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Saturday, December 08, 2007

Franchise Fees Dispute Old News

A State Comptroller report "determined that the franchise fees calculated by NYRA ....were understated by a combined total of at least $11.6 million and perhaps as much as $15.3 million."
You may have read all the stories today with the screaming headlines about the latest revelation. Audit: NYRA shortchanged taxpayers, said the Daily News. The Albany Times-Union dusted off and trotted out Jeff Perlee to call NYRA "chronically dysfunctional" (which makes for an apt description of his own Empire Racing). The NY Post, in revealing the imminent release of the report the other day, labeled it a "bombshell."

However, like a lot of negative headlines we've read about NYRA over the last few years, it's not really news. In fact, the italicized excerpt at the top of this post is from a report released in 2002 by then Comptroller Alan Hevesi, and the shortfalls noted were from 2000 and 2001. NYRA and the state have long disagreed on how the franchise fees are to be calculated, so the fact that the state has additional claims since Hevesi's report is hardly a surprise.

There was apparently a meeting amongst the staffs of Spitzer, Bruno, and Silver on Thursday night to attempt to resolve the franchise. But talk about lack of transparency:
...spokespersons for the governor and Rep. Sheldon Silver, the speaker of the Assembly, would neither confirm nor deny that the meeting took place. [DRF]
Meanwhile, the upstate Ithaca Journal reports that NYRA is not the only issue of importance to the state's racetracks. Still pending is a bill, passed earlier this year by the Senate, that would increase racetracks' share of VLT revenue. Once again, Jeff Gural is threatening to close his Tioga Downs and Vernon Downs harness tracks should the bill not be approved by the Assembly and signed into law. He claims the tracks are losing $1 million a month. “The economics just don't work."

With VLT revenues at the state's racinos disappointing almost across the board, the tracks that host them are suffering.
The owners of Monticello Raceway in the Catskills, meanwhile, are contemplating layoffs and going to a seasonal schedule.
Even Yonkers Raceway, the state's largest video-lottery-terminal parlor, has failed to meet expectations, despite its proximity to New York City, analysts said.

“In some areas, especially Yonkers, the win per-day per-machine is much lower than anyone could have anticipated,” said Bennett Liebman, head of the Racing and Wagering Law Program at Albany Law School. “It's just a major disappointment.”
Since April, the revenue per machine per day in New York has averaged $168 a day, according to the state Lottery. Saratoga has averaged $234 a day per machine since April, while Finger Lakes, the state's only privately owned thoroughbred track, is at $224; Yonkers is at $209. Trailing the pack is Monticello at $121.

Track officials said it is difficult to compete with other states such as Pennsylvania, which let tracks keep a larger percentage of revenue and thus can woo gamblers with more amenities and giveaways.
The average in other states is said to be around $250. The Assembly's racing committee chairman Gary Pretlow is said in the article to favor the new formula; earlier this year, he had expressed skepticism.


Anonymous said...

Based on the interest in your latest rant, I think most observers are tired of your "pound Perlee and Bruno" tact, regardless of what they have to say, and instead they might like something of real substance, other than "I love NYRA."

steve in nc said...

This observer appreciates the good information and spirited discussion that is found here, but what I get tired of is pot-shots at Alan that mischaracterize his words and his work and add nothing to our understanding of what's going on.

Is there something incorrect about his argument that the audit fee dispute is just an old difference over accounting procedures, and not some new corrupt practice deserving nasty treatment in the press for NYRA? If he's dead wrong, make your case on the issue -- take your own advice and present "something of real substance."

I for one sure don't love NYRA, but I've seen it improve a lot over the years. With lots of oversight, a franchise extension wouldn't have to be a disaster. I sure don't want some for-profit with no particular concern about improving the sport getting the franchise. Churchill has some issues, but at least racing is its main mission. I'm open to the idea of some new quasi-governmental group getting the franchise. But if a track is going to house a casino, I believe a good share of the profit should go to racing. What's your plan?

steve in nc said...

OK, here's some more real substance that also pounds Bruno, this time from the DRF's Steve Crist.

