With continuing impasse over NYRA, horse racing faces uncertain future in New York

Political observers and horse racing enthusiasts awaiting a resolution to the longstanding conflict between the New York Racing Association and the governor's office on state control of the thoroughbred industry saw their hopes quickly fade in the final hours of the 2016 legislative session.

Instead, the impasse will likely continue for the next 15 months. In June, Gov. Andrew Cuomo and state legislators announced that NYRA, the nonprofit that runs the three largest racetracks in the state, would remain under state control until Oct. 18, 2017, marking the second consecutive one-year extension of control for the NYRA Reorganization Board of Directors. In May of 2012, NYRA trustees relinquished control of the board to the state for a three-year term in the wake of a 15-month takeout scandal, in which investigators determined that the association defrauded bettors of $8.5 million in race winnings. At first, many racing insiders did not expect the arrangement to last beyond 2015.

“This agreement preserves the valuable public window into the operation of racing and wagering at New York's premier racing facilities, and into the use of statutory racing support payments,” Cuomo's office said in a June statement announcing the end of session items.

Days earlier, Cuomo proposed a bill that could have led to the privatization of NYRA in exchange for increased supervision from the state's Financial Oversight Board, which was formed as a seven-member committee appointed by the state and charged with managing the association's operations. Cuomo's bill also intended to set a cap on revenues directed to NYRA from video lottery terminals at Aqueduct Race Course at $46 million, down from the $58 million the association received in 2015.

“We kept trying to negotiate, there were a lot of things we negotiated that we could both live with," said state Sen. Kathleen Marchione. “What we couldn't live with is that the governor was capping NYRA at $46 million. It's very difficult to cap them at $46 million when their expenses keep going up and their retirement (costs) keep going up. I felt they would be doomed for failure, we just couldn't come together on the money aspect of it.”

In addition to the fight over funding, the state legislature also proposed changes to the NYRA board, passing a bipartisan bill that would have established a new 15-member NYRA board, headed by CEO Chris Kay. Kay, meanwhile, told City & State that he is encouraged by the overwhelming bipartisan support NYRA received from the Legislature in its attempt to return to private control.

“We are also pleased with the positive statements made by the governor's office regarding our performance,” Kay said. “Those are the kinds of things we will focus on in our future negotiations in Albany.”

The legislature’s plan included NYRA board appointments from the governor, the Assembly and the Senate, as well as representatives from the New York state's horsemen and breeders' associations. In addition, the measure called for three representatives from Saratoga, Nassau and Queens' counties, where Saratoga Race Course, Belmont Park and Aqueduct are located.

Moving forward, experts have identified three potential working models on how NYRA could proceed on a long-term basis. The association can return to private control as it did prior to the state's takeover in 2012, or the nonprofit organization could operate entirely without state assistance as Monmouth Park and Meadowlands Racetrack in New Jersey have in recent years. Alternatively, NYRA could adopt a comprehensive public-private partnership that is prevalent in most states that offer horse racing.

Todd Shimkus, president of the Saratoga County Chamber of Commerce and a member of the group Concerned Citizens for Saratoga Racing, is advocating for a nonprofit model.

“It's a shared responsibility for the operation in protecting the fiduciary responsibility of the organization,” Shimkus said. “A private entity is beholden to the shareholders, a public entity is beholden to the taxpayers. If you take those three options, clearly when you're talking about horse racing in New York we want the stakeholders in the community to be at the table in the governing. That's why the not-for-profit model for us is the only one that makes sense.”

The debate persists amid mounting concern among racing officials around the country on the sport’s long-term sustainability, as government subsidies through slot machine and other casino tax revenues continue to dry up. Earlier this month, two racetracks in West Virginia – Hollywood Casino at Charlestown Races and Mountaineer Casino, Racetrack and Resort – announced that up to $1.5 million in government mandated purse money could be slashed next year to help close a $270 million gap in the state's 2016-17 budget. In New Jersey, the operator of Monmouth Park is lobbying for the state to redirect $50 million a year in tax revenues to the racing industry if a referendum on the construction of two North Jersey casinos passes this fall. It comes nearly five years after Gov. Chris Christie signed a bill privatizing the two main tracks statewide, eventually closing off a $30 million annual subsidy from the Atlantic City casinos.

As states from traditional racing hotbeds like Illinois, Indiana, Virginia and Delaware grapple with the prospect of declining financial support, Tim Ritvo, chief operating officer of The Stronach Group, the largest thoroughbred racing company in North America, has urged his peers to become self-sufficient by avoiding the temptation to depend on government subsidies. Currently, almost two dozen states nationwide use tax revenues from casino proceeds to help subsidize horse racing, according to the American Gaming Association. The Stronach Group owns major racetracks such as Santa Anita Park in Southern California and Gulfstream Park outside Miami, as well as Pimlico Race Course and Laurel Park in Maryland.

