financial condition of new york state regional off-track betting corporations

8/9/2019 Financial Condition of New York State Regional Off-Track Betting Corporations

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DIVISIONOF LOCAL GOVERNMENT

& SCHOOL ACCOUNTABILITY

O F F I C E O F T H E N E W YO R K ST A T E C O M P T R O L L E R

2009-MS-10

Financial Condition

of New York StateRegional Off-Track

Betting Corporations

Thomas P. DiNapoli


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OFFICEOFTHE NEW YORK STATE COMPTROLLER2

State of New YorkOffice of the State Comptroller

Division of Local Governmentand School Accountability

May 2010

Dear Corporation Officials:

A top priority of the Office of the State Comptroller is to help local government officials manage

government resources efficiently and effectively and, by so doing, provide accountability for the

revenues and expenditures related to local government operations. The Comptroller oversees the

fiscal affairs of local governments statewide, as well as compliance with relevant statutes and

observance of good business practices. This fiscal oversight is accomplished, in part, through our

audits, which identify opportunities for improving operations and Board of Directors governance.

Audits also can identify strategies to reduce costs and to strengthen controls intended to safeguard

local government assets.

Following is a report of our audit entitled Financial Condition of New York State Regional Off-

Track Betting Corporations. This audit was conducted pursuant to Article V, Section 1 of the

State Constitution, and the State Comptrollers authority as set forth in Article 3 of the General

Municipal Law.

This audits results and recommendations are resources for Corporation officials to use in effectively

managing operations and in meeting the expectations of their constituents. If you have questions

about this report, please feel free to contact the local regional office for your county, as listed at

the end of this report.

Respectfully submitted,

Office of the State Comptroller

Division of Local Government

and School Accountability


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Audit Results

The financial condition of the States five regional OTB Corporations has substantially deteriorated

over the course of the last five years. Total handle received by the five Corporations declined by

almost $103 million (10 percent) in this period; moreover, in the first five months of 2009, handle

fell by 10 percent when compared to the same period in 2008. In addition, between 2004 and 2008,the Corporations were required to pay 56 percent of their remaining handle (total handle after

paying bettors) to the racing industry, the State, and local governments before paying operating

expenses. Although most of the Corporations reduced their operating expenses during that period,

the Corporations net operating revenues their collective bottom line declined by 67 percent due

to the combination of the declining handle and up front payments made to the racing industry

and governments.

External conditions have brought about much of the Corporations deterioratingfinancial condition.

Over the past five years, the amount bet on horse racing nationwide has decreased by about 10

percent, from $15 billion in 2004 to $13.6 billion in 2008. The Corporations must compete for

these declining handle dollars with other gaming entities (e.g., casinos), as well as with out-of-state advance deposit wagering companies that neither are regulated by, nor pay distributions to,

the State. Further, a 2003 law allows Corporations to take wagers on nighttime races, but only if

they pay harness tracks compensation at rates that are outdated and too high. Harness tracks can

also limit the Corporations ability to adjust their operations: harness tracks are able to veto the

sites of new OTB remote locations that cost less to operate because the Corporations do not own

or staff the sites. As conditions in the industry change, the legislation governing the Corporations

must also evolve to address the existing conditions.

To their credit, the Corporations have already implemented some cost savings measures, like

reducing staff, and have pursued a number of revenue enhancement opportunities, such as rewards

programs for patrons. However, the Corporations must be willing to take additional actions that

will cut costs and raise revenues. These steps include considering additional reward programs

to attract bettors, closing Corporation venues that lose money, expanding automated telephone

betting systems and remote wagering mechanisms that save money, and enabling low-cost, on-

line wagering. As of the end offield work, only Capital and Nassau offered on-line wagering. It is

also essential that the Corporations continue to pursue collaborative efforts that have the potential

to improve OTB marketing, save costs, and advance their collective bottom line. A healthier

bottom line will benefit the Corporations, as well as local taxpayers who benefit indirectly from

the continued payments made to the State and local governments.

Comments of Corporation Officials

The results of our audit and recommendations have been discussed with Corporation officials and

their comments, which are included in Appendix D, have been considered in preparing this report.


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DIVISIONOF LOCAL GOVERNMENTAND SCHOOL ACCOUNTABILITY 5

Background

Introduction

Articles V and VI of the State Racing, Pari-Mutuel Wagering

and Breeding Law (Racing Law), which were enacted in 1970

and 1973, authorize local governments within New York State

to operate systems of off-track pari-mutuel betting as a method

of raising revenues for the local governments, the States horse

racing industry, and New York State. The legislation was also

intended to prevent and curb unlawful bookmaking and illegal

wagering on horse races, and ensure that off-track betting (OTB)

activities were conducted in a manner compatible with the well-

being of the States horse racing industry.

Pursuant to the legislation, six regional off-track betting

corporations (Corporations) were created. The New York StateRacing and Wagering Board (Racing Board) has jurisdiction over

the Corporations, along with all other horse racing activities and

pari-mutuel betting activities in the State. As provided for under

the authorizing legislation, each of these Corporations is a public

benefit corporation governed by a Board of Directors whose

members are appointed by the governing bodies of the relevant

local governments. The Board of Directors of the New York City

OTB Corporation are appointed by the Mayor of New York City.

The five regional OTB Corporations outside New York City

include Capital, Catskill, Nassau, Suffolk, and Western.1

The Corporations offer off-track pari-mutuel wagering on

thoroughbred and harness races held at various race tracks in the

State, as well as at race tracks located outside the State that have

simulcast contracts with the Corporations. The Corporations

accept wagers at various physical locations, as shown in Table

1, and also accept wagers over the phone. Capital and Nassau

accept wagers through the internet, but, as of the end of field

work, Catskill, Suffolk and Western did not currently offer

internet-wagering services to their patrons.

____________________1 The Western OTB Corporation also owns and operates Batavia Downs

Gaming Facility (Batavia Downs) which conducts lives harness racing, and

simulcasts races to and from other racetrack facilities. In addition, Western

was granted a video gaming license to begin video gaming operations in May

2005.


