NYCOTB Changes Needed to Avoid Insolvency

 

The New York City Off-Track Betting Corp., which is now controlled by the state government, is facing insolvency unless it can get its financial affairs in order, state Comptroller Thomas DiNapoli reported Aug. 14 in a long-awaited audit.

The comptroller blamed part of the financial woes on "significant’’ distributions the OTB must pay to the horse racing industry in the form of revenue-sharing arrangements required by state law. He said the OTB in a recent four-year period paid the industry, including the New York Racing Association, $386 million in distributions – 72 of the amount it had to share with various stakeholders, including the state and local governments.

The audit also blames the OTB’s management for not devising a "detailed assessment’’ of its financial problems or coming up with targeted goals with a timetable to resolve the problems.

"New York City OTB is on very shaky financial ground," DiNapoli said in a written statement. "Even if cost-savings measures are implemented, it’s unlikely that it will remain financially solvent for long. This is a serious problem that needs in-depth examination. If the goal is to keep OTB viable, serious consideration must be given to changing the mandated state formulas and restructuring operations to coordinate different aspects of the racing industry.’’

While he did not specifically claim it, DiNapoli’s audit suggests payments by the OTB to the racing industry are too high –- a claim racetrack operators such as NYRA are certain to contest. He said that payments by NYCOTB to the racing industry are "by far’’ its greatest statutory revenue sharing requirement. He also noted that changes a year ago allowing NYCOTB to keep more of its revenues –- made at the time the state took control of the OTB from the New York City government –- have not had "a significant impact’’ because of the downturn in the economy that has depressed wagering.

The audit found the OTB has accumulated an operating deficit of $38 million and a total of $228 million in red ink when all its budget components are included. The OTB was created by state law in 1970. Over the years, tracks and OTB’s in New York have been on a competitive collision course for a dwindling betting dollar. NYCOTB, which has 68 parlors and a thriving internet and phone wagering business, is one of six OTB entities in the state.

"The off-track betting industry in New York has taken a beating in the last few years. It’s not the cash cow it used to be. The future of the industry is seriously in question, and there are jobs at risk and economic development opportunities being missed,’’ DiNapoli warned.

"NYCOTB provides millions of dollars in revenues to the horse racing industry, which in turn provides employment for thousands of New Yorkers. The industry is too important to fail. Something has to be done. Inaction will mean insolvency,’’ he added.

That NYCOTB is in financial trouble is no secret. It has been railed against by New York City mayors and New York governors for bloated operations and money-losing ways. Former New York Mayor Rudolph Giuliani routinely derided it as the only "bookie’’ in the city to lose money. New York Mayor Michael Bloomberg threatened to shutter the operation for good before the state of New York took it over in June 2008.

The audit, which looked at a four-year period beginning in July 2004, found the OTB during that time collected $1 billion in wagers. It said, for instance, the OTB in its 2007 fiscal year handled $998 million in bets, paying back $761 million to bettors in the form of winnings. Of the remaining $129 million, $93 million went to the racing industry and $35 million to the city, state and other local governments. It said the OTB had expenses that year of $134 million, but was left with only $116 million after all its statutory payments to operate – leaving a deficit that year of $18 million. The 2007-08 fiscal year was the fifth in a row to operate in the red, the audit said.

The DiNapoli audit said a comprehensive review of the OTB’s management and branch staffing structure needs to be performed. He noted some of the branches have operating expenses of 27% as a percentage of handle, compared to as low as 6% for some others. The audit said a review of the OTB’s staffing has not been performed since 1981. (The OTB, in a response to DiNapoli that was included in the audit, said a study of its operations, including staff, was conducted by an outside firm in 2007.)

Most of the OTB’s operating expenses are for payroll and fringe benefits of its nearly 1,400 workers, most of whom are unionized and work under contracts signed with New York City before the state takeover.

A new OTB board, created since the state takeover last year, vowed in a response to a draft audit by DiNapoli to "re-examining all aspects’’ of the operations to find cost savings, the audit noted. OTB officials were not immediately available for comment.

The audit also found a number of questionable expenses. DiNapoli noted three large consulting contracts amounted to $250,000 in payments in 2007, but none of the contracts have any written justification for their need and they were not competitively bid.

NYCOTB’s horse racing payments go to NYRA, Finger Lakes racetrack, the state’s harness tracks, out-of-state tracks that send race signals to OTB parlors and breeding funds. Of the nearly $300 million in revenue-sharing payments to racing interests in a three-year period, $161 million went to NYRA, the audit found. It noted that New York tracks get money from NYCOTB for signals it shows from tracks such as Churchill Downs. In 2007, nearly $24 million of the $52 million received by NYRA from NYCOTB came from wagers on out-of-state races made at the OTB.

The financial review found that the OTB’s fiscal problems will not recover unless its betting handle increase, its expenses are cut or more changes are made to permit it to keep more of its revenues it now must share with others, such as governments and the racing industry.

In its written response contained in the audit –- which took up 14 pages of the 29-page report by DiNapoli –- NYCOTB officials said the state needs to change its statutory payment structure to allow the OTB to keep more revenues to be able to operate in the black. It criticized the payment structure that now sets distribution levels based on the OTB’s gross, instead of its net revenues.

 

In a response Aug. 14, NYCOTB officials said they agree with DiNapoli's gloomy fiscal assessment. NYCOTB said an internal review of its operations is underway and the agency expects to be making a report soon to Gov. David Paterson "to resolve NYCOTB's financial and structural issues.''

"NYCOTB's board of directors recognizes that meaningful measures to address NYCOTB’s poor financial condition and future business prospects must be taken quickly given the Corporation’s importance to the economic well-being of the state’s horseracing industry and the multiplier effect it has in generating thousands of jobs throughout the state,'' the OTB said.

But NYRA President Charles Hayward dismissed the claims by NYCOTB that the revenue-sharing payments are the cause of its problems. "It is a well-known fact that the New York state OTBs pay to racetracks outside of New York is the lowest simulcast rate in the country,'' he said.

Hayward noted that the maximum rate OTBs pay to out-of-state tracks for simulcast rates is 2.75%t, well below the 4% to 5% charged to off-track betting entities in other states. "The highest rate rate that any of the NY state OTBs pay NYRA on its live races is 2.7% and the lowest is 1.25%. By comparison, NYRA receives almost 10% for a bet made on track. On this topic, sticking with the facts versus rhetoric is most illuminating,'' he said.

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