RIČARDS VAMBUTS

IMPLEMENTING FINANCIAL FAIR PLAY RULES AT LATVIAN-ESTONIAN BASKETBALL LEAGUE

Final Master Thesis

Study programme: Sport Business Management State code 6211LX001

Supervisor: Assoc. prof. dr. Renata Legenzova

Defended: Assoc. prof., dr. Rita Bendaravičienė Dean of the Faculty of Economics and Management

Kaunas, 2021 Table of contents SUMMARY ...... 3

INTRODUCTION ...... 4

I. LITERATURE REVIEW ON FINANCIAL FAIRPLAY AND FINANCIAL STABILITY ...... 6

1.1 The concept of financial stability in sports and its influencing factors ...... 6

1.2 Measures of financial stability ...... 8

1.3 Financial fair-play rules and their influence on financial stability in sports ...... 11

1.4 Overview of financial fair-play rules in practices - cases of Euroleague and NBA ...... 15

II. ANALYSIS OF TEAMS' FINANCIAL STABILITY IN LATVIAN-ESTONIAN LEAGUE AND COMPARATIVE ANALYSIS OF FAIR-PLAY RULES ACROSS THE LEAGUES ...... 23

2.1 Overview of Latvian-Estonian basketball league ...... 23

2.2 Research methodology ...... 24

2.3 Results of the analysis of Latvian-Estonian basketball league team's financials ...... 27

2.4 Results of the financial fair-play regulation practices across the comparative leagues...... 38

2.5 Lessons learned and problems identified ...... 41

III. RECOMMENDATIONS FOR LATVIAN-ESTONIAN BASKETBALL LEAGUE ON IMPLEMENTENTION OF FINANCIAL FAIR-PLAY RULES ...... 43

3.1 Proposed financial fair-play rules ...... 43

3.2 Implementation guidelines ...... 44

3.3 Discussion ...... 49

Conclusions ...... 50

List of references ...... 52

Annexes ...... 58

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Ričards Vambuts. IMPLEMENTING FINANCIAL FAIR PLAY RULES AT LATVIAN- ESTONIAN BASKETBALL LEAGUE: Final Master Thesis in Sport Business Management / Assoc. prof. dr. Renata Legenzova / Vytautas Magnus University, Faculty of Economics and Management, Graduate studies. – Kaunas, 2021. – 57 pages.

SUMMARY

Research problem addressed in this paper is what should be financial fair play rules of the Latvian-Estonian basketball league in order to ensure financial stability of the teams competing in the league. Current situation in Latvian professional basketball teams isn't the best due to the recent tax reform in the country. The aim of the paper is to discover what financial fair play rules should be implemented in Latvian-Estonian basketball league in order to ensure financial stability of the teams competing in the league. The main parts of the paper were about the concept of the financial stability and fair play rules and analyzing Latvian basketball teams and comparative basketball leagues around the world. Main results were that there are no financial stability and fair play rules in the Latvian-Estonian basketball league and the situation with Latvian basketball team finances isn't positive. Main recommendations for the league are to introduce minimum budget that would help teams in the long run and to check financial statements of the teams every year in order to see financial situation of the teams. Key words: basketball, financial stability, financial stability measures, financial fair-play, sports leagues

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INTRODUCTION

Relevance and topicality. The situation with Latvian professional basketball teams currently is difficult, even though basketball has risen in popularity in recent years with Latvian players playing in European and USA leagues, and with national teams playing well on the international stage. Furthermore, since the 2018 – 2019 season a unified Latvian – Estonian professional basketball team league has been created. In 2018 Latvia underwent a tax reform that had a significant impact on the sports industry, including basketball. While team's performance does not always depend on its financial ability, in the long run, a team will be more successful if it is financially stable. The issue of team finance must involve not only the teams, but also the league, which, through financial regulations and rules, can contribute to the long-term financial stability of the teams. Analysis of the available literature resources revealed that many different authors have touched upon the topic of sports sustainability. Barajas (2017), Budzinski (2014) and others have looked at the specifics of the financial fair-play, which were also used in this work to understand the nature of the financial fair-play and sustainability. Research problem addressed in this paper is what should be financial fair play rules of the Latvian-Estonian basketball league in order to ensure financial stability of the teams competing in the league. The object of the paper is financial fair play rules in basketball as a mean to ensure teams' financial stability. The aim of the paper is to discover what financial fair play rules should be implemented in Latvian-Estonian basketball league in order to ensure financial stability of the teams competing in the league. To reach the aim of the paper the following objectives were set: 1. To discuss the concept and importance of financial stability in sports and identify its measures; 2. To overview implications of implementation of fair play rules in practice based on cases of NBA and Euroleague; 3. To analyse and discuss current situation with financial stability of in Latvian- Estonian basketball league; 4. To analyse cases of comparable basketball leagues in terms of financial stability and financial fair play rules' implementation;

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5. To propose financial fair play rules for Latvian-Estonian basketball league and present their implementation guidelines.

The paper is structured in 3 main parts. The first part is about concept of financial stability in sports, its influencing factors and measures, as well as financial stability and financial fair play rules implementation in two pioneering basketball leagues – NBA and Euroleague. The second part is devoted to analysis of similar basketball leagues and their financial rules and Latvian professional basketball financial stability analysis. In the third part conclusions are made from analysis and recommendations to Latvian- Estonian basketball league are given. Research methods. The analysis and compilation of scientific articles and literature is conducted in order to know more about financial fair play rules in the biggest sports leagues. To get better understating of financial fair play and stability rules in selected basketball leagues, their representatives were contacted via e-mail. Data analysis on financials of Latvian professional basketball teams was conducted in order to evaluate Latvian basketball teams' financial position. Also interviews with team representatives were used to understand situation from team's perspective. Information sources. In this paper scientific articles were used, as well as financial reports of Latvian basketball teams, interviews with team representatives and internet articles.

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I. LITERATURE REVIEW ON FINANCIAL FAIRPLAY AND

FINANCIAL STABILITY

1.1 The concept of financial stability in sports and its influencing factors

In order to better study basketball leagues and teams, it is first necessary to understand how financial stability manifests itself in sport and what the sport economy is like in general. If we look from the perspective of ordinary business, financial stability is the ability to withstand a temporary problem, such as a decrease in sales, lack of capital or loss of a key employee or customer (Ashe-Edmunds, 2020). In other resources, it is mentioned that being financially stable means not having to worry about paying for expenses or taking care of your obligations. It doesn’t mean that you have to be rich, but it does mean that you’re able to handle finances without taking on more debt (Entrepreneurshipinabox.com, 2020). If we are talking from professional sports team perspective, the biggest difference is in the goal, compared to a standard business mode – the goal of it is to make a profit, but the business objective of professional football clubs typically is do gain prestige and success rather than making profit (Vopel, 2011). From a theoretical point of view, financially stable sports team is able to pay salaries to players and employees on time, as well as pay for other payments and not remain in debt. Team expenses don't exceed income (Goal.com, 2018). A sports league can be seen as an industry that produces sports competitions with individual teams or clubs within a league that can be considered as companies in the industry. Fans who watch games are consumers who demand sports competitions. It is assumed that economic agents operate in the market rationally, have full information about the consequences of their decisions and they strive to achieve the set goals. It is assumed that teams or companies try to maximize their profits, while fans try to maximize their benefits, which is enjoyed by watching sports competitions that can be obtained by purchasing tickets (Downward, Dawson, & Dejonghe, 2009). The main areas of interest in professional team sports economics are league market structure and team objectives, demand for professional team sports, labour issues, financing, and sports broadcasting (Vassiliki, 2007). Nowadays sport has become a huge business and it is also big part of culture and lifestyle in almost every country. The sport economy has significantly improved over the last decade, not only in size but also in complexity and diversification. New sports have emerged, most of which are so-called extreme sports, which allows us to think more broadly and differently about the sport 6 economy. Some sports are the result of changes in the law, while others have evolved thanks to new technologies and possibly social structures. The standard approach to the sports economy involves efficient resource allocation and evaluation in professional team sports (Potts & Thomas, 2018, pp. 82-96).

In 2018, PricewaterhouseCoopers, an audit and business consulting firm, conducted a sports survey that surveyed sports industry leaders around the world. As a result, sports that have the greatest potential to generate revenue globally have been identified. While football was ranked with the highest potential in 2017, there was a change of leadership in 2018, taking the lead by e- sports and leaving football and basketball behind (PWC, 2018). The sport economy cannot be ignored for several reasons. According to the European Commission's 2007 White Paper for Sport, sports added value in 2004 was € 407 billion, representing 3.7% of the European Union's gross domestic product. It should also be remembered in mind that sport employs a very large number of people - in 2004, 5.4% of the total workforce in the European Union was employed in sport and related activities (Commission of the European communities, 2007). There are five main features of the professional sports team industry. First, there is virtually no opportunity in the industry to improve productivity, for example in football teams cannot improve productivity without putting a left guard on the field, which would make it easier for the opposing team to reach the goal. Secondly, competition in professional team sports has a huge impact on the outside. Because teams are limited in the tournament table, each team cannot improve their score unless one of their opponents has become weaker. Competitor leagues often do not survive for long periods of time because either the league becomes too dominant and squeezes its competitors, or the competing leagues come together to form a monopoly. Due to their specificities and possibly their popularity, the professional sports team industry has different rules on common competition rules, for example salary restrictions, people relocation restrictions or centralized marketing would be conceivable in any other industry. These exceptions create very interesting features of the labour market in professional team sports. Fourth, the so-called outcome uncertainty hypothesis suggests that competitiveness and similar levels of team competition increase fan interest. In other sectors, companies prefer weaker competitors. In professional team sports, weak opponents cannot attract large crowds and are therefore economically unattractive. Fifth, professional team sports create a variety of other markets that can generate even greater revenue than the primary sports market. The most typical example of such a market would be the betting market (Dietl & Frick, 2007, pp. 376-377).

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It is very important for teams to get a lot of spectators to the games, as ticket revenue is one of the main sources of revenue for any sports team. Ticket prices are fluctuating, seating dependent, and in US sports leagues, ticket prices are also dependent on the opponent, but teams need to work hard to determine the right ticket price, otherwise viewer numbers and potential revenue may decline (Blair, 2012, pp. 20). Ticket revenue has grown steadily since 2006, rising from $ 37 billion to $ 44.75 billion in nine years (Figure 1).

50 43.54 44.75 45 40 40.61 41.32 38.39 38.87 39.57 39.04 40 37.06 35 30 25 20 15 10 5 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 1. Ticket revenue for World sport, 2006 - 2015, billion USD Source: Statista, 2019

1.2 Measures of financial stability

In order to understand what financial stability and what kind of financial situation is in general, there are different ways and methods how to do it. Financial ratios can be used as a one of it - financial ratios are tools used to assess the relative strength of companies by performing simple calculations on items on income statements, balance sheets and cash flow statements. Ratios measure companies' operational efficiency, liquidity, stability and profitability, giving investors more relevant information than raw financial data. Investors and analysts can gain profitable advantages in the stock market by using the widely popular, and arguably indispensable, technique of ratio analysis (Ingram, 2019). It cannot be said that much research has been done on the financial stability of sports in general. Of course, there are papers that address this issue, but many authors have studied UEFA's fair-play rules in general and expressed their views on their effectiveness. There is a lot of research on team finances in general - how much is earned during the season, how much revenue comes from ticket sales, TV contracts and player transfers.

