Dodgers Deferred Contracts: How They Work

The Los Angeles Dodgers, known for their big-money acquisitions and star-studded rosters, have also become quite adept at using deferred money in their player contracts. This financial strategy allows the team to secure top talent while managing their short-term payroll obligations. Deferred money, in essence, means that a portion of a player's salary is paid out at a later date, sometimes long after they've stopped playing for the team. This approach has significant implications for both the team's financial flexibility and the player's long-term earnings.

Understanding Deferred Money in Baseball Contracts

Deferred money in baseball contracts is a financial arrangement where a player agrees to receive a portion of their salary at a later date, rather than in the year it was earned. This practice isn't new, but the Dodgers have utilized it extensively, making it a key component of their team-building strategy. To understand why teams and players agree to this arrangement, it's essential to delve into the details of how it works and the benefits and drawbacks for both sides.

How Deferred Money Works

When a player and a team agree to a contract with deferred money, they specify the amount to be deferred, the payment schedule, and any interest that may accrue on the deferred amount. For example, a player might agree to defer $10 million of their $30 million annual salary, to be paid out over the next ten years after the contract expires. This means the player receives $20 million upfront, and the remaining $10 million is paid out in installments, plus any agreed-upon interest. The structure of these payments can vary widely, depending on the specific agreement between the player and the team. Some contracts might include interest payments, while others may not. The payment schedule can also differ, with some players receiving annual payments, while others receive them quarterly or even monthly. The key is that both parties agree to the terms, and it's written into the contract.

Benefits for the Team

For the Dodgers, and other teams, deferred money offers several key advantages. First and foremost, it allows them to lower their Competitive Balance Tax (CBT) payroll in the short term. The CBT, also known as the luxury tax, is a threshold set by Major League Baseball that limits how much teams can spend on player salaries. By deferring a portion of a player's salary, the team's CBT payroll is reduced, giving them more financial flexibility to sign other players or make trades without exceeding the tax threshold. This is particularly important for a team like the Dodgers, who often aim to compete at the highest level and are willing to spend money to do so. Deferred money also helps teams manage their cash flow. Instead of paying the full salary upfront, they can spread the payments out over a longer period, which can be beneficial for their overall financial planning. This can free up funds to invest in other areas of the organization, such as player development or stadium improvements. In essence, deferred money provides teams with greater financial flexibility, allowing them to compete more effectively while managing their long-term financial health.

Benefits for the Player

While it may seem like deferred money primarily benefits the team, players can also gain from this arrangement. One of the main advantages for players is the ability to secure a larger overall contract. Teams might be more willing to offer a higher total value if they can defer a portion of the payments. This can be particularly appealing to players who are looking for long-term financial security. Additionally, some players may prefer deferred payments for tax reasons. By spreading out their income over a longer period, they may be able to reduce their overall tax liability. However, this depends on their individual financial situation and tax planning strategies. It's crucial for players to consult with financial advisors to determine whether deferred payments are the right choice for them. Deferred money can also provide players with a guaranteed income stream long after their playing days are over. This can be particularly beneficial for players who want to ensure a steady flow of income in retirement. In some cases, deferred payments can even become a valuable asset that can be passed on to future generations.

Risks and Considerations

Of course, there are also risks and considerations associated with deferred money for both teams and players. For teams, the primary risk is the potential for future financial difficulties. If the team's financial situation worsens, they may struggle to meet their deferred payment obligations. This could lead to legal disputes and damage the team's reputation. For players, the main risk is the uncertainty of the future. If the team goes bankrupt or experiences financial hardship, they may not receive the full amount of their deferred payments. Additionally, the value of the deferred money could be eroded by inflation over time. It's essential for players to carefully consider these risks before agreeing to a contract with deferred money.

High-Profile Examples of Dodgers' Deferred Contracts

The Dodgers have a history of utilizing deferred money in contracts with some of their biggest stars. These deals often make headlines due to the large sums involved and the creative financial structures. Examining a few high-profile examples can provide a clearer understanding of how deferred money works in practice and its impact on the team and the players.

