The New York Racing Association’s (NYRA) traditional racing operations have generated deficits totaling $109 million over five years and management has yet to develop a formal plan to make these operations profitable, according to an audit released today by State Comptroller Thomas P. DiNapoli. Auditors also noted questionable expenses, which contributed to NYRA’s racing-related deficits.

“NYRA relies on Video Lottery Terminals to stay in the black, but that revenue stream isn’t guaranteed to continue as strongly, especially as new casinos open up across the state,” DiNapoli said. “NYRA needs to come up with a plan to make money on racing operations, especially as it seeks to return to private control. Without such a plan, NYRA’s long term solvency could be a long shot.”

In September 2008, upon renewal of its exclusive franchise, NYRA entered into a bankruptcy settlement agreement conveying all rights, titles and interests in racetrack properties to New York state. In return, the state forgave nearly all of NYRA’s debt obligations. In addition, a Franchise Oversight Board (FOB) was formed to oversee NYRA’s financial operations. A temporary Reorganization Board of Directors was also created in 2012 after more financial losses and scandal to provide further oversight of NYRA operations. Currently, the Reorganization Board is scheduled to expire in October 2016.

Under NYRA’s current franchise agreement, a percentage of Video Lottery Terminal (VLT) revenue from Resorts World New York City Casino is directed to NYRA for enhanced purses, operational support and capital expenditures. NYRA will receive VLT payments until 2033.

As a result of the millions of dollars it received annually from VLT operations, NYRA reported an annual surplus for each year in the audit period of Jan. 1, 2012 through Dec. 31, 2014. For the three years audited, NYRA received about $318 million in VLT revenue. Of this amount, about $68 million was dedicated to general NYRA operations, $91 million to NYRA’s capital program and $159 million to purses.

Revenue Calculations

DiNapoli’s auditors found significant flaws in NYRA’s revenue calculations.

NYRA reported a surplus of $1.7 million in 2014, excluding the VLT subsidies. To arrive at the surplus amount, NYRA officials excluded expenses such as pension contributions, depreciation and post-employment health benefits (OPEB) totaling $13.2 million. NYRA officials contended that the exclusion of those expenses was justified because the costs were beyond NYRA’s control.

However, there is no regulatory, accounting or other authoritative justification for this practice and DiNapoli’s auditors determined that without the VLT revenues, NYRA actually lost $11.5 million. Total racing operation losses from 2010 through 2014 totaled $109.3 million.

Additionally, auditors found NYRA paid expenses that were not properly supported or were not ordinary and necessary for racing operations. These expenses included a $250,000 bonus to its CEO. According to the evaluation criteria for this bonus, the CEO was to develop a strategic plan to achieve a balanced operating budget, excluding VLT funding. However, during the three years covered by the audit, NYRA lost $62 million on its racing operations.

No plan to make racing profitable

The FOB has stressed the need for NYRA to make its racing operations profitable without reliance on VLT subsidies. Despite this, DiNapoli’s auditors found no formal written plan by NYRA management to make racing operations profitable.

DiNapoli recommended NYRA:

• Include all ordinary and necessary expenses, such as pension contributions, OPEB, and depreciation when calculating the results of its racing-related financial operations;
• Develop a detailed plan to eliminate annual deficits from racing operations;
• Assess the propriety of the questionable expenses and develop and implement written policies to minimize the risk of excessive payments for the goods and services in question; and
• Determine general horse racing industry practices regarding the questionable expenses and identify opportunities to enhance revenues and reduce costs.

A prior Comptroller’s audit identified steps NYRA could take to reduce questionable operating expenses and identified almost $1 million in immediate opportunities that NYRA could likely act upon to save money, including formally evaluating the need for certain horse transportation costs and annual legal fees. The audit recommended that NYRA develop a business plan that aligns its operating expenses with its actual net revenues.

NYRA officials generally disagreed with the findings of today’s audit and defended the practices cited, particularly the methods used to calculate NYRA’s profit or loss from racing operations. NYRA’s response is included in the full audit.

Read the report Financial Condition and Selected Expenses: New York Racing Association, or go to: http://www.osc.state.ny.us/audits/allaudits/093016/15s21.pdf