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From 2004 through 2008, the five Corporations cumulatively

collected $4.9 billion in handle,2 which is the total amount

wagered on horse races. The winning bettors receive a major

percentage of the amounts wagered on each race. From the

remaining handle, the Corporations must make certain statutory

distributions to the States horse racing industry, which comprises

various racetracks and horse breeding funds, and to New York

State. These statutory distributions are made based on formulas

contained in the Racing Law. The Corporations must also paymonthly surcharge fees to counties that participate in the OTB

system, and additional surcharges to counties where racetracks

are located. The handle that remains, plus any other sources

of income, equals the Corporations operating revenues. After

paying operating expenses, each Corporation must distribute its

net operating revenues, less contributions for capital acquisitions,

to participating local governments. (See Appendix A for OTB

Terms and Definitions.)

The Laws of 2008 created the Task Force on the Future of Off-Track Betting (Task Force), whose five members are appointed

by the Governor, the State Senate and State Assembly. The Task

Force has been asked to analyze and make recommendations

concerning the optimal use of the States regional OTB system

with an emphasis on the systems capability to raise revenues

for State and local governments and strengthen the racing and

breeding industries in New York. The Task Force submitted its

report to the Governor in January 2010.

The objectives of our audit were to assess the financial condition

of the five regional Corporations outside New York City, and todetermine what actions the Corporations have taken to improve

their financial condition. Our audit addressed the following

related questions:

Objectives

Table 1 OTB Wagering Locations

Corporation Branches Remote Wagering Locations Tele-theater

Capital OTB 40 36 2

Catskill OTB 23 5 1

Nassau OTB 11 8 1

Suffolk OTB 13 15 1

Western OTB 35 7 1

____________________2 As presented in this report the term handle is synonymous with the term net

handle as used in the New York State Racing and Wagering Board Annual and

Simulcast Report.


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Comments of CorporationOfficials

Is the financial condition of the five regional OTB

Corporations deteriorating?

Have regional Corporation officials implemented plans to

improve their Corporationsfinancial condition by raising

revenues and reducing costs?

For the period January 1, 2004 to June 30, 2009, we interviewed

Corporation officials, reviewed the Racing Law, examined

Corporation records and reports and other documentation, and

analyzed audited financial statements for the five years ended

December 31, 2008.

We conducted our audit in accordance with generally accepted

government auditing standards (GAGAS). More information on

such standards and the methodology used in performing this audit

are included in Appendix E of this report.

The results of our audit and recommendations have been discussed

with Corporation officials and their comments, which are included

in Appendix D, have been considered in preparing this report.

Scope and Methodology


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Financial Condition

The Corporations financial condition determines their ability

to continue to make statutory and contractual payments, cover

operating expenses, and provide future revenue streams to

participating local governments. The financial condition of the

States five regional OTBs has substantially deteriorated over

the course of the last several years. Total handle for the five

Corporations declined by 10 percent in this five-year period;

further, in the first five months of 2009, handle fell by 10 percent

when compared to the same period in 2008. Various factors

account for the significant and continuing downturn in handle,

including a diminished interest in horseracing, competition from

unregulated internet gambling sites, and restrictions on the siting

of new remote wagering locations. After the Corporations paybettors, they pay out a large portion (56 percent over the five-year

period) of the remaining handle to the racing industry, the State,

and local governments. Operating revenues what remains after

Corporations make these payments declined by an average of

13 percent at four of the five Corporations between 2004 and

2008. Although most of the Corporations have reduced their

operating expenses, the Corporations net operating revenues

their collective bottom line declined by 67 percent during this

period.

We examine the reasons for the Corporations deterioratingfinancial condition below, and report on cost savings and revenue

enhancement opportunities the Corporations can introduce, or

continue to pursue, in the following section. However, given the

significant amount of the up front payments the Corporations

must make to the racing industry and government, and the extent

to which these payments reduce operating revenues, we believe

that Corporations will be unable to cut expenses fast enough

to continue as financially viable entities if no action is taken to

reduce these required payments.

All five Corporations have experienced declines in handle

over the five-year period 2004 through 2008. Collectively, the

Corporations have experienced a 10 percent decline in handle

approximately $102.6 million over this period. The following

chart shows the change in handle during the last five years.

Decline in Handle


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Catskill experienced the greatest percentage decline in handle

since 2004 (down 15 percent), while Suffolk saw the largest decline

in dollars, at $26.7 million. Details of the decline in OTB handle,by Corporation, for 2004 through 2008, are shown in Appendix

B. Further, this trend of diminished handle is worsening: each

Corporations handle from January through May 2009 was down

compared to the same period in 2008, as shown in Table 2.

Table 2 Decline in OTB Handle: May 2008 vs. May 2009

January - May 2008 January - May 2009 Difference % Change

Capital $78,457,217 $71,888,046 $(6,569,171) -8%

Catskill $54,979,786 $47,352,416 $(7,627,369) -14%

Nassau $125,778,178 $113,632,745 $(12,145,433) -10%Suffolk $77,250,593 $68,211,952 $(9,038,640) -12%

Western $61,303,903 $56,092,798 $(5,211,104) -9%

Total $397,769,677 $357,177,957 $(40,591,717) -10%

Economic changes and trends, competition, and restrictions for

siting remote wagering locations have all contributed to this

overall decline in the Corporations handle, as follows:

Economic and Trend Changes The downturn in the

economy, which began in the fall of 2008, continues to reducethe total amounts wagered on horseracing and at other venues.

Furthermore, there is a general decline in interest in horseracing,

as demonstrated by decreased attendance at most State racetracks.

Over the past five years, the total amount bet on horseracing

across the United States has declined from $15 billion in 2004

to $13.6 billion in 2008, a decline of almost 10 percent. In 2008,

U.S. total wagers were down 7 percent compared to the prior

year, while the Corporations handle was down 5 percent.

