OTB finances a complex equation

When New York City Mayor Michael Bloomberg threatened on Thursday to close the financially challenged New York City Offtrack Betting Corporation, he contended that taxpayers should not have to subsidize a money-losing gambling operation.

An examination of the company's financial statements, however, shows that the question of whether OTB actually loses money for the city is far more complicated than the mayor's simple contention.

Bloomberg and OTB officials like to cite the company's deficit at the end of the past four fiscal years. But those deficits do not include the city's share of the surcharge that OTB collects from some customers on winning bets, which actually gives the city a net gain on the OTB operation.

In 2006, the latest year for which complete financial figures are publicly available, the city OTB had a deficit of approximately $6 million. The city, however, took a dividend on the surcharge revenues of $17.4 million in the same year. So the city had a net gain of more than $11 million from OTB operations in the 2006 fiscal year.

Officials in the Bloomberg administration and city OTB confirmed that the surcharge revenue is taken as an expense on the company's financial statements, as did officials at the New York State Racing and Wagering Board.

The officials, who spoke on a condition of anonymity because they were not authorized to discuss the financial statements publicly, maintained that because the company cannot make a profit on its wagering revenues - each $1 bet loses roughly 0.7 cents - the long-term prognosis is that taxpayers eventually will have to subsidize the operation under the present statutory requirements.

One Bloomberg official called the city OTB "unsustainable" and said that its financial problems did not reflect on its operations, but rather the peculiarities of New York's racing law, which mandates payments to the racing industry based on the company's handle, rather than its net revenues. The official said that unless the legislature addresses those peculiarities, the city has no incentive to continue as a bookmaker, a service that Bloomberg, who made his fortune in the private sector, doesn't believe the government should provide in the first place.

The difficulty in establishing the OTB's profitability underscores the byzantine structure of New York's offtrack betting model, in which six county-owned OTB corporations are governed by statutes that include payments to a vast number of racing industry participants, including tracks, breeders, regulators, and the counties themselves. The payments are based on a wide variety of factors. For example, a bet placed at an OTB on an in-state track during an afternoon in which Finger Lakes is racing live is treated completely differently from a bet placed over a telephone wagering system on a night when no harness tracks are holding a live meet - and these are just two of the multitude of iterations.

New York City OTB is the single largest bet taker in the U.S., accounting for more than $1obillion in wagers in the 2006 fiscal year through 60 parlors and an Internet and telephone wagering system. Because of the sheer size of its handle, the company has been able to strike cut-rate simulcasting deals for out-of-state signals while at the same time providing tens of millions of dollars each year to support racetracks in the state.

There appear to be several options to prevent a shutdown of OTB. One would be to reduce its mandatory payments so that the company retains more revenue - at the expense of racetracks, horsemen, breeders, regulators, or a combination of all three. Another would be an increase in the takeout, allowing OTBs to increase the revenue provided by each bet. Still another would be legislation that folds the OTB into the next franchiseholder for the three tracks currently operated by the New York Racing Association, an idea that, in principle, Bloomberg supports.

NYRA chief executive Charles Hayward said on Friday that the association would resolutely oppose any increase in the takeout - or the price of betting - which the association tries to keep low as a matter of policy for its betting customers.

A merger with the racing operator is perhaps the most logical solution, considering the duplications between the two companies. Each operates its own account-wagering, marketing, and advertising operations despite offering the exact same product. Hayward said a merger makes the most sense, but the fate of the franchise, which expires on Dec. 31, is bogged down in the legislature with little time to create the framework for an OTB deal.

Finally, there is the issue of the parlors themselves. What is the long-term future of offtrack betting parlors and the system's expensive overhead in a state where Internet and telephone wagering are legal? Consistently over the past 10 years, handle has migrated to Internet and telephone accounts because they are more convenient to players and less expensive to operate.

"You have to remember, when OTB was created more than 30 years ago, bricks-and-mortar seemed to be the way to go," Hayward said. "That's certainly not the case anymore."