12/23/2009 12:00AM

N.Y. racing facing same old problems


The New York Racing Association says it's going broke. A casino approved for Aqueduct in 2001 is in limbo, held up by mysterious political maneuvering. And racing industry officials and politicos are trying to figure out what to do with New York City Off-Track Betting Corporation, which is in desperate need of shedding layers of fat built over a nearly 40-year existence of serving New York's bloated political machine.

Does that sound like late 2006, when NYRA filed for bankruptcy amid intense negotiations with the state over the Aqueduct casino? Well, it also sounds a lot like late 2009.

Three years gone, and the song remains the same in New York, which hoped to put the biggest of its racing problems behind it with NYRA's reorganization and emergence from bankruptcy in 2008. But the recession, the stalled Aqueduct casino, and New York City OTB's unrelenting problems have combined to create a crisis that once again holds the potential to reshape New York racing.

While the promise of revenues from slot machines at Aqueduct remains unfulfilled, the more immediate matter of concern is New York City OTB, which filed for bankruptcy in early December with a stack of unpaid bills to racetracks and horsemen. Those unpaid bills are having a direct effect on people's lives, unlike the slot-machine money, which has existed so far only as an illusory number on a spreadsheet.

The New York State Thoroughbred Breeding and Development Fund, for example, anticipates that it will be unable to issue checks due to breeders in February because of New York City OTB's $2.2 million debt to the organization, according to Martin Kinsella, the executive director of the fund. Payments from New York City OTB account for 40 percent of the fund's budget during a typical year, Kinsella said.

"If this was one of the smaller OTBs, we might be able to get out of it with some creative accounting, taking some funds from somewhere else until the situation is resolved," Kinsella said. "But because it's New York City OTB, and that's such a big portion of our funding, we're not going to have the cash flow to pay the awards."

New York OTB officials contend that the bankruptcy filing would allow the company to reorganize as a leaner company that has half the expenses, but the filing would almost certainly pay out less revenue to a racing industry that is already struggling. Although details are sparse, one OTB official said recently that the plan would probably entail closing all but a dozen or two of the company's 60-plus parlors in New York City. Half of the company's employees would be laid off, the official said.

Although OTB officials have told racing officials the restructuring would ultimately result in a stronger racing industry, Joseph Faraldo, the president of the Standardbred Owners Association of New York, isn't buying it. Faraldo said that New York OTB "needs to go away." Faraldo accused the company of consistently reneging on its financial promises since being created by the state nearly 40 years ago.

"As long as this entity is around, we are going to have a problem with them screwing up our product," Faraldo said. "They're a parasite, and they always have been."

The relationship between the harness industry and New York City OTB is so strained, in fact, that the Standardbred owners are considering filing a legal challenge to the bankruptcy filing, Faraldo said, based on the company's use of Chapter 9 of the bankruptcy code. Chapter 9 is reserved for municipalities, and Faraldo said the group's legal advisors have said New York City OTB, which is owned by the state, does not qualify for protection under the code.

Faraldo said that the harness industry wouldn't miss OTB and that Standardbred and Thoroughbred tracks could easily replace the revenue it provides by opening their own offtrack betting parlors and driving customers to their Internet wagering operations. And by cutting out the middleman, the racing industry would only need to recapture a fraction of New York City OTB's $1 billion in annual handle to remain revenue-neutral, Faraldo said, citing the overhead of the OTB company and its obligations to state and local governments.

"The racing industry would become more proactive," Faraldo said. "They'd go after those customers, and they'd get them, and they'd be getting 13-cent dollars instead of 5-cent dollars."

Sandy Frucher, the chairman of OTB, has said that New York state would be on the hook for $600 million in unpaid obligations to OTB's 1,400 workers if the company were dissolved or closed. The contention seems designed to put pressure on the New York legislature to agree to a restructuring of the statutes that govern the OTB's distributions to the racing industry, at a time when New York lawmakers are facing a $9 billion budget deficit for 2010.

Since New York is facing such a huge deficit, it's tempting to think state lawmakers would be in a rush to approve the Aqueduct casino, which could contribute hundreds of millions of dollars a year to the state. However, selection of the operator has been stalled by political considerations that are not clear. That has become an enormous concern for the New York Racing Association, which had included anticipated revenues from the casino in its 2010 budget. Now, NYRA officials said, they'll run out of money by June of next year, at the latest.

"There's no good reason this decision hasn't been made," said NYRA's chief executive, Charles Hayward. "I just have no idea. You and I could sit down over a drink and probably come up with 20 reasons for it, and none of them would make any sense."

Selection of the operator is being negotiated behind closed doors by the state's political leadership: Gov. David Paterson, a Democrat who is gearing up for the party nomination for next year's election; Rep. Sheldon Silver, the speaker of the Assembly, also a Democrat; and Sen. Malcolm Smith, the pro-tem president of the Senate, who is also a Democrat.

Representatives for Paterson and Silver declined to comment in mid-December or did not respond to questions. But Travis Proulx, a spokesman for the Senate's leadership conference, said Albany hopes to announce a deal with an Aqueduct operator within the next month.

"Our priority has been selecting an operator who will fulfill the economic objectives of New York state," Proulx said. "We believe we have identified those operators who can fulfill those objectives, and we hope to have an agreement in place soon."

Five companies - mostly partnerships of casino companies and politically connected real-estate development firms - are seeking the contract to operate the Aqueduct casino under what is thought to be a 30-year deal that requires at least a $200 million upfront payment. An official associated with one of the companies complained in December that government officials have never adequately explained the criteria by which the contract will be awarded, but he also said participants in the process are just as befuddled by the delay as racing officials are.

The situation gets even murkier now that the federal government has indicated that it will approve the Shinnecock Native American tribe's request for recognition. The Shinnecocks are based on Long Island, and the tribe could press the federal and state government for the ability to open a casino. While community opposition for a casino in the Hamptons is nearly absolute, efforts by the tribe to open a casino will almost certainly restart talks about building a casino at Belmont Park in Elmont, N.Y.

Given New York's enormous budget deficit and NYRA's recent bankruptcy, the state legislature might be reluctant to dip into the till to help out NYRA again. However, NYRA doesn't have to go hat-in-hand to the legislature, according to Hayward. The settlement agreements NYRA negotiated as part of its bankruptcy reorganization included a provision requiring the state to fund the association's operations until it begins to receive slot-machine revenues if the casino was not operational by March 9, 2009. As a result, Hayward is confident that NYRA will not have to shut down, as it threatened to do in 2007 unless the state came to its rescue - even if that means having the state ask the casino operator to front NYRA the money.

"We're going to need money from either the casino operator or the state, and the state is going to have to make good on its promise," Hayward said.