Playing the Percentages

This is the sign that was posted at Vernon Downs last week by track owner Jeff Gural. I think that most reasonable people on either side of the issue would agree that it was Gural, and not Joe Faraldo, the attorney for the Harness Horse Association of Central New York (HHACNY) (and the President of the Standardbred Owner’s Association of New York), who ordered the barn area shut. Gural also ended the fall race meeting early in defiance of the State Racing and Wagering Board, and is threatening to shutter the casino next month.

Faraldo called the action "childish." On Monday, after he argued that the closure was in violation of the HHACNY's contract with the track, a judge ordered Gural to keep the barns open and to resume maintaining the track pending a full court hearing scheduled for Friday.

The dispute centers around the casino bill, championed by Gural and opposed by the horsemen, which was passed by the Senate last week (but not taken up by the absent Assembly). It would increase some New York tracks' revenue cut from their racino operations. But Faraldo and Gural have actually been tangling since late 2005. A group led by the latter had entered into an agreement to purchase the track, which had been dark since 2004. When negotiations with the HHACNY on purse funding broke down, Gural helped facilitate the formation of a rival group; the horsemen claim he funded it. The State Racing and Wagering Board eventually denied the new group's certification, and Gural was forced to negotiate with Faraldo's group; the hard feelings on his part obviously persists.

Gural claims that he's losing $1 million a month and needs the added money the bill provides to stay open. But the horsemen are piqued at the 8.5% contribution to purses that Bill #S6512-A provides, and are particularly galled by the fact that Vernon Downs is singled out for the most special of the special treatment it contains. The current statutory rate calls for racinos to retain a 32% cut of VLT net revenues, plus an additional 8% for marketing. The latter increases to 10% across the board. However, the legislation provides carve-outs to benefit certain tracks deemed to need additional support - 36% for racinos with less than 1,100 machines; 40% for tracks with a population less than one million within 40 miles. (All figures are for the first $50 million in annual revenue.) It also provides 42% for tracks located within 15 miles of an Indian gaming facility; and that's the kicker as far as the legislation's opponents are concerned. Vernon Downs is located a virtual stone's throw from the Turning Stone casino - an 11 minute drive according to Google Maps - and is the only track eligible for the highest rate. (Yonkers, Finger Lakes, Saratoga Harness, and Aqueduct (some day) would remain at 32%.)

The horsemen are furious that Gural would receive special treatment to basically bail him out of the flawed, to put it mildly, business decision to open a racino within shouting distance of a full-blown Indian casino (a sentiment shared by others, including Assemblyman Gary Pretlow, chairman of the Committee on Racing and Wagering). At the time, Gural said:

"Hopefully, we'll be able to offer a different product and people will go both to Turning Stone and us.....Turning Stone attracts a lot of people to the area and hopefully they will take a ride over to Vernon if they want to watch some racing." [Oneida Daily Dispatch]

Wishful thinking indeed. Gural also fancifully expressed hope that bettors would patronize his racino given the fact that the revenue is taxed for education, and Turning Stone is not. Now, he complains that he can't compete against an operation that isn't taxed.

Faraldo and the horsemen see their 8.5% share as a reduction from the intent of the original VLT legislation, passed in 2001 but declared unconstitutional by a state judge in 2004, which, they contend, provided for an effective rate of 9.25%, which they want set as the minimum standard. That was actually a blended rate in the 2001 bill - the actual percentages were 7.50% for the first three years, 7.75% for the next two, and 10% over the next ten. The state legislature amended the law to address the court's concerns, but had to strike those required revenue splits in order to do so. Thus, the splits were then determined through negotiations between individual tracks and their horsemen (or, at least in one case, at Monticello, by arbitration after a dispute in which the horsemen withheld their approval for out-of-state simulcasting of the track's signal). The rates currently range from 8.25% (Vernon, Yonkers, Monticello, Tioga), to 8.5% (Saratoga), to 9.25% (Buffalo Raceway).

In this rebuttal to Faraldo's statement linked to above, Gural decries the losses he's suffered at Vernon and at Tioga Downs, points out that the 8.5% is actually an increase from the current rate, and describes improvements he intends to make to the barn area. However, his arguments fall apart when he writes that why "the State would be taking money from education to give to the horsemen is anybody’s guess." It's Vernon Downs which stands to reap the greatest benefits; and the horsemen's request seems paltry in comparison to the 12% total increase the track stands to receive.

Having said all of that, the bill also contains a provision which allows tracks and horsemen to negotiate deals above or below the stated 8.5% share. So, like everything else political that has to do with horse racing in NY, that brings us back to the franchise issue. The MOU which proposes to extend NYRA's term for 30 years includes a cut of only 6.5% for the horsemen. (In fact, the actual percentage may actually drop going forward, a somewhat complex mathematical exercise which we'll try to get to in a later post.) Charles Hayward explained in a September article in Thoroughbred Times.

NYRA President Charles Hayward said that NYRA also gets a much lower share of VLT revenues under the Spitzer plan. NYRA would receive 7%, but 4% would have to go toward capital improvements, leaving 3% for operations.

“The VLT splits for the horsemen we negotiated as aggressively as we could,” Hayward said. “The government wanted them to be lower; we wanted them to be higher. The horsemen we’ve talked to, although they realize that it’s less, what’s more important is to get this process going and get this thing built, starting to get some money to purses.

“Because even 6.5% … we’re still going to have a purse increase of about $30-million. That’s an increase of almost 30%. It’s less than the other deal, but the financial dynamics the components of the other deal were quite different.” [Thoroughbred Times]

John Pricci, in a column dated September 13, pointed out that NYRA's original plan when MGM was slated to run the racino, was more beneficial to the horsemen, and to breeders too.

Originally NYRA had agreed to distribute more, on a sliding scale 7.5% of gross gaming revenues to purses for the first three years, 7.75% in years four and five, and 10 percent in year six and beyond. The share to the breeders was constant at 1.25% [1% under the MOU].
.....
One of the four franchise bidders, Excelsior Racing, was awarded the rights by the Ad Hoc Committee on Racing appointed by previous Governor George Pataki. Did Spitzer’s advisors and the inspector general ever bother to check the proposal made by the original awardees?

Excelsior’s proposal not only promised the same higher purse distributions from VLT revenue as the original NYRA accord, but it proposed to raise the percentage of the gross gaming revenue to the New York Breeding and Development Fund from 1.25% to 2% which, based on projections, meant $11 million more for the breeders. [HorseRaceInsider.com]

And the thoughts of the NY Thoroughbred Horseman's Association (NYTHA)? I don't really know. The NYTHA has been rather silent since its split from Empire and the departure of its outspoken former president Richard Bomze. I'm sure that Joe Faraldo would have something to say. He might even order the barn area to close.