Off-Track Be tting Corporation Handle

2004-2008

$850,000,000

$900,000,000

$950,000,000

$1,000,000,000

$1,050,000,000

2004 2005 2006 2007 2008

Year

Dollars

Handle


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Competition In addition to competing with other entities in the

gaming industry, such as casinos, video gaming and government-

sponsored lotteries, the Corporations also contend with a

relatively new source of competition: out-of-state advance deposit

wagering (ADW) companies. The Racing Board decided in early

2008 to ease restrictions on ADWs to allow them to take internetwagers on races from New York State residents. Currently, the

ADWs are not licensed or regulated in New York State, and are

not subject to the Racing Law and other regulatory requirements,

as are the Corporations. The Corporations have sought an opinion

from the New York State Attorney Generals Office regarding the

legality of ADWs operations in the State.

The handle lost to ADWs could be significant. According to handle

figures published by the State of Oregon, where a hub of ADWs

currently operates, Oregon ADWs generated over $1.3 billion

in handle in 2008, about 10 percent of the total of $13.6 billionwagered in the U.S. in 2008. The total handle for New York State

tracks and the Corporations in 2008 was more than $2.4 billion,

representing 18 percent of the amount wagered nationwide.

Corporation officials estimate that, in 2008, they potentially lost

as much as $236 million in wagers processed through these sites.

While we are unable to confirm these estimates, any handle lost

to ADWs is money that the States racing industry and State and

local governments do not receive.

Remote Location Sites The Racing Law gives regional harness

tracks the authority to approve or deny placement of OTB

branches and remote wagering locations that are located within a

40mile radius of the harness track. Capital reports that regional

harness tracks have denied placements of remote wagering

locations at two hotels and two restaurants in the Albany area

in 2009. Remote wagering sites are less expensive to operate

because they are located in non-OTB establishments that the

Corporations are not required to staff. Capital officials stated

that their efforts to replace unprofitable branches with lower-cost

remote wagering locations are seriously limited because of the

veto power harness tracks hold regarding their placement.

The majority of the Corporations handle (about 76 percent)

is returned to bettors. After bettors are paid, handle is further

reduced by statutory distributions the Corporations pay to the

racing industry and the State, and by surcharges they pay to

local governments. For the five-year period, the Corporations

paid about $665 million, or more than 56 percent of their $1.18

billion in remaining handle, in the form of statutory distributions

Decline in OperatingRevenues


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and surcharges. The remaining handle plus income from other

sources equals total operating revenues. Total operating revenues

decreased by over $10 million (8 percent) between 2004 and 2008,

as shown in Table 3; excluding Western, the only Corporation

whose revenues grew over this period, operating revenues

decreased by more than 13 percent. The substantial amountsCorporations must pay up front to the racing industry, the

State and local governments significantly reduces Corporations

operating revenues and contributes to their deteriorating financial

condition.

Table 3 - OTB Financial Condition Analysis: 2004 2008

2004 2005 2006 2007 2008 % Change Total

tal Handle $1,009,545,163 $1,015,147,559 $996,036,929 $954,764,616 $906,948,324 -10% $4,882,442,591

:

urned to Bettors $766,336,760 $770,168,185 $755,559,749 $724,546,569 $688,422,930 -10% $3,705,034,193maining Handle $243,208,403 $244,979,374 $240,477,180 $230,218,047 $218,525,394 $1,177,408,398

:

utory Payments $102,100,136 $102,036,143 $101,984,058 $96,674,896 $95,458,654 -7% $498,253,887

harges Paid to

al Governments $21,731555 $21,212,662 $20,637,776 $19,880,619 $18,544,472 -15% $102,007,084

er Surcharges 3 $13,320,664 $13,523,544 $13,359,639 $12,601,541 $11,773,947 -12% $64,579,335

:

er Revenue: $16,698,920 $18,148,162 $20,805,506 $18,207,031 $19,721,487 18% $93,581,106

al Operatingenue $122,754,968 $126,355,187 $125,301,213 $119,268,022 $112,469,808 -8% $606,149,198

% Change N/A 3% -1% -5% -6%

____________________3 These other surcharges comprise monies derived from section 532 income

that the Racing Law directs can be set aside to fund the Corporations capital

acquisition funds, or retained to use for quarterly distributions from the

Corporations net revenues.

Statutory Distributions and Surcharges Statutory distributions

and surcharges represent a significant financial outlay for the

Corporations. During the five years ended December 31, 2008,

the Corporations paid a total of $665 million for statutory

distributions and surcharges. Of this amount, $498.3 million was

for legally required monthly distributions, as shown in Table 4.


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Table 4 - OTB Statutory Distributions: 2004-2008

2004 2005 2006 2007 2008 Total

Racing Industry

$85,892,324 $85,239,571 $85,992,594 $81,126,612 $79,669,776 $417,920,877

New York State

$15,805,854 $16,391,024 $15,617,891 $15,201,283 $15,477,193 $78,493,245

City of Albany $338,391 $349,972 $325,134 $304,435 $270,200* $1,588,132

City of Niagara

Falls

$63,567 $55,576 $48,439 $42,566 $41,485* $251,633

Total Statutory

$102,100,136 $102,036,143 $101,984,058 $96,674,896 $95,458,654 $498,253,887

* In 2008, these payments were included under operating expenses in the New York State Racing and Wagering Annual

and Simulcast Report. However, for comparison purposes in this global report, we have included these payments

under statutory payments and deducted them from operating expenses.

The majority of the amounts paid in statutory distributions (84

percent) were payments to the racing industry4 totaling $417.9

million. Distributions to the racing industry are made to:

In-state racetracks based on statutory rates depending on

the type of wager and other contractual agreements

Out-of-state racetracks based on specific contractual

agreements

Certain horse breeding funds created to support andpromote in-state horse breeding and racing.

Among the payments made to in-state racetracks are those

made to harness tracks in conformance with New York States

Hold Harmless law, enacted in 2003. This law authorized the

Corporations to accept wagers on nighttime (post times after

7:30 p.m.) thoroughbred racing. In return, the Corporations

were required to pay in-state regional harness tracks both a

percentage of their handle to compensate them for lost bets, and

other Maintenance of Effort payments. The Racing Board

calculates the amounts the Corporations must pay harness tracks

____________________4 These payments are commissions to the tracks and payments for breeding

and development funds. They include payments to in-state tracks based on

statutory rates, out-of-state tracks based on contractual agreements, and

designated horse breeding funds.