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In general, there are many different indicators that can be used to determine the financial situation of sports teams. Profit indicators will be considered first: NP/OP = Net profit / Operating profit (1) Among the objectives of the UEFA (2018) are the improvement of the economic and financial capacity of clubs and higher discipline and rationality in their finances. In this line, the NP/OP ratio weights positively to those clubs that regardless of the operating management, be able to obtain good financial results. This ratio supports the clubs to obtain a positive financial result (Barajas, Castro-Limeres, & Gasparetto, 2017). OP/OR = Operating profit / Operating revenues (2) The ratio OP/OR rewards clubs that optimize the management of its operating activities. So that with a certain level of revenues the best operating results is obtained. Promote financial discipline and rationality is an objective of UEFA (2018). UEFA chases it by using the Break-even mechanism, among others. This determines the level of spending by the club, looking for an improvement in its results and positively impacting the economic and financial stability (Barajas, Castro-Limeres, & Gasparetto, 2017). TOR/TA = Total operating revenues / total assets (3) The ratio TOR/TA supports clubs that best manage their operating activity considering all invested assets. Managing assets in a profitable and efficient way means to be closer to fulfill the objectives of sound management established by UEFA (2018) and further from the financial irrationality (Barajas, Castro-Limeres, & Gasparetto, 2017). The next category considered is stability ratios. Clubs with greater economic and financial stability and lower debt level will be better valued under this criterion. STD/TL = Short-Term Debt / Total liabilities (4) The STD/TL ratio measures the weight of short-term debt regarding the total debt. Total liabilities are the sum of the obligations in the short and long term, together with equity. The ratio penalizes clubs with high levels of short-term debt (Barajas, Castro-Limeres, & Gasparetto, 2017). LTD/TL = Long-term Debt / Total liabilities (5) The LTD/TL ratio measures the percentage of debt that the club should meet long-term regarding the total liabilities. The higher the debt with maturity greater than one year, the worse is the result of the ratio (Barajas, Castro-Limeres, & Gasparetto, 2017). WC/CA = (Current Assets – Current liabilities) / Current Assets (6) The WC/CA ratio measures the percentage of working capital on current assets. The working capital can be understood as the difference between the assets and rights in the short term

9 and also short-term obligations. Therefore, this ratio measures the short-term solvency of the club (Barajas, Castro-Limeres, & Gasparetto, 2017). Coverage ratios are based on the ability of clubs to cover against third parties. These ratios support those clubs whose assets and rights sufficiently cover its obligations. They are also directly related to the objectives of the UEFA (2018) to protect the integrity and proper functioning of European competitions, as well as the viability and long-term sustainability of clubs. Thus, the greater the ability of clubs to guarantee against third parties, competitions will be better preserved (Barajas, Castro-Limeres, & Gasparetto, 2017). E/TL = Equity / Total liabilities (7) E/TL ratio measures the net guarantees of the club on the total amount of the creditors. NCA/TL = Non-current assets / Total liabilities (8) One of the main measures of coverage against third parties is the non-current assets of a company. Non-current assets correspond to the assets, rights and other goods economically controlled by the company whose liquidity is in a longer term. Regardless of the level of working capital needed in a club, the higher the non-current assets greater the guarantee against debts (Barajas, Castro-Limeres, & Gasparetto, 2017). TA/TD = Total assets / (Current Debt + Non-Current Debt) (9) The TA/TD ratio is indicative of the level of the passive of the club. Greater than or equal to 1 result indicates that the assets and rights are sufficient to cover obligations to third parties; and lower results than 1 confirm that the value of obligations to third parties is superior to the club guarantees (Barajas, Castro-Limeres, & Gasparetto, 2017). Liquidity ratios measure the ability of the club to meet their payments in a very short time and with highly liquid assets. Quick ratio = (Current assets – Stocks) / Current liabilities (10) CSTD/CL = (Cash + short-term debtors) / Current liabilities (11) These measure the most liquid asset items at the end of the fiscal year to meet the short term obligations (Barajas, Castro-Limeres, & Gasparetto, 2017). Spending level ratios are based in two of the accounting items that characterize this industry: the level of wage expenditure and operating costs. W/OR = Wages / operating revenue (12) The article 62 of the FFP of UEFA (2018) states that personnel cost of clubs should not exceed 70% of total revenues. The ratio W/OR adjusts this proportion weighting personnel costs exclusively on operating revenue - not taken into account other revenues. Operating revenues correspond to: broadcasting revenue, tickets, marketing, merchandising and other operating income.

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Therefore, this ratio links staff costs (mostly sporting staff) with the main operating revenue. The higher the result, less discipline and rationality the club will have on its finances (Barajas, Castro- Limeres, & Gasparetto, 2017). W/TR = Wages / Total Revenue (13) Like the above, the ratio W/TR weights staff costs based on revenue. However, here the denominator consists of total revenue. The aim is to gather information on those clubs that have ability to obtain other revenues from its activity in addition to the main operating revenue (Barajas, Castro-Limeres, & Gasparetto, 2017). W/OE = Wages / Operating Expenses (14) The W/OE ratio weights staff costs on operating costs, allowing to obtain the proportion of operating expenditure that is intended to sports and non-sports staff. The higher the ratio, the lower the club funds allocated to other operating costs and greater imbalance will have on the structure of the income statement. Further, based on the objectives of the UEFA (2018) the club will have reduced economic and financial capacity and less discipline and rationality in their finances (Barajas, Castro-Limeres, & Gasparetto, 2017).

1.3 Financial fair-play rules and their influence on financial stability in sports

Football is probably the most popular sport in Europe and perhaps in the world. In England, Spain, Germany, Italy, people pay big money to go to stadiums and support their favorite teams, TV companies pay big money to leagues to broadcast games, but sponsors are willing to give big money so that only their logo is on a team shirts. All this leads to teams having a large income that can be spent on adding new players, for example, in 2017, the French heavyweight PSG bought Neymar for 222 million euros, but Kylian Mbappe was bought 180 million euros (Doyle, 2020). Of the 50 largest football transfers of all time, 36 have taken place since 2015, which alone shows that the financial situation of teams has improved considerably in recent years. The value of several football teams is estimated at billions - "Real", "Manchester City" and "Liverpool" (Transfermarkt.com, 2020). In 2009 UEFA, the governing body of European football, introduced financial fair play concept. They intended to bring "discipline and rationality" to European football club finance, to make sure that football clubs were not spending more than they earned and, in doing so, prevent them from falling into financial troubles which may endanger their long-term survival, to prevent clubs from over-spending across several seasons within a set budgetary framework (Goal.com, 2018). Financial Fair Play is also intended to address the widespread perception of a relative lack of

11 competitive balance, which in turn arises as a result of a growing gap between the wealthiest clubs and the rest (Marks, 2012). Financial fair-play are introduced not only in the football. Euroleague, top basketball competition in Europe, has set plenty of financial fair-play and stability rules that teams need to follow in order to compete in the tournament. NBA, which is considered the best basketball league in the world, has gone into a little bit different path. Their financial fair-play rules consists on how much teams can spend during the season and how much money they can offer to the players. The aim of the financial fair play in football is (UEFA, 2018): • to further promote and continuously improve the standard of all aspects of football in Europe and to give continued priority to the training and care of young players in every club; • to ensure that clubs have an adequate level of management and organisation; • to adapt clubs sporting infrastructure to provide players, spectators and media representatives with suitable, well-equipped and safe facilities; • to allow the development of benchmarking for clubs in financial, sporting, legal, personnel, administrative and infrastructure-related criteria throughout Europe; • to improve the economic and financial capability of the clubs, increasing their transparency and credibility; • to place the necessary importance on the protection of creditors and to ensure that clubs settle their liabilities with employees, social/tax authorities and other clubs punctually; • to introduce more discipline and rationality in club football finances; • to encourage clubs to operate on the basis of their own revenues; • to encourage responsible spending for the long-term benefit of football; • to protect the long-term viability and sustainability of European club football.

The FFP regulations consist, in substance, of two rules: • the no overdue payables rule: overdue payables are understood to be all out-standing payments (towards employees, social and tax authorities or other clubs) that have not been paid by the contractually agreed deadline; • the break-even rule: relevant expenses must be paid out of relevant income or, in other words, relevant expenses must not exceed relevant income; an aggregate deviation of up to € 5 million (over three financial years) is acceptable (Budzinski, 2014). In the Table 1 can be seen what is meant by relevant income and expenses, non-relevant income and expenses. 12

Table 1 The Break-Even Rule of UEFA's fair-play rules Relevant income Relevant expenses • gate revenues; • costs of sales and materials; • revenues from sponsorship and • wages and salaries (including advertising; related expenses such as social • revenues from broadcasting rights; security contributions or medical • commercial activities revenues care); (merchandising, food and • other operating expenses (e.g. beverages sales, conferencing, match expenses, administration and lotteries, etc.); overhead expenses); • other operating income (including • finance costs and dividends non-football income related to the club); • finance income (interest revenue) Non-relevant income Non-relevant expenses • income transactions above fair • expense transactions below fair value; value; • donations and assumptions of debt • youth development; by a third person; • community development activities • income from non-football (e.g. promoting participation in operations not related to the club; sports or advancing social • income from non-monetary credits development in education, health, (e.g. revaluations of assets and amateur sports, etc.); inventories) • non-monetary debits and charges; • finance costs of tangible fixed assets; • non-football operations not related to the club; • income taxes. Source: Budzinski, 2014 While the idea is good and team finances should be under control, there are several opponents who argue that the financial fair play rules put in place are not so good, criticizing for 3 different things: 13

• UEFA issued a regulation that forgoes potential benefits arising from substantial injections of "external" money into football payrolls (Madden, 2012); • UEFA issued a regulation that limits competition in the player market and puts downward pressure on wages like a US salary cap, but without compensating through benefits from increased competitive balance (Peeters & Szymanski, 2012); • UEFA issued a regulation that will "ossify" or "freeze" the hierarchy of European football, creating a barrier to entry (Sass, 2012). Speaking about the first criticism - limiting "external" money injections through FFP does not simply translate into "less money for football payrolls" but rather into "restoring efficient managerial incentives". The time for repeated managerial moral hazard and rent-seeking games in European football is over if FFP comes into action. Football managers will have to concentrate on productive efforts to develop the football business as a whole and in a sustainable way instead of focusing on "payroll-gambling" in a sort of "football casino". It is true that "some" external money will not find a direct way into football payrolls any longer due to the capped maximum rescue package of benefactors. However, as FFP restores incentives for "good management" in football clubs, new revenues will be generated, which in the end could allow the payment of even higher salaries than in the current system (Franck, 2014). Criticism 2 portrays financial fair play as a restrictive measure comparable to a US salary cap. However, contrary to a US salary cap, FFP formulates a very "tolerant" restriction of competition, which would not even be binding in any "normal" business environment. Downward pressure on salaries is only a transient effect that makes sense in an industry characterized by massive overspending. Moreover, US salary caps are the wrong benchmark for assessing the potential of FFP to contribute to more vibrant competition in the open European football system (Franck, 2014). Criticism 3 claiming an "ossification" of the football hierarchy through FFP obviously assumes that "small clubs" can only or can better challenge "large clubs" in a system of unlimited money injections. There is no mechanism, which systematically allocates "unlimited" money injections according to a pattern that makes small clubs relatively more competitive. Instead, the existence of an inverse mechanism, making sure that "money comes to money", is much more plausible. Breaking the "money comes to money" dynamics and increasing the importance of "management quality" through FFP could be a more reliable way to shake established football hierarchies (Franck, 2014).

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1.4 Overview of financial fair-play rules in practices - cases of Euroleague and NBA

