06/10/2016 1:51PM

Comptroller's office says NYRA fails to generate surplus from racing operations

Email

The New York Racing Association has overstated the financial results from its racing operations in recent years and has not been able to generate a surplus from the racing side of its business, contrary to what its top officials have claimed, the New York Comptroller’s Office contends in an audit of the association released Friday.

The audit, conducted by the office of Comptroller Thomas DiNapoli, said that NYRA’s racing operations ran a $109 million operating deficit from 2010-14, including an $11.5 million deficit in 2014, when NYRA’s chief executive, Chris Kay, claimed that the association ran a $1.7 million operating surplus. The discrepancies arose, according to the audit, because NYRA did not include costs related to pensions, post-employment benefits, and depreciation in its calculation of the racing-operations figure.

In a response to the audit, Joseph Lambert, NYRA’s chief administrate officer and general counsel, argued that the costs were not included in the calculation because they were “non-controllable” expenses, a notion that the comptroller’s office disputed. Lambert wrote that the $1.7 million figure was calculated as a way “to provide key insight into operational metrics,” in much the same way that many companies use measures that are not generally accepted accounting principles.

“The calculation allows NYRA management to focus on the outcome of operating decisions while excluding the impacts of nonoperating decisions,” Lambert wrote.

While the audit’s main contentions are related to accounting policies and likely will have little impact on the day-to-day operations of NYRA, the contention that NYRA is not producing a net surplus from its racing operations could impact the association politically. Since NYRA’s board was taken over by the state in 2012 in a plan engineered by Gov. Andrew Cuomo, NYRA officials have repeatedly contended that they have made vast improvements in the company’s racing operations, and Cuomo has said that the association has benefited significantly from the state’s involvement.

In addition, NYRA has claimed that the improved results have proven that the company’s racing operations can be profitable without counting subsidies the association receives from a casino located adjacent to its Aqueduct racetrack. From 2012-14, according to NYRA’s financial documents, the association received $158 million in subsidies from the casino, with $90.6 million of that total earmarked for capital-improvement projects at the association’s three tracks. The remainder was used to fund NYRA’s operations.

The audit states that NYRA’s “overall financial condition … is sound” but cautions that “without the significant amounts of [slot-machine] revenue subsidies, there is considerable risk that NYRA would have been financially stressed in recent years.”

The audit also notes that Kay received a $250,000 bonus in 2014, based in part, it said, on the assertion that NYRA’s racing operations generated a surplus during the year. Because the comptroller maintains that a proper accounting of all expenses would have generated an $11.5 million deficit that year, “we question the propriety of a bonus of this magnitude,” the comptroller’s audit said. Kay was hired in the summer of 2013.

In NYRA’s prepared response, Lambert stated the bonus was based on a provision of Kay’s contract and approved by the chairman of the association’s board after his performance was evaluated in the context of a “balanced scorecard” prepared by the executive search committee that recommended Kay for the job.

Lambert also noted in his response that NYRA will continue to claim a $3.6 million surplus from racing operations in 2015 and has budgeted a $2.3 million surplus from racing operations in 2016. “We note that NYRA has taken considerable and successful actions to enhance racing and track-related revenues,” Lambert wrote.

In a statement released after the audit was made available, NYRA’s communications director, Pat McKenna, said the purpose of the comptroller’s audit “was to determine if NYRA received, spent, and accounted for its revenues and expenses properly,” and that the report “clearly states we did.” The statement also noted that NYRA’s independent auditor, KPMG, has issued a “clean” audit for the association’s financial documents for the last four years.