In Pennsylvania, Gov. Tom Wolf threatened to shut down six racetracks last October, citing the state's inability to maintain the integrityof its Race Horse Development Fund, established in 2004 to support racing endeavors through slot machine generated revenue. Free market advocates argue that the proceeds could be utilized more effectively, given that the state set aside a projected $253.5 million for the racing fund in its 2015-16 operating budget – more than twice the amount allocated for solar, wind and energy efficiency investments combined.

Of the total, nearly 80 percent is intended for bolstering winning purses, a May report from the Pittsburgh Tribune-Review found. At last September's Pennsylvania Derby, with a purse of $1 million, Godolphin Racing took home a winner's share of $576,000. The international breeding and thoroughbred enterprise is owned by Sheikh Mohammed bin Rashid Al Maktoum, the vice president and prime minister of the United Arab Emirates (UAE). By the same token, approximately 60 percent of a $50 million winner’s pool in harness racing has gone to owners based outside Pennsylvania since 2013, according to the Commonwealth Foundation for Public Policy Alternatives, a Harrisburg-based free-market think tank.

The Commonwealth Foundation, a nonpartisan organization devoted to transforming free-market ideas into fiscally conservative public policy, does not single out horse racing. In 2007, lawmakers in Pennsylvania passed Act 55, a measure that apportioned up to $75 million in tax credits for film and television production companies. While political leaders pledged to offer homeowners an average of $300 in property tax relief when the state approved 14 casinos a dozen years ago, the actual savings wound up being around $187, according to figures compiled by the Pennsylvania Department of Education.

“The larger principle is that we shouldn't be picking winners and losers in the economy, whether that's horse racing, whether that's having tax credits just for film production, whether that's grants for specific companies for headquarters,” said Nate Benefield, the Commonwealth Foundation’s vice president of policy and chief operating officer for the Central Pennsylvania region. “Those are all things on the surface that are good, but when you look at the bigger picture the money spent there could have gone to reducing taxes for businesses or to all families. That's why Pennsylvania has one of the highest overall tax burdens in the country and highest overall corporate tax rates in the world. It makes it very uncompetitive for all businesses, so we kind of pick and choose. That's not the path to prosperity.”

Proponents of NYRA's privatization efforts, however, point to a key distinction from a 2008 reorganization plan approved by a federal bankruptcy court, which separates it from other states that may require government assistance to remain afloat. Under a 25-year franchise agreement passed by the state Legislature in February 2008 and later approved by the bankruptcy court, NYRA relinquished its ownership claims on Aqueduct, Belmont and Saratoga in a ground lease agreement with the state, which leased back the tracks for a period through 2033. New York state also provided NYRA with a $105 million bailout as part of the agreement to help cover operating expenses and millions of dollars in debt forgiveness.

“The state received a billion dollars in land, it's not like NYRA is asking for a handout. It's asking for the mortgage to be paid out over the 25 years of the agreement,” Shimkus said. “It's very different in terms of what New Jersey or others might have done in terms of siphoning revenues off from casinos to horse racing.”

In terms of video lottery terminal revenues, the agreement also entitled NYRA to a statutorily required 4 percent of net winning percentages from the Aqueduct gaming facility for capital expenditures, along with 3 percent of the winnings for operating expenses, according to the reorganization plan. NYRA also receives a percentage of the gaming funds to help increase purse totals and for a further stipend for breeding awards.

“When we were looking for the proper way to plan the future of getting out of bankruptcy and planning the future of our stewardship of the three New York tracks, coupled with the fact that we were contemplating and ultimately made the decision to turn over the land under those three tracks, we wanted to make sure we were only willing to do that land transaction if there was going to be proper funding for racing operations for the physical facilities, the breeders and the owners of the farms and purses,” said former NYRA CEO Charles Hayward. “That's why the effort was made by NYRA's lawyers, NYRA's outside bankruptcy council and NYRA's board to negotiate with the state and secure guarantees for the next 25 years that would allow NYRA to get out of bankruptcy and operate the future of racing with great optimism.”

