FOR RELEASE:

Audit Finds NYRA Routinely Violated State Law And Its Own Policies In Purchasing Millions In Goods And Services In 2002-2004

Comptroller Cites Association’s Use of No-Bid Contracts, Notes NYRA’S New Leadership Has Begun to Implement Reforms With Help of Federal Monitor

New York Racing Association officials purchased millions of dollars of goods and services over a two-year period through no-bid contracts, including one for $797,913 to a relative of the former NYRA chairman, and often paid vendors with no written contracts and without any evidence that the goods or services were actually provided, according to an audit released today by State Comptroller Alan G. Hevesi.

In an audit that covered NYRA operations from January, 2002 through December, 2004, Hevesi said that the NYRA routinely violated State law and its own policies in purchasing goods and services and spent extravagantly on items such as trophies.

“NYRA has an exclusive franchise to operate the State’s premier thoroughbred race tracks, and in return NYRA is legally required to operate in an efficient and economical manner so it can return as much revenue as possible to the State. When NYRA doesn't follow the law and its own rules, taxpayers are cheated,” Hevesi said. “We found that NYRA purchased many goods and services that were unnecessary for its operations, were not documented as being received, or were simply too expensive, especially for a racing association operating at a continuous deficit.”

As part of a court-imposed deferred prosecution agreement entered into between NYRA and the United States Attorney for the Eastern District of New York in December of 2003, the Association currently is under the supervision of a Federal Monitor, the law firm of Getnick & Getnick. Pursuant to the deferred prosecution agreement, the Monitor reports to the Office of the State Comptroller, the United States Attorney’s Office for the Eastern District of New York and Federal District Court Judge Arthur D. Spatt. NYRA’s new leadership is working with the Federal Monitor to come into compliance in all its procurement operations.

“Under the watchful eye of the Federal Monitor, NYRA has begun to improve its operations and practices. I want to thank the Monitor, Getnick and Getnick, for its excellent work, and the Office of the United States Attorney for its continued oversight. I also want to recognize NYRA’s new leadership for its stated commitment to reform and for starting to take the actions necessary to support that commitment,” Hevesi said.

NYRA spends about $115 million annually on goods and services. The Parimutuel Racing, Wagering and Breeding Law requires NYRA to award contracts for goods and services costing more than $250,000 via a process of competitive bidding. In 1998, NYRA officials developed their own procurement policy requiring competitive bidding for purchases over $10,000 and provided guidelines for routine purchases.

The audit has found that NYRA routinely disregarded the competitive bidding requirements set forth in the Racing Law and in its own purchasing policies. Further, the audit found that neither the procurement policy in place for most of the audit period, nor an alternate set of procedures that NYRA claims to have used in procuring goods and services was adequate to ensure that NYRA purchases were made at the best possible price.

Specifically, the audit found:

• Violations of Law and Policy. In a sample of 58 transactions totaling $3.8 million, auditors found that 49 transactions totaling $3.5 million (92 percent of the value) contained one or more violations of the Racing Law and/or NYRA’s procurement policy. The 58 transactions were a judgmental, not a random sample, so it would not be appropriate to assume that 92 percent of the $230 million spent over the two years covered by the audit involved violations of law or procedure. However, it is fair to assume that the problem was not limited to the transactions sampled.
• No Competitive Bidding. In 38 of the 58 transactions, NYRA failed to follow its own competitive bidding policies. In 22 of these transactions, NYRA awarded contracts valued at more than $250,000 without using a competitive bidding process, in violation of statute. For example, during the audit period NYRA paid $797,913 in a no-bid contract to a web services company owned by the daughter and son-in-law of NYRA’s Chairman and Chief Executive Officer at that time.
• No Written Contracts. Twenty-two of the sampled transactions met NYRA’s own criteria to be considered long-term relationships and to involve significant dollar value, but in each case money was paid without any written contract. For example, one vendor providing promotional services to NYRA received $1.6 million without a contract.
• Excessive Spending. The Association used operating funds to pay excessive amounts on trophies, including one that cost NYRA $13,500. NYRA could have saved at least $400,000 a year by splitting the cost of trophies with the owners, and therefore increased its franchise fee payments to the State. Auditors also noted that NYRA officials spent $5,413 for a trustee’s retirement gift of a silver tray and gold cufflinks.
• Unnecessary Spending. Auditors also identified instances of NYRA performing unnecessary services, such as transporting horses between its tracks. Usually owners pay for transporting their own horses. NYRA paid two horse transporters $384,244 during the audit period.
• No Support for Vendor Payments. For $77,885 spent through six of the 58 transactions, there was no evidence that the products or services were actually received. In one case, NYRA paid a vendor $10,000 for media advertising services based solely on the vendor’s invoice with no documentation supplied to show that the services were provided.
• Lack of Controls Over Spending. The Association maintained two separate checking accounts that Aqueduct and Saratoga facility managers used to procure goods and services outside the NYRA purchasing department and with no controls. Auditors found that of the spending from these accounts they checked, $12,788 of a total of $25,593 either was not supported by vendor receipts or was not necessary for NYRA business.

“Past NYRA executives operated in a culture that routinely violated laws and regulations, shortchanging the State and taxpayers over and over again,” Hevesi said. “Our previous audits have shown a long history of management so lax that it led to criminal investigations and the indictment not only of NYRA officials, but of NYRA itself.”

An OSC audit of the Association issued in 1997 found similar problems with purchasing practices, including instances of favoritism, no-bid contracts, and an award made to a contractor that did not legally exist. Through the work of the Federal Monitor, NYRA has pledged to follow the Racing Laws competitive bidding requirements.

Auditors also found that NYRA department heads did not have copies of its procurement policy and that not only were purchasing department staff not formally trained in implementing the policy, but that they followed different policies that were not written down.

Unnecessary spending reduces the franchise fee NYRA is required to pay to the State in exchange for exclusive rights to operate the racetracks. A previous Hevesi audit found that NYRA understated franchise fees for 2000 and 2001 by a combined total of $15.3 million. NYRA officials have pledged to recalculate the Association’s tax returns after the Comptroller issues further audits of the Association to determine how much NYRA should remit to the State and the Federal governments for those years.

Auditors noted that while many of the failures cited in this audit occurred under prior management, some of the instances occurred under the current management. Auditors also noted that the procurements reviewed during the audit period occurred before the Federal Monitor began its extensive work to reform NYRA’s operations. Auditors recommend that NYRA’s new management investigate the questionable procurement activities, develop additional controls needed to prevent their recurrence, and take corrective or disciplinary action, as needed.

Among the auditors’ recommendations were that NYRA officials:

• Establish a control environment that fosters compliance with the Racing Law, including competitive bidding requirements, and require all NYRA employees to sign a Code of Ethics.
• Unless appropriate documentation is obtained, recoup the $90,663 in disallowances noted in this report from the contractors/vendors noted where services paid for were not documented.
• Devise a comprehensive contracting and procurement policy that addresses the problems outlined in the report and distribute it to all NYRA staff.
• In cooperation with the Federal Monitor, investigate the questionable procurement-related activities highlighted in this report to determine whether additional controls and procedures should be developed.

In response to the audit, NYRA officials outlined a series of steps being taken to address the audit findings, including: developing an accounting and internal controls manual; revising its Code of Ethics; establishing an Ethics Committee; reducing expenses; and hiring a Contracting and Procurement Director. They noted that some actions had already been taken to address the recommendations. The full response is included in the audit.

In the coming months, the Comptroller’s Office will be releasing audits of the franchise fee and the backstretch operations.

Click here for a copy of the audit.

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