Tom Noonan

I was quite surprised when I learned of the controversy concerning the New York Racing Association’s failure to adjust a takeout rate to conform with a statute.  Surprise turned to concern, however, when I looked into the details.

For those not familiar with racing jargon, “takeout” is the percentage of wagered money that is retained by the track.  The takeout percentages may vary by bet type, with win wagers having a lower takeout than “exotic” wagers  –  those involving multiple races or multiple horses in a single race.  In an effort to assist the struggling New York City Off-Track Betting Corporation, the Legislature raised the maximum takeout on exotic wagers from 25% to 26%, with a provision that the change would expire two years later, on September 15, 2010.

On April 26 of this year, New York’s Racing and Wagering Board  –  one of four state agencies with some level of oversight responsibility for NYRA  –  released an interim audit concluding that NYRA’s CEO Charles Hayward knew of the violation and continued to collect the extra takeout despite that knowledge.  The audit conclusions were reported in both local and industry media, and several days later the NYRA Board fired Hayward and NYRA’s General Counsel Patrick Kehoe.

NYRA’s Board replaced Hayward as President of the Board with NYRA’s Chief Operating Officer Ellen McClain, and Kehoe with Kenneth Handal as Secretary of the Board.  On May 15, the head of the Racing and Wagering Board and the head of the Franchise Oversight Board, who happens to be Governor Cuomo’s Budget Director, sent the NYRA Board Chairman a scathing letter saying the NYRA Board lacked the authority to take this action and threatened revocation of NYRA’s franchise to run New York racing.  The pair reached these conclusions even though McClain was not mentioned in the audit report, and Handal was not connected to NYRA during the period under review.  In a further remarkable statement, the letter raised the possibility that members of the NYRA Board could be in a conflict of interest because they had “financial interests in horse racing.”  The Board responded by asserting its authority to make the appointments.

Since media accounts tend to rely on press releases and Executive Summaries, and then feed on one another by parroting what they read elsewhere, I searched in vain for the actual audit.  Surprisingly, I could not find it on the site of the Racing and Wagering Board even though it is updated daily, and the report itself was released as interim because of the “seriousness of the findings.”   I finally found it by chance on Google while looking for a related matter.  Here are some of the surprising items I found in the report:

• The audit was based on a review of 5,000 NYRA documents;  the Board also says that NYRA has not provided all requested documents.
• It appears that no one was interviewed, including Hayward and Kehoe, even though there are also other NYRA employees identified in emails who had knowledge of the issue.
• Three auditors responsible for providing independent reviews of either NYRA or the company that processes bets did not identify the issue.  One of the auditors actually identified the correct statutory takeout rate as well as the incorrect actual rate, but did not raise the issue.
• The Office of State Comptroller is identified in the Interim Audit as the “primary governmental agency responsible for auditing NYRA.”  Even though the Racing and Wagering Board found that OSC reviewed NYRA’s “detailed financial records, including future cash flow projections” around the time the higher takeout rate expired, “the Board has not examined OSC’s work papers to determine if OSC had reviewed the takeout rates.”
• Another of the state oversight agencies, the Franchise Oversight Board, headed by Governor Cuomo’s Budget Director, has no full-time staff and could not be expected to perform a detailed analysis.
• The Racing and Wagering Board annually “reviews the complete volume of the Racing Law for provisions that may sunset….  The Board performed this review in 2010 but did not identify the relevant NYRA takeout section as expiring.  However, it was not standard practice to identify expiring provisions of law when revering sections were in place.”
• Emails play a significant role in “who knew what” and “when did they know it.”  There is an email from a bettor to Hayward questioning the takeout rate in September 2010;  there is another from the Daily Racing Form‘s Stephen Crist in August 2011;  and, there is an allegation that someone emailed the Board in January 2011.  The emails to Hayward represent a sizeable portion of the Board’s case against Hayward.  The Interim Audit reports that the Wagering Board could not find the email supposedly sent to them, postulating that it was kicked out for having a virus or being spam.

I had initially decided to write a post on the NYRA issue when I read the report in Friday’s Saratogian by Paul Post (who is doing an excellent job reporting this) that the Governor was considering adding more state-appointed members to NYRA’s Board.  My only thought was “are you kidding me?”  As someone who spent an entire career working for government, I am not one of those who reflexively reject government involvement.  But let’s look at just two recent examples concerning horse racing in New York (and ignore others, including the prolonged effort to award the franchise now held by NYRA).

First, we had the bankruptcy of the  New York City Off-Track Betting agency.  Now how does an entity that collects bets and has a guaranteed share of the wagers (see discussion of “takeout”) go bankrupt, particularly in New York City?  You have fixed costs such as rent and computers (and if you have ever been to an OTB you know there aren’t any amenities above that), and labor costs.  Yet this one needed a state bail-out (the one that began this controversy) and still could not cut it.

