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February-21-2008,
Don't Order Your Funeral Wreath For New York's OTB Just Yet...By Nelson Lardner

The surface story is this: The New York City Off-Track Betting Corporation's board of directors voted Tuesday to cease operation of their more than 60 city branches.

The operation rakes in mountains of revenue derived from horserace gambling, but payments to the state (and to the tracks) mandated by prevailing laws make continued operations under the present conditions less than palatable -- to Mayor Michael Bloomberg.

"If we did nothing, by the end of June OTB would be running a cash negative operation for the first time in its history," Bloomberg said, saber-rattling at a high spin ratio. "I believe that if OTB is not able to operate without taxpayer subsidies then it should not operate, period. The city simply cannot take dollars away from schools and hospitals to pay for a gambling operation."

In the mayor's defense, Bloomberg is not an advocate of extending gaming offerings to generate tax revenues. "The city simply cannot take dollars away from schools and hospitals to pay for a gambling operation," said Da Mayor. That's not quite a kosher representation of the basic facts, but it emphasizes where Bloomberg is coming from.

But as is the case in most major-league political wrangling, it would be best not to take everything you see and hear at face value.

The target date for the final denouement/last day of betting availability is some four months away, in mid-June. The first of the layoff notifications for some fifteen hundred employees of the enterprise are ticketed to start in eight weeks. This leaves ample elbow-room on the calendar for constructive cashflow manipulation. And given the fiscal needs of all those involved, anticipate that sustained, heartfelt efforts to save the patient will take place.

Checking the veracity of public statements on the matter is always a good place to start - and we'll to start with the Mayor, since Bloomberg has been the most vocal of those taking public umbrage at the eventual deployment of the monies New York racing generates. While poormouthing when referring to OTB's $6 million dollar deficit of last year (as reflected on the books), Bloomberg overlooks the fact that OTB forked over $17 mill to the city's coffers, generated by its standard 5% surcharge applied to most winning bets.

That 5% "surcharge" has long been a sticky wicket in discussing OTB's ups and downs. Unless you observe certain dollar-volume ground rules at isolated OTB outlets, the added 5% hit is unavoidable. And in a game where the basic percentage rake is in the high teens, before any such surcharge, its effect on player activity patterns is significant. Most big players will take considerable pains NOT to play with OTB, if their transactions are such that they're vulnerable to the added bite. It's a testament to the limited options enjoyed by most bettors that OTB handle figures remain as high as they are, in these days of players enjoying access to multiple ways and means of getting bets down without subjecting themselves to such ripoffs. I mean, the fact that a horse paying $5.10 at the track only pays $4.60 at OTB should get the point across. Can you imagine OTB wagering levels if they did away with the surcharge? A whole new deal could be cast . . if the participants only had the nerve.

But make no mistake, the equation is complex. Latest OTB developments come on the heels of last week's on-the-wire legislative agreement regarding the long-awaited long-term extension to the New York Racing Association's franchise. The operation, recently wracked by bankruptcy and various operational scandals, was granted another twenty-five years of life. Among what the state gets out of the deal is uncontested title to the three racetracks under discussion - Long Island's Aqueduct and Belmont, and upstate's Saratoga.

Many veteran observers - me, included - expected that the settlement of all aspects of this wrinkle would be an integral part of any new NYRA deal. The prevailing executives get to maintain their positions for the remainder of their professional lives, and the band plays on. But this came after plenty of wrangling, because while there has been scant argument about the state owning the racetracks, there had been lengthy, heated debate over whether the state or NYRA owned the land upon which they stood.

Clearly, Bloomberg is sorely displeased that the conception of the latest NYRA deal failed utterly to take OTB and its needs into account, while NYRA received $105 million in specialized funding -- $75 million to address its bankruptcy-plan obligations, and an additional $30 mil to facilitate operations through the remainder of this calendar year. To be fair, it must be noted that the overall structure of the revenue-distribution procedures involved make it nigh-impossible for OTB's balance sheet to come out smelling like a rose. It's reported that OTB annually pays out some $17 million to the state government in Albany. The annual payment is based on gross revenues, and it could reasonably be argued that an arrangement based on net revenues might be more equitable all around.

Patrick Foy, the downstate chairman of the Empire State Development Corporation, gently noted in a Tuesday conference call that "It's our belief that the ultimate closedown of OTB would be inconsistent with state law." Foy noted that budget projections suggest that a likely $1.1 million cash shortfall would likely affect OTB's operation -- by June.

It's no coincidence that Bloomberg's posturing points to June as the end of the road. But it's also undeniable that both the state and NYRA would have to feel suicidal, to allow OTB to wither and die, given the jobs created, the millions the operation generates for the state, and for NYRA purse monies.

Pie-in-the-sky answers from Bloomberg's perspective, which aren't going to happen anytime soon, if ever, might include (a) a takeover of OTB by the racing association, an idea which has long had considerable surface merit -- but trust me, the devil's in the details, as the powers presiding over various spheres of influence will certainly come to blows, before this ever happens, or (b) cutting OTB in on a portion of the eventual revenues to be derived by the installation of Video Lottery Terminals (slot machines, to you!) at Aqueduct, in Queens.

Bloomberg's moaning about OTB's having to pay a significant portion of its take to the tracks is significantly out of line. Excuse me . . . the tracks are putting on the show on which you're taking bets, and they deserve their piece of the action, thanks. The mayor's not getting off scot-free on that one. But there's room for debate about the degree of support, and there are multiple ways to iron out the intermediate-term so that current entities may continue to co-exist, without major job losses.

So if you love and/or work in the five boroughs and can't get out to the track as often as you would like, and like hands-on action, don't panic. We'd be shocked if OTB were shut down, en masse, in four months. But there will be a number of sharp turns and steep dips in this thrill ride, before it pulls back into the terminal with all aboard settled and happy.

02-21-08
NelsonLardner
MajorWager.com
lardner@majorwager.com

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