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based on the 2002 total handle figures.5 Although wagers on

nighttime races were expected to generate as much as $400

million in additional handle for the Corporations, the increase in

handle never materialized; in fact, handle declined significantly

since 2003. However, the Corporations are still paying harness

tracks based on handle amounts in 2002, a year when total handle(including NYC OTB handle) was over $2 billion, one of the

highest in OTB history.

Also included in the statutory distributions are payments to New

York State for pari-mutuel taxes and breakage, regulatory fees to

the Racing Board, and uncashed tickets. Capital and Western also

make contractual payments to the Cities of Albany and Niagara

Falls, respectively,6 in lieu of paying other local taxes.

The Corporations also pay monthly surcharges to participating

local governments (i.e., local governments that authorize OTBlocations and accept OTB surcharge revenue), and pay additional

surcharges to local governments with tracks. Monthly surcharge

payments to local governments totaled $102 million during this

five-year period. The Racing Law also allows the Corporations to

set aside a portion of handle to help pay for capital acquisitions/

improvements, and to retain another portion of handle to use

for quarterly distributions from the Corporations net revenues.

These other surcharges totaled $64.6 million during the same

period.

Operating Revenues Operating revenues have declined at

four of the five Corporations. From 2004 to 2008, total operating

revenues generated at these four Corporations declined by $13.4

million (13 percent) from $105.2 million in 2004 to $91.5 million

in 2008. Catskill and Suffolk each experienced a 16 percent decline

in operating revenues since 2004, while Capital and Nassau saw

13 and 9 percent declines, respectively. Only Western realized

an increase in operating revenue, which is primarily attributable

to the additional income generated by Batavia Downs Gaming

Facility, which Western owns and operates. Even after including

________________5 Several Corporations participated in a lawsuit against the Racing Board to

seek judicial review of the Racing Boards calculation methodology relative to

the Hold Harmless and Maintenance of Effort payments. In December 2008,

the New York State Court of Appeals overruled a prior decision and ruled

against the Corporations, requiring them to make the payments.6 Pursuant to the Racing Law, Capital and Western have contractual agreements

with the Cities of Albany and Niagara Falls whereby each City receives 1

percent of the tele-theater handle in these locations in lieu of any other local

tax.


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the 19 percent increase in Westerns operating revenues over this

period, the Corporations total operating revenues still dropped by

8 percent, as shown in Table 5.

Table 5 - OTB Operating Revenues: 2004-2008

2004 2005 2006 2007 2008% Change2004-2008

pital $25,640,958 $25,371,027 $24,983,353 $23,779,109 $22,395,470 -13%

tskill $18,530,607 $19,703,487 $18,124,840 $17,265,115 $15,568,064 -16%

ssau $34,853,007 $37,039,379 $36,890,436 $35,248,464 $31,677,772 -9%

ffolk $26,138,670 $25,976,848 $26,052,793 $23,237,360 $21,858,154 -16%

b-total $105,163,242 $108,090,741 $106,051,422 $99,530,048 $91,499,460 -13%

stern $17,591,726 $18,264,446 $19,249,791 $19,737,974 $20,970,348 19%

Total $122,754,968 $126,355,187 $125,301,213 $119,268,022 $112,469,808 -8%

The Corporations net operating revenues operating revenuesless operating expenses constitute their collective bottom

line, and a measure of their overall financial viability. The

Corporations bottom line dropped by $7.9 million (67 percent)

during this five-year period, as shown in Table 6, even though

they reduced their overall operating expenses. Suffolks bottom

line actually declined 1,475 percent between 2004 and 2008.

Only Western saw growth in its net operating revenues.

Decline in NetOperating Revenues

Table 6 - OTB Net Operating Revenues (Loss): 2004-2008

2004 2005 2006 2007 2008 % Change

Capital $1,862,561 $2,820,399 $2,701,454 $1,588,289 $992,021 -47%

Catskill $5,124,083 $6,551,870 $5,245,581 $4,601,979 $3,220,092 -37%

Nassau $7,001,493 $6,182,704 $5,403,873 $4,576,128 $146,099 -98%

Suffolk $137,024 $442,987 ($59,607) ($437,550) ($1,884,212) -1475%

Western ($2,163,620) ($1,377,042) $119,821 $157,154 $1,527,100 171%

Total $11,961,541 $14,620,918 $13,411,918 $10,486,000 $4,001,010 -67%

The Corporations net operating revenues dropped significantly

even though four of the five Corporations reduced their operating

expenses, which include payroll and other costs for branch and

corporation management. The Corporations operating expenses

declined by 2 percent overall during the 2004 2008 period. (See

Appendix C for details). Four Corporations cut their operating

expenses by 9 percent (Capital and Suffolk), 8 percent (Catskill)

and Western (1 percent), respectively; only Nassau saw an increase


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Table 7 - Total Distributions to Local Governments: 2004-2008

2004 2005 2006 2007 2008 Total

Surcharge Revenues

for Participating Local

Governments

$16,174,022 $16,150,441 $15,654,830 $14,796,587 $13,790,804 $76,566,684

Surcharge Revenues toLocal Governments with

Tracks

$5,557,533 $5,062,221 $4,982,946 $5,084,032 $4,753,668 $25,440,400

Total Surcharges Paid to

Local Governments $21,731,555 $21,212,662 $20,637,776 $19,880,619 $18,544,472 $102,007,084

Net Operating Revenues

Distribution 8 $15,617,925 $15,667,190 $13,367,539 $12,486,971 $5,895,987 $63,035,612

TOTAL

$37,349,480 $36,879,852 $34,005,315 $32,367,590 $24,440,459 $165,042,696

____________________7 The quarterly distributions are made after the Corporations deduct

contributions to the capital acquisition fund. The fund permits the Corporations

to reserve revenue to pay debt service costs and to buy capital assets without a

negative effect on cash flow required for operations.8 The Western OTB experienced losses in net revenues for distributions

in 2004 and 2005 of approximately $2.2 and $1.4 million while Suffolk

OTB experienced similar losses in 2005-2008 of approximately $473,000,

$477,000 and $1.9 million. When totaling distributions to local governments

we computed the distributions as zero.

in operating expenses, which rose 13 percent over this five-year

period from $27.9 million in 2004 to $31.5 million in 2008.

