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Post by ephus on Dec 10, 2023 23:25:21 GMT -5
Me reading this post. Man, I really would of re-thought my $60k grad school experience if they pitched it as a one year, $130,000 proposition and called student loans “deferred income for the loan servicing company.” lol
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Post by incandenza on Dec 11, 2023 6:38:39 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. Thanks! This is by far the clearest explanation of how this deferred money thing works that I've seen. One upshot for me is that the years X AAV value is really the most relevant one for judging the size of a contract. So, e.g., Mookie didn't sign a $365 million contract with LA, he signed for 13 x 25.6 = $333 million.
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Post by ab17 on Dec 11, 2023 18:48:54 GMT -5
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Post by bloomstaxonomy on Dec 11, 2023 19:22:06 GMT -5
The Dodgers are so damn clever. They got it done, full well knowing that it would raise a s***storm and the deferred money/AAV language would be changed in 2026, and they decided to do it with one of the best players of all time full well knowing nobody would ever have another chance to do something like this and get $68 million deferred for $46mil AAV or $100mil for $70mil or $30mil for $5mil for any future generational talent ever again.
I’m starting to hate them. It’s completely legal by the letter of the law in the CBA, no debate about that. But they know what they’re doing, and they don’t care. He’s the best player in the world, currently, so why not spit on norms knowing you’ll benefit by a long shot?
My hypothesis precludes, of course, that the “it was Ohtani’s idea!” reports were deliberate leaks and misdirections to the media from the Dodgers. I have a hard time thinking Ohtani would just bring that up to be nice, even when he makes so much money on the side.
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Post by Foulke_In_Athol on Dec 11, 2023 19:25:40 GMT -5
Theoretically though isn't the purpose of the Luxury Tax supposed to be used as a way of increasing profit sharing throughout the league, not just a way to reign in the big boys? Isn't it supposed to be take from the rich give to the poor.
If most of a contract is being deferred isn't that money that is never being touched by the "Luxury Tax" ? ie. meaning overage payments that the league will never see. Money that theoretically is supposed to go to small markets.
If big market teams are still getting the big money players, but waiting to pay them when they retire, doesn't that defeat the whole purpose of the Luxury Tax.
What about using these deferred payments to skirt draft pool amounts, international signing limits etc.
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Post by wcsoxfan on Dec 11, 2023 19:40:25 GMT -5
Theoretically though isn't the purpose of the Luxury Tax supposed to be used as a way of increasing profit sharing throughout the league, not just a way to reign in the big boys? Isn't it supposed to be take from the rich give to the poor. If most of a contract is being deferred isn't that money that is never being touched by the "Luxury Tax" ? ie. meaning overage payments that the league will never see. Money that theoretically is supposed to go to small markets. If big market teams are still getting the big money players, but waiting to pay them when they retire, doesn't that defeat the whole purpose of the Luxury Tax. What about using these deferred payments to skirt draft pool amounts, international signing limits etc. The deferred payments are included in the CBT AAV, simply at a discounted rate of 5% per year to account for the decreased value of money. There is revenue sharing to do much of what you're referring to as well, the CBT amount is far less, but it being accounted for in that real AAV.
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Post by Underwater Johnson on Dec 11, 2023 23:26:39 GMT -5
The Dodgers are so damn clever. They got it done, full well knowing that it would raise a s***storm and the deferred money/AAV language would be changed in 2026, and they decided to do it with one of the best players of all time full well knowing nobody would ever have another chance to do something like this and get $68 million deferred for $46mil AAV or $100mil for $70mil or $30mil for $5mil for any future generational talent ever again. I’m starting to hate them. It’s completely legal by the letter of the law in the CBA, no debate about that. But they know what they’re doing, and they don’t care. He’s the best player in the world, currently, so why not spit on norms knowing you’ll benefit by a long shot? My hypothesis precludes, of course, that the “it was Ohtani’s idea!” reports were deliberate leaks and misdirections to the media from the Dodgers. I have a hard time thinking Ohtani would just bring that up to be nice, even when he makes so much money on the side. You can believe that or not but the bottom line is the player also has to agree to the deal. Maybe after years of losing with an Angels team that already had the best player in the world when he arrived, he decided to maximize the likelihood of winning in his next stop. It's not like he (or his agent) invented this -- the Patriots for many years had a star QB who agreed to be paid below market rate because he wanted a better shot at winning and had alternative income sources. I bet you didn't hate that! And in that case the team didn't even have to pay him later -- LAD will be paying for this window for a while.