Euroleague and NBA are the two main basketball leagues in the world. Every basketball player wants to play in both or at least one of the leagues. Because leagues are so popular, they need to set an example for other leagues, including financial matters. The two leagues have developed different mechanisms to ensure financial fair-play and that the competition between teams is fair. This chapter will look not only at the rules of financial fair-play and stability, but also at other differences between the main European and US basketball leagues. In both Europe and the US, sports leagues are joint ventures, while teams are separate, they set their own ticket prices, carry out marketing activities and develop strategies to compete with other teams. One of the most important differences is the selection of young players or drafts. This only happens in the US, but there is one exception in Europe - KHL. The team with the worst results during the season has the highest chances of getting the first choice, while the best team chooses the last (Andreff & Staudohar, 2000). The US system also has its roots in defining team hometown and selling TV rights through the league. Another important aspect of the US leagues is the sale of licenses to manufacturers and sellers who sell things related to sports leagues. The US market is in high demand for different types of products related to the team, such as player cards, clothing and souvenirs. Sponsors are willing to pay big sums just to produce the league's official soft drink, credit card or be an official airline. In the early 2000s, the basketball team "Barons" was the first player in Latvia to produce player cards, but overall, this activity was unsuccessful, and no other Latvian basketball team has offered anything like this in the coming years. Player cards are not a common occurrence in Europe either, and team-related clothing, such as player shirts, is much more difficult to buy than in the US. There are also different features in the national championship game systems. It is common case in Europe for the worst team in each season to leave the championship and compete in lower league next season, with the best team in the lower league entering the strongest league respectively. This is not the case in the US, where changes in team numbers occur only when a new team joins the championship, but the number of participants is not reduced (Quirk & Fort, 1992). In recent years Euroleague has evolved as a closed league because many teams have licences to play in the league although one spot is awarded to the best Eurocup team. Everything points to that in one day Euroleague will be fully closed league and it will be very difficult to enter it. The main advantage of participating in a closed tournament is that the income can be distributed between teams, thus maintaining a financial balance between all participants. The best 15 example of this is the NFL, where all revenue from games played on national television is evenly distributed between teams. 60% of the ticket sales goes to the home team and the remaining 40% to the guest team, resulting in less economic disparity and revenue for the New York Jets, the big market team, and the Green Bay Packers, the small market team, is about in the same level. The situation is different in the other three major US leagues - NBA, NHL and MLB. Although the revenue from games transmitted on national television is distributed equally, the biggest difference is the revenue from contracts with local television. New York based MLB team Yankees receives about $60 million from local TV per season, while smaller-market teams receive only $4 to $6 million (Andreff & Staudohar, 2000). This leads to teams not being in an equal position to offer contracts to the best players. To reduce inequality, the US sports leagues have salary caps. It works in such a way that teams have a certain amount up to which players' salaries can be spent, but over and above that amount they must pay extra tax, so all teams have the potential to play the same way in the player market. This is not the norm in European professional sport, so often the team that can offer the highest salary signs a player. We might think that in the US, in the free business zone, sports teams don't get subsidies. While there are no direct payments from government to teams, there are generous tax discounts. Sports teams are the only ones that can reduce the number of people employed to reduce income tax. Local authorities are involved in the construction of stadiums and arenas, thus encouraging teams to stay in the area or trying to get other teams to change location. Not only do teams use arenas for free or at a lower price, but they also often receive revenue from concessions, parking and other amenities available at arenas. The big fan interest and their fear of losing their beloved team allows team owners to be extremely harsh: "Build us a new stadium or we will leave town" (Noll & Zimbalist, 2000). About 55% to 60% of the revenue of NHL, NBA, NFL and MLB teams goes to players as compensation. With team revenues rising from $10 million to $50 million after relocation, most of the extra revenue goes into players' wallets (Siegfried & Zimbalist, 2000). The rest is left to the team owners to cover the costs, if any, associated with the new sports facility. Another major difference between European and US professional sports is collective agreements. In US sports, players from the respective league have formed unions that agree with the league on rules that apply to all players. Income sharing negotiations have resulted in several strikes and lockouts, which means that players do not practice and there are no games. The only exception in Europe is the Euroleague, and in the summer of 2018, the Euroleague Players Association was created with the main goal of defending players' rights in the league (Eurohoops, 2019).

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Team revenue comes from a variety of sources. In the past, North America's most popular sports teams made the most money from ticket sales and from stadiums (Table 2). The previous factors are still relevant today, but new forms of revenue are emerging, such as broadcast rights sales, stadium title sales, trademark rights sales, advertising revenue and more (Blair, 2012, pp. 19). Table 2 Income distribution of North America's most popular sports league teams in 1996 (%) League Revenue Revenue Revenue Other Total Athlete costs from from media from revenue revenue (% of total tickets stadium revenue)

MLB 39 38 19 4 100 54 NBA 41 37 13 9 100 47 NFL 29 55 10 6 100 67 NHL 61 15 19 5 100 51 Source: Andreff & Szymanski, 2006, pp. 698

Profit-based sports organizations seek to raise revenue from a variety of sources, but ticketing and TV contract sales are the most important. David Carter, who taught a sports business at the University of Southern California, said: "Winning playoff games will increase demand for tickets, allowing team owners to raise ticket prices." Carter also added that more wins in playoff games will boost potential long-term revenue from advertisers and sponsors, while also creating a sense of excitement for the team as a whole (Heath, 2001). A bad season could cost NBA teams $ 5.3 - $ 7.8 million, and that only applies to unearned ticket sales. The previous figures do not include the potential revenue from the playoff games, television and radio or other business transactions (Nourayi, 2006). At the beginning of this century, the German Bundesliga received € 430 million a year for the sale of television rights, of which € 250 million is due to exclusive broadcasters (Dietl & Hasan, 2007). There are significant differences in how sporting events are televised in Europe and the US. Whereas in Europe the rights to broadcast football games are predominantly purchased by commercial television, the US right to broadcast NFL games belongs to the national television company CBS. Starting from the 2015/2016 season, Euroleague has introduced the rules of financial fair play (Euroleague.net, 2015). Purpose of the financial fair play rules is to ensure a greater balance in the clubs' budgets in order to help them and the league build consistent and sustainable growth over years and to guarantee the transparency and credibility in the finances of the participating clubs. Each fiscal year starts on July 1 and ends on June 30.

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All teams participating in the Euroleague must meet various criteria, for example, there must be no late payment of salaries to current or former players, coaches, employees, other league teams, tax or social authorities. The Greek team Olympiacos had problems with the payroll of the players. At the end of January, the Euroleague Finance Panel announced that it would forbid the team from registering new players until the commission's decision (Euroleague.net, 2020a). The decision was made a month later (Euroleague.net, 2020b) when the Finance Panel lifted the previous ban but set restrictions on the players" expenses: • A 7.5% reduction (from 65% to 57.5%) of the permitted gross player salary costs for the 2020-21 EuroLeague season; • A 5.0% reduction (from 65% to 60%) of the permitted gross player salary costs for the 2021-22 season. The team's minimum budget must be 5 400 000 euros, but team's total deficit in the previous three seasons must not exceed 10% of the average budget of the previous three seasons. The gross salaries of players may not exceed 65% of all expenses, while the shareholders' contribution to the budget for the 2020/2021 season may not exceed 60% of the total budget. Teams must submit various documents by June 15 of each year. Of course, the main document is an audited financial statement, which includes the balance sheet, profit and loss account. Auditors are very important because they must be independent in compliance with the International Federation of Accountants (IFAC) Code of Ethics for Professional Accountants, as well as they must be a member of one of the relevant IFAC member bodies. If there is no member of the IFAC within a club's territory, the club is required to use an independent auditor who is permitted by national law to carry out audit work. In 2019, the Euroleague's Finance Panel fined two teams for failing to submit documents on time. CSKA Moscow was sanctioned with a fine of €42 000 and Olympiacos Piraeus was sanctioned with a fine of €14 000 (Euroleague.net, 2019). In Europe, basketball teams are often part of a large organization with different sports teams, such as "Barcelona", "Real" and "Fenerbahce". In order to better understand the financial situation of basketball teams, besides the audited annual accounts of the whole entity, the audited annual financial statements must be provided only for the basketball department. Once the documents have been submitted, they will be analysed by the Management Control Commission. The club will reply to all requests for clarifications and complementary information that it receives so that the Management Control Commission can have a reliable image of its financial and accounting position. The reports on analyses based on parameters will be provided. They will have to be completed according to the following criteria (Euroleague, 2020):

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• Going Concern: financial statements prepared on the assumption that the club is a going concern and will continue in operation for the foreseeable future; • Accrual Basis of Accounting: transactions and events are recognised when they occur (and not when cash or its equivalent is received or paid) and they are entered in the accounting records and reported in the financial statements of the period to which they relate; • Consistency: the presentation and classification of items in the financial statements will be retained from one period to another; • Offsetting: assets and liabilities will not be offset; • Relevance: financial statements provide information that is relevant to the decision- making needs of users; • Reliability: financial statements represent faithfully the result and the financial position of the club and reflect the economic substance of events and transactions and not merely the legal form. They are also neutral (free from bias), prudent and complete in all material aspects. During the season, revenues are obtained from various sources, but their distribution is quite clear. Revenue generated during the game days stays with the team, revenue from TV broadcasting goes to the Euroleague, revenues from partnerships are split equally between teams and league, but revenue from arenas fully goes to the teams. Successful leagues also have to take into account various external factors, for example, in the case of the Euroleague, they could have different legal rules and economic situations, as the teams represent different European countries and the situation is different in each. There is a particularly significant difference in tax systems: each country has different value added, corporate and individual taxes, as well as residence rules and other. Social responsibility is also important to the Euroleague, and it participates in various of activities. League also takes into account the United Nations 17 sustainability goals (United Nations, 2020): no poverty, zero hunger, good health and well-being, quality education, gender equality, clean water and sanitation, affordable and clean energy, decent work and economic growth, industry, innovation and infrastructure, reduced inequalities, sustainable cities and communities, responsible consumption and production, climate action, life below water, life on land, peace, justice and strong institutions and partnerships for the goals. Different story is with NBA. Team owners are billionaires who are then also responsible for the financial situation of their teams. The process of becoming an NBA team owner is not that simple. The owner must first request a transfer of ownership from the NBA commissioner, 19 currently Adam Silver, after a deal is struck with the potential buyer. Of course, the buyer must be approved by the league's commissioner ahead of time. If the owner is selling off 10 per cent or more of his interest in the team, he has to pony up $50 000 to cover any expenses the request may incur on the NBA, such as attorney's fees. Finally, after all agreements are made between the parties and the commissioner, ¾ of the NBA"s Board of Governors have to approve the transfer before it's enacted and you have your very own squad (Ballnroll.com, 2014). It must be said that there is no publicly available information on whether the NBA requires teams to submit financial statements, but the league has its own financial rules that allow teams to equally compete on the player market. Everything in the NBA is based on the salary cap. Before each season, the league determines how much money teams can spend. This system imposes some sort of balance in the league. In its absence, there could be infinite spending where it becomes a competition focused on money and wealth rather than basketball and management (Blakey, 2018). It can be said that something similar can be observed in the Euroleague, because the budgets of CSKA and "Žalgiris" are incomparable, thus CSKA can also buy much better players or at least offer much higher salaries. The cap is considered a soft cap. This means that the cap can be exceeded under certain conditions rather than operating as a hard cap, which would prohibit exceeding the cap no matter the circumstances. The salary cap was set at $109.14 million for the 2019/2020 season (NBA.com, 2019). This number is based on projected basketball-related income for the upcoming year. The final number that the cap will be set at is negotiated between the NBA and the players association under the Collective Bargaining Agreement, which is the contract between the NBA and the players association (Blakey, 2018). Whilst a team is not supposed to exceed this cap, it is also supposed to meet a minimum team salary, which was $98.226 million last season (NBA.com, 2019). This is 90% of the salary cap, so a team must spend more than this number but be expected to spend less than the salary cap (Blakey, 2018). This prevents franchises simply reaping the financial rewards from the lucrative broadcasting deals and cashing in with low-paid rosters. The minimum cap ensures that franchises benefit financially from the money that the sport amasses but remain competitive in the league, once again striking a seemingly fair balance. The NBA has adopted a luxury tax system for some time. Franchises have salary caps that they must consider when selecting their rosters. If a team exceeds its salary cap, a luxury tax is imposed on them for doing so. The resulting total is then distributed evenly to the other teams that

20 did not exceed the cap (Blakey, 2018). Simply put, there are penalties for teams who exceed the threshold and benefits for those that do not. The NBA"s system can be difficult to grasp, but it is generally made up of three components: the salary cap, exceptions and the luxury tax. Whilst the salary cap operated at $109.14 million last season, the luxury tax threshold was $132 million (NBA.com, 2019). If a team exceeds this threshold, they will be charged a tax per dollar that it is in excess of the threshold. This can cost a team twice the amount of money by paying the sums due to the player over the cap, and then paying those same sums as a tax to the league. The NBA will distribute roughly half of the total luxury tax paid to non-tax paying franchises and the NBA retains the surplus for "league purposes". Taxpaying franchises will not benefit from the distribution of the tax and if they exceed the "apron" they will receive further restrictions. The apron is a point that is set above the luxury tax – last year it was $6 million higher than the luxury tax threshold. Further restrictions for exceeding the apron include losing entitlement to use certain exceptions to the salary cap rule (Blakey, 2018). So, where a team could usually sign a new player by using the relevant exception, this exception will no longer be available for the franchise to use for the season. The NBA permits teams to exceed the salary cap without being taxed if it makes use of an exception. This allows teams to function despite being above the cap. Whilst a description of each exception and how it interacts with the system will be discussed in a following post, for now it should be sufficient to understand that a team can exceed its cap without penalty by using an exception. One exception is the Larry Bird exception, named after the three-time MVP and Boston Celtics legend, Larry Bird. This exception allows a team to exceed its cap by re-signing one of its own players. When a player is out of contract, he will enter free agency and be free to join any franchise he wishes because he is no longer bound to an existing contract. It would be unfair if a team could not re-sign one of its players (entering free agency) simply because it would exceed their salary cap. Instead, the NBA permits the team to make use of an exception to sign the player even if it exceeds the cap as a result (Blakey, 2018). In this instance, the exception applies to franchises with a player on its roster who has been with the franchise for three consecutive seasons and is entering free agency. Being under the cap has its advantages. It can improve a franchise's bargaining position when negotiating trades with other franchises that may need to trade players who are consuming a large portion of their salary space.

