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Wednesday, November 28, 2007

By The Numbers

- One of the benefits of this blogging gig is that I occasionally open my email inbox to find a message from an unexpected source. Yesterday, it was Charles Hayward. No, not a personal invitation to sit in the NYRA box, but at least I've made it onto the big guy's press mailing list. Contained therein was the Disclosure Statement - the association's latest proposed reorganization plan to be presented to bankruptcy court, and to be accepted or declined by the approved creditors. In his introduction to the document, Hayward points out that all creditors will be paid in full - "100 cents on the dollar;" and that NYRA will fully fund its pension plans, and continue to do so in the future.

He also makes an emphatic point that the MOU which would grant NYRA the franchise for the next 30 years is not a bailout, a term that I and other observers have been using freely in reference to the financial obligations that the state would assume should the plan be approved by the legislature (as in: Spitzer, Silver, and Bruno).

The reorganization does not constitute a “bailout” of NYRA. Under the September 4, 2007 Memorandum of Understanding (MOU) between NYRA and the State of New York, the contemplated transaction resolves significant and contentious litigation that could have lasted several years, in exchange for the NYRA’s agreement to relinquish any present or future rights with respect to the ownership of Aqueduct Race Track, Belmont Park, and Saratoga Race Course, whose value has been recently appraised in excess of $1 billion. The reorganized NYRA shall receive, among other items, 1) a 30-year thoroughbred racing franchise, and 2) sufficient funds (not to exceed $75 million) to satisfy its creditor obligations. Moreover, if NYRA does not obtain the new franchise, and the State were successful in connection with the aforementioned litigation, by statute, the State of New York must assume all of NYRA’s liabilities which are in excess of $300 million.
That's certainly one way of putting it, and whether or not one accepts that spin depends I suppose on what one believes were NYRA's chances of prevailing had the matter gone to court. What Mr. Hayward does not mention here, but what is contained in the document, is that the deal also calls for the state to relinquish $132 million in claims against NYRA, and to provide sufficient operating funds until the time that slots money begins to flow; that could be as high as $30 million per year (and what the hell is going on with the naming of the racino operator anyway?). So, call it what you will, bailout or a settlement of pending litigation, but it's an expensive bill for the state.

The document (again, please contact me privately if you'd like to have a's a 62 page pdf file) is most interesting to me as a historical account of NYRA's descent into bankruptcy, with all the details of the various loan packages, the prohibited sales of land and artwork, the Pataki Administration's refusal to sign off on the MGM racino and NYRA's subsequent lawsuit against it (to be dropped as part of the MOU), and much more. It also contains an analysis of the OTB issue that we discussed the other day (and since day one of the franchise debate). So let's try to put some numbers together and try to make some sense out of them. From the Disclosure Statement:
One of the major challenges facing the Debtor [NYRA] was the migration of customers from the Racetracks, where, as described above, on average, the Debtor retains 9.3% of each wager, to off-track establishments where, on average, the Debtor retains only 2.5% of each wager. As a result of the migration and drastic difference in retention rates, over the ten-year period prior to the Petition Date, the Debtor's revenues were virtually flat despite a 65% increase in overall Handle. The competitive relationship between racetracks and OTB's is unique to New York. In other jurisdictions, OTBs are owned by racetracks, operate as joint ventures with racetracks, or otherwise have their interests aligned.
During the ten-year period prior to the Petition Date, the Debtor's expenses increased 20%. As a result, after earning almost $20 million in 1995, Debtor's profitability began to decline and, since 2001, the Debtor sustained losses every year, including a loss of almost $16 million in 2004 and approximately $15 million in 2005.
Of course, Ben Liebman's recent 12 Months of Bankruptcy report puts the losses at a staggering $30 million for the 12 months from last November through this past October. Perhaps that last paragraph from the Disclosure Statement above, plus all of the bankruptcy costs, partly answers the recent commenter's question as to why NYRA seems to have been bleeding so much money just in the last five years.

Let's take a closer look at some numbers with respect to the OTB's. I sense that some people are tired of hearing about 'changing the business model' and 'fixing the OTB's,' ignoring the issue and blaming everything on NYRA. The following is an unscientific look, but I think it provides a general idea of what has been going on. Another Albany Law School report entitled NY Racing By The Numbers in 2006 (pdf file) states that, in 2006: At the OTB's, the NYRA signal averaged $2.518 million in per diem handle. If you multiply that out by the approximately 250 racing days in the year, that comes to $629.5 million. Let's say, just to be conservative, that the figure is actually $500 million.

The percentage spread between NYRA's take of 9.3% from on-track bets compared to 2.5% of OTB bets is 6.8%. 6.8% of $500 million is $34 million. Had those bets been placed on-track or its equivalent, that's enough to cover all the losses, pay their bankruptcy lawyers ( and Getnick), do some work on the backstretch, and maybe even hand out some Xmas bonuses for their beleaguered employees. I certainly may be missing something here, and, as always, I welcome any corrections or criticism of what is, as I said, a simplistic analysis. But even give or take a few million bucks, it seems clear that no matter who is running the tracks - NYRA, Capital Play, Joe Bruno, or Bill Gates for that matter, the operation is not going to be successful financially on its own unless the OTB model is changed.