Sure, you can attack him as biased because as publisher of the Form, has to keep good relations with NYRA, and he's a former NYRA official to boot. And judging from hairstyle alone, I'm betting he's not a Republican.

But let's forget about all that personal stuff and get to what he's saying about the simulcast signal issue. Could NY racing go it alone and jack up fees for its signal? Or would that be financial suicide?

I'd sure love to see the tracks that pay purses get a greater share of the handle than those entities that merely process the bets.

Here's the article. What do y'all think?

Bruno floats a very bad plan

NEW YORK - Of all the nutty ideas that have come up in connection with the future of the New York racing franchise - shutting down Aqueduct, designating a different operator for each of the state's tracks, turning the whole show over to Australian bookmakers - there's a serious new contender for the nuttiest of them all. Joe Bruno, the state senate majority leader who is holding up the process, now wants the tracks to turn over the sale of their simulcast signals to a new state agency staffed with political appointees.

The only question surrounding this proposal is whether it is stupid, sinister, or both.

Among the many aspects of the New York Racing Association's operations that have been questioned, both fairly and unfairly, its signal price has never been raised because there is no issue surrounding it. NYRA's rates are among the highest in the country, commensurate with the quality and popularity of its racing, and are entirely consistent with industry norms. As in every other state, experienced track officials negotiate simulcast contracts within a very narrow band of market pricing, and those contracts are routinely reviewed and approved by state regulators, in New York's case the State Racing and Wagering Board.

There is no lack of government involvement or oversight, and little need for any. The tracks' interests are entirely aligned with those of the state, as both benefit from charging the highest rates the market will bear.

This is not to say that signal prices are not a major industrywide issue. It is clear with hindsight that all tracks underpriced their signals at the dawn of simulcasting nearly 30 years ago. The racing industry would be far better off if there had been a 50-50 split between interstate senders and receivers instead of the current arrangements where the sender typically gets 3 percent of handle while the receiver keeps 15 percent or more.

That historical mistake can not be undone easily, however. There are antitrust issues involved if tracks act together to raise prices, and anyone who tries to go it alone will be shut out of the market, as California learned when it lost a long game of chicken over signal prices with Las Vegas several years ago.

In any case, the notion that some new commission composed of New York politicians' friends and donors could secure better rates for the signal is preposterous - so much so that one has to question Bruno's motives in raising this non-issue a month before the expiration of the NYRA franchise.

Bruno has been lobbied throughout the franchise-renewal process by various racing companies, including Churchill Downs and Magna Entertainment, which were founding partners in Empire Racing, at one time a leading prospect to be awarded the franchise. Bruno had close ties to other members of Empire's original board, many of whom are longtime allies based in the district he represents, and one of whose members was forced to resign from Empire amid a federal investigation of his business dealings with Bruno. Even as Empire was disintegrating in recent months, with Churchill and Magna finally bailing out, Bruno was curiously calling for the involvement of out-of-state racing entities in the operation of New York's tracks.

The relevant backdrop to all this is NYRA's cable-TV and home-wagering deal with the Television Games Network, which expires along with the franchise at the end of this month. TVG's future is highly uncertain if it does not continue to carry NYRA racing, because Tracknet, an alliance between Churchill and Magna, has pulled its tracks' signals from TVG as contracts have expired. The clear Tracknet long-term strategy is to eliminate third-party providers such as TVG and YouBet from the account-wagering equation.

The uncertainty surrounding TVG only intensified when its parent company, Gemstar, was sold Friday for $2.8 billion to Macrovision, an anti-piracy software company whose officials said they have yet to evaluate whether to keep or sell TVG. If it's the latter, Tracknet would be the logical buyer, and the price would be much lower if the TVG portfolio of contracts does not include NYRA racing.

Maybe it makes sense for NYRA to join up with Tracknet, which might move the game closer to having a single account-wagering system with wide carriage over multiple platforms. Or maybe it makes more sense for NYRA to remain independent, or to re-up with TVG if it continues to exist.

That is a decision that needs to be made by NYRA or whoever is operating the tracks, however, not by a commission of amateurs serving at the direction of politicians who have aligned themselves with companies that stand to gain by the choice.

Anonymous said...

One of the reason NYRA is losing customers to Poker and elsewhere.