Saratoga Race Course, among the nation's oldest sporting venues, is coming off a record year with a total NYRA handle of $656.1 million for the six-week meet, 14.1 percent more than the same period a year earlier. With a daily average handle of $16.4 million, Saratoga became the first non-Breeders Cup meet in American racing history to eclipse an average of $16 million on a daily basis. In 2014, an economic and financial impact analysis of the Saratoga Race Course conducted by Camoin Associates and the Saratoga County Industrial Development Agency found that the meet generated nearly 2,600 jobs and a regional economic impact of $237 million. The study took into account sales tax, property tax and room tax revenues from lodging, an uptick in out-of-area tourism figures and considerable increases in breeding operations in nine counties in the region.

Overall, NYRA reported an operating profit of $4 million last year, above projections for $2.2 million in the 2015 budget. It also represented the first time since 2000 that the agency finished with operating profits in consecutive years. The figures, though, contrast starkly with an audit from the New York State Comptroller’s Office, which found that NYRA lost $11.5 million in 2014 when expenses such as health care benefits for retirees, pension contributions and depreciation were factored. Dating back to 2010, state Comptroller Thomas DiNapoli determined that NYRA lost $109.3 million over a five-year period, excluding video lottery terminal revenues. Kay disputed the figures in a July editorial in the Albany Times Union, where he emphasized that NYRA has consistently received a “clean audit” from KPMG in recent years.

“NYRA excluded both (video lottery terminal) revenue and non-operating expenses including taxes, depreciation, interest, pension and post-employment benefit expenses (from the assessment),” Kay wrote. “This is a common board practice; it is clearly noted in our financial reporting, which reflected profits from racing operations in 2014 and 2015; and is consistent with our commitment to complete transparency in our financial statements.”

In the meantime, NYRA has worked arduously to cater to millennials and serious horseplayers by incorporating innovative mobile and digital platforms into its wagering menu. The start of the Saratoga meet will coincide with the launch of the NYRA Bets program, which expands mobile and online wagering to customers out of state. Recent industrywide data could provide Kay with optimism as NYRA launches the initiative. At TwinSpires.com, an advanced deposit wagering site operated by Churchill Downs, online wagering on this year's Kentucky Derby jumped by 22 percent for the race itself. TVG.com, another leading online betting site, reported a second-quarter handle of $222 million, according to data compiled from the Oregon Racing Commission, falling just below the amount handled by TwinSpires.

“Certainly, you see more and more people are wagering online and with apps as we are becoming more of a mobile society. As you probably know, we at NYRA represent about 5 percent of the number of races that are conducted in America, yet 20 percent of the wagering in America is placed on our races,” Kay said. “This gives us an opportunity now to connect with horseplayers and fans in a way we have not been able to do so in the past.”

Rick Violette, the trainer of prominent Triple Crown horses Upstart and Samraat and a member of NYRA's Board of Directors, says there are still numerous ways in which NYRA can streamline costs and operations at the three tracks. Had NYRA been privatized, the association could have stepped in and opened a host of betting parlors throughout Manhattan after New York City OTB shut its doors six years ago. Violette also believes NYRA can do more to reach out to bettors in Europe and other international markets. Notably, Violette has been pleased with the strides made by projects like the Take The Lead retirement program and the Thoroughbred Aftercare Alliance, which provides grants to approved aftercare organizations to retrain and house former racehorses through industrywide fundraising efforts.

“I do think that while our industry is changing and there is some built in contraction to it, it's still very, very viable. I'm proud to be a member of it,” said Violette, who also serves as the head of the New York Thoroughbred Horsemen's Association. “We've made incredible progress on a number of areas including aftercare for our horses, the integrity in testing and trying to ensure a level playing field. We could always do more and the goal is to do more every day, but I think we've made great strides statewide and nationally.”

Still, even the most ardent New York race fan is unsure what the developments mean for the future of the NYRA. Shimkus argues that if Saratoga or Belmont is sold to a company such as Churchill Downs Inc., nothing prevents the corporation from diverting money away from a profitable enterprise to a struggling venture in order to prop up a weak link. With ample community representation, akin to the shareholder model employed by the City of Green Bay's ownership of the Green Bay Packers, the threat of placing Saratoga Race Course in the wrong hands may diminish. Moreover, if political leaders are intent on avoiding another stalemate, Marchione would like to start negotiations in early 2017 – much sooner than lawmakers did in the previous legislative session.

"We need to get all of the information to the governor making sure that he has every piece of information necessary to perhaps convince him of the position where we're standing and then to continue negotiations with hopefully a resolve – and a resolve that is good for all of New York state, the horse racing industry and certainly NYRA," Marchione said.

A call to Cuomo spokesman Rich Azzopardi seeking comment was not immediately returned.

Correction: Due to an editing error, an earlier version of this story incorrectly stated that Cuomo’s NYRA proposal included a five-person board.