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Post by Jimmy on Dec 11, 2023 23:30:56 GMT -5
As for as why it would benefit the player: Currently the 10 year Treasury Bill (risk free rate) is ~4.25%. If the discount rate for AAV formula is 5%, you’re getting 75 bps better risk free return than the general public can get. Obviously this is assuming in negotiations the team only cares about the luxury tax impact & not real $ (which I have a feeling is the case for the Dodgers). If you want to really get into it you could argue whether a guaranteed salary from an MLB team is really “risk free” in comparison to the US government, but I think that’s besides the point . The comparison to the T-Bill doesn't really matter in this situation. 5% is an arbitrary number used for calculating the LT amount. The player and his agent are going to use a rate that they believe to compare this contract vs. the other offers. I tend to think of deferred comp for this players as a way to guarantee income in their post-playing years. And tax strategy, if Mookie and Shohei move to Florida, Texas, or Tennessee in those deferral years they won't have to pay CA tax on that income (not sure how foreign tax works, but living in Japan should also mean no state income tax). Your last statement is interesting too. The way deferred compensation works in general is that it's only guaranteed if the payee is in business in those future years. That's probably not a huge risk in baseball (but who knows). Let's say you got deferred compensation from WeWork... well that's a different story. On the rate piece, of course that is working off the assumption the Dodgers paid him 5% more (compounded) than what he would’ve gotten with normally distributed payments. There’s no way to know for sure but an interesting thought exercise. On the later point, which I just thought of today, I’m curious if there’s a mechanism either required or available to secure the $, such as putting the $ or a portion of it in escrow or obtaining a letter of credit from a bank.
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Post by Jimmy on Dec 11, 2023 23:33:30 GMT -5
As for as why it would benefit the player: Currently the 10 year Treasury Bill (risk free rate) is ~4.25%. If the discount rate for AAV formula is 5%, you’re getting 75 bps better risk free return than the general public can get. Obviously this is assuming in negotiations the team only cares about the luxury tax impact & not real $ (which I have a feeling is the case for the Dodgers). If you want to really get into it you could argue whether a guaranteed salary from an MLB team is really “risk free” in comparison to the US government, but I think that’s besides the point . I don't think the average rate of return on investments for someone with that much money is between 4.25 and 5%. It’s not - I was speaking strictly on *risk free* returns. More risk = more return but if you want as close to a 100% guarantee to getting your money back as possible, the current rate of return is ~4.25%
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Post by orion09 on Dec 11, 2023 23:43:32 GMT -5
I wonder if this will become a trend. It’s been reported in the past that many MLB players compare themselves by the size of their contract. In practical terms, is there a difference in lifestyle between $250M and $350M? I doubt it. But there’s a difference in status and bragging rights. Ohtani, at “$700M,” gets to be the highest paid American athlete of all time.
Maybe the Sox can offer Yamamoto $350M to be the highest paid pitcher of all time… but it’s actually only $200M in real money.
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jimoh
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Post by jimoh on Dec 12, 2023 8:18:33 GMT -5
I wonder if this will become a trend. It’s been reported in the past that many MLB players compare themselves by the size of their contract. In practical terms, is there a difference in lifestyle between $250M and $350M? I doubt it. But there’s a difference in status and bragging rights. Ohtani, at “$700M,” gets to be the highest paid American athlete of all time. Maybe the Sox can offer Yamamoto $350M to be the highest paid pitcher of all time… but it’s actually only $200M in real money. This is all explained in Homer's Iliad. Agamemnon had to give back a captive slave woman, so he took away the captive slave woman that had been awarded as a prize to Achilles, making Achilles sit out and refuse to honor his contract, because of the insult to his honor. It's not the slave girl, it's the honor it represents as being the best fighter.