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The NBA seems to have struck a good balance with this system: it encourages wise and shrewd spending where compliant franchises have financial and tactical incentives whilst non- compliant franchises are punished proportionately. The flexibility of the system – incorporating a soft cap and exceptions – still enables a new ambitious owner to wield their wealth and "transform" a franchise to glory but this does come at a cost: a cost that will benefit other franchises (Blakey, 2018). Rather than simply creating a system to deter and punish spending, the NBA recognises a system that intends on closing the gap between the wealthiest and the least wealthy, restoring a fair and balanced competition where money does not always win. In summary, analysis of the first part showed that financial stability in ordinary business means that it is able to withstand various problems, while in sports financial stability means that the team is able to pay the athletes salaries on time and pay for other liabilities without being in the red. It should be emphasized that the main goal in the sports business is to become prestigious and stay in the top at the end of the season, while in the ordinary business the main goal is to make a profit. Various indicators can be identified to better understand financial stability. In this work, several indicators of profit, stability, coverage, liquidity and level of spending were presented. Financial ratios are tools used to assess the relative strength of companies by performing simple calculations on items on income statements, balance sheets and cash flow statements. UEFA was one of the first organizations to introduce financial fair-play. Its main aim is to ensure that team spending does not exceed income and that various payments, such as player and staff salaries, are not delayed, but the rules introduced have also been criticized. Even the largest basketball leagues in the world have their own financial rules that teams must follow. Four years ago, the Euroleague introduced the rules of financial fair-play, for example, there can be no late payments to players and team members, a minimum budget of 5.4 million euros and a shareholder contribution to the budget of no more than 60% of the total budget. Teams are also required to submit annual financial statements. The rules are different in the NBA. The league, which is considered the best basketball league in the world, has a fixed salary cap, which teams must not exceed, otherwise a luxury tax must be paid. Also, teams have certain amounts of money that can be offered to a particular player, so there can be no situation where one team outperforms the other in terms of money - this can only be the case if the current player's team offers a new contract. It should also be mentioned that NBA teams are funded by team owners' millionaires and other private supporters, while in Euroleague a lot also depends on countries and municipalities.

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II. ANALYSIS OF TEAMS' FINANCIAL STABILITY IN LATVIAN-

ESTONIAN LEAGUE AND COMPARATIVE ANALYSIS OF FAIR-

PLAY RULES ACROSS THE LEAGUES

2.1 Overview of Latvian-Estonian basketball league

The Latvian-Estonian basketball league was established in 2018. The main goals of the league are to promote basketball in Estonia and Latvia and to be a valuable tool for the federations and the clubs of the region for the player development (Latvian-Estonian basketball league, 2020b). The league is ran by management board which consists of 4 board members which are elected for an indefinite period and they can be recalled by the general meeting decision. Management board is responsible for the coordination and control of the administration work overall. Resolution of the management board may be adopted with votes of three management board members. This season 13 basketball teams from Latvia and Estonian are competing in the merged Latvian-Estonian basketball league – 6 from Latvian and 7 from Estonia (Table 3). If we are comparing to previous seasons, then it is a drop in number of teams competing as in previous year 15 teams started the season. Table 3 Latvian-Estonian basketball league teams' in 2020-2021 season AVIS UTILITAS Rapla BC Kalev/Cramo (Estonia) BK Liepaja (Latvia) (Estonia) BK Ogre (Latvia) BK Ventspils (Latvia) Latvijas Universitate (Latvia) Pärnu Sadam (Estonia) Rakvere Tarvas (Estonia) Tallinna Kalev/TLÜ (Estonia) TALTECH (Estonia) Tartu Ülikool (Estonia) Valmiera Glass/VIA (Latvia) VEF Riga (Latvia) Source: Latvian-Estonian basketball league, 2020

Before the teams are analysed, it is necessary to look at what and whether there are fair- play rules in the league. Two years ago, Latvia and Estonia merged and created Latvian-Estonian basketball league in order to improve competition because there aren't many professional basketball teams in both counties. From the last season general sponsor of the league is betting company Pafbet but previous it was Olybet and this is trend in Latvian sports leagues because other sports 23 leagues are supported by betting companies too and teams are getting financial support from betting companies also. The regulations of the Latvian-Estonian Basketball League, which are available on the Internet, do not provide a broad insight into the financial regulations, therefore communication was made with the Secretary-General of the Latvian Basketball Association Kaspars Cipruss. He said there is no minimum budget for a team to participate in a tournament. For the 2019/2020 season, participation fee was 7200 euro (Latvian-Estonian basketball league, 2020b) and first 50% of the fee team need to pay until 1st July but second – until 1st September. Mr. Cipruss said that financial documents are required from those teams that want to apply for participation in the league, however, he acknowledged that there were no rules specific to the financial situation of the teams, meaning that league isn't checking team financial situation during the season. In cases when teams start to experience financial difficulties, the league will not be involved and will not provide financial assistance to teams, because the league budget does not provide funds for such purposes. The league helps teams in a different way. The payment received for the rights to the TV broadcasts is transferred to the league budget, a large part of which is used to support the clubs by paying the transport costs of the game judges and the work of the commissioners.

2.2 Research methodology

The aim of field analysis is to assess current situation of Latvian-Estonian basketball league's financials stability and rules related to financial fair play and to collect examples of financial fair-play regulation in comparative leagues. In order to achieve the objectives, it necessary to make two steps. First step is to analyse financial situation of Latvian-Estonian basketball league teams, but second step is to analyse financial fair-play regulations in the selected leagues. In both steps, it is also necessary to answer a few questions that will help achieve the set goals (Table 4). Table 4 Questions to answer in order to achieve the set goals Step Questions to be answered Research methods Step 1 a) What is financial • Content analysis of Analysis of financial situation situation and financial results team webpages; of teams in Latvian-Estonian of the teams? • Content analysis of league b) What are the financial team documents; 24

Step Questions to be answered Research methods stability ratios of the teams? • Ratio analysis; c) What are the lessons • Content analysis of learned from financial team administration sustainability perspective? comments in the press Step 2 a) Do the leagues have • Case analysis; Analysis of financial fair-play fair-play rules? • Content analysis; regulations in the selected b) What criteria are • Comparative analysis leagues implemented? c) What is the reasoning? Source: Table created by the author

Step 1 of the field analysis require calculating financial ratios which reflect financial stability of the teams. Discussion of the ratios is presented in Part 1 of the paper. For the field analysis 11 ratios were chosen, as presented in Table 5. Table 5 Financial ratios used for assessment of financial stability of Latvian-Estonian league Group Formulas Profit • Net profit / Operating profit • Operating profit / Operating revenues • Total operating revenues / total assets Stability • Short-Term Debt / Total liabilities • Long-term Debt / Total liabilities • (Current Assets – Current liabilities) / Current Assets Coverage • Equity / Total liabilities • Total assets / (Current Debt + Non-Current Debt) Liquidity • (Cash + short-term debtors) / Current liabilities Spending level • Wages / Total Revenue • Wages / Operating Expenses Source: Table created by the author

Only Latvian basketball teams are chosen for the analysis, because the author of the work is also from Latvia, as a result of which it is possible to obtain more information about the

25 basketball teams of this country. It should also be noted that Estonia and Latvia have different legislation, so it would not be objective to compare the teams of both countries. For out of six Latvian teams competing during this season were analysed in detail – BK "Ventspils", "VEF Riga", BK "Ogre" and BK "Liepaja". The remaining 2 Latvian teams are student teams that do not comply with the principle of professional teams, therefore weren't analysed. The paper also looked at two teams that ceased to exist last season – "Valka/Valga" and "Betsafe Jurmala". Therefore, the final scope of the analysis is 6 Latvian teams. Data set of the analysis represents 2016 – 2019 financial years. As for the main limitations that arose in the team analysis process, these were certainly vague annual reports. Although they comply with the law, it is difficult to understand whether the figures given correspond to reality, because, for example, there were teams with a value of 0 in the "salaries paid" section. Step 2 of the field analysis required to choose comparative leagues. The main strategy when choosing basketball leagues was that they had to be from Europe and one of the factors had to be equal to Latvia, such as population or the popularity of basketball. There are 44 countries in the European Union (Worldometers.info, 2020), and virtually every has its own basketball league. The first national basketball league to be compared is Lithuania. In this case, the argumentation is quite simple - Lithuania is one of the Baltic states, all three countries are always compared with each other in different areas. Lithuania is ahead of its neighbours in the popularity of basketball, so it is more interesting to compare. The next national basketball league is Finland. Yes, the population, size and economic situation of Finland cannot be compared with Latvia and Estonia, but basketball is certainly not the most popular sport in the Nordic country, as Finland's national sport is hockey by a mile, while basketball is at the top in Latvia and Estonia. This paper will also look at the Bulgarian and Serbian basketball leagues. It is logical that the Latvian-Estonian basketball league cannot be compared with the French, German or Spanish leagues, so looks must be taken into other directions. Both Bulgaria and Serbia have well-known teams, as well as basketball players, but their local basketball leagues do not stand out against the European background. In this case, it is not the Adriatic league, teams from many countries competes there. If we compare countries by size, then Serbia is only 1.2 times larger than Latvia (Mylifeelsewhere.com, 2020), and the nominal GDP was relatively similar (Statisticstimes.com, 2020). In terms of economic indicators and size, Bulgaria is well ahead of Latvia, but in terms of the results of the national men's basketball teams, Latvia is superior. The Bulgarian national team has not played in the Eurobasket since 2011, while Latvia has participated in all Eurobaskets in this

26 century. One more interesting thing - Latvia and Bulgaria are currently in the same qualification group of the Eurobasket 2022. It would also be relevant to compare the Latvian-Estonian basketball league with a non- European league. For this reason, the Puerto Rico basketball league will also join the four previous mentioned basketball leagues. Again, if you look at the economic data, area and population, it is difficult to compare Latvia and Puerto Rico, but there are common trends for both countries. In these countries, basketball is one of the most popular sports, both national teams have performed well in recent years, and the Puerto Rican team participated in the FIBA World Championship in 2019. In terms of size, both countries are small on their continents compared to other countries, as well as in terms of population. The main limitation in comparing leagues was certainly translation. Although the regulations of all basketball leagues have been elaborated in detail, it is certain that an important point in the translation may have been missing, which would allow even better comparison of leagues. A bad example is Serbia, because the league regulations could not be found, so it was only necessary to rely on the presentation of a person close to the situation. When it comes to the Latvian-Estonian basketball league, the regulations were written in general, while the league representative was not ready to take part in major discussions, so it was not possible to obtain extensive information.