NYRA Takeout-
25% Pick 6 on carryover days, Pick 3, Pick 4, Trifecta, Superfecta.

Wake up NYRA.Drop the takeout to 15%.

Anonymous said...

Steve Crist is hardly a dispassionate commentator on things NYRA. His company, the Daily Racing Form, has the NYRA printing contract and is a creditor in the bankruptcy. One needs only to read his autobiography, Betting on Myself, to see the deep relationship he has with Charlie Hayward, NYRA’s President.

While I agree with Mr. Crist that politically appointed individuals shouldn’t be making the decisions on NYRA’s signal alignment or pricing, he’s simply nuts to argue NYRA has been effective in pricing.

Crist writes: “ ... New York Racing Association's ... signal price has never been raised because there is no issue surrounding it. NYRA's rates are among the highest in the country, commensurate with the quality and popularity of its racing, and are entirely consistent with industry norms.” Well, that’s just wrong. Many people, from blog commentators to academics such as Bennett Liebman of Albany Law School have questioned the NYRA signal pricing. Given NYRA’s argument that they have the premier signal in the United States, they should be on the leading edge of simulcast signal sale. Surprisingly, they’re not.

In fact, review of their recent Disclosure Statement filed in U.S. Bankruptcy Court finds nothing will be soon changing. NYRA writes: “Simulcast rates, the amounts charged to receive the Debtors signal, are projected to rise modestly from 4.5% of simulcast handle in 2007 to 4.9% in 2012. The assumption of rising simulcast rates is based on the fact that several large industry participants have indicated that they intend to increase their simulcast rates as a result of the changing dynamics of the industry. The Debtor, having one of the most valuable signals in the country, expects to benefit from this trend in the form of higher rates." Is anyone surprised that NYRA is waiting for ‘changing dynamics of the industry’ from ‘several large industry participants’ to benefit, rather than taking initiative themselves? Given that NYRA projects elsewhere an annual rate of inflation at two percent, even with their piggy-backed benefit they won’t even stay constant in terms of real dollars. Come to think of it, have the simulcast rate charges kept with the rate of inflation over the past two decades?

Crist continues: “As in every other state, experienced track officials negotiate simulcast contracts within a very narrow band of market pricing, and those contracts are routinely reviewed and approved by state regulators, in New York's case the State Racing and Wagering Board.” As a former high ranking NYRA official, Mr. Crist should know that the State Racing and Wagering Board does not have the legal authority to question the pricing within a simulcast contract, let alone reject one based on that pricing. The Board’s review is limited to ensuring that the receiving racetrack’s regulatory authority has approved the signal purchase.

Finally, when discussing industry address historical simulcast rate inequities, Crist writes: “There are antitrust issues involved if tracks act together to raise prices ...”. Perhaps he is a little quick to buy into the ‘we can’t even help ourselves’ argument of racetracks. The U.S. Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (No. 06–480) rejected an antitrust rule that had been in effect since a 1911 Supreme Court decision: that price-fixing agreements are per se violations of the law. The majority, in an opinion by Justice Kennedy, said that price-fixing must be weighed case by case, to decide whether its effects in the particular circumstances are likely to be anticompetitive. It’s been the rule of the land since decided on June 28, 2007.

Can NYRA wave a wand and make things perfect? No. Can they try something - something within their sole control? Yes.

I'd much rather see a proactive approach - trying to right the ship than just hear the same old 'woe is me' complaints from NYRA and their apologists.

Anonymous said...

Alan, thanks for keeping the media assault on NYRA in perspective. I still haven't heard the critics respond to the proposition that given the fact that Mr Anti-Corruption himself has given NYRA the nod, why isn't that evidence enough that NYRA has, with no mal intent, operated as best it could under the circumstances? We just continue to see the pols and media trying to score points against NYRA by rehashing the same old stuff, over and over. Steve Crist's criticism of Joe Bruno, on the other hand, certainly has some merit. His kinda off-the-wall proposals for splitting up the franchise, his shilling for Magna, then the Aussies, and so-on is the part about Joe Bruno I could never get and I think legitimately damages his credibility on what should be his issue. In the end he will have to buck up and get on board the NYRA train as NYRA has always been the odds-on favorite in Saratoga Springs, despite the media's best efforts to make NYRA the bad guys. /S/Green Mtn Punter

Anonymous said...

