New York Gov. David Paterson has selected Delaware North to run a new, sprawling video lottery terminal casino at Aqueduct, sources at the state capital said Oct. 10.  But the Senate balked at his choice.

The selection of Delaware North was put on hold when the Republican-led Senate raised questions about the proposal. By law, Paterson, Assembly Speaker Sheldon Silver, and Senate Majority Leader Dean Skelos have to unanimously approve the casino operator.

Skelos said the Delaware North’s plan “does not include an economic development proposal that would be a greater benefit in the long run.’’ He said the firm’s recent addition of a Florida developer to its team, Donahue Peebles, has not yet been reviewed or vetted by the state or local groups in Queens.

“It appears that in an effort to close the budget deficit, Governor Paterson has made a choice that may not be in the best long term interests of the state or for the communities that surround Aqueduct.  It is our belief that unless we make Aqueduct a true destination venue, this project will not generate the largest possible benefit,’’ Skelos said in a written statement.

For his part, Paterson said Delaware North offered the best set of financial terms for the state. He said the Buffalo-based company also had proven experience operating racetrack VLT casinos at three other facilities in New York. The administration said Delaware North has also pledged to work to create new development opportunities around the track.

"This is the best deal for all New Yorkers,'' said Paterson spokeswoman Risa Heller.

"It is shocking that Senator Skelos, who claims to understand the importance of this revenue stream and who has repeatedly and publicly called on the governor to award this contract, has now decided to stall a significant economic development project.  Equally troubling is that he has refused to state what proposal he supports and why.  In this time of a financial crisis every day we delay hurts New York.  We must work together to ensure that we maintain the integrity of the State's finances instead of allowing political interests to undermine our fiscal health,'' she added in a statement.

Sources said the afternoon of Oct. 10 that high-level meetings were occuring at the capital among officials seeking a resolution to the impasse. The latest development in a long line of delays for the project means Paterson, with the backing of Silver, wants Delaware North, and the Senate's choice of a bidder is uncertain.

Buffalo, N.Y.-based Delaware North, which already runs three VLT casinos at racetracks in New York State, would oversee the operations of a casino with 4,500 machines officials believe will be able to tap into the lucrative metropolitan New York gambling market that now has bettors heading to Atlantic City, N.J., and Connecticut casinos.

Delaware North owns and operates Finger Lakes Gaming & Racing, a western New York Thoroughbred track, and operates VLTs at two upstate harness tracks: Buffalo Raceway and Saratoga Gaming & Raceway.

The New York Racing Association, which runs Aqueduct, has been pushing the state for years to get the VLT operation running as a way to provided much-needed revenue for the racing group. Besides $1 million a day in projected revenue for the state, the VLT facility will send millions of dollars a year to additional purse payments and funds for breeding programs.

With the state facing a growing budget crisis, Delaware North’s bid offered an enticing component: lots of up-front money to the state in the way of a franchise payment. Delaware North will pay New York $370 million for the operator rights. SL Green, a Manhattan developer, and its partners, led by Hard Rock Entertainment, offered $250 million up front, while Capital Play offered $100 million.

The deal comes as Senate Republicans are intensifying efforts to permit a VLT operation at NYRA's Belmont Park.

The state is facing what Paterson believes is a $2-billion potential deficit in the current budget. Lawmakers are due back in November to cut the current budget’s spending, and the Delaware North money would likely mean less politically popular spending has to be trimmed. The state was banking on $250 million in a franchise fee payment this year for the VLT casino.

A week ago, during a public meeting on the state’s budget crisis, the issue of the delay by Paterson in naming an operator was raised by one legislative leader looking for ways to raise revenue without hiking taxes. “We need to award the contract for VLTs at Aqueduct,” Skelos told Paterson.

But Delaware North officials say their plans do include other amenities, such as a hotel and entertainment space, but that those efforts will commence once it’s clear how successful the casino will be.

“We’ve always viewed this project as one of staged development,’’ said William Bissett, president of Delaware North’s Gaming & Entertainment subsidiary. He said if its plan is approved soon, construction, which would take up to 14 months to complete, could be underway within two to three months.

Bissett also questioned the revenues Delaware North’s competitors say they can make from the casino over 30 years, and said there is no guarantee those groups will build the ambitious non-casino projects in the future.  “We’ve gone in a very conservative fashion so the state can rely on the numbers we project,’’ he said.

But Delaware North’s competitors say the company, because it does not have the name recognition of their partners, will not bring in as much in revenues to the state, NYRA or purses as their plans. And they questioned the company’s lack of a specific plan.

“What they’re saying is trust us. They’re like Wall Street bankers,’’ said Robert Bellefiore, a spokesman for SL Green, a Manhattan developer whose partners include Hard Rock Entertainment.+

Mitchell Etess, president of Mohegan Sun, said the casino will be most successful if all the other components – hotel, retail and entertainment space – are done together. “The community doesn’t want a wait-and-see approach,’’ he said.+

Both SL Green and the Capital Play team defended their revenue projections. Etess said that while the state will get more up-front money with Delaware North, it will make far less in VLT revenue sharing over the years. “It’s very short-sighted,’’ he said of those backing Delaware North.

The state, looking to raise revenue, first gave racetracks the right to open VLT casinos a month after the 2001 World Trade Center attacks. The Aqueduct facility ran into a whole series of roadblocks involving NYRA’s own financial and legal troubles, as well as delays by three different governors in selecting an operator.

The Aqueduct facility is expected to bring $1 million a day in the way of revenue-sharing for state programs.