2.3 Results of the analysis of Latvian-Estonian basketball league team's financials

Although at the start of the last Latvian-Estonian basketball league season 15 teams were playing, when the COVID-19 pandemic hit only 13 teams were part of the league. Problems with "Valka/Valga" started already in February. Team was unique because Valka and Valga are the same cities but between them is a border – Valka is city in Latvia, Valga – city in Estonia. Before Latvian-Estonian basketball league was created team was playing in two national championships – Latvian and Estonian. "Valka/Valga" was a team with small budget and the biggest sponsor was municipality. There were rumours in February that team couldn't finish the season because of financial issues and the chairman of Valka city council Vents Armands Krauklis approved it: "If we had calculated that there would be 33 thousand euros in January, but instead it is zero, then, of course, the situation is very difficult. Valga municipality has not allocated any of what was budgeted for now. This is a very important part of the budget" (Lācis, 2020a). There was a promise from Valga municipality 27 that in a next few week's team would receive necessary amount of money so they could pay player salaries, but the head coach already left team as well as some players. Krauklis continued: "I am not optimistic. Promises have been made for a long time. However, the current political situation in Valga is very difficult. The mayor of Valga was mistrusted. All this creates an unprecedented situation. Valga municipality was previously the most stable supporter, based on which other sponsors were attracted. This situation could not have been foreseen." The team players decided to boycott the next game, which was awarded a technical loss. Several players demanded that their contracts must be terminated because their salaries had not been paid for at least 60 days. According to the league regulations (Latvian-Estonian basketball league, 2020b), two technical losses mean disqualification of the team. It also happened in reality - "Valka/Valga" was unable to complete the line-up for the next game, for which a technical loss was received, and the team was disqualified. A few months later, the former head coach of the team Varis Krūmiņš did not comment positively on what was happening in the team. "There was a mess all the time. The coach was responsible for everything. The manager did not always help. The attitude towards the team, to put it mildly, was pathetic. Salaries were not paid in time, the training process was subordinated to what happened in the gym. If we could train in the gym, then the conditions were good. The stadium was also acceptable. But that management attitude" (Lācis, 2020b). The coach also admitted the team still owes him 700 euros. Similar story was with another Latvian-Estonian basketball league team. Right after the COVID-19 pandemic started "Betsafe Jurmala" announced that ceases to operate due to lack of city council financial support. At the end of each year, the team has applied for the support program "On the allocation of co-financing for the organization of sports organizations, their represented teams and individual athletes". The team also signed a contract with the municipality in previous seasons. In 2019, an agreement was reached for support of 140 thousand euros - 80 thousand for the second half of the 2018/2019 season, but the remaining 60 thousand would be due in the first part of the 2019/2020 season (Delfi Sports, 2020a). The team did not receive 60 thousand from the city, but in January 2020 applied for another announced city procurement. It received a decision on the victory in the procurement on February 5, but on March 3, a confirmation was sent that the procurement had been terminated. A few weeks later, the team changed its name to "SilJa" and announced that it was closing down for financial reasons. "It all started in August. Jurmala City Council does not fulfil its promised things. That's how we dragged the season in the hope that something could change. They do not want to support

28 us, they do not think we are worthy of this money," in a interview said team captain Ugis Pinete (Delfi Sports, 2020b). "There were rumours of some political interests. I didn't get paid for two or three months, even though I trained every day and gave it my all." Although no money was received from the city council, the team did their best to pay the salaries of the players. Later, the Jurmala City Council also provided an explanation of the situation. "Jurmala City Council has fulfilled all contractual obligations undertaken in previous years for the support of the basketball club "Jurmala". At present, the municipality has no contractual obligations with the association or club. When handling public funds, the municipality must comply with the de minimis conditions - one legal entity cannot receive more than 200 000 euros of public funding over a three- year period. The management of the basketball team "Jurmala" was also informed about the above rule. When the threshold of 200 000 euros is reached in a three-year period, the municipality is not entitled to grant additional co-financing. Given this limitation, the management of the basketball club had to involve private sponsors in good time" (Delfi Sports, 2020c). Within 1 month, two basketball teams announced their termination. Unlike Europe's largest basketball teams, others rely heavily on the city's financial support. Without the support of the city, it is not possible to exist, which also happened in the above cases. Turning to the teams that competes in Latvian-Estonian basketball league this season, the first one is BK "Ventspils". It is team with the biggest traditions in Latvian basketball. "Ventspils" was the first champion in Latvian-Estonian basketball league but in Latvian basketball league team has 23 different medals. In recent seasons, the team's budget has declined quite rapidly. In the spring of 2019, the team's general manager Ralfs Pleinics said that the "Ventspils" budget was around 1.5 million euros, but he predicted that the budget for the next season (2019/2020) would be only about 1 million. He described the budget cut as insufficient action on the part of the Latvian government. "The situation is becoming more dramatic every year. The tax burden on business is high enough and the government has not created the conditions to support both sport and culture. The situation worsened further in 2018 with the tax reform." Pleinics said that small market is also a problem. "There is not much interest in sport or culture in the long run, because every four years an event can be attended by people, but basketball is played every week, so people lose interest. The competitiveness of basketball is also an important argument, because the situation would be different if we had a Euroleague team or other international competitions, in which the team has involved, would be interesting enough and well- publicized, would generate more interest and possibly attract the attention of wholesalers."

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BK "Ventspils" underwent major changes at the end of 2019. The team announced that Ventspils Mayor Aivars Lembergs will no longer be the team president. The change took place because the United States included Lembergs in the global Magnitsky Act or blacklist (LETA, 2019). A. Lembergs worked for the Ventspils Freeport authority, which for many years concluded advertising service agreements with BK "Ventspils", and they accounted for up to 50% of the club's budget. A. Lembergs stopped working in Ventspils Freeport authority, in mid-December changes in the law "Law on Ports" took place and board members changed as well. The team also concluded an advertising agreement with the Ventspils Freeport authority for 2020, but for a smaller amount. As a result of the changes that took place in December, the planned amount was significantly reduced. In January, the club received 25% of the promised funds (from the new amount), but later received the news that part of the money must be repaid (Noviks, 2020). The bad news is that the team will not receive money from the Ventspils Freeport authority this season. Assuming that last season's budget was 1 million, but the funding allocated by the Ventspils Freeport authority is half, it can be concluded that this season budget is only 500 000 euros. "Part of the budget will consist of municipal funding, part - funds allocated by private companies. The proportion of private funding will increase, albeit at the expense of budget cuts," Pleinics said. Due to a large budget cut, virtually all last season's players joined other teams in the off- season. The team consists mostly of young basketball players. Of course, it is good that new players have a place to develop, but it should not be done by the team with the most championship titles (10) in the history of Latvian basketball. In the summer, the team's head coach also changed, and now the team is led by a local Ventspils specialist. Since the 2002/2003 season, the team has participated in European competitions in addition to the local championship, but this season the team plays only in the Latvian-Estonian league. "VEF Riga" team was renewed in 2007 and since then it is one of the best teams in Latvia. Team stands out of the rest of the Latvian basketball teams by announcing the team's budget before each season. In the 2018/2019 season budget was 1.4 million euros (VEFRiga.lv, 2018) but before last season, team president Edgars Jaunups announced that the budget had fallen by a third to about 1 million euro (VEFRiga.lv, 2019). Like the BK "Ventspils" team, VEF's budget previously decreased due to tax changes, but the COVID-19 crisis has also introduced its own adjustments. "We, as a team that relies largely on private funding, made wise and responsible decisions three days after the state of emergency was declared. We were very confident that the season was unlikely to continue, so we quickly gave up a few expenditure lines, including terminating our contracts with the foreign players," Jaunups said

30 on April. "All sponsors are still with us, but it must be understood that the economic crisis caused by the pandemic has just begun. Therefore, I cannot say that everyone who has expressed support now will not say the opposite in a month or two" (LETA, 2020). VEF last season started a new campaign. Because of reduced budget and tax regulations in Latvia, VEF is looking for 100 co-owners which could donate them 10 000 euro annually. Their plan is in 3 years to get 100 people, meaning that 1 000 000 euro from budget would be generated from co-owners. BK "Ogre" made debut in Latvian basketball league in 2015. "Ogre" is the only Latvian team in the first division which is playing there because of championship in second division. Probably the team is the biggest victim due to the pandemic caused by COVID-19, if you look at it from the sports side, because last season the team showed a great basketball, which allowed to be in the 2nd place in the Latvian-Estonian league. In the summer, announcements about the team's budget reduction or other troubles could not be read in the media. Team reported on its social networks about new signed players, which only shows that finances are largely in order and that the pandemic has not caused any major problems. Janis Laganovskis, a representative of BK "Ogre", did not previously publicly disclose the size of the team's budget, but according to unofficial data it could have been around 300 000 euros. It is likely that it has decreased as a result of the pandemic, but the main supporter of the team is the Ogre municipality. Five years ago, municipality's support was the decisive factor in allowing the team to debut in the Latvian basketball league's highest division. Laganovskis told the author of this paper previous that attracting other sponsors is a problem, although the team's performance improves with each season. Success in the season also greatly influences spectator attendance at games: "The spectators follow the success. If there are wins and competitive games, then the spectators are in the arena. If we play bad, there are no spectators, but this year there are enough spectators and the arena is almost 80% full." BK "Liepaja" made debut on the Latvian basketball stage two seasons ago. In previous seasons, the total budget was around 340 000 euros, the team representative Normunds Atvars revealed, but there are several teams under the wing, as association "Sporta klubs Liepajas basketbols" contains men's team, women's team and youth teams. The biggest sponsor of BK "Liepaja" is Liepaja city council, which support approximately 60% of the whole team budget. The financial support of the other sponsors is roughly the same, but overall the situation with sponsor attraction is not good. "The situation is bad, because entrepreneurs mostly stay in advertising cooperation's because donating is not profitable. Donators

31 are mostly local entrepreneurs who cooperate because they understand our mission," said Normunds Atvars. BK "Liepaja" has also many factors that prevents from raising money, but Normunds Atvars also highlighted that entrepreneurs evaluates project only superficially. "The obstacles are many - there are many different sports and entertainment events in Liepaja and Latvia in general and everyone needs support, but there isn't money for everyone. It is also the case that sometimes entrepreneurs do not go into the very essence of the project, but rather superficially evaluate the results. But the mission is deeper, to attract qualified coaches, physiotherapists, to provide a quality workout process for every young person, providing the right food to grow strong, talented young people without the need to leave Latvia at the young age to become a professional basketball player." Normunds Atvars said that at one time Latvian Basketball Association even interfered with teams, "but in recent years, communication and mutual understanding of processes have improved". He emphasizes the main message of BK "Liepaja": "There can't be strong local championship without strong and stable basketball clubs. And then there will be no strong youth or adult national teams." In order to better understand the financial situation of the teams, various financial stability indicators were used, which were discussed in the first part of the study. First, three profit indicators were calculated. All "Net profit / Operating profit" ratios for all teams is the same every year just because net profit is the same as operating profit. It is necessary to emphasize that all basketball teams are established as associations that do not have to pay corporate income tax if the purpose of the main activity is not to make a profit (Bilance, 2019). Therefore, this indicator is the same for all teams every year. The situation is different when the "Operating profit / Operating revenues" indicators were calculated (Figure 2). They are negative for practically every year for all teams, but there are only a few exceptions. This is because practically every financial year for teams ends with a loss.

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0.60 0.40 0.20 0.00 -0.20 -0.40 -0.60 -0.80 -1.00 -1.20 2016 2017 2018 2019 VEF -0.21 -0.35 -1.06 -0.52 BK Ventspils -0.40 -0.33 -0.21 -0.26 BK Ogre -0.39 -0.73 0.28 0.13 BK Liepaja 0.45 -0.97

Figure 2. "Operating profit / Operating revenues" ratios Source: Author's calculations

A wider range is shown in the "Total operating revenues / total assets" ratios (Figure 3). Every year, the leader has been BK "Ventspils", which means that the team makes the best use of assets to generate total operating income.

35.00 30.87 30.00 25.90 25.00

20.00

15.00 14.03 11.20 10.00 7.84 8.21 6.37 6.96 3.74 4.23 5.00 3.29 2.43 2.46 1.54 0.00 2016 2017 2018 2019

VEF BK Ventspils BK Ogre BK Liepaja

Figure 3. "Total operating revenues / total assets" ratios Source: Author's calculations

The next group is the stability ratios. If you look at short-term debts against total debts (Figure 4), then the highest indicators are "VEF Riga". The higher the rate, the greater the

33 likelihood that teams will be unable to settle short-term liabilities using only assets. It should be noted that the team has also had the biggest losses in previous years and "total liabilities" also take this into account.

35.00 33.03 29.50 30.00

25.00 19.82 20.00

14.82 14.33 15.00 12.03

10.00 7.54 6.34 3.98 5.00 2.91 1.24 1.58 1.61 0.31 0.00 2016 2017 2018 2019

VEF BK Ventspils BK Ogre BK Liepaja

Figure 4. "Short-Term Debt / Total liabilities" ratios Source: Author's calculations

Long-term debt versus all debt is observed in only a few cases (Figure 5). In this case, "Ventspils" stands out, which had large long-term liabilities in 2018 and 2019, therefore also a significant ratio to the background of other teams.

14.00 12.32 12.00 11.43

10.00

8.00

6.00

4.00

2.00 0.76 0.03 0.00 VEF BK Ventspils BK Ogre BK Liepaja

2016 2017 2018 2019

Figure 5. "Long-term Debt / Total liabilities" ratios Source: Author's calculations 34

Ratio of working capital and current assets (Figure 6) shows short-term solvency of teams. The results aren't great, especially for "VEF Riga" which has the worst ratio in every year. The main problem is that the team has too many short-term liabilities.

5.00 0.00 -5.00 -10.00 -15.00 -20.00 -25.00 -30.00 -35.00 -40.00 2016 2017 2018 2019 VEF -5.80 -15.11 -34.21 -30.23 BK Ventspils -2.99 -11.16 -13.48 -18.89 BK Ogre -0.31 -1.99 -0.90 -1.49 BK Liepaja 0.69 -7.02

VEF BK Ventspils BK Ogre BK Liepaja

Figure 6. "(Current Assets – Current liabilities) / Current Assets" ratio Source: Author's calculations

The next big group are coverage ratios. "Equity / Total liabilities" ratio (Figure 7) shows the ability of clubs to cover against third parties. Again, the situation isn't great because all the ratios are negative, except BK "Liepaja" in 2018 but that is the year when team was founded so the result should be viewed with some scepticism.

