New York State’s Comptroller, Thomas DiNapoli, released an audit of the financial practices of the New York Racing Association.  He concluded that NYRA “continues to produce multi-million dollar annual deficits in its racing operations,” and that continuing this trend means that “NYRA’s long-term solvency could be a long shot.”

While this may come as a surprise to those who believed NYRA CEO Chris Kay’s constant proclamations that the organization was finally running in the black after years of deficits, it was obvious to anyone who went beyond press releases and actually looked at their financial statements.  The audit comes at a particularly resonant time since the Legislature is due to take up legislation this week concerning the future of NYRA, including a bill proposed by Governor Andrew Cuomo that would degrade significantly NYRA’s financial situation.

The audit covers the three years ending in 2014, during which NYRA was largely controlled by the Reorganization Board put in place by the Governor and Legislature in mid-2012.  CEO Kay has been in charge for the second-half of that period.

DiNapoli concluded:

• NYRA is incurring significant operating losses from racing unless it includes the revenues from Video Lottery Terminals guaranteed by law;
• NYRA’s assertion that it is operating profitably without the VLT revenues is based on the exclusion of certain operating expenses, for which “there is no authoritative accounting or financial reporting justification,” and is “very misleading;”
• NYRA had not developed a plan to eliminate deficits from racing operations as recommended by the Franchise Oversight Board;
• As an example of questionable expenses, it cited the NYRA Board’s awarding a $250,000 bonus to CEO Kay even though he had not met goals of achieving profitability without the VLT revenues or developing a plan to do so.

Central to both the audit and the Governor’s legislation to again revamp NYRA is the role of VLT payments.  While there are those who question why racing needs the revenues from slot machines, it is an essential component of the agreement reached when NYRA transferred title to the state of the land on which its tracks sit.  One can question the wisdom of doing so, but it was a contract, the provisions of which are embodied in law.

The Governor is now proposing that the VLT payments for racing and capital expenditures to NYRA be reduced from $57.5 million to $46 million.  Given that there is no dispute on NYRA’s numbers, irrespective of how they are characterized, it should be obvious that this would be a devastating blow to New York racing.

NYRA finds itself in the position of possibly absorbing this hit because of its “success” in convincing the media and outside groups of a dramatic turnaround in its finances.  As the audit demonstrates, however, the supposed turnaround borders on fraud.  John Hendrickson, the Board member from Saratoga who resigned when it became clear that the Governor did not need any independent advice, dismissed the Government’s impact on restoring NYRA to profitability, saying it would occur solely because of the VLT revenues.  He put it succinctly in BloodHorse.com:

“For the Governor to say ‘I saved racing’ is like taking your friend out on a boat and throwing him over with concrete sneakers and rescuing him.”

Among DiNapoli’s criticisms of NYRA are questionable expenditures.  Because it did not occur during the period covered by the audit, we will have to wait for the next one to get his views on the Chris Kay self-tribute that is the large structure he built in Saratoga in 2015 to celebrate those who Kay thinks should be celebrated.

This year, he apparently decided to celebrate the audit findings by announcing that he had commissioned a new Triple Crown trophy.  While I am sure that this was done following a competitive bidding process, he remarkably came up with someone he worked with while at Toys ‘R Us.

NYRA does have government bodies overseeing it, including the Gaming Commission and the Franchise Oversight Board, but each entity is controlled by the Governor’s appointees.  The audit raises an issue of their effectiveness.  I have been writing about NYRA’s questionable practice of claiming profitability by moving obvious operating expenses “off the books,” but I do not recall any one in either of these groups questioning it.  (Indeed, a member of the Franchise Oversight Board questioned Kay upon hearing of his plan to expand his self-tribute at Saratoga then demurred by saying, “You don’t have to tell me if you don’t want to.”)

This all comes to the fore because the close of the legislative session is Thursday, at which NYRA’s future is to be determined.  The Governor’s bill retains his control by effectively giving him say over 13 of 15 Board members.  The legislative bills are not much better because they would give a majority of Board appointments to those decided by the Governor’s loyalists.  The Governor’s bill would also strip $11.5 million from a NYRA that an independent source has now raised questions as to its long-term viability.

I think there is an appropriate role for government involvement in a future NYRA.  I do not think the Governor should control the future Board, but rather there should be an independent and professional panel naming so-called “private” Board members.  And, if we want truly independent government oversight, put the Comptroller on the Board.

The future of New York’s racing and breeding industries is at an important crossroads.  It could all go under if responsible figures do not act responsibly.