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jimoh
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Post by jimoh on Dec 12, 2023 8:58:40 GMT -5
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Post by greatscottcooper on Dec 12, 2023 9:15:43 GMT -5
Deferred payments are not new, as has been noted here. But the sheer size of them in this contract is at the very least surprising, I would say startling.
This is similar to a fortune500 company leveraging their current position by taking on future debt. Not uncommon by any means, but if done in excess it can certainly have financial ramifications that can even bring well run companies down. I would fear this type of excessive deferments becoming the norm, however I don’t think the other owners will follow suit, certainly not in scope. This leads me to believe there’s going to be some kind of change to the rules In the next CBA in reference to this subject.
If the Dodgers believe this too, I expect them to take full advantage of this window.
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Post by Guidas on Dec 12, 2023 9:22:08 GMT -5
I wonder if this will become a trend. It’s been reported in the past that many MLB players compare themselves by the size of their contract. In practical terms, is there a difference in lifestyle between $250M and $350M? I doubt it. But there’s a difference in status and bragging rights. Ohtani, at “$700M,” gets to be the highest paid American athlete of all time. Maybe the Sox can offer Yamamoto $350M to be the highest paid pitcher of all time… but it’s actually only $200M in real money. This is all explained in Homer's Iliad. Agamemnon had to give back a captive slave woman, so he took away the captive slave woman that had been awarded as a prize to Achilles, making Achilles sit out and refuse to honor his contract, because of the insult to his honor. It's not the slave girl, it's the honor it represents as being the best fighter. And in the unpublished chapter of the Iliad, there is that quote by Pedro who said, "I just want to make one dollar more a year than Curt Schilling."
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Post by jbuttah on Dec 12, 2023 9:27:45 GMT -5
I don't know how many other players make as much in endorsements as Ohtani does. That's probably the major reason for this type of deal.
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Post by greatscottcooper on Dec 12, 2023 9:32:35 GMT -5
I don't know how many other players make as much in endorsements as Ohtani does. That's probably the major reason for this type of deal. I thought I read somewhere the other day that Ohtani made $40.00 $40 million in endorsement deals last year. The next two highest grossing earners were Trout and Judge at $5 and $4 million. So yes, Ohtani has a certain level of flexibililty no one else seemingly has.
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Post by patford on Dec 12, 2023 10:04:02 GMT -5
All this sort of thing does is encourage more team owners to say, "Why even bother."
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Post by stevedillard on Dec 12, 2023 10:19:48 GMT -5
I don't think the average rate of return on investments for someone with that much money is between 4.25 and 5%. It’s not - I was speaking strictly on *risk free* returns. More risk = more return but if you want as close to a 100% guarantee to getting your money back as possible, the current rate of return is ~4.25% Remember the Mets' reason for the Bonilla deferral was that they had found a great investment that was churning out regular 10% returns, year over year, so they would have a lot more money when the deferred payments were due. Some investment fund called Haydoff, or something like that. I don’t know why everyone thinks this is such a trick. the Dodgers need to pay him $700 million. All they did was backload it — essentially a balloon mortgage. As a billion dollar company they’ll be able to afford it on a cash flow basis but it’s still actual cash they’ll have to shell out each year long after he’s gone, on top of their then payroll. And for tax purposes, they’re charged on the present value of that deal, which reflect the true value of it- 500 mil or so is a guess, depending on discount rate assumptions of future interest rayes
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Post by greatscottcooper on Dec 12, 2023 10:59:16 GMT -5
I believe a higher interest rate would mean a higher discount rate, which would lower the net present value of future payments.
The Dodgers took advantage of that fact with one of the only professional athletes who can afford to defer the majority of his contract and still make tens of millions a year.
Honestly, I hate the Dodgers for doing this but I admire them for it too.
