New York City OTB is broke, audit says

SARATOGA SPRINGS, N.Y. - New York City Off-Track Betting Corp., the state-owned agency that has a monopoly on taking offtrack parimutuel bets from residents of New York's five boroughs, has an operating deficit of $38 million, an accumulated deficit of $228 million, and will be insolvent soon without legislative help or the implementation of drastic cost-cutting measures, according to an audit conducted by New York State Comptroller Thomas P. DiNapoli released on Friday.

The audit, which analyzed the operations of the state-owned company over the past four fiscal years, concludes that OTB's financial problems are largely related to its obligations to the racing industry and state and local governments. However, the auditors stressed that conclusion only after OTB officials repeatedly pointed out that an independent consulting group and its own accountants had concluded over the past several years that no amount of cost-cutting could restore the company to solvency.

"Even if cost-saving measures are implemented, it's unlikely that it will remain financially solvent for long," DiNapoli said, in a statement attached to the audit. "This is a serious problem that needs in-depth examination. If the goal is to keep OTB viable, serious consideration must be given to changing the mandated state formulas and restructuring operations to coordinate different aspects of the racing industry."

DiNapoli's office conducted the audit at the direction of Gov. David Paterson, who last year negotiated the takeover of New York City OTB from the city of New York after Mayor Michael Bloomberg threatened to close the operation. The audit covered New York City OTB's operations from July 2004 through October 2008.

New York City OTB operates 68 branches in New York's five boroughs as well as an Internet and telephone betting operation. In fiscal year 2008, which ended in July 2008, the company took in $998.2 million in bets, or approximately 7 percent of the national handle, making it the single largest bet-taker in the U.S.

Though the audit takes issue with a wide array of expenses at the company - including 87 company cars that cost $6,700 each a year to maintain, or $583,000 annually - it points most critically to New York City OTB's mandatory statutory distributions to the racing industry and state and local governments. OTB officials have been pressing the state to change the mandatory distributions, either through direct reductions or a change in the way the distributions are calculated, but have had little success except for minor changes.

According to the audit, New York City OTB had $244.7 million in revenue in fiscal year 2008. It paid out $128.6 million in statutory payments while incurring an additional $133.9 million in expenses, for a one-year deficit of $17.8 million, according to the audit. In the three previous fiscal years, the OTB ran deficits of $8.63 million, $6.12 million, and $5.78 million.

The auditors take issue with OTB's calculation of the total of mandatory distributions, however, contending that approximately $24 million of the $128.6 million total is not mandatory but is instead paid to out-of-state racetracks and the New York Racing Association because of simulcasting contracts. In a response, OTB contended that 32 percent of the payments could be considered mandatory because of a contract negotiated by NYRA, "which the corporation does not get to negotiate."

Meyer Frucher, who was recently appointed chairman of OTB, has said he is preparing a report for Paterson that would recommend dramatic structural changes for the company, to be released within the next month. Frucher has also said that OTB could benefit from a closer relationship with NYRA, which has been pressing for a consolidation among OTBs and racing interests for years.

If OTB and NYRA agree on a new relationship, it is likely the two organizations will go t o the legislature jointly to ask for relief, according to officials.