04/01/2010 12:00AM

No clear solution for New York OTB

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There's no easy way for the New York Thoroughbred industry to deal with the threat by the state-owned New York City Off-Track Betting Corp. to close its parlors and shut its Internet and telephone wagering operations as of April 11.

A shutdown would deprive the New York Thoroughbred industry of roughly $160,000 a day in direct payments, eliminate a $500 million annual source of handle for out-of-state racetracks across the U.S., and imperil the financial viability of the New York Racing Association, operator of New York's three major Thoroughbred tracks.

But the OTB company's plan to cuts its payments to racetracks and horsemen as part of a wide-ranging reorganization is equally dangerous, industry officials contend. Even OTB officials acknowledge the company's business model is an "anachronism," in the words of the company's chairman, Sandy Frucher.

The need for change is where the agreement between OTB and racing officials ends, however. OTB wants to privatize its operation as much as possible and close nearly two-thirds of its parlors while installing betting kiosks that can be converted into video gambling machines in hundreds of New York City bars and restaurants. The Thoroughbred industry contends any plan that cuts its share of OTB handle spells doom for live racing. And the state's harness industry - which in 2008 took in $285 million in revenue from slot machines - has told the company it couldn't care less if New York City OTB closed forever.

The OTB is pressing the state for permission to suspend its statutory payments to the racing industry for at least 30 days for leverage to negotiate lower payments while still remaining open. So far, the state has balked, but most racing officials said earlier this week that they expected the state to make some concession to keep OTB open after the legislature ends its holiday recess April 7.

The racing industry is in serious financial trouble, nationally and in New York. NYRA emerged from bankruptcy two years ago, and association officials contend the company will run out of money by the middle of the summer, when racing moves to Saratoga for the country's premier meet. New York City OTB, which filed for bankruptcy in February, already owes the association $15 million, and any suspension of its statutory payments would deal a fatal blow, officials contend.

"NYRA is already running out of money," said Jeffrey Cannizzo, executive director of the New York Thoroughbred Breeders. "If they lose the OTB payments, they go out of business. If they go out of business, everybody goes out of business."

NYRA officials declined to comment publicly earlier this week about the association's strategy. However, an official familiar with the strategy said that the association had told legislators and other government officials they would not support any proposal that would cut into the Thoroughbred industry's $55 million share of New York City OTB's estimated handle of $900 million.

Industry officials point to the state's delay in determining an operator for a casino at Aqueduct in limiting the industry's options. The casino, which was approved by law in 2001, would probably provide NYRA with approximately $45 million a year in revenue and horsemen with approximately $40 million a year in purse subsidies.

Instead, the casino won't be up and running until 2011 at the earliest, and NYRA's decision to include casino revenues in its 2010 budget has limited the association's options, despite an agreement requiring the state to fund any shortfall in NYRA's operating budget if the casino was not open by spring 2009. New York state is facing a $9 billion budget deficit, and its legislature, beset by scandal and partisan bickering, has never been more ineffective.

"This needs a political solution," said the NYRA official, referring to New York City OTB, "but if you look at the state of New York politics, it's sheer craziness. It's never been worse. There's no one to make a decision. And now you have schools closing. You have hospitals closing. It's a mess."

Frucher, who was installed as New York City OTB's chairman last summer, said the state has no option but to accept the company's reorganization plan, which would require a suite of statutory changes. Under the plan, the OTB would close approximately 40 of its 61 parlors in New York's five boroughs, lay off half of its employees, raise $250 million from private markets through a bond issue, put 1,300 self-serve betting machines throughout the New York metropolitan area, and cut payments to the racing industry - paying the industry out of its profits instead of its revenue. If the state doesn't accept the plan, the OTB will need to come up with $700 million to pay the company's unfunded liabilities to its employees, Frucher said.

"It's going to be very difficult to ask the taxpayer to bail out the racing industry again," Frucher said, referring to the unfunded liabilities. "And it's inappropriate."

The state Thoroughbred industry does not object to a reorganization of OTB, only the provision that the industry take a cut in its share of the OTB's betting handle. In part, that's because racing officials contend the OTB already shortchanges the racing industry by paying approximately 6.4 percent of its handle to tracks and horsemen.

That fee is by far the lowest in the country paid by an OTB. In virtually every other state with an off-track betting network, a bet at an OTB is treated almost as if it were a bet at a live racetrack - as a result, the state racing industry gets approximately 20 percent of the handle. In most of those states, OTBs are at least partially owned by the tracks, not by municipalities.

In California, for example, OTBs are owned by the state's racetracks. In that system, the OTB location retains 2 percent of the handle; the rest goes to the racetrack in the state running live. One California racetrack official, who agreed to be quoted on the condition that he not be identified because he negotiates contracts with New York OTB companies, said if California's OTB network were run like the one in New York, "We'd close every OTB down. We wouldn't even give them the signal. It wouldn't be worth it to us."

In New Jersey, the state agency that owns and operates Monmouth Park and the Meadowlands also runs the state's most highly successful OTB parlor, in Woodbridge. The OTB location handled approximately $100 million last year and had a profit of $5 million, even after sending nearly all of the revenue from handle back to the racing industry, according to Robert Kulina, vice president of racing at the New Jersey Sports and Exposition Authority.

"If you don't own the OTBs, it doesn't work," Kulina said. "That's not because the operator isn't doing a good job. It's just because all the operator is doing is trying to move money from the live racetrack to itself, and because it has no incentive to give the racing industry any of it."

According to figures from a task force set up to study New York's OTB system last year, New York City OTB's branch expenses were 9.9 percent of its handle in 2008. Its corporate expense was 10.4 percent of handle in the same year. It should be noted that the company's wages and salaries ballooned then to comply with new accounting regulations requiring state agencies to record retirement benefits in the year the benefits are earned, rather than when the benefits are paid out. In 2007, before the change, the OTB's corporate expense was 5.7 percent of handle.

So New York City OTB needs at least 20.3 percent of the handle to pay its expenses, which do not include its contributions to the racing industry. It's little wonder, then, that Assemblymen Gary Pretlow, chairman of the Assembly's Committee on Racing and Wagering, has introduced an alternate plan to Frucher's that would require the OTB to dramatically pare its expenses without cutting racing-industry benefits. Pretlow contends his plan would cut costs and raise revenues at New York City OTB by $56 million, including his estimate that the company could trim its management salaries and fringe benefits from $12 million a year to $1.3 million a year, an 89 percent reduction.

Frucher said Pretlow's plan is unworkable and unrealistic and that New York City OTB's only viable solution is to improve its balance sheet to attract funding from the private sector.

New York City OTB was formed in the 1970s with the mission of providing revenue for local governments and the racing industry. So, if the reorganization plan were adopted, would New York City OTB also need to change its legislative charter to reflect that it was now generating money for the private sector?

"If you ask me, personally, if I believe government should be running a bookie operation, a transfer operation to a private industry, which is the racing industry, then I would say no," Frucher said.