2.50 2.27 2.00 1.50 1.00 0.50 0.00 2016 2017 2018 2019 -0.50 -0.20 -0.39 -0.57 -1.00 -0.75 -0.66 -0.84 -0.93-0.92 -0.97 -0.96 -0.97 -0.97 -0.87 -1.50

VEF BK Ventspils BK Ogre BK Liepaja

Figure 7. "Equity / Total liabilities" ratio Source: Author's calculations 35

"Total assets / (Current Debt + Non-Current Debt)" ratio (Table 6) in practically all cases confirm that the value of obligations to third parties is superior to the club guarantees. Table 6 "Total assets / (Current Debt + Non-Current Debt)" ratio 2016 2017 2018 2019 "VEF Riga" 0.16 0.07 0.03 0.03 BK "Ventspils" 0.25 0.08 0.04 0.03 BK "Ogre" 0.80 0.34 0.43 0.61 BK "Liepaja" 3.27 0.13 Source: Author's calculations

Liquidity ratio "(Cash + short-term debtors) / Current liabilities" (Table 7) shows that teams may have problems meeting short-term liabilities. Table 7 2016 2017 2018 2019 "VEF Riga" 0.052 0.037 0.014 0.010 BK "Ventspils" 0.042 0.009 0.011 0.001 BK "Ogre" 0.383 0.092 0.309 0.336 BK "Liepaja" 2.712 0.024 Source: Author's calculations

The last big group is spending level ratios. The "Wages / Total Revenue" ratio (Figure 8) is good for all teams, as the revenue generated is much higher than the salaries paid, however, it should be taken into account that not all teams paid salaries are included in the relevant section. It is very interesting with "Ogre", because the reports show that in the last 3 years the team has not paid salaries to anyone. Then it turns out that the players played for free?

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0.14

0.12 0.12 0.12

0.10 0.11

0.08 0.08 0.07 0.07 0.06 0.06 0.06 0.07 0.06 0.04

0.02 0.02

0.00 0.00 0.00 0.00 2016 2017 2018 2019

VEF BK Ventspils BK Ogre BK Liepaja

Figure 8. "Wages / Total Revenue" ratio Source: Author's calculations

The last indicator is "Wages / Operating Expenses" (Figure 9). For all teams, the ratio is relatively low, which means that funds are more allocated to other operating costs and a greater balance will have on the structure of the income statement.

0.12

0.10 0.10 0.09 0.10 0.09

0.08 0.07 0.06 0.05 0.06 0.06 0.05 0.05

0.04

0.02 0.02

0.00 VEF BK Ventspils BK Ogre BK Liepaja

2016 2017 2018 2019

Figure 9. "Wages / Operating Expenses" ratio Source: Author's calculations

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2.4 Results of the financial fair-play regulation practices across the comparative leagues

The review of comparable leagues should start with Lithuania, which is closest to Latvia and Estonia. Country is known as the basketball country, and the second religion there is basketball. Their national basketball league is well known around the Europe not just because of Kaunas "Zalgiris" but also other teams have shown great results in international competitions. Overall, 12 teams are playing in the highest division. Before digging deeper, I would like to commend the Lithuanian Basketball Federation for responding to my e-mail within five minutes. After checking the league bylaws, conclusions were that the Lithuanian basketball league has much more financial rules than the Latvian-Estonian basketball league. If a team wants to play in the highest Lithuanian basketball division, it must collect minimum budget which was 400 000 euro for 2018/2019 season. Team needs to buy a licence but before that team must submit annual financial statements. For monitoring purposes, the team must provide variety of data: • budget execution and budget deviations for the previous twelve budget months; • accounting registers substantiating the amount of short-term liabilities as of 30 June; • written deferral or settlement reconciliation agreements for current liabilities to players, coaches, other club staff and employees; • the budget of the future championships; • monthly and / or annual received support declarations submitted by the team to the State Tax Inspectorate under the Ministry of Finance of the Republic of Lithuania. During the season, the teams do not have to present financial indicators, but already when applying for the tournament, the teams present a lot of different documents that show the professionalism of the league. By setting the minimum budget, the league shows that it wants competition between professional teams and not semi-amateurs and indicating the future budget of the teams shows that the league thinks in the long run and not in the short term. In the Lithuanian basketball league, not only the strongest teams but also the weakest have something to fight for. The worst team in the season automatically relegates to the lower division. Best team in the Lithuanian 2nd league goes to the higher division if it meets the criteria set and approved by the board for a basketball club applying to participate in the Lithuanian highest league. It should be mentioned that there is no such principle in the Latvian-Estonian basketball league.

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These are all things that takes the league to the next level, because no one likes that teams change every year, and the whole project looks much more attractive from the sponsors and spectators view. The next country on the list is Finland. As in Lithuania, a license is required to play in the Finnish basketball league. It is mandatory for every Finland basketball team to have an authorized public accountant, Facebook, Twitter, Instagram and Youtube accounts, as well as full-time executive director or chief administrative officer, people responsible for sales and marketing, people responsible for communication. It is interesting that social media accounts in previous mentioned platforms is a must – of course, this is nothing new that best way how to connect with fans is through social media but surprised that it is a mandatory requirement. One more difference with Latvia and Lithuania is that Finnish teams must have junior teams in different age groups. Every Finnish highest division basketball team must demonstrate that it has provided statutory social security for all team members and withholding taxes from the previous competition year. The league pays great attention to financial statements – teams need to show the latest approved financial statements, which must be newer than December 31, 2018, with notes and balance sheet details, and an auditor's report. If the financial statements are older than December 31, 2019, the club must submit an income statement and balance sheet signed by the accountant and the official signatories of the team. Teams must submit a budget showing that it is possible to play in the upcoming season and, as a comparison, the actual figures of the previous competition year. The budget must be made on a form drawn up by the association and the club must state the figures requested in it, broken down for each month. Budgeted revenue must be reliably verifiable by indicating the amount in euros of the contracts in force and a plan for the final sale. Although Finnish basketball is not high in the European basketball hierarchy, the rules for basketball teams could be among the highest. It is also understandable that if the teams are in good financial condition, basketball will be able to continue to develop in this northern country. Our next stop is Bulgaria. There are plenty of financial rules that teams must fit into in order to participate in the highest league. Minimum budget for every team is 127 640 euro (converted from Bulgarian lev). Team can't have financial obligations to FIBA, FIBA Europe or Bulgarian Basketball Federation, nor to the coaches working under a written contract with team and until September 30 teams need to pay all other obligations from last season. What distinguishes the Bulgarian league from previous mentioned, is that teams pay "match fee" before every game – either it is home game or away. Every regular season game and quarterfinal game costs more than 350 euros, every semi-final and 3rd place game fees are more

39 than 430 euro but every gold medal game cost more than 500 euros. If a team can't pay the fee, it is increased for the next game. Three unpaid fees are equal to a technical loss but if a team can't pay three times again, then it is disqualified from the league. The bylaws of the Bulgarian basketball league do not emphasize the necessary of showing financial statements. The main difference from previous leagues is the payment of a fee before each game, because in other leagues the participation fee must be paid within certain deadlines. Serbia is the 5th European basketball league checked in this paper. Although the bylaws for the 2020/2021 season are available on the Internet, they did not mention anything about the financial rules. Contact with the league representative also failed, so alternatives had to be found. I managed to contact a Serb who told a little about the Serbian basketball league. She told that there is no minimum budget for teams in order to participate in the league. Teams are paying monthly participation fee, but league doesn't require teams to show financial statements. Clubs are separated from Serbian basketball federation and are working as separate body. Source told that Serbian basketball league has some sponsors but for a longer period there is no general sponsor and the source said that overall, everything is happening at a very low level. To see what is happening not only in the European basketball leagues, the Puerto Rican basketball league is also used as an example in this paper. In order to better understand the nuances of the league, I managed to contact a person who has a connection with the Puerto Rican basketball league. The league has similar rules to the NBA, for example, it has a salary cap for both players and teams as well as draft. The max contracts for players are $40 000 per season, but, as source said, there are rumours that every team is violating this rule. Average salary for player last season was $20 132.15. The collective salary cap for each team is $400 000 with a cap of $550 000 of which teams who exceed this amount ($400 000.01 to $550 000.00) would be subjected to a luxury tax. Bylaws indicate that every franchisee must submit to the league their respective account statements and financial reports, but source said that they do not do so. According to the league bylaws, if a team does not submit the documents before the 31st of December of each year, the franchise is subjected to $5 000 fine and it cannot compete on the upcoming season until it does so. According to the former president Lcdo. Fernando Quiñones, around three teams submitted their documents – no fine was also administered. It is mandatory for every Puerto Rican basketball league franchise to have a second team and a youth team. Interesting part is that for every ticket sold home team is donating 50 cents to the

40 general fund of the league. Maximum money that can be donated each season in total by a team is $25 000. In general, the league has quite strict financial rules, but they do not seem to work at all if teams can pay higher salaries to players and penalties are not imposed for non-submission of financial statements.

2.5 Lessons learned and problems identified

After summarizing all financial ratios, answer to the question what is financial situation and financial results of the teams is that the financial position of Latvian basketball teams is negative. Most of the financial ratios for teams were negative, such as the operating profit ratio against total revenue, which shows that the teams simply spend too much and do not earn enough revenue to cover all expenses. The stability indicators were also not positive, indicating that it is difficult to settle for a short-term liability, but this was especially relevant for the VEF and Ventspils teams. The previous statement was also confirmed by the calculation of the liquidity ratio, which was close to zero or the critical line for all teams. The solvency of the teams was not satisfactory, with all teams showing negative indicators, moreover, the situation of the "Liepaja" team deteriorated by practically 8 percent within one year. Yes, the overall picture does not look good, but I would like to add something positive. On the positive side, teams, despite world events, are able to raise budgets to participate in the Latvian-Estonian league. It is also positive that there are companies that are ready to continue financially supporting teams. An important factor here is also the form of business. As basketball teams are associations in the form of business, their main goal is not to make a profit, so it can be considered that from the very beginning the teams understand that no profit will be made. In the analysis profit, stability, coverage, liquidity and level of spending ratios were used, however, for the reasons already mentioned, the profit ratios could also not be used. National legislation also plays an important role in this regard. It has already been pointed out that there were difficulties in analysing the annual reports, as the figures presented are unlikely to reflect the real situation in the teams. The teams are hard to blame in this case because they have complied with the legal requirements and there have been no objections from the state. Answer to the question what are the lessons learned from financial sustainability is that the teams rely very much on the support of the municipality, except for "VEF Rīga". As it was seen in the case of "Jurmala Betsafe", if the municipality does not support the team, it can go bankrupt. "Ventspils" also received a much smaller amount from a company partly owned by the city, and the

41 fate of the team was unknown for a long time. If you look at it from a long-term perspective, this is not good, because a lot of things can be determined by municipal elections in the future. If the new mayor is not interested in basketball, he will not support it, the team will not receive a large part of the budget and will cease to exist. Private sponsors need to be more involved in team sponsorship, but it is very difficult to attract large sponsors outside the capital. The league management should be more involved, as there are no financial fair play and stability rules in the league, and the teams close the financial years with losses. The league needs to find some mechanisms that could encourage additional funding for the teams, which would at times improve the financial situation, as well as raise the league itself in a different light, as this would show that it cares about its teams. If we compare the selected leagues, answer to the question do the leagues have fair-play rules is positive – yes, they have. The main rules of fair-play in the selected leagues were a minimum budget, showing financial reports and having a youth team. Serbia stood out in a negative way because it is one of the basketball powers in Europe, but the basketball league itself does not really have financial rules. Lithuania is trying to maintain competitiveness, as setting a minimum budget indicates a certain level that teams must reach. Although basketball is not the most popular sport in Finland, the league's financial rules are quite detailed, which only shows that the country's economic situation is good, because every detail matter. Also, not every team can play in the Bulgarian basketball league, because there is also a minimum budget. Answer to the question what criteria are implemented is that a minimum budget is most often set. In this case, the question what is the reasoning can also be answered perfectly. The minimum budget of the teams is set so that all teams that want to participate know the minimum amount of the budget to be collected. It also shows the long-term thinking of the teams, because budget X will not be collected just to play 1 season. It also creates stability for the league itself, as it is possible to develop the league and other plans. Most leagues also require teams to submit annual financial statements. These reports are very important because it allows to judge the team from previous seasons and see how serious the organization is. Of course, Puerto Rico stood out the most, as it has equated its basketball league with the NBA concept. This league has a cap space that is not set in Europe, so it can be said that there is more inequality in European basketball leagues - the minimum budget is set, but teams can spend much more on players' salaries because no maximum amount is specified. The rules that have been put in place are good, but if they are not followed, it only shows that the rules have been created just to have something written.

