04/14/2010 11:00PM

The real cost of closing down OTB

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Meyer "Sandy" Frucher, the chairman of the bankrupt New York City Off-Track Betting Corporation, has frequently said that taxpayers in New York would be on the hook for $700 million if New York City OTB went out of business. The figure has provided Frucher and OTB's supporters with a powerful bargaining chip as the company's lobbyists seek legislative concessions that could require cuts in the payments the OTB company makes to the Thoroughbred racing industry.

However, even OTB officials acknowledge that the legal basis for at least $550 million of that liability figure is questionable, introducing doubts about whether taxpayers would be liable for any ongoing payments to OTB's employees should the company shut down. In addition, even if the $700 million were legally valid, the figure has not been adjusted for the costs that OTB would incur during a reorganization, which has the effect of inflating the appearance of the net costs to the state. Nor has it been presented as a figure that would be paid off by the state or city over at least three decades, minimizing the effect on the state's annual budget, which in the last fiscal year was $78.2 billion.

As legislators struggled during the week to devise a plan to rescue OTB while simultaneously attempting to close a $9 billion budget gap, an accurate figure for the liability costs of a shutdown is paramount in understanding the problem and devising solutions. The OTB notified its employees it would close April 11 but backed away from that plan after OTB officials said they had received assurances that legislation would be passed to address its short-term problems. As of Wednesday afternoon, no bill had been approved.

The majority of the $700 million is taken from an analysis prepared by the City of New York's Actuary late last year at the request of New York City OTB. The request was to determine the benefits that OTB's 1,300 employees would be eligible to collect from city-managed agencies if they were all fired as of the end of 2009.

According to the analysis, the present value of the pension benefits that employees have so far earned through the New York City Employment Retirement System is $283.7 million. The present value of other post-employment benefits such as health care was $267.4 million - also through a city-managed fund - for a total present value of $550 million.

According to an OTB executive, the $700 million cited by Frucher includes the $550 million in benefits, $95 million in unpaid bills before the company entered bankruptcy, and several tens of millions of dollars in other costs related to a shutdown.

However, it is unclear if city or state taxpayers would be required to fund the $550 million in future benefits if New York City OTB ceased to exist. In fact, a section of the racing law passed in 1982 pertaining specifically to New York City OTB states that "the bonds, notes, or other obligations of the corporation shall not be a debt of either the state or the city, and neither the state nor the city shall be liable thereon, nor shall they be payable out of any funds other than those of the corporation."

The language of the statute suggests taxpayers cannot be held responsible for any unpaid obligations to OTB's terminated workers. Ira Block, the general counsel for New York City OTB, acknowledged this week that the statute would require workers seeking benefits to make a case to overturn the law if OTB went out of business.

"There is no clear-cut answer for who has responsibility for the benefits if OTB does not continue to exist and has no assets," Block said.

Part of the uncertainty surrounding the liability is related to New York City OTB's unusual status, history, and bankruptcy filing. For one, New York City OTB is owned by the state, though it was gifted from the city in 2008 through legislative fiat after New York City Mayor Michael Bloomberg threatened to shut down the company. The OTB chose to file under Chapter 9 of the bankruptcy code, a rarely used section that is reserved for municipalities.

So there is little precedent to determine obligations for the company in the event of a shutdown. In addition, as employees of a state agency, OTB workers lack the safety net created by federal law in 1974 when the Pension Benefit Guaranty Corporation was established to protect workers at private corporations that go bankrupt and are dissolved. It is also important to point out the OTB workers' pensions would continue to be managed by New York City retirement system, which provides pension benefits to a vast array of workers and might be able to absorb the costs through a variety of tactics.

On another level, the $700 million liability figure does not appear to account properly for the cost to the state of the company's reorganization. Currently, the OTB is proposing to fire at least 600 workers as part of a larger plan to close half of its parlors and install betting kiosks at hundreds or even thousands of bars and restaurants in New York's five boroughs. Although New York City OTB officials said they could not provide a figure for the costs of terminating 600 workers and paying for their severance packages because of the wide differences in costs for different types of workers, the actuary's estimate suggests strongly that there are significant costs attached to terminating a worker in New York. Those costs should be subtracted from the $700 million figure - legally valid or not - to give an accurate depiction of the true cost of a shutdown. For example, if it costs $250 million not to shut down and $700 million to shut down, the incremental, or true, cost of a shutdown would be $450 million.

In addition, whichever entity were liable for the workers would not be liable for $700 million in one lump sum. The majority of the money would be owed to workers as they became eligible for benefits far later in life and would therefore be paid out in increments over a long period of time. And if any of those fired workers were to find employment at a city or state agency, the liability for that worker would then transfer to the new agency and be wiped from the legacy of OTB's closing.