09/16/2003 11:00PM

State comptroller recommends independent oversight of NYRA

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NEW YORK - The New York State comptroller on Wednesday called for the appointment of an independent monitor to evaluate the ability of the politically embattled New York Racing Association to continue operating the state's three largest racetracks.

The comptroller, Alan Hevesi, a Democrat elected last year after 22 years in the State Assembly and two terms as the New York City comptroller, made the recommendation during a news conference at his midtown Manhattan office as part of a wide-ranging 50-page report calling for reform at NYRA. Along with the report, Hevesi's office released a narrowly focused audit that was highly critical of the association's accounting practices.

"It's time to face the fact that NYRA is poorly run," Hevesi said.

In a written response, dated Aug. 24, that was included as part of the audit, NYRA's general counsel, Patrick Kehoe, disputed nearly every conclusion of the Hevesi audit. Kehoe claimed that the comptroller had misread the law governing NYRA's finances and misapplied accounting principles to arrive at his conclusions. NYRA officials did not return phone calls on Wednesday.

NYRA has been under intense public scrutiny since New York Attorney General Eliot Spitzer, also a Democrat, released a report early this summer that was highly critical of NYRA's management. Spitzer's report cited the convictions of 19 mutuel tellers at NYRA over the past three years for income-tax fraud and money laundering to make a case that NYRA's management disregarded criminal acts by its employees.

The attorney general's report was followed by a highly public disagreement between Spitzer and NYRA officials, who each accused the other of distorting facts to serve their own purposes. The dispute cooled somewhat after NYRA hired a consulting firm to evaluate its cash-handling procedures, but it flared again late in the summer after reports that federal prosecutors were exploring the possibility of indicting NYRA managers for tax fraud in connection with the mutuel clerks' convictions.

NYRA is a highly regulated, not-for-profit organization that operates Aqueduct, Belmont, and Saratoga under a franchise awarded by the State Legislature. NYRA's most influential supporters are Republicans, and the effort to renew the franchise is often treated as a political football.

The stakes for the franchise have risen since late 2001, when the Legislature adopted a bill legalizing slot machines at Aqueduct and other New York tracks. NYRA recently put on hold its construction plans for a slots parlor at Aqueduct after its gaming partner, MGM Grand, expressed concerns because of NYRA's ongoing legal problems. NYRA's current franchise would expire in 2013 if its slots were operational by April 1, 2008; if not, the franchise would expire in 2007.

Citing the importance of the slots revenue to the state budget, Hevesi recommended in his report that the Legislature pass a bill that would enable the state to go forward with slot machines at Aqueduct regardless of the status of NYRA's current management.

Hevesi's recommendation to appoint an independent monitor drew heavily from the allegations in Spitzer's report. Hevesi said the monitor should be appointed by the comptroller's office and would answer to the comptroller, the state attorney general, and the State Legislature. Hevesi said legislators would use periodic reports from the monitor to determine whether NYRA's franchise should be renewed.

Hevesi said he expected NYRA to voluntarily accept the appointment of the monitor, and he threatened more audits if the association did not agree.

"If NYRA does not comply fully, we will launch a series of fully comprehensive audits to expose their management, their perks," Hevesi said.

Hevesi sharply criticized NYRA for failing to turn a profit over the past two years despite increasing revenues. Hevesi said a proportionately larger increase in NYRA's expenses was to blame, but when pressed for details, Hevesi said he did not know which expenses had increased, or why.

A central part of the audit accused NYRA of underpaying its franchise fee to the state for 2000 and 2001 by "at least $11.6 million and as much as $15.6 million." The yearly amount due for the fee is determined by a complicated statutory formula.

Kehoe responded sharply for NYRA, however, contradicting the comptroller's calculation of the fee for 2000 and 2001 and saying that the comptroller's office had not used the same criteria to calculate the fee in audits performed in prior years.

Hevesi also accused NYRA of bending accounting laws by deducting interest from its taxable income despite not actually paying the interest. But he conceded that NYRA had a defensible position for making such deductions and said that the comptroller's office has asked the IRS to issue a ruling on the practice.