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III. RECOMMENDATIONS FOR LATVIAN-ESTONIAN

BASKETBALL LEAGUE ON IMPLEMENTENTION OF

FINANCIAL FAIR-PLAY RULES

3.1 Proposed financial fair-play rules

After summarizing all the results and comparing other basketball leagues, several proposals have been made for the Latvian-Estonian basketball league, which could improve the overall situation in the future. The recommendations can be found in the Table 8, followed by a more extensive comment. Table 8 Recommendations to the Latvian-Estonian basketball league towards the implementation of financial fair-play rules Financial fair-play rules Minimum annual budget of 300 000 euro 2 division system, last team is relegated To have a 2nd team or youth team Financial statement checking in the summer Cash bonuses Distributing revenue generated by TV Team focus on social media Source: Table created by the author

Other provisions in the leagues discussed in this paper were also considered, but their implementation in the Latvian-Estonian league did not seem possible. NBA revenue is also distributed after ticket revenue. In the Latvian-Estonian league, the introduction of such rules that revenues are distributed among all teams would not work, because ticket companies are sold by companies other than the teams themselves, as well as the league itself pays television for live games instead of television paying the league. It should also be taken into account that the Latvian- Estonian league is not a closed league, as is the case with the NBA and the Euroleague, as a result of which the participating teams can change much more easily from year to year. The way teams can make money is to sell their merchandising, but in Latvia and Europe in general it is not as popular as in the USA, if football is not considered. There are also concerns 43 about whether people would be willing to pay 30-50 euros for a team shirt, because the production costs are not small, but people's solvency in Latvia is not the highest. All Latvian teams have social media accounts, and this could become a way to gain additional sponsors and earn extra money, but teams should reach a certain number of followers, such as 10,000, which could encourage potential partners to cooperate with teams, because nowadays, social media activities are very important. Both the NBA and Puerto Rico have a fixed salary cap that teams cannot exceed, otherwise they will have to pay an additional tax. Such a rule is not necessary in the Latvian-Estonian league, because the difference in team budgets is not as big, neither team owns billions as in the NBA, moreover, both countries need top teams that can compete and represent the country in European competitions. It would also not be necessary to set a maximum player salary, especially in these COVID-19 conditions, where teams try to spend less on player salaries. It is possible that previous mentioned rules would be necessary in the Euroleague, because the differences in the budgets of the teams are huge, for example, the budgets of "Zalgiris" and CSKA cannot be compared. There is a rule in the Euroleague and other European leagues that prevents teams from being indebted to former players and other team members in the long term. This problem, wage delays, is quite a topical issue in Latvian basketball, because even in ordinary companies, various payments are often delayed, so it would not be wise to introduce such a rule. Of course, it is not a good style to delay the payment of wages, but unfortunately this is a reality that has been confirmed by several people close to basketball. True, in this direction the league should look and start, perhaps with some small steps.

3.2 Implementation guidelines

The main recommendation would be to set the minimum budget needed to participate in the competition. If the minimum budget were to be quantified, it could be around 300 thousand euros. The possible amount of the budget in such amounts was also mentioned by several people close to Latvian basketball, among whom were journalists, agents and others, however, the budget could be increased once teams recover from the COVID-19 crisis. The main rule in determining the potential budget is the salaries of players and coaches. One of the surveyed basketball agents said that currently (autumn 2020) the average salary in the VEF team could be 3 thousand euros, in the Ventspils and Liepaja teams the average salary could be 1500 per month, but the average salary of the Ogre players could be about 2000. The average salary among the previous mentioned 4 Latvian basketball teams is 2000 euros, however, 2 student teams are also participating in the Latvian- Estonian league, where practically no player receives a salary, as a result the average salary could

44 be dropped to 1000 euros among 6 Latvian basketball teams. Table 9 summarizes the potential team costs over a 10-month period resulting in an approximate budget. Table 9 Potential costs structure in a team of Latvian-Estonian league at the minimum budget threshold Position Amount of money per 10-month season (EUR) Player salaries 150 000 Coaches and staff salaries 84 000 Home arena costs 16 500 Other expenses 49 500 Total 300 000 Source: The table created by the author after a conversation with an undisclosed basketball agent, who provided information about possible player salaries and other costs

These calculations considered that the player's average salary in a team is 1500 euros. If we talk about Latvian teams, then the budget of VEF is around one million, but the budgets of the other three Latvian professional basketball teams could be around 300 thousand or a little more. Of course, the amounts may change, but this is the beginning from which the league could move in both directions, because certain budgets of the weakest teams in the league are less than 300 thousand. The minimum budget would ensure that the teams have the same rules of the game. Teams would know the minimum amount of money they need to reach to participate in the tournament, and this would reduce the risk of teams with a bad budget situation and on the verge of collapse. Currently, there are also several student teams in the league, which do not count as professional teams, moreover, in previous seasons, student teams had a very difficult time against several teams and the deficit on the board was large. It is not a bad thing that the student team participates in the tournament, because they also won, but from the point of view of the professional league it is not the best situation. Setting a minimum budget would also make the basketball league and teams more serious in the eyes of companies, as a minimum budget makes teams think long-term. Companies like clarity and plans, so in this case they would know what to expect in the future. There are four historical districts in Latvia - setting a minimum budget could lead to greater local patriotism, as companies in the area could sponsor one team. The second recommendation follows from the first, because the Latvian-Estonian basketball league could introduce a two-division system. Teams that could not reach the minimum

45 budget would start in the second division, but after each season the best team in the second division would win the opportunity to start in the first division, but the required amount of budget should be collected. The worst team in the first division would lose its place after the season and move to the second division. Nobody likes if the games end with a big difference in results and the two-division system would allow to reduce this possibility, as well as increase the intrigue and the value of each game. The creation of the second division would generally allow to increase the number of teams in the league, as the second division could start teams with budgets that are not yet the largest but have long-term ambitions. The total number of participants could increase, for example, to 20 teams, playing 10 in each division. Among the negative things, it should be mentioned that the number of games for teams would decrease, but the format could be modified. The teams of the second division would start the season faster, they would play 1 round and the 4 best would join the first division, while the remaining teams of the second division would split the remaining places and, for example, some cash prizes. In both Latvia and Estonia, the lowest league championships are popular, so, in my opinion, it would not be a problem to create a league with an even larger number of participants than 20. However, a situation may arise that more teams choose to remain semi-professional, as a result of which the circle of professional teams is very small and it is not profitable to create a separate tournament for only 5-8 Latvian and Estonian basketball teams, while the rest play in a separate tournament. An alternative to attracting lower league teams would be to introduce rule that all Latvian- Estonian basketball league teams need to create a second team or youth team where nearest reserves and young talent would play. In this case, it would be possible to avoid the redistribution of teams and the creation of a new playoff format, as there would be two separate leagues - the Latvian-Estonian championship and the second team championship. This would be an ideal stage for young basketball players, as they could also compete daily with Estonian basketball players, which would promote faster development. Even with such a step, the league would show long-term strategic thinking, which could go hand in hand with an increase in team budgets. Teams could also make money with this if they have very talented basketball players who could then be sold to the best European basketball teams. The downside to all this is that the minimum budget should be increased, as the maintenance of youth teams is not free, and the costs would increase significantly. However, the team could circumvent the rule of creating a second team with such an elementary step as agreeing with a lower league team to be formalized as a second team. A similar system has been set up in the United States, where virtually all NBA teams have their own development league team playing in the G-League. The rosters are mainly made up of new players who have not been

46 selected in the NBA draft or the closest reservists of the first team, as well as those who just want to break out and play in the NBA. Given that the league representative did not explicitly mention in the interview whether the league requires teams to present annual financial statements in the off-season or after the new year, this requirement could be made mandatory in the off-season. Looking at the teams' financial annual reports, the league would have more clarity about the teams' financial situation, as well as, in general, could notice the first unpleasant factors that could allow to avoid team bankruptcies. An examination of the financial statements is a normal phenomenon in many European leagues, including those discussed in this paper. It should also be borne in mind that the introduction of such rules would increase the league's prestige in the eyes of both partners and spectators, as it would show that the league cares about its members and thinks in the long run, similar to the minimum budget recommendation. In this case, it is important to remember the situation described in the paper that the figures published in the reports largely do not correspond to the real situation. It is not possible to force teams to change their legal status, so a major reform would be desirable on the part of the state, but it is not so easy to do so. Remaining with the current situation that the legal status of the Latvian team is an association, in addition to analysing the reports, it would be necessary to conduct interviews with team representatives in order to fully understand the financial situation of the teams. It should also be noted that the author has no knowledge of the Estonian financial system, financial statements of basketball teams and their accuracy. One of the main things that came out after the interview's was that the Latvian-Estonian league isn't financially supporting the teams. Recommendation would be to introduce cash bonuses so that teams can earn extra revenue throughout the season. Bonus system is implemented in Euroleague but public information about the amounts cannot be found, thus for this case example would be FIBA Champions league which in regulations has written about the prize pool (FIBA Champions league, 2020). Every team participating in the regular season receives 50 000 euro, every team participating in Round of 16 gets 70 000 euro but the 4 best team splits 1.74 million euro, as the winner gets 1 million. Of course, the Latvian-Estonian basketball league cannot offer huge bonuses for wins, but even small amounts would be a nice solution. For example, for every win in a regular season, the team would receive 300 euro, each playoff (8 in total) would receive 1000 each for reaching this stage but 4 best teams would compete for extra money - 2 500 euro for 1st place, 1 500 euro for 2nd place, 3rd place - 600 euro and 4th place - 400 euro. The total amount of the prize fund and its distribution is shown in Table 10.

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Table 10 Example of a prize fund in the Latvian-Estonian basketball league Stage in the season Amount of money (EUR) Regular season 93 600 (300 per win) Entering playoffs 8 000 (1 000 per team) Final four 5 000 (2 500 – 1st, 1 500 – 2nd, 600 – 3rd, 400 – 4th) Total 106 600 Source: Table created by the author

How much money one team could earn per season? For example – during the 2020/2021 regular season team X plays 26 games and gets 13 wins which is enough to get into the playoffs. That means that during the regular season team X has earned 3 900 euro and extra 1 000 for entering playoffs, in total it is 4 900. Of course - this amount comparing to the big basketball leagues is very, very small, but this amount would help to cover some significant costs. The most important thing for a prize fund at all is to attract sponsors. A lot of work should be done by the league itself here, but with a clear vision and goals, it would be much easier to find potential supporters. Setting a minimum budget for basketball teams would also be an attractive aspect for sponsors, which, as mentioned previous, would indicate the professionalism and sustainable thinking of the league. Another way for teams to make more money would be to distribute all the revenue generated by TV broadcasts equally between all teams. Currently, this is not the case in the Latvian-Estonian basketball league. What's more, according to unofficial information, it is the league that pays the television for showing the games and not the other way around. In the NBA, Euroleague and other sports leagues, televisions are the ones that pay the leagues large sums of money to show games and make money from commercials, but in the Latvian-Estonian league, things are different. Basketball teams should also pay more attention to the digital environment - gaining more followers on social media could attract sponsors interested in advertising on social platforms as well as in real life. Social networks are very important part of a team business card and it can help to get new sponsors. We can't forget that young generation is spending a lot of time in the social media and slowly they are becoming adults who will be the main people in the country, so it is important for teams to get their attention right now, because in the future they will be the ones who will choose to spend the evening in the arena and take their kids to the games.

