Audit: NYRA Underpaid State Franch

Audit says NYRA underpaid state $10.9 million in franchise fees from 2004 to 2005.

The New York Racing Association, whose annual deficits are “not reflective of operating in a sound and economical manner,’’ underpaid the state of New York by $10.9 million in franchise fees from 2004 to 2005, according to a new audit by state comptroller Thomas DiNapoli.

The audit comes at a bad time for NYRA: negotiators for Gov. Eliot Spitzer and Assembly and Senate legislative leaders this week began their first three-way talks to try to resolve differences over the future of whether to award another franchise to NYRA to operate Aqueduct, Belmont, and Saratoga racetracks.

The $10.9 million is on top of $43 million previous audits by the comptroller’s audit say NYRA shortchanged the state since 2000.

“NYRA is legally required to pay taxpayers a reasonable amount in exchange for operating the state’s Thoroughbred race tracks. But over and over again our auditors have found that NYRA has continually misinterpreted the mathematical formula for calculating the franchise fee and shortchanged taxpayers,” DiNapoli said in a statement. “NYRA appears to have cleaned up some of its past practices but they’re still shortchanging taxpayers on franchise fees. ‘’

The comptroller called on Spitzer and legislative leaders to include new, stronger oversight components for the future operator in any deal they may strike in the coming weeks involving the franchise.

NYRA pays a franchise fee to the state based on its adjusted net income, with the exception of $2 million that goes for purses and stakes. If the net income is below $2 million, the balance goes entirely to purses and stakes and the state gets no franchise fee.

DiNapoli said NYRA has continued to use faulty calculations – it uses expenses that are deductible on its federal tax returns – that has resulted in underpayments to the state. It said NYRA claimed tax-basis operating expenses of $146.4 million in 2005, when its total expenses were actually $167.3 million. In 2004, NYRA shortchanged the state $14.3 million, DiNapoli said. In 2005, NYRA mistakenly calculated it owed the state $3.3 million, when in fact it owed nothing.

Auditors said the way NYRA calculates its expenses has provided its trustees with an inaccurate “picture of its financial situation when they voted on its budget,’’ the comptroller’s office said.

The new audit agreed with prior audits that have raised red flags about other NYRA’s financial accountings. It noted the IRS recently said NYRA owed the federal government $1.6 billion in back taxes; the IRS sharply lowered that claim and now is in line to accept a $25 million payment from NYRA to settle the tax dispute.

In light of the findings, DiNapoli wants the governor and lawmakers to provide specific language in law detailing the comptroller’s legal rights to examine any and all financial aspects of racing and gambling activities in the state. Also, DiNapoli said the law should be clarified so racetrack operators “fully understand’’ their financial obligations to the state.

NYRA disputed the comptroller’s findings. In a written response included in the audit, NYRA president Charles Hayward said the law was followed in determining the franchise fee payment. “We must respectfully submit that no additional funds are owed to the state of New York,’’ Hayward said.

NYRA said its lawyers in the past have determined that the franchise fee calculation be based on its tax reporting expenses and revenue, not the calculations DiNapoli believes NYRA must follow.

Hayward also strongly objected to the audit’s conclusions that NYRA is not operating in a “sound, economical and efficient manner.’’

“This statement cannot be further from the truth,’’ Hayward wrote. He noted the comptroller’s own audit showed a decline in expenses by NYRA over the past several years. He said NYRA’s entire business climate has changed: 100 % of wagers being on-track in 1955 to just 12 % today. And he added that half of its costs are fixed for such expenses as health insurance, pensions and utility expenses.

“NYRA, during the audit period, has operated in a responsible, sound, economical manner by finding new revenues sources and cutting expenses,’’ Hayward said.

It’s been a rough week for NYRA at a critical time in its future. The state Commission of Investigation, subpoenaed Getnick & Getnick, which is NYRA’s outside counsel. The commission has been looking at complaints by Senate Majority Leader Joseph Bruno about its $125,000 monthly contract with NYRA.

Bruno has so far balked at Spitzer’s plan to give NYRA a 30-year franchise renewal and $75 million in direct aid in return for NYRA ending its land claims of Aqueduct, Belmont and Saratoga racetracks.

Bruno originally floated a plan of splitting the tracks up among different operators. He has softened that stance, but wants different aspects of the racetrack operations – such as simulcasting – to be awarded by a new state oversight authority.

The NYRA franchise expires Dec. 31, and there are different possibilities if no deal is reached by then, including a long-shot chance that racing could be shut down until the sides come together. The senate is due back at the state Capitol Dec. 13 to possibly take up any franchise legislation, but it depends on the outcome of private talks during the next week by the governor, Bruno and Assembly Speaker Sheldon Silver.