Shohei Ohtani

One of the most recent and notable examples is Shohei Ohtani's contract with the Dodgers. Ohtani's historic $700 million deal includes an unprecedented amount of deferred money. The structure of this contract is designed to allow the Dodgers to remain competitive while still fitting Ohtani's massive salary under the CBT. Specific details of the deferrals: $680 million of Ohtani's $700 million contract will be deferred. He will receive only $2 million per year during the 10-year term of the contract, with the remaining $68 million per year paid out over the subsequent 10 years. This unique arrangement significantly lowers the Dodgers' CBT payroll during Ohtani's tenure, giving them considerable financial flexibility to build a championship-caliber team around him. This deferred structure also illustrates the collaborative nature of negotiations, reflecting Ohtani's willingness to structure the deal in a way that benefits both himself and the team.

Mookie Betts

Mookie Betts, another cornerstone of the Dodgers' roster, also has a contract with deferred money. While the details may not be as widely publicized as Ohtani's, the inclusion of deferred payments in Betts' contract demonstrates the Dodgers' consistent use of this financial strategy. Betts' contract is a 12-year, $365 million deal signed in 2020. As part of the agreement, $115 million is deferred and will be paid out from 2033 to 2044. This deferral helps the Dodgers manage their short-term payroll while securing Betts' services for the long haul. The specifics of Betts' deferrals show that this approach is not limited to only the most exceptional cases like Ohtani, but is a common practice in structuring large contracts for key players.

Max Scherzer

Even though Max Scherzer's time with the Dodgers was relatively short, his contract also involved deferred money. When the Dodgers acquired Scherzer in a trade, they inherited the terms of his existing contract, which included deferred payments from his previous team, the Washington Nationals. While the Dodgers weren't directly responsible for negotiating the deferred payments, they still had to account for them in their overall payroll planning. Scherzer's original contract with the Nationals included $105 million in deferred money, to be paid out over seven years from 2022 to 2028. This example highlights that deferred money can impact teams even when they aren't the ones who initially negotiated the terms.

The Impact of Deferred Money on the Dodgers' Financial Strategy

Deferred money has become an integral part of the Dodgers' financial strategy, allowing them to compete at the highest level while managing their payroll effectively. This approach has both short-term and long-term implications for the team's financial health and competitiveness.

Short-Term Flexibility

In the short term, deferred money provides the Dodgers with significant financial flexibility. By lowering their CBT payroll, they can sign other players, make trades, and invest in other areas of the organization without exceeding the luxury tax threshold. This allows them to maintain a competitive roster year after year. The Dodgers' ability to consistently field a star-studded team is, in part, due to their skillful use of deferred money. This financial flexibility also allows them to be more aggressive in pursuing top free agents, as they can structure contracts in a way that minimizes the immediate impact on their payroll.

Long-Term Considerations

However, deferred money also has long-term implications. The Dodgers will eventually have to pay out the deferred amounts, which could impact their financial flexibility in future years. It's essential for the team to carefully plan for these future obligations and ensure that they have the resources to meet them. The Dodgers' long-term financial planning must take into account the deferred payments to players like Ohtani and Betts. While these payments are spread out over several years, they still represent a significant financial commitment. The team must also consider the potential impact of inflation on the value of the deferred money. If inflation rises significantly, the real value of the deferred payments could decrease, making it more challenging to meet their obligations.

Competitive Advantage

Overall, the Dodgers' use of deferred money has given them a competitive advantage in the MLB landscape. It allows them to attract top talent, manage their payroll effectively, and compete for championships year after year. This strategy has been a key factor in their success over the past decade. Other teams have taken notice of the Dodgers' approach and have begun to utilize deferred money more frequently in their own contract negotiations. However, the Dodgers remain one of the most sophisticated and successful practitioners of this financial strategy.

Conclusion

Deferred money is a complex but valuable tool that the Los Angeles Dodgers have used to great effect. It allows them to secure top talent while managing their payroll and maintaining financial flexibility. While there are risks and considerations for both the team and the players, the benefits of deferred money can be significant when used strategically. As the Dodgers continue to compete at the highest level, it's likely that deferred money will remain an important part of their financial strategy. Understanding how deferred money works is essential for fans, analysts, and anyone interested in the business of baseball. The Dodgers' innovative use of this financial tool has helped them become one of the most successful and competitive teams in MLB, and it will be interesting to see how they continue to utilize it in the future.