applied against the Club’s current aggregate deferred compensation funding obligations from Uniform Player’s Contracts signed during that Basic Agreement period and not any particular Uniform Player’s Contract(s).
Unless the Uniform Player’s Contract provides otherwise, a Club may fund deferred compensation obligations in such manner as it elects, provided that: (a) the funding method used by the Club must be such that the amount(s) funded are exclusively for the uses and purposes of satisfying the deferred compensation obligation(s) being funded; (b) the amount(s) funded are maintained in the form of unencumbered assets comprising cash or cash equivalents and/or registered and unrestricted readily marketable securities, unless a Club obtains the Parties’ prior written authorization of an alternative form; and (c) such amount(s) funded are subject to the claims of the Club’s general creditors. Each Club shall certify quarterly to the Office of the Commissioner by January 31, April 30, July 31, and October 31 of each year (and the Office of the Commissioner shall provide such certifications to the Association within 30 days of their receipt) the manner in which its deferred compensation obligations that were required to be funded by the immediately preceding July 1 have been funded. In addition, upon each quarterly certification, each Club shall provide to the Office of the Commissioner all records relating to its deferred compensation funding arrangements, and the Office of the Commissioner shall supply any such records to the Association upon request.
There shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide.
Deferred compensation obligations incurred in a Contract executed after December 31, 1985 but before September 30, 2002 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 third January 1 following the championship season in which the deferred compensation is earned. Deferred compensation obligations incurred in a Contract executed on or after September 30, 2002 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. For purposes of this Article XVI, full funding of the present value of deferred compensation obligations shall mean that 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. If the prime interest rate in effect at The J.P. Morgan Chase Bank on the immediately preceding November 1 is 7% or higher, the Parties shall meet and confer regarding this Article XVI discount rate and may, with due notice to the Clubs, amend such discount rate effective the next succeeding July 1.
Notwithstanding the above funding requirement, each Club shall be entitled to an annual deductible amount of deferred compensation which need not be funded for Contracts executed before December 11, 2011. Such deductible amount shall be applied to the aggregate of Uniform Player’s Contracts executed during a given Basic Agreement period before December 11, 2011, and shall be in an amount equal to the lesser of $2,000,000 or the present value of the total deferred compensation obligations owed by a Club pursuant to Uniform Player’s Contracts executed during a given Basic Agreement period before December 11, 2011. The deductible amount applicable to Uniform Player’s Contracts signed during a given Basic Agreement period before December 11, 2011 is applied against the Club’s current aggregate deferred compensation funding obligations from Uniform Player’s Contracts signed during that Basic Agreement period and not any particular Uniform Player’s Contract(s).
Unless the Uniform Player’s Contract provides otherwise, a Club may fund deferred compensation obligations in such manner as it elects, provided that: (a) the funding method used by the Club must be such that the amount(s) funded are exclusively for the uses and purposes of satisfying the deferred compensation obligation(s) being funded; (b) the amount(s) funded are maintained in the form of unencumbered assets comprising cash or cash equivalents and/or registered and unrestricted readily marketable securities, unless a Club obtains the Parties’ prior written authorization of an alternative form; and (c) such amount(s) funded are subject to the claims of the Club’s general creditors. Each Club shall certify quarterly to the Office of the Commissioner by January 31, April 30, July 31, and October 31 of each year (and the Office of the Commissioner shall provide such certifications to the Association within 30 days of their receipt) the manner in which its deferred compensation obligations that were required to be funded by the immediately preceding July 1 have been funded. In addition, upon each quarterly certification, each Club shall provide to the Office of the Commissioner all records relating to its deferred compensation funding arrangements, and the Office of the Commissioner shall supply any such records to the Association upon request.