Then there was the fiasco with the public bidding for the Video Lottery Terminals to be placed at Aqueduct Race Track that resulted in a 300-page audit by the Comptroller in 2010.  For those who would like to forget, VLT’s were initially authorized in 1991, and a company was to be selected by the Governor, Speaker of the House and Senate President.  Nineteen years later, the then-Governor and Speaker of the House stepped aside and allowed the Senate to work its will.  The result of this “process” was so odoriferous that it had to be withdrawn.  It was only when the procurement was sent to professionals in the budget office that we got a speedy and solid result.  While revenue from the VLT’s has long been viewed as essential to NYRA’s financial stability, the revenue was going to contribute billions of dollars to the state’s educational system.  Despite the financial significance of getting the VLT’s up and running, it took almost two decades to get it done, and had to be delayed further because of what can only be described  –  at best  –   as gross incompetence by the most powerful public officials in the state.

So there is not exactly a stellar record when it comes to the state’s involvement in horse racing affairs.  The current law provides that NYRA’s 25-member Board shall have nine state appointments.  As noted above, there are four state agencies with oversight responsibility, and two of them did not exactly cover themselves with glory in the current matter.  So there is, by law, a significant involvement by state government in the conduct of racing in New York.  In my years of following both horse racing and politics, I have not detected a high level of interest in racing by anyone in power until, of course, it comes time to award a trophy at Saratoga.

But I do not think it is the interests of horse racing that is the motivation for the growing conflagration that again engulfs New York racing.  If there are two things one can say about Charles Hayward, they are that he is an experienced business executive and that he loves the sport.  In his tenure with NYRA, he has improved the integrity of an operation that once had pending criminal charges, brought a measure of financial stability to the organization, and managed the extension of the franchise.  Let’s not forget that a year ago at this time there were questions about whether there would actually be a race meet at Saratoga.

I am not defending the failure to adjust the takeout race.  In Hayward’s email to Stephen Crist he stated NYRA was working on making the necessary adjustments, but he was concerned about political fallout, both from the Governor and  particularly from the OTB outlets in New York who would be losing the extra revenue.  While this may not have been the best course of action, Hayward certainly looks prescient in assessing the political landscape.  Incidentally, keeping the takeout rate at the higher level did not result in what one would call a windfall for NYRA.  According to the Interim Audit, the total excess income realized by NYRA during the roughly 15 months the higher rate was in effect was $1.1 million, more than half of which has been reimbursed to bettors.  By way of comparison, NYRA has received $22 million from VLT revenues since the Aqueduct casino opened October 30, 2011, according to the Daily Racing Form‘s Matt Hegarty.

The most disturbing part of this whole controversy, however, is not the behavior of NYRA officials, but that of New York political leaders including the Governor and his high level staff.  Yes, the failure to address the takeout rate is a matter that warrants investigation, but it was identified and corrected a full five months before the Interim Audit was released.  The purported reason for the Racing and Wagering Board’s release of an interim report is the “seriousness of the findings.”  Yet the auditors did not bother to even interview Charles Hayward, and if they actually interviewed anyone else it is not disclosed in the report.  When the report was released by the Wagering Board, it had to have been with the knowledge that the likely result would be a firestorm surrounding NYRA, and the opportunity for some serious political posturing.

While NYRA was going to the most obvious target of media coverage, the role played by state actors has been overlooked.  There is no mention that 9 members of the 25-member NYRA Board are state government appointees.  While the report does mention that four state agencies have oversight responsibility for NYRA, the auditors did not check to see if the Office of State Comptroller  –  the “primary governmental agency responsible for auditing NYRA”  –  even checked the applicable takeout rates when reviewing the books.  A second agency, the Franchise Oversight Board headed by the Governor’s Budget Director, was given a free pass because they lacked staff.  While I am not completely familiar with New York’s government, I would be willing to wager that the Budget Director is widely viewed as the second most powerful person in any Governor’s administration.  So if he needed some help, he could probably get it.  Also, the inability to closely monitor a situation did not prevent him from signing the May 15 letter disapproving of the NYRA Board’s appointment of a President and Secretary, or from threatening to revoke the franchise of NYRA and determining whether the right of individual Board members to “participate in horse racing” should be revoked.  Finally, the Racing and Wagering Board gave itself a pass because of the legal sophistry described above where it claimed it did not have the responsibility to evaluate all the statutory changes applicable to New York racing.  None of these shortcomings, however, has been considered a sufficient reason to delay what looks like an unnecessary rush to judgment.

I don’t know what is going on here, whether it is a personal vendetta, a power play, or an attempt to cover up governmental ineptitude by focusing all the blame on a single individual and a group of citizens who do not get paid for their service on the NYRA Board.  What I am fairly certain of, however, is that it has little to do with what is in the best interests of horse racing in New York.