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August 14, 2009

 

DiNapoli: NYC OTB Facing Mounting Losses, Insolvency Looms

The New York City Off-Track Betting Corporation (NYC OTB) is facing financial insolvency if current financial trends continue, according to an audit released today by New York State Comptroller Thomas P. DiNapoli. The NYC OTB’s operating expenses and accumulated losses have increased steadily in the last four years, resulting in an operating deficit of approximately $38 million. In total, the organization has an outstanding deficit of more than $228 million. DiNapoli’s audit also recommended significant management changes.

“New York City OTB is on very shaky financial ground,” DiNapoli said. “Even if cost-savings measures are implemented, it’s unlikely that it will remain financially solvent for long. This is a serious problem that needs in-depth examination. If the goal is to keep OTB viable, serious consideration must be given to changing the mandated state formulas and restructuring operations to coordinate different aspects of the racing industry.

“The off-track betting industry in New York has taken a beating in the last few years. It’s not the cash cow it used to be. The future of the industry is seriously in question, and there are jobs at risk and economic development opportunities being missed. NYC OTB provides millions of dollars in revenues to the horse racing industry, which in turn provides employment for thousands of New Yorkers. The industry is too important to fail. Something has to be done. Inaction will mean insolvency.”

NYC OTB is a public benefit corporation created in 1970 to generate revenue through pari-mutuel betting for New York City, the horse racing industry and the state. NYC OTB has 68 betting locations and accepts wagers over the phone and Internet. As of September 1, 2008, it had a total of 1,366 employees. There are six regional off-track betting corporations in the state.

In recent years, NYC OTB has been unable to cover all of its operating expenses without using surplus funds and delaying some statutory payments. Since 2004, its outside CPA firm has questioned its ability to keep operating. NYC OTB had planned to close in June 2008, but instead the state took it over on June 17, 2008.

The audit, which began after the state took over operations, examined the financial condition of NYC OTB from July 1, 2004 through October 24, 2008. Auditors reviewed current financial statements and actions taken by NYC OTB to reduce operating costs, as well as identified additional opportunities for possible cost reductions.

The review of the NYC OTB’s finances found:

  • Financial condition deteriorated: From fiscal years 2004-05 to 2007-08, NYC OTB collected about $1 billion a year in wagers, but accumulated growing operating deficits, totaling about $38 million. In fiscal year ended June 30, 2008, NYC OTB took in a total of $998.2 million in wagers. The winning bettors received approximately $760.9 million, and statutory distributions, totaling $128.6 million, were made to the horse racing industry ($93.2 million), New York City and local governments ($20.2 million) and New York State ($15.2 million). NYC OTB was left with $116.1 million to cover its operating expenses, which were $133.9 million, leaving it with an operating deficit for the year of $17.8 million.
  • Distribution formula changes not enough: The NYC OTB’s statutory distributions are a significant financial outlay. By far the most significant of these distributions are to the horse racing industry. Over a four-year period, distributions to the industry totaled $386 million and accounted for more than 72 percent of the NYC OTB’s total $533.5 million in statutory distributions. Legislative changes in June 2008 to allow the NYC OTB to retain more of its revenue have not had a significant impact on the organization because wagers are down and are expected to remain down due to economic conditions.
  • No comprehensive assessment of operating expenses: While management has taken action to address operating deficits, it has not performed a detailed assessment of its operations or developed a plan for achieving cost reductions by specific dates.

To achieve potential cost savings, DiNapoli recommends that NYC OTB:

  • Conduct a formal evaluation of executive, management and branch staffing.
  • Examine the wide variations in operation expenses for branch offices. For instance, when comparing operating expenses as a percentage of handle, some offices have operating expenses of 6 percent while others are as high as 27 percent.
  • Review consultant contracts to determine if they can be reduced or eliminated. Auditors examined three of the largest consultant contracts and found no written justification for the contracts, none had been selected through a competitive process and no evaluation was done as to whether these services could be performed in-house.
  • Determine if the organization needs 87 vehicles, including the 22 vehicles assigned to executive and management staff. Auditors were unable to find any written justification governing the assignment of vehicles. In addition, vehicle logs were not properly maintained and did not include information on who was going where and for what purpose. Each vehicle costs about $6,700 a year to maintain.

In its response to the audit, the OTB said it was re-examining all aspects of operations to identify cost saving opportunities. However, OTB officials said more significant actions such as changing the mandatory distribution system and aligning the business interests of the state’s various racing institutions were necessary to stave off ultimate insolvency.

Click here for a copy of the audit.


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