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Post by wcsoxfan on Dec 12, 2023 11:04:56 GMT -5
I believe a higher interest rate would mean a higher discount rate, which would lower the net present value of future payments. The Dodgers took advantage of that fact with one of the only professional athletes who can afford to defer the majority of his contract and still make tens of millions a year. Honestly, I hate the Dodgers for doing this but I admire them for it too. What you're referring to would have to be a change of past contracts collectively bargained by MLB and MLBPA in a new CBA. The discount is 5% unless the interest rate exceeds 7%.
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Post by greatscottcooper on Dec 12, 2023 11:26:15 GMT -5
I believe a higher interest rate would mean a higher discount rate, which would lower the net present value of future payments. The Dodgers took advantage of that fact with one of the only professional athletes who can afford to defer the majority of his contract and still make tens of millions a year. Honestly, I hate the Dodgers for doing this but I admire them for it too. What you're referring to would have to be a change of past contracts collectively bargained by MLB and MLBPA in a new CBA. The discount is 5% unless the interest rate exceeds 7%. I'm treating this like a financial instrument. Anyways, after I posted I realized the interest rate could be set via a CBA and went back and did a little digging. So we know the discount rate. Still, the situation with Ohtani seems unique, but thank you for clarifying that for me. I can definitely see the Ohatani contract being used as a case study in a finance 101 class in a college some day.
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Post by maxwellsdemon on Dec 12, 2023 13:02:32 GMT -5
Still can't quite come to the $46mm AAV with the 5.00% discount rate. Closest is to take the $680mm as a lump sum at year 10 (plus one day I guess) and them discount that back at 4.45% annually to get to $440mm. That divided by 10 (the contract life) is $44mm per year which when added to the $2mm he's receiving (which is not discounted) gets to $46mm AAV. Using the full 5.0% discount rate gets the lump amount to a bit under $420mm (and under $42mm per year) and just shy of $44mm AAV.
Ah, but using beginning of period rather than the standard end of period discounting leads to something north of a $438mm lump sum which, when divided by 10 and then adding the $2mm gets close to the $46mm. Very convoluted way to do it, but sort of legit.
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Post by bluechip on Dec 12, 2023 13:07:42 GMT -5
The Dodgers are so damn clever. They got it done, full well knowing that it would raise a s***storm and the deferred money/AAV language would be changed in 2026, and they decided to do it with one of the best players of all time full well knowing nobody would ever have another chance to do something like this and get $68 million deferred for $46mil AAV or $100mil for $70mil or $30mil for $5mil for any future generational talent ever again. I’m starting to hate them. It’s completely legal by the letter of the law in the CBA, no debate about that. But they know what they’re doing, and they don’t care. He’s the best player in the world, currently, so why not spit on norms knowing you’ll benefit by a long shot? The Red Sox were in this role when they signed Moncada over the international cap. At the time, teams were going over by a good amount to sign players feasting for a year then taking the penalty. The Red Sox went above and beyond giving Moncada all that dough. A few short years later, the exploit was closed by MLB.
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Post by scottysmalls on Dec 12, 2023 13:09:17 GMT -5
Still can't quite come to the $46mm AAV with the 5.00% discount rate. Closest is to take the $680mm as a lump sum at year 10 (plus one day I guess) and them discount that back at 4.45% annually to get to $440mm. That divided by 10 (the contract life) is $44mm per year which when added to the $2mm he's receiving (which is not discounted) gets to $46mm AAV. Using the full 5.0% discount rate gets the lump amount to a bit under $420mm (and under $42mm per year) and just shy of $44mm AAV. The actual discount rate is 4.43%, 5% is just a ballpark people are quoting. They use the federal fund mid-term rate for the October preceding the first contract year. www.lonestarball.com/2023/12/11/23996986/deferred-money-mlb-luxury-competitive-balance-tax-shohei-ohtani-los-angeles-dodgers-cba
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Post by maxwellsdemon on Dec 12, 2023 13:27:25 GMT -5
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