A New York appeals court July 7 said the revenue-sharing agreement for racetrack video lottery gambling is unconstitutional, a decision that raises new questions about a program that has stalled at the state's biggest tracks.The third department of the state Supreme Court's Appellate Division, in a 5-0 ruling, said the revenue-sharing arrangement contained in the 2001 law that authorized racetrack video lottery terminals is unconstitutional. The law gives a portion of revenue from VLTs to purses and breeding funds. But the court, in declaring VLTs to be considered a form of state lottery gambling, said revenue from such devices can only go to the state for public school funding.The court declared that VLT gambling is constitutional. It rejected arguments that the devices are nothing more than slot machines and, therefore, should be banned. The judges said the machines are, instead, electronic versions of a lottery scratch-off game, and, as a result, legal. The judges targeted their concerns at the distribution of VLT revenue.The Pataki administration, the defendant in the case, said it is reviewing the 52-page decision. Appeals are likely by all sides, because the decision also upheld the portion of the 2001 law that legalized the spread of Indian casino gambling in New York.There are four racetracks --Finger Lakes, Buffalo Raceway, Monticello Raceway, and Saratoga Raceway--with VLT operations. Another four, including Aqueduct and Yonkers Raceway in the New York City metropolitan area, have stalled for various reasons.The decision isn't expected to affect existing VLT operations, because the case will now move to the Court of Appeals, the state's highest court, for a decision that could be a year away. But the ruling could put a chilling effect on Gov. George Pataki's plans to further expand gambling in New York.In his 2004 budget proposal, Pataki offered a plan to permit VLTs in an additional eight locations. He didn't specify the sites, but tracks have complained the additional sites, which could include off-track betting parlors, would amount to unfair, state-sanctioned competition. With state budget talks stalled, it remains uncertain now whether the court's ruling would lead the legislature to block further expansion of VLTs.The ruling does present yet another hurdle for the New York Racing Association, whose VLT program for Aqueduct has stalled because of its ongoing legal and financial troubles. The court's decision could pose new risks for MGM Mirage, the Las Vegas company NYRA tapped to run its VLT parlor at Aqueduct.MGM has said it can't proceed at Aqueduct until it has at least some assurances it will operate the racino beyond the end of 2007, when NYRA's current racing franchise is set to expire. MGM has said it needs more time to ensure it will get back the $140-million investment expected at Aqueduct.NYRA chairman Barry Schwartz was unavailable for comment, and other NYRA officials declined to talk about the impact of the court's ruling on the Aqueduct VLT plans.But Assembly Speaker Sheldon Silver said the ruling is likely to further delay the Aqueduct VLT parlor because investors will be leery about putting money into the venture. Silver said he doesn't think it should be fixed until the Court of Appeals makes a final decision in the case.When asked if that would only further delay Aqueduct's expansion plans, Silver said: "That's the difficulty. The uncertainty will be in the financing."But Senate Majority Leader Joseph Bruno said MGM officials "should find comfort" in the court's ruling because it upheld the overall constitutionality of VLTs. As for the revenue-sharing issue, Bruno said officials are working to find remedies. Bruno said it is "important" the horsemen not be hurt by the court's ruling.One suggestion made was to require tracks to enter into side deals with horsemen's groups and breeding funds to bolster payments, thereby erasing any specific state statute that demands shares goes to those funds instead of education programs.Bob Flynn, executive director of the New York Thoroughbred Horsemen's Association, which represents NYRA horsemen, said he understands the court's logic in the decision. But it doesn't represent the realities of running a racetrack, he said."Why did they put VLTs at a racetrack if there's going to be absolutely no benefit to the industry?" he said.Flynn said the court's ruling, unless it is fixed by lawmakers, will wear down the industry. He envisioned VLTs taking money away from horse racing with no benefit to the industry."Would Macy's say, 'Put VLTs in our basement and we don't get any money?" he said. "Or, 'Listen governor, could we put VLTs in your house with no benefits whatsoever to pay for the time and use of your building?' "Flynn said he believes NYRA will slow down with its plans to put VLTs at Aqueduct. "MGM is worried," he said. "I don't think they're going to jump forward."Bennett Liebman, coordinator of a think tank on racing and wagering at Albany Law School, said the ruling could hinder the four tracks in New York that have yet to begin VLT operations."It's more a practical issue than legal one," he said. "Do you want to invest funds in something that might be found unconstitutional?"The court refused requests to "sever" the provisions of the VLT law that it finds unconstitutional. The law funnels 61% of VLT revenue to public schools, 10% to the state Lottery Division for expenses, 20.25% to racetracks, and the rest to purses and breeding funds.Had the court severed what it deemed the unconstitutional payments to breeding funds and purses, it would have meant 29% of the proceeds would now go to racetracks. Such a level, the court said, would have resulted in an "inflated" fee for the tracks.That could be a dangerous signal for the tracks, Liebman said. Racetrack officials have maintained they can't make any money under the existing revenue-sharing deal, and have begun efforts to get a greater percentage of the VLT split. But the court seems to be signaling that the tracks are getting enough."The court could be placing limits on the potential size of the (racetrack) fee," Liebman said.Operators at Finger Lakes Gaming and Racetrack, which opened a VLT parlor earlier this year, said they expect no disruption from the court's ruling. Ronald Sultemeier, president of Sportsystems Corp., a division of Delaware North Co., which owns Finger Lakes, said he believes lawmakers can resolve the VLT ruling."I wouldn't say we're happy," Sultemeier said. "You'd always hope for an affirmation without the qualifications and asterisks. At the same time, it's something we see as fixable."