01/08/2010 12:00AM

New York OTB presents financial strategy

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NEW YORK - Officials from the New York City Off-Track Betting Corp. presented a legislative committee on Friday a plan to save the company from insolvency, but other industry officials said approval of the plan could mean the end of Thoroughbred racing in the state.

One of the major facets of the plan, as presented by OTB's chairman Sandy Frucher, is for the company to pay the state racing industry off of net income as opposed to gross receipts, a plan that New York Racing Association officials called "preposterous." Handle on New York racing accounts for 36 percent of OTB's handle.

"This change would destroy the Thoroughbred racing and breeding industry in New York," NYRA's president and CEO, Charles Hayward, said in testimony given before the Assembly Standing Committees on Racing and Wagering, and Corporations Authorities and Commissions.

Under the proposed plan, industry officials estimate that OTB's payments to the state racing industry would be reduced by approximately 50 percent over the first two years.

"Essentially the proposal that Mr. Frucher put forward would be the end of our sport here in New York, essentially taking the product and not paying for that product unless you're profitable yourself," said Jeffrey Cannizzo, the executive director of the New York Thoroughbred Breeders Association.

Frucher said if the state legislature does nothing, OTB would have to close in two months. He said the cost to shut the agency down is $683 million, which includes welfare and pension benefits, and that the cost would have to be absorbed by the city and state.

On Dec. 3, New York City OTB filed for bankruptcy under a seldom-used section of the bankruptcy code, Chapter 9, which is reserved for municipalities. Unlike other bankruptcy codes, under Chapter 9, only OTB - and not any creditors - can submit a reorganization plan for the court to consider. NYRA, OTB's second-largest creditor at about $18 million, and the New York Thoroughbred Horsemen's Association filed objections to dismiss the bankruptcy petition.

Other parts of OTB's plan include a 55 percent reduction in staff by the end of 2011; closing 41 branches and a reduction of space at its Manhattan headquarters by more than 50 percent; opening five upscale bar/restaurant/parlors throughout the five boroughs of New York City; and opening 1,100 to 1,300 self-service betting kiosks throughout the city.

Further, OTB wants to float $250 million in bonds to cover costs of accumulated debt of approximately $100 million, capitalization costs of $100 million, and pensions and severance costs of $50 million. Frucher said those bonds would yield a 7 percent interest, though the current market yields 4 percent.

The opening of the kiosks would essentially replace the closed parlors. The kiosks idea, however, was met with great resistance by legislators who fear the expansion of gambling, especially putting them in areas accessible to minors.

Wagering at kiosks would not be subject to the 5 percent surcharge that currently exists at parlors, which could result in loss of revenue as well.

"It would be a revenue source that we'd have to replace with another revenue source," Frucher said in an interview after his testimony.

Hayward said NYRA is in the process of putting together its own business plan for OTB, one that it hopes to give to legislators within two weeks. The plan would call for a consolidation of services such as tote systems, account and phone wagering, television production, and marketing. Hayward said he did not believe the kiosks were a good idea and said that NYRA's plan would call for eight to 10 bar/restaurants, not the five that OTB proposes.

Hayward said that while NYRA would certainly be hurt if OTB closed, he believes NYRA would pick up a large percentage of the $175 million OTB handles in phone and Internet business.