Anonymous said...

As a former book purveyor, Charlie Hayward is intimately familiar with the term "semantics." Without a significant cash influx from the taxpayers and forgiveness of debt, NYRA cannot think of solvency. It's a bailout. Resolution of the land claim can be equated simply to the State paying for something twice. NYRA has never offered an explanation for their acceptance of the 1955 or 1983 language.

Hayward's argument that at "the end of the day if there is no new NYRA franchise, the state has a responsibility to assume all the liabilities of NYRA, which is substantially more money than we are talking about in our reorganization plan" is accurate. The Blood Horse reports NYRA puts potential liability for the state at more than $300 million. Hayward makes an imaginative argument: we have put the State in such a hole, we should be rewarded. It's analogous to having your daughter wreck the Mercedes, but letting her keep the keys because ... the damage is already done.

Anyone reading the NYRA reorganization plan should recall the document is an advocacy piece, not a dispassionate review of the facts and circumstances. The prohibited sales of land and artwork is consistent with the State's theory of the franchise assets being theirs. If you have a contract to sell a car, on the way over to the buyer's house, would you be able to sell the engine? No difference and illogical to blame the State on that one.

NYRA likes to blame their fiscal woes on the Pataki Administration's refusal to sign off on the MGM racino contract. Forgotten is that the Spitzer Administration was in office four months before MGM backed out, but they didn't direct Lottery to approved the contract either. If the issues were that easy to decide, why didn't Spitzer approve the contract? Regardless, let's not be so hasty to fully blame the State for the video lottery gaming debacle. There's plenty of blame to go around:

NYRA: Delay was caused by their failure to bid their video lottery development and management contract in accordance with the racing law, thus requiring the State Legislature to pass a bill legalizing NYRA's unlawful designation of MGM.

Joe Dalton: That's right, Mr. Saratoga County Chamber of Commerce. Dalton challenged Chapter 383 of the Laws of 2001, which legalized video lottery gaming and permitted some Indian gaming compacts. But for his failed lawsuit, NYRA could have had the VLT's up and operating.

MGM: MGM, NYRA's hand-picked video lottery developer and operator, delayed serious action until the Dalton lawsuit was finally resolved ... several years later. MGM didn't want to take a risk - a risk that Saratoga Gaming and Raceway, Buffalo Raceway, Batavia Downs, Finger Lakes Race Course and Monitcello Raceway each took. Result? All those facilities got operating while NYRA still languishes.

The NYRA discussion of the woes inflicted by OTB's is curious, but caution needs to be utilized when undertaking a review. As a previous commentator mentioned, NYRA's export to New York State-based Off-Track Betting Corporations, evidenced by the New York State Racing and Wagering Board's 2006 Annual Report, was $624,684,547 (28.72 percent of off-track handle). That same report illustrates NYRA's export to out-of-state was $1,612,443,187 (71.28 percent).

If NYRA includes the out-of-state handle in the calculation of their wager retention - they're being misleading because NYRA's out-of-state signal sale is the product of negotiation between NYRA and the receiving racetrack. Did they utilize the whole off-track handle in an effort to inflame opinion against the inequity? Can't tell. They didn't address how they arrived at their figures. Given that we are not informed what method NYRA used to calculate their off-track wager retention rate, any discussion of how much money would be left relies on facts not yet in evidence, i.e., the trustworthiness of the 6.8 percentage spread. It could be much, much less. I'd love to read Bennett Liebman's take on this.

For years we've heard success follows the handle, but it's not just "all about the handle." Increase handle all you want, but if you decrease the retention from the handle in a corresponding fashion it's a zero-sum game. The 2001 legislation decreasing takeout was intended by Barry Schwartz to increase handle at NYRA, coupled with the return through rebates can turn what is an apparently healthy handle increase (albeit without inflation factoring) into flatlined revenues. From NYRA's own filing: "During the ten-year period prior to the Petition Date, the Debtor's expenses increased 20% As a result, after earning almost $20 million in 1995, Debtor's profitability began to decline and, since 2001, the Debtor sustained losses every year, including a loss of almost $16 million in 2004 and approximately $15 million in 2005."

Hmmm. 2001? Same year as the Schwartz take-out reduction experiment?

Even the greatest NYRA cynic must agree that system of off-track betting in New York is less than optimal. That said, does even the most naive of readers believe the legislature will find the political will to rectify NYRA's mistake of 1970 and join off-track betting with the State racing franchise?

Anonymous said...

Lots of stuff in the anon post, will take some time to look at it later.

Bottom line, it is obvious that there would be economies to any merger. Unknown amount but certainly substantial enough to generate a profit for the OTB portion of the new company, especially considering NYC ALREADY makes a profit.

But you can not just add the 6% increment to NYRA's bottom line. In case of a merger they would not just get the 6% spread but would also inherit OTB's expenses, unless they magically shut every parlow and migrated all the customers to on track wagering.

Won't matter, Bloomberg is just bluffing anyway, no way NYC politicos are going to let this patronage well dry up.

He is just trying to renegotiate away the bad deal made by OTB.

NYCOTB will be around longer than any of us.