Green Mountain -

Will you accept that Eliot Spitzer is relatively known for his hubris?

Let's think this through -

Attorney General Spitzer was a vocal critic of NYRA. His office worked in conjunction with the U.S. Attorney's Office on the NYRA criminal investigation and participated in working out the deferred prosecution. He was laudatory of the deferred prosecution agreement - which resulted in the hiring of Getnick & Getnick as the federal monitor.

Fast forward. Rejecting NYRA post-monitor is impossible, especially if based in part on their past conduct. To do so would require admitting perhaps the deferred prosecution wasn't a great idea.

Can you imagine a world where Eliot Spitzer admits he made a mistake?

steve in nc said...

Anon, thanks for the solid analysis. Couldn't the pols in Albany force NYRA to raise its signal price legislatively by setting some sort of minimum rate on new contracts? If the takeout is regulated by law, why not the signal price as well?

And what price could the market bear? At a certain point, wouldn't the distant carriers just drop NYRA and hope at least some of the handle would shift to tracks with lower rates?

Anonymous said...

N.C. Steve -

Without a compelling reason, I don't think the State Legislature could set signal sale price. The signal is presently a private product, distinguished from the take-out, which is functionally the state tax. State tax is what the state can lawfully control.

Perhaps that's what Bruno's floating: if the franchise is on state lands, an argument might be made that the product result is a state permissions. Maybe the state's looking to get a better return on the sale. Who knows. Bruno hasn't really articulated what he meant.

Market? Yes, a critical element. NYRA (an all New York-based punters) claim the product is the best and 'everyone' needs it. It would be interesting to see if that's true. Reluctant tracks would bear the risk dumping the NYRA signal. Patrons seeking the NYRA product might not simply move to local, otherwise seeking an outlet for their wagers. Much easier to do now than in years past.

Finding the proper rate is simply good business practice. That's part of the non-profit model problem - there's no incentive to be creative to increase revenues or being concerned with the bottom line.

Anonymous said...

Is this true? From “A Losing Bet” New York Sun article - Adding insult to injury, NYRA has been unable or unwilling to learn from its mistakes. As part of the bankruptcy proceedings, NYRA was required to file a reorganization plan detailing losses incurred and their proposal to satisfy debt. In its proposal, NYRA completely ignored their employees' pension plans, which are under-funded by $95 million. Instead, they chose to ensure that only the president's retirement package was safe under the reorganization plan.

Alan Mann said...

>>Is this true?

NYRA prefaced its Disclosure Statement by saying:

"NYRA intends to satisfy its outstanding minimum funding contributions with respect to its pension plans and make provisions for all future minimum funding contributions."

Having said that, having not read all of the fine print, I'm not going to comment further other than to point out that the Sun piece was written by a consultant at Sheinkopf, which is Capital Play's PR agency, and the folks who brought you the anti-NYRA TV commercial. So I would take any claims in that opinion piece - really more like an infomercial - with that in mind.

Anonymous said...

Seemingly lost in many of the stories covering the audit is the fact that the Comptroller found NYRA to have OVERpaid the State in 2005. That certainly supports Hayward's assertion that this is just a dispute over what accounting practices the law requires.

Regardless of what one thinks of NYRA, it's hard to imagine that a quasi-governmental agency running a racing and/or wagering operation would be good for the sport. That model has been tried. It's called OTB.

You have to admire the ingenuity of where Bruno seems to be going. The land claims make it impractical to eliminate NYRA in favor of a patronage-generating entity, so he suggests that the NYRA trustees resign as part of the franchise deal and secures the right to appoint their replacements.

To me, the signal pricing issue is the biggest one in racing. The fundamental problem is that more of ADW and simulcast dollars go to the horsemen in the state where the bettor happens to live than to the horsemen putting on the show that the bettor wants to bet on. That kind of protection of local industry is prohibited by the Commerce Clause in most contexts, but not here, it and creates enormous roadblocks to racing getting where it needs to go.