The Corporations are required to distribute their net operating

revenues to local governments quarterly.7 Local governments

receive these distributions in addition to the monthly surchargerevenues. In summary, the five Corporations have distributed

both monthly surcharge revenues and net operating revenues to

local governments totaling approximately $165 million over the

last five years, as shown in Table 7.

Because the Corporations net operating revenues declinedso dramatically, they had less money to distribute to local

governments: in total, local governments received about 62

percent less money from quarterly distributions in 2008 ($5.9

million) than they did in 2004 ($15.6 million).

In comparing all the payments local governments receive from

the Corporations - that is, both monthly surcharge revenues

and quarterly distributions local governments received 35

percent less revenue in 2008 ($24.4 million) than they did in


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To State Policymakers

1. Given the continuing decline in both the Corporations revenues

and the amounts they can distribute to the racing industry,

New York State, and local governments, we recommend that

policymakers should review:

The formula used to calculate the Corporations payments

to harness tracks, as required by the 2003 Hold Harmless

law

The Corporations' authority to site remote wagering

locations

Whether advance deposit wagering (ADW) companies

should be subject to the Racing Law and regulatory

requirements

The formulas used to calculate the Corporations up-

front statutory and surcharge payments to balance the

State's revenue objectives with the Corporations financial

viability.

Recommendation

2004 ($37.3 million). Without improvement in the Corporations

financial condition, including changes that help reverse the

decline in handle and the downward trend in operating revenues,

the Corporations financial viability and their ability to provide

revenues to local governments is in question.


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Cost Savings and Revenue Enhancement Steps

The five regional OTB Corporations have introduced various cost

savings measures and pursued revenue enhancement opportunities.

However, the actions taken thus far have not been adequate to

staunch the downward slide in net operating revenues. Below we

examine the steps the Corporations have already taken such as

enhanced rewards programs and broader use of new, lower-cost

betting mechanisms and others they should consider taking

like increased internet betting to remain financially viable. State

and local government officials have every interest in preserving

the Corporations financial health because OTB monies have been

a steady source of revenues.

Cost Cutting Actions Each Corporation recognizes thatpersonal service-related costs represent a significant portion of

its operating expenses and have reviewed these areas for cost

savings opportunities. For example, Capital has eliminated a

vice president position and reduced its workforce by about 14

percent since January 2007. Western reduced wage structures for

employees hired after April 2007; Suffolk imposed a hiring freeze,

reduced staffing and work hours, and began requiring employee

contributions toward health insurance benefits in June 2009.

Several Corporations have reviewed and adjusted their branch

operations to cut costs and make the branches more profitable.Capital has modified 12 branches since 2007, turning some into self-

service locations and reducing hours at others. Catskill has closed

three branches, and reduced hours at other locations. For example,

Catskill closed certain branches on Mondays and Tuesdays, which

are historically days when attendance and wagering are low.

The Corporations have also implemented a variety of other cost

savings actions, such as renegotiating rental costs for branch

locations and reducing the number of professional contracts.

Several Corporations have also cut their health insurance costs.For example, Capital reduced its health care costs by switching

from a self-financing plan to a health maintenance organization,

and Suffolk required its employees to contribute 15 percent toward

the costs of their health insurance premiums effective June 2009.

Corporations also closed six branches, converted 12 branches to

self-service locations to reduce costs, cut operating hours, and

combined operations of certain branches to save on manager salary

costs.


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Corporations have also worked to save money on ordinary

operating expenses. For example, Suffolk has reduced its

operating costs by processing payroll in-house. Nassau

required its managers to turn in their Corporation-supplied

vehicles. Nassau then sold all but three of these vehicles,

which it retained as pool cars. Suffolk reduced its vehiclefleet by 11 cars.

Revenue Enhancements In an effort to increase revenues and

patron interest and to contend with the increased competition

from out-of-state (e.g., ADW) wagering entities, several of

the Corporations have begun to introduce reward programs.

For example, Capital OTB began offering cash rewards9 in

2006; beginning with the 2007 season, Capital has also run

a promotion during the Saratoga racing season to help attract

new patrons. Nassau has recently launched a Player Rewards

program, known as the Players Club, using a structure thatgives more rewards to patrons who wager on-line than to

those who wager by phone. In addition, the program pays

out more rewards to patrons who place higher-revenue bets

or exotic bets, both of which generate more handle. Western

offered a new wager, a 10-cent superfecta,10 in July 2007 to

enhance patron interest and increase handle.

Improved Betting Mechanisms The Corporations have

begun to introduce newer betting mechanisms that may be

able to lower costs, provide better service and improve their

operating results. For example, each of the five Corporations

has introduced telephone betting systems with varying degrees

of automation. Suffolk and Nassau share an automated

telephone operation that provides patrons with the choice

of speaking to an operator or accessing automated wagering

services. In July 2005, Capital introduced a system that could

significantly improve the efficiency of its telephone betting

operations. Capitals automated system allows for touch-

tone, voice-activated, and operator-assisted wagering. The

system monitors queue volume and time, operator call time,

number of answered calls, and number of dropped calls, andit routes VIP accounts (patrons who generate large amounts of

____________________9 With cash rewards, patrons earn reward points based on the dollars they

wager at various tracks (outlined in the specific reward program). The

objective is to provide bettors with incentives to place more bets.10 A 10-cent superfecta allows the bettor to box four horses in a race

(i.e., pick the first four finishers in order) for $2.40, making this type of bet

much more affordable for average bettors.


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handle) to more experienced operators. The system also provides

comprehensive reporting and tracking options, and records all

transactions for audit and inquiry/complaint resolutions.