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3.3 Discussion

In summary, proposed financial fair play rules would benefit the league in the long run. Rules should be introduced as soon as possible. Of course, at a time when COVID-19 is still raging and no one can predict next week's events, it would be difficult to make radical changes in the league, especially in the Latvian-Estonian league, where team budgets are very small on a European background. The starting point could be the 2021/2022 season, in the hope that the virus will stop, and people will be able to return to life until the spring of 2020. Basketball teams together with the companies could take a second breath and grow together step by step, which at the same time would contribute to the growth of the league. It is not necessary to set a budget of 300 thousand euros for teams at the beginning, it can be set lower, but with the addition that the minimum amount will increase after a year. Before the next season, the amount could increase even more, but the teams will already be accustomed to the need to collect a minimum amount of budget to start the league, so it will not be anything new. The same goes for the prize pool - you can start with a smaller but gradually increase with each subsequent season. It is important to do this as soon as possible as it will show long-term thinking and the teams will know that they can expect support from the league. As mentioned, all activities will also be assessed with a plus sign in the eyes of potential sponsors, because all parties involved want to be safe and confident about what they are doing. It is important to remember that long-term plans could lead teams to the situation where paying salaries to players and employees on time isn't nothing surprising but is a part of being financially stable basketball teams (Goal.com, 2018). Late payments are the current reality in Latvian basketball, the undisclosed basketball agent said in a conversation. An improved system of financial rules would allow teams to show better financial ratios, which is one of the main measures of how teams can understand their financial situation (Barajas, Castro-Limeres, & Gasparetto, 2017). The league and teams need to understand that everything cannot be based on short-term thinking - yes, maybe in one season a team can have an impressive budget and win the title, but if the team doesn't exist after that season, then what's the point? The NBA and the Euroleague has set good examples, because it is about long-term thinking, as well as about making a profit for the teams and not just losing money. In the US, this system is working while European basketball is still being worked on, but the decisions made are right, and it will pay off in the long run.

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Conclusions

1. Financial stability in ordinary business means that it can withstand various problems, while in sports financial stability means that the team is able to pay the athletes salaries on time and pay for other liabilities without being in the red. The main goal in the sports business is to become prestigious and stay in the top at the end of the season, while in the ordinary business the main goal is to make a profit. 2. Various indicators can be identified to better understand financial stability. In this work, several indicators of profit, stability, coverage, liquidity and level of spending were presented. 3. UEFA was one of the first organizations to introduce financial fair-play. Its main aim is to ensure that team spending does not exceed income and that various payments. Four years ago, the Euroleague introduced the rules of financial fair-play, for example, there can be no late payments to players and team members. The rules are different in the NBA. The league has a fixed salary cap, which teams must not exceed, otherwise a luxury tax must be paid. 4. Financial position of Latvian basketball teams is negative. The data were taken for 2019, but now, when COVID-19 has taken over the whole world, the financial situation of the teams could be even worse. 5. As Latvian basketball teams are associations in the form of business, their main goal is not to make a profit, so it can be considered that from the very beginning the teams understand that no profit will be made. 6. There were difficulties in analysing the annual reports, as the figures presented are unlikely to reflect the real situation in the teams. The teams are hard to blame in this case because they have complied with the legal requirements and there have been no objections from the state. 7. There are no financial fair play and stability rules in the Latvian-Estonian basketball league. 8. Comparative analysis of the selected basketball leagues showed that they have their financial fair-play and stability rules. The main rules of fair play in the selected leagues were a minimum budget, showing financial reports and having a youth team. Puerto Rico stood out the most, as it has equated its basketball league with the NBA concept. 9. Based on the results of the conducted analysis a recommendation to implement 7 fair play rules in Latvian-Estonian league was made. The main recommendation for the Latvian- Estonian basketball league would be to set the minimum budget needed to participate in the competition. If the minimum budget were to be quantified, it could be around 300 thousand euros.

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10. The second recommendation follows from the first, because the Latvian-Estonian basketball league could introduce a two-division system. Teams that could not reach the minimum budget would start in the second division, but after each season the best team in the second division would win the opportunity to start in the first division, but the required amount of budget should be collected. 11. An alternative to attracting lower league teams would be to introduce rule that all Latvian- Estonian basketball league teams need to create a second team or youth team where nearest reserves and young talent would play. In this case, it would be possible to avoid the redistribution of teams and the creation of a new playoff format, as there would be two separate leagues. 12. Given that the league representative did not explicitly mention in the interview whether the league requires teams to present annual financial statements in the off-season or after the new year, this requirement could be made mandatory in the off-season. 13. One of the main things that came out after the interview's was that the Latvian-Estonian league isn't financially supporting the teams. Recommendation would be to introduce cash bonuses so that teams can earn extra revenue throughout the season. Another way for teams to make more money would be to distribute all the revenue generated by TV broadcasts equally between all teams. 14. Basketball teams should also pay more attention to the digital environment - gaining more followers on social media could attract sponsors interested in advertising on social platforms as well as in real life. 15. The proposed fair play rules would bring the team closer to how financially stable teams are described - they would be able to pay salaries to players and employees on time, as well as improve financial ratios, which is currently not good for Latvian teams. 16. If we talk about further research, then one aspect that could be considered would be from the perspective of the Latvian-Estonian basketball league - how much the league spends and earns, how actively the league is looking for cooperation sponsors. The number of comparative leagues could also be higher in order to understand the current situation in the world. It would be especially interesting now to watch the activities of other leagues, because of the COVID-19 crisis.

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60. United Nations. (2020, August 27). Sustainable Development Goals. Retrieved from https://sdgs.un.org/goals 61. US Legal. (2020, November 10). Professional Sports Organization Law and Legal Definition. Retrieved from https://definitions.uslegal.com/p/professional-sports- organization/#:~:text=Professional%20and%20Amateur%20Sports%20Protection,more%20 professional%20athletes%20participate%2C%20or 62. Vassiliki, A. (2007). The Economics of Professional Team Sports: content, trends and future developments. Sport Management International Journal, Vol 3. 63. VEFRiga.lv. (2018, September 27). "VEF Rīga" paziņo sezonas mērķus. Retrieved from http://www.vefriga.com/lv/jaunumi/zinas/vef-riga-pazino-sezonas-merkus-2453 64. VEFRiga.lv. (2019, September 25). "VEF Rīga" preses konferencē informē par sezonas mērķiem un jaunumiem. Retrieved from VEF Riga: http://www.vefriga.com/lv/jaunumi/zinas/vef-riga-preses-konference-informe-par-sezonas- merkiem-un-jaunumiem-2619 65. Vopel, H. (2011). Do we really need financial fair play in European club football? An economic analysis. CESifo DICE Report 9 (3), 54-59. 66. Worldometers.info. (2020, August 12). Countries in Europe. Retrieved from https://www.worldometers.info/geography/how-many-countries-in-europe/#depend 67. Young, J. (2019, April 15). What Is Financial Structure? Retrieved from https://www.investopedia.com/terms/f/financial- structure.asp#:~:text=Financial%20structure%20refers%20to%20the,value%20of%20the%2 0associated%20business.&text=In%20general%2C%20the%20financial%20structure,to%20 as%20the%20capital%20structure.

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Annexes

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Annex 1

Glossary of terms Financial stable sports team - team expenses don't exceed income (Goal.com, 2018).

Financial stability - ability to withstand a temporary problem, such as a decrease in sales, lack of capital or loss of a key employee or customer (Ashe-Edmunds, 2020).

Financial ratios - tools used to assess the relative strength of companies by performing simple calculations on items on income statements, balance sheets and cash flow statements (Ingram, 2019).

Financial fair-play rules – rules that make sure that teams were not spending more than they earned and, in doing so, prevent them from falling into financial troubles which may endanger their long-term survival, to prevent clubs from over-spending across several seasons within a set budgetary framework (Goal.com, 2018).

Donations – a charitable donation is a gift of cash, goods, or services made to a non-profit organization to help it accomplish its goals (Kagan, 2020).

Expenses - cost of operations that a company incurs to generate revenue (Liberto, 2020).

Financing sources - sources of financing are as broad as they are long, but they generally fall into two categories: internal and external sources of finance. Internal sources of finance are funds that come from inside the organization. Examples include cash from sales, the sale of surplus assets and profits you hold back to finance growth and expansion. External sources of finance are funds raised from an outside source. Examples include trade credit, bank overdrafts, loans and share issues (Thompson, 2018).

Financing structure - mix of debt and equity that a company uses to finance its operations (Tuovila, 2020).

Revenue - money received by the team for various activities (Young, 2019).

Sports organization - a person or governmental entity that sponsors, organizes, schedules, or conducts a competitive game in which one or more professional athletes participate (US Legal, 2020).

League - a group of teams playing a sport who take part in competitions between each other (Cambridge Dictionary, 2020).

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Professional league - a league of principal importance in other professional sports, such as basketball, football, or ice hockey (The Free Dictionary, 2020).

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Annex 2 BK "Ventspils" revenue and expenditure statement 2016-2019 2019, 2018, 2017, 2016, Code Index EUR EUR EUR EUR R10 Membership fees 4350 1373 5850 3454 R20 Donations 0 4000 0 0 R40 Grants 301800 301800 587452 607572 R50 Revenue from operating activities 733130 862540 652080 642563 R60 Other 116872 150644 55927 87316 R70 Total 1156152 1320357 1301309 1340905 R80 Expenditure 1345665 1499312 1513909 1596574 R90 Cash payments to persons 0 0 0 0 R100 Material costs 0 0 0 0 R110 Salaries 76611 90664 78566 80438 R120 Social security payments 18092 21717 18554 18995 R130 Depreciation of property and intangible assets 173 214 238 201 R140 Other expenses 1250789 1386717 1416551 1496940 R150 Taxes 0 0 0 0 R160 Total expenditure 1345665 1499312 1513909 1596574 R170 Revenue - expenditure -189513 -178955 -212600 -255669 Figure 1. BK "Ventspils" revenue and expenditure statement 2016-2019 Source: Team financial statements

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Annex 3 "VEF Riga" revenue and expenditure statement 2016-2019 2019, 2018, 2017, 2016, Code Index EUR EUR EUR EUR R10 Membership fees 0 0 0 0 R20 Donations 20000 0 0 5000 R40 Grants 0 0 0 0 R50 Revenue from operating activities 524800 379049 350962 631083 R60 Other 942063 998565 1187005 1128160 R70 Total 1486863 1377614 1537967 1764243 R80 Expenditure 1761238 1778208 1661175 1896687 R90 Cash payments to persons 869884 800468 721079 916828 R100 Material costs 38711 51209 38388 60407 R110 Salaries 158755 160944 110926 104232 R120 Social security payments 69259 38800 26168 24588 R130 Depreciation of property and intangible assets 2062 4225 9453 11601 R140 Other expenses 622567 722562 755161 779031 R150 Taxes 0 0 0 0 R160 Total expenditure 1761238 1778208 1661175 1896687 R170 Revenue - expenditure -274375 -400594 -123208 -132444 Figure 1. "VEF Riga" revenue and expenditure statement 2016-2019 Source: Team financial statements

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Annex 4 BK "Ogre" revenue and expenditure statement 2016-2019 2019, 2018, 2017, 2016, Code Index EUR EUR EUR EUR R10 Membership fees 0 0 0 0 R20 Donations 1200 43300 0 49000 R40 Grants 150000 50000 43465 3655 R50 Revenue from operating activities 81375 163895 99049 81455 R60 Other 19500 211 55 34510 R70 Total 252075 257406 142569 168620 R80 Expenditure 241425 211335 215154 200768 R90 Cash payments to persons 0 0 0 0 R100 Material costs 8767 9329 15242 15835 R110 Salaries 0 0 0 4007 R120 Social security payments 0 0 0 947 R130 Depreciation of property and intangible assets 2104 562 0 285 R140 Other expenses 230554 201444 199912 179694 R150 Taxes 0 0 0 0 R160 Total expenditure 241425 211335 215154 200768 R170 Revenue - expenditure 10650 46071 -72585 -32148 Figure 1. BK "Ogre" revenue and expenditure statement 2016-2019 Source: Team financial statements

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Annex 5 BK "Liepaja" revenue and expenditure statement 2018-2019 Code Index 2019, EUR 2018, EUR R10 Membership fees 0 800 R20 Donations 60850 42000 R40 Grants 235500 150000 R50 Revenue from operating activities 105869 90323 R60 Other 820 0 R70 Total 403039 283123 R80 Expenditure 505638 242359 R90 Cash payments to persons 0 0 R100 Material costs 14846 13334 R110 Salaries 49095 23683 R120 Social security payments 10160 5933 R130 Depreciation of property and intangible assets 858 409 R140 Other expenses 430679 199000 R150 Taxes 0 0 R160 Total expenditure 505638 242359 R170 Revenue - expenditure -102599 40764 Figure 1. BK "Liepaja" revenue and expenditure statement 2018-2019 Source: Team financial statements

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