VLT proceeds are part of state audit of NYRA

VLT proceeds are part of state audit of NYRA

NYRA Photo

Audit: NYRA 'Overstated' Financial Condition

But the racing association has disputed the findings of New York State comptroller.

New York's top fiscal watchdog said the New York Racing Association's portrayal of its financial improvements have been artificially inflated after an audit found the not-for-profit operation has run up deficits of $109 million on the racing side over the past five years.

State Comptroller Thomas DiNapoli, in an audit released the morning of June 10—a day before the Belmont Stakes (gr. I)—said NYRA's financial surplus claims in recent years have been illusionary. He noted, for instance, that a reported 2014 surplus of $1.7 million came about only because NYRA executives "overstated NYRA's actual financial condition" by excluding a host of expenses, including pension contributions and post-retirement health care benefit costs.

The audit found that NYRA actually lost $11.5 million that year.

"NYRA relies on video lottery terminals to stay in the black, but that revenue stream isn't guaranteed to continue as strongly, especially as new casinos open up across the state," DiNapoli said in a written statement accompanying the audit.

NYRA in the audit report rejected a number of DiNapoli's claims and said its racing operations are in the black It also issued a follow-up statement June 10 from spokesman Pat McKenna that said: "The purpose of the OSC's audit was to determine if NYRA received, spent, and accounted for its revenues and expenses properly, and the OSC's report clearly states that we did. This finding has been previously reported by our accounting firm, KPMG, who has issued a 'clean audit' for each of the last four years."

The comptroller's audit comes as Gov. Andrew Cuomo, whose appointees have controlled NYRA the past four years under a state takeover period, is negotiating with state lawmakers over various plans to return NYRA to private-sector control. Cuomo, in his plan released the week of June 6, wants to increase state oversight powers of NYRA and redirect at least $12 million in VLT proceeds that flow to NYRA from its Aqueduct Racetrack casino.

"NYRA officials need to come up with a plan to make money on racing operations, especially as it seeks to return to private control. Without such a plan, NYRA's long-term solvency could be a longshot," DiNapoli said.

The comptroller also cited a number of "questionable" expenses by NYRA, including $89,000 in horse transportation costs and a $250,000 bonus paid in 2014 to Christopher Kay, its chief executive officer. He noted that Kay's performance payment was based, in part, on NYRA achieving a surplus in racing operations without including VLT revenue.

The audit said "significant objectives of the incentive program were not achieved, and therefore we question the propriety of a bonus of this magnitude."

NYRA officials rejected the concerns about the Kay bonus. They said the bonus was included in Kay's contract, the performance benchmarks were achieved, and the bonus was approved by the board chair with approval from the NYRA board's compensation committee.

NYRA also dismissed the comptroller's concerns about horse transportation costs, saying it was a "business decision carefully made" involving the shipment of a small number of international horses to Belmont Park.

The audit also sampled 10 consulting deals—worth $200,000—out of $4.36 million in 2014. It said five of the payments were not backed up by contracts or agreements specifying the work to be done or amount to be paid for each service. NYRA, in response, said it operates under procurement policies approved by a state government oversight board.

The audit, which focused on the period from 2012 through 2014, found that NYRA's overall financial condition is sound "as a result of VLT revenue subsidies." The audit noted that NYRA received $318 million in revenue-sharing payments from the operation of the Aqueduct facility called Resorts World and run by Genting Group, with $68 million of that amount dedicated to NYRA operations, $91 million to NYRA capital expenses, and $159 million to purses.

Officials have worried that current or future competition—from daily fantasy sports and other online gambling to additional commercial casino development in New York as well as proposed casinos in northern New Jersey—will erode the Aqueduct VLT revenue in coming years and strain NYRA's overall health.

DiNapoli focuses his report on what he calls NYRA inaction on developing a plan to eliminate racing operation deficits. NYRA executives told auditors that the conclusions about the 2014 deficit, for instance, were not correct because the various costs DiNapoli believes should be factored into the equation—pension costs and depreciation expenses, for example—are considered "non-controlled" costs for NYRA.

DiNapoli rejected that view, saying such expenses are "routine and necessary costs of doing business" and should have been factored into NYRA's annual budget picture. He said management decisions over the years involving NYRA's workforce had a direct impact on post-employment costs that NYRA now must fund.

His audit said that for NYRA to claim a surplus in years when such expenses are not included "is very misleading."

In a four-page written response by NYRA and then separate responses to them by DiNapoli's auditors, Joseph Lambert, chief administrative officer and general counsel for NYRA, pushed back against a number of claims made by DiNapoli.

On the issue of not including certain expenses in its annual budget calculation, Lambert said NYRA acts within accepted accounting principles used by other companies and analysts. He said NYRA could do what DiNapoli is seeking, though "it is not at all clear what the purpose would be."

NYRA also noted that a 2008 settlement to emerge it from a bankruptcy proceeding envisioned the use of VLT revenue to help fund racing operations. Lambert said NYRA has also taken "considerable and successful actions" to boost racing revenue.

He said NYRA had a racing operation surplus of $1.7 million in 2014, rising to $3.6 million in 2015 and is projected to be $2.3 million in the black in 2016.

Auditors agreed that the bankruptcy settlement allowed for VLT proceeds to be used for racing, but that the state's Franchise Oversight Board, which was created as part of the 2008 bankruptcy settlement agreement, made clear in 2011 that NYRA needed to develop a plan to make racing profitable without VLT revenue.