In addition, each of the five Corporations has introduced remote

wagering mechanisms that allow bettors to place wagers atestablishments such as bowling alleys and restaurants. These

mechanisms, when used as an alternative to staffed sites, provide

the advantage of cost savings, because the Corporation does not

have to staff, or pay rent for, a Corporation-operated building;

instead, the Corporation pays only a commission, based on the

handle generated or on a pre-approved set rate, to the owner of

the establishment. The presence of low-cost remote wagering

mechanisms in a variety of establishments also offers the potential

of attracting new patrons.

However, internet wagering offers the greatest potential forincreased handle at a relatively low cost. Although each of

the Corporations has an internet presence, only Capital and

Nassau OTB have introduced internet-wagering options for

their patrons. Capital began offering internet-wagering options

in January 2008, while Nassau launched its internet platform in

May 2008. Officials at Catskill, Suffolk and Western told us they

are exploring opportunities to introduce internet wagering in the

most cost-effective manner.

By more rapidly introducing its newer betting mechanisms and

enabling internet wagering, all the Corporations may be able to

improve their operating results and the Corporations overall net

operating revenues. Currently, the Corporations accept wagers at

branch offices, at tele-theaters, over the telephone, and through

remote wagering locations; two Corporations also accept internet

wagers. As shown in Table 8, some of these newer wagering

methods have lower costs to operate than the more traditional

methods. For example, branches and tele-theaters, which cost

an average of 10 percent and 7 percent of handle, respectively,

are the highest-cost methods of serving patrons. The operations

of telephone and remote wagering locations are, on average, farmore economical, since their operational costs are 5 percent and

4 percent of handle, respectively. Internet wagering is the least

costly, at only 2.5 percent of handle. By not offering internet

wagering capabilities, Catskill, Suffolk and Western are missing

the opportunity to reduce their operating costs, increase their

handle, or both.


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Table 8 - 2008 Operating Costs as a Percent of Handle

Branches Tele-theater Telephone Remote Site Internet

Capital 10% 6% 6% 6% 2%

Catskill 9% 5% 5% 3% N/A

Nassau 9% 7% 5% 4% 3%

Suffolk 10% 6% 5% 4% N/A

Western 12% 12% 5% 5% N/A

Average 10% 7% 5% 4% 2.5%

We also found that the Corporations may be able to save money

by modifying operations at certain branches. When we analyzed

the 2008 operating costs of individual branches, we identified

wide variations in operating expenses as a percent of handle. For

example, operating expenses at Capitals 40 branches ranged from

4 percent to 38 percent of the individual branchs handle. Other

Corporations had similarly large variations in their branches

operating costs, as a percentage of the branch handle, with rangesfrom 4 to 27 percent at Western; from 2 to 21 percent at Catskill;

from 3 to 15 percent at Nassau; and from 4 to 16 percent at Suffolk.

Several Corporations had branch locations where expenses were

greater than revenues in 2008. Although Corporation managers

have acted to close or make modifications at under-performing

branches, further cost-cutting steps may be needed.

Collaborative Efforts Together, the five Corporations have

the opportunity to collaborate on a variety of common issues to

advance their collective bottom line. According to Corporationofficials, they have discussed establishing a unified platform

for tote systems11 and internet wagering and developing shared

marketing and branding campaigns.

Corporation officials told us that they have worked together,

and will continue to do so to improve their operations and

profitability. According to Corporation officials, they routinely

work with the New York City OTB to negotiate simulcast signals

for all six of the regional Corporations. Officials also told us

that the Corporations joined in a statewide marketing effort when

they took part in a Pick 6 Contest for the Breeders Cup anda statewide handicapping contest; more recently, they jointly

____________________11 Tote systems run pari-mutuel betting, calculating payoff odds, displaying

them, and producing tickets based on incoming bets.


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developed a request for proposal for a statewide totalizator12

contract for all six Corporations, including New York City.

However, this proposal has since stalled because New York City

OTB entered into bankruptcy proceedings in December 2009.

In addition, Corporation officials said there has been continuous

discussion about developing a unifi

ed platform for OTB internetwagering. With Capitals and Nassaus decision to pursue internet

wagering platforms of their own, the three remaining Corporations

are discussing whether they should develop their own individual

internet-wagering options, develop a joint platform or join the

existing platforms to offer internet-wagering capabilities of their

own. Other collaborative efforts under discussion include the

joint purchase of insurance, a joint public relations plan and a

24/7 television channel for the Corporations, similar to a channel

that Capital currently operates.

The Corporations have reduced their expenses, and have, to agreater or lesser extent, pursued revenue enhancement and cost-

cutting measures. However, given their recent history of declining

handle and net operating revenues, the Corporations must take

stronger actions to keep and/or attract patrons; economize

wherever possible by closing unprofitable locations; initiate or

expand internet operations; and save money through collaboration.

If the Corporations can improve their financial condition, State

and local taxpayers will continue to receive significant statutory

distributions and surcharge revenues that governments count on

to help balance their budgets.

2. Corporation management should continue efforts to increase

revenues through innovative marketing ideas (e.g., cash

rewards).

3. Corporation management should continue to focus on increasing

revenues from the more cost-effective telephone betting,

internet betting and remote wagering location operations.

4. Catskill, Suffolk and Western management should explore

opportunities to implement internet-wagering capabilities.

____________________12 A totalizator is a computer system that computes the wagering and payoffs

in pari-mutuel wagering. Having one statewide totalizator would save money

by consolidating the payoff calculation function for all regional OTBs. Patrons

could also have one account for all New York State tracks and OTBs, and be

able to cash tickets at any of these entities.

Recommendations


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5. Corporation management should continue to analyze branch

operations and consider reducing costs at under-performing

branches by converting them to remote wagering locations or

closing them altogether.

6. Corporation management should perform a comprehensiveassessment of all Corporation operating areas to identify

further cost savings opportunities.

7. Corporation management should collaborate to identify cost

savings and revenues enhancement opportunities, as well as

cost efficiencies, where appropriate.


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APPENDIX A

OTB TERMS AND DEFINITIONS

Handle Handle is the amount wagered by off-track betting patrons through branches, remote

wagering sites, tele-theater, telephone, and internet venues (refered to as net handle in the NewYork State Racing and Wagering Board Annual and Simulcast Report).

Participating Local Government A participating local government has decided to take part in

off-track betting operations.

Non-participating Local Government A non-participating local government has decided not to

take part in off-track betting operations.

Statutory Distributions Statutory distributions are based on complex formulas in the States

Racing Law. They are paid to New York States horse racing industry, which includes various race

tracks and horse breeding funds, and to the State.

Surcharge Fees Paid to Local Governments The Corporations must impose a 5 percent surcharge

on the portion of pari-mutuel wagering pools that is distributable to people who placed bets at

OTB facilities. On a monthly basis, the Corporations distribute the surcharge fees they collect to

participating local governments, and pay an additional fee to local governments where tracks are

located.

Operating Revenues Operating revenues comprise the handle that remains after the Corporations

makes required payments (paying winning bettors, allocating statutory distributions, and paying

surcharge fees), along with any types of miscellaneous income.

Operating Expenses These expenses include the Corporations payroll, utilities, etc. for both

Corporation executive offices and for branch, tele-theater and remote wagering locations.

Net Operating Revenues Operating revenues less operating expenses results in net operating

revenues.

Capital Acquisition Fund This fund permits the Corporations to reserve revenues for the payment

of debt service and the acquisition of capital assets without negatively affecting the Corporations

cash flow required for operations.

Distribution to Local Governments This distribution pays out the Corporations entire net

operating revenues (after contributions are made to the capital acquisition fund) to participating

local governments.


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APPENDIX B

OTB HANDLE, BY CORPORATION: 2004 - 2008

2004 2005 2006 2007 2008 TOTALCapital $212,235,503 $213,061,004 $209,922,787 $201,839,522 $190,544,474 $1,027,603,290

Catskill $143,119,690 $146,522,643 $143,032,748 $131,807,834 $121,869,536 $686,352,451

Nassau $299,355,534 $311,114,349 $307,674,951 $293,523,497 $281,957,687 $1,493,626,018

Suffolk $205,292,864 $199,046,909 $195,177,802 $188,158,721 $178,590,944 $966,267,240

Western $149,541,572 $145,402,654 $140,228,641 $139,435,042 $133,985,683 $708,593,592

TOTAL $1,009,545,163 $1,015,147,559 $996,036,929 $954,764,616 $906,948,324 $4,882,442,591


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APPENDIX C

OTB NET OPERATING REVENUE (LOSS),

BY CORPORATION: 2004 - 2008

Year Capital Catskill Nassau Suffolk Western Total

2004

Operating

Revenues

$25,640,958 $18,530,607 $34,853,007 $26,138,670 $17,591,726 $122,754,968

Operating

Expenses

$23,778,397 $13,406,524 $27,851,514 $26,001,646 $19,755,346 $110,793,427

Net Operating

Revenues

$1,862,561 $5,124,083 $7,001,493 $137,024 ($2,163,620)

$11,961,541

2005

OperatingRevenues

$25,371,027 $19,703,487 $37,039,379 $25,976,848 $18,264,446 $126,355,187

Operating

Expenses

$22,550,628 $13,151,617 $30,856,675 $25,533,861 $19,641,488 $111,734,269

Net Operating

Revenues

$2,820,399 $6,551,870 $6,182,704 $442,987 ($1,377,042)

$14,620,918

2006

Operating

Revenues

$24,983,353 $18,124,840 $36,890,436 $26,052,793 $19,249,791 $125,301,213

Operating

Expenses

$22,281,899 $12,879,259 $31,486,563 $26,112,400 $19,129,970 $111,890,091

Net OperatingRevenues $2,701,454 $5,245,581 $5,403,873 ($59,607) $119,821 $13,411,122

2007

Operating

Revenues

$23,779,109 $17,265,115 $35,248,464 $23,237,360 $19,737,974 $119,268,022

Operating

Expenses

$22,190,820 $12,663,136 $30,672,336 $23,674,910 $19,580,820 $108,782,022

Net Operating

Revenues

$1,588,289 $4,601,979 $4,576,128 ($437,550)

$157,154 $10,486,000

2008

Operating

Revenues

$22,395,470 $15,568,064 $31,677,772 $21,858,154 $20,970,348

$112,469,808

Operating

Expenses

$21,403,449 $12,347,972 $31,531,673 $23,742,366 $19,443,248 $108,468,708

Net Operating

Revenues

$992,021 $3,220,092 $146,099 ($1,884,212)

$1,527,100 $4,001,100

% Change in NetRevenues: 2004-08 -47% -37% -98% -1475% 171% -67%


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APPENDIX D

RESPONSES FROM CORPORATION OFFICIALS

A draft copy of this global report was sent to local officials in the five Corporations we audited. We

received responses from Suffolk, Capital, and Catskill officials, and have provided excerpts fromtheir responses below. Although Western and Nassau officials had the opportunity to respond, they

chose not to do so.

Suffolk OTB

However, despite our ongoing and largely successful efforts to reduce costs, we will be unable

to become profitable in the future unless the State Legislature and the Governor addresses the

antiquated and inequitable statutory revenue distributions all OTBs are required to make.

Capital OTB

Capital OTBs management has reviewed the draft and believes that the issues discussed in the

report outline the relevant circumstances (economic changes and trends, competition, restrictions

for sitting remote wager locations and the statutory distributions and surcharges [that] represent

a significant financial outlay for the Corporations) that have resulted in the financial decline

within the States off-track betting corporations.

On page 16 of the report the Audit outlines a number of areas that State Policy makers should

review. While we appreciate the audit correctly raising these issues and highlighting them as

having a detrimental impact on OTB business, I would submit that the time for reviews anddiscussions are long past. It is time for the State Legislature and Executive Branch to take action.

As noted in the Audit Report, OTBs must be accountable and must continue to build on the

steps they have taken to become more cost effective and efficient. To point, the OTBs have taken

considerable actions to become more efficient and have entered into a Joint Venture Agreement

or JVA to solidify that approach. Thus far four of the States off-track betting corporations have

signed onto the JVA These Corporations are committed to find new and innovative ways to

run our operations more efficiently, promote New York racing and provide the best in customer

service.

Catskill OTB

a brand new harness racetrack and eight video lottery racinos at racetracks commenced

operations across New York Statethe amounts of monies wagered at these such facilities has

negatively impacted wagering at ALL prior existing racing and wagering facilities within New

York State.


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Despite cost cutting, the required statutory payments are depleting the monies available for

distribution to State and Local Government.

With the current statutory payment schedule, we cannot afford what the out of state ADWs offer,

as they do not have the same payment obligations we have.

Under the current payment structure all other recipients of OTB monies, New York State,

racetracks, and breeders all get their share off the top.


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APPENDIX E

AUDIT METHODOLOGY AND STANDARDS

We interviewed officials at the Regional Off-Track Betting Corporations to gain an understanding

of the operations at each Regional location. We reviewed the State Racing Law to familiarizeourselves with the statutes that impact the OTBs, and we reviewed the Corporations records and

reports. Our review of the Corporations records and reports included the following:

Read the Board of Directors meeting minutes and any relevant policies adopted by the

Board

Analyzed total handle figures

Reviewed and analyzed the Districts financial condition from 2004 - current and identified

trends in operating revenues, statutory distributions to the racing industry, operating

expenses and net profit/losses

Obtained an understanding of the Corporations budget process and monitoring. We

reviewed budget status reports and analyzed the 2004-08 budget to actual. We compared

major revenue estimates in the 2009 budget with the last completed fiscal years actual

(2008) revenue figures.

o Additionally, we compared the major revenue estimates in the 2009 budget to the trend

in actual revenues over the past five years (2004-2008). We looked for unreasonable

decreases or increases, and investigated significant variances.

o We identified the Corporations major expenditures, and compared expenditure

estimates in the 2009 budget with the last completed fiscal years (2008) actual

expenditure figures. Additionally, we compared the major expenditure estimates in

the 2009 budget to the actual expense trends over the past five years (2004-2008), and

checked for unreasonable decreases or increases or a trend of no increases. We then

investigated significant variances.

o We reviewed debt service, personal services, retirement and employee benefits

expenditures to determine if estimates were reasonable.

Identified revenues and expenditures attributable to phone, internet, branches and remotewagering sites

Reviewed and analyzed the OTB revenues received by State and local governments from

2005 2009 to identify trends, and the impact of any trends on localities

Reviewed CPA and prior OSC reports


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Reviewed New York State Racing and Wagering Annual and Simulcast reports for the five

years ended December 31, 2008

Asked Corporation officials about the Corporationsfinancial outlook and external concerns

Inquired as to any pending legal concerns

Tested data reliability of the Corporations audited financial statements and supporting

schedules

Reviewed debt schedules.

We conducted our performance audit in accordance with generally accepted government auditing

standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufficient,

appropriate evidence to provide a reasonable basis for our findings and conclusions based on our

audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings

and conclusions based on our audit objectives.


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APPENDIX F

HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT

To obtain copies of this report, write or visit our web page:


Public Information Office

110 State Street, 15th Floor

Albany, New York 12236

(518) 474-4015

http://www.osc.state.ny.us/localgov/


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APPENDIX GOFFICE OF THE STATE COMPTROLLER

DIVISION OF LOCAL GOVERNMENT

AND SCHOOL ACCOUNTABILITY

Steven J. Hancox, Deputy ComptrollerJohn C. Traylor, Assistant Comptroller

LOCAL REGIONAL OFFICE LISTING

GLENS FALLS REGIONAL OFFICEKarl Smoczynski, Chief Examiner


One Broad Street Plaza

Glens Falls, New York 12801-4396

(518) 793-0057 Fax (518) 793-5797

Email: [email protected]

Serving: Clinton, Essex, Franklin, Fulton, Hamilton,

Montgomery, Rensselaer, Saratoga, Warren, Washingtoncounties

ALBANY REGIONAL OFFICEKenneth Madej, Chief Examiner


22 Computer Drive West

Albany, New York 12205-1695

(518) 438-0093 Fax (518) 438-0367


Serving: Albany, Columbia, Dutchess, Greene,

Schenectady, Ulster counties

HAUPPAUGE REGIONAL OFFICEIra McCracken, Chief Examiner


NYS Office Building, Room 3A10

Veterans Memorial Highway

Hauppauge, New York 11788-5533

(631) 952-6534 Fax (631) 952-6530


Serving: Nassau, Suffolk counties

NEWBURGH REGIONAL OFFICE

Christopher Ellis, Chief Examiner


33 Airport Center Drive, Suite 103

New Windsor, New York 12553-4725

(845) 567-0858 Fax (845) 567-0080


Serving: Orange, Putnam, Rockland, Westchester

counties

BUFFALO REGIONAL OFFICERobert Meller, Chief Examiner


295 Main Street, Room 1050

Buffalo, New York 14203-2510

(716) 847-3647 Fax (716) 847-3643


Serving: Allegany, Cattaraugus, Chautauqua, Erie,

Genesee, Niagara, Orleans, Wyoming counties

ROCHESTER REGIONAL OFFICEEdward V. Grant, Jr., Chief Examiner


The Powers Building

16 West Main Street Suite 522

Rochester, New York 14614-1608

(585) 454-2460 Fax (585) 454-3545


Serving: Cayuga, Chemung, Livingston, Monroe,

Ontario, Schuyler, Seneca, Steuben, Wayne, Yates

counties

SYRACUSE REGIONAL OFFICE

Rebecca Wilcox, Chief Examiner


State Office Building, Room 409

333 E. Washington Street

Syracuse, New York 13202-1428

(315) 428-4192 Fax (315) 426-2119


Serving: Herkimer, Jefferson, Lewis, Madison,

Oneida, Onondaga, Oswego, St. Lawrence counties

BINGHAMTON REGIONAL OFFICE

Patrick Carbone, Chief Examiner


State Office Building, Room 1702

44 Hawley Street

Binghamton, New York 13901-4417

(607) 721-8306 Fax (607) 721-8313


Serving: Broome, Chenango, Cortland, Delaware,

Otsego, Schoharie, Sullivan, Tioga, Tompkins

financial condition of new york state regional off-track betting corporations

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