NYC OTB: The fight for survival | Trainer Magazine | European Trainer Article Index

Apr 14

Apr 14 NYC OTB: The fight for survival

OURTROOM 501 of US Bankruptcy Court, Southern District of New York, at 1 Bowling Green in Lower Manhattan, was awash in a sea of gray-blue banker suits on Monday, February 22. The two sides gathered before the white-haired and bearded Judge Martin Glenn were executives of the New York City Off-Track betting Corp. (NYC OTB) and the New York Racing Association (NYRA); both sides were indistinguishable in appearance and were represented by similar white-shoe law firms, but they were ideological studies in contrast. What they both confirmed, however, was the poor health of New York racing, specifically of the NYC OTB, which, according to both sides, is on its deathbed. The NYC OTB, however, would like lastThe Nassau OTB in Carle Place, New York order.” At the time this article went to press, Judge Glenn had not interpreted the arcane legalese to decide whether NYRA had a case to take NYC OTB off life support, although his mannerisms, sardonic comments, and contentious questioning of Weil, Gotshal attorneys gave the impression that he favored keeping the patient alive. For five consecutive years now, NYC OTB, a NY state public benefit corporation originally under the jurisdiction of the Mayor of New York City, has been losing money to the tune of about $45 million in operating expenses, with an overall deficit of more than $230 million, despite an annual handle of about a billion dollars in recent years – about half of all monies wagered in New York. The situation had become dire enough over the last few years that New York City Mayor Michael Bloomberg had threatened to shutter the hemorrhaging organization in 2008; this very real possibility, which also was approved by the Bloomberg-appointed board of NYC OTB, led to the state-enacted emergency legislation that put it under its umbrella as of June 17, 2008. A year after assuming control of NYC OTB, Governor Paterson appointed Meyer “Sandy” Frucher as Chairman of the Board of the wobbling corporation, which had originated in 1971 New York Racing is in poor health, with the New York City off-track betting Corp (NYC OTB) in debt to the tune of more than $230 million. The question of whether it lives or dies will have significant consequences for the entire racing industry in the U.S. By Sid Fernando minute, drastic surgery for a chance at survival; NYRA, on the other hand, believes that NYC OTB is past the point of no return and wants nature to take its course without intervention. This, in essence, was the legal issue that was argued before the court by attorneys from Cravath, Swaine & Moore for NYC OTB and by lawyers from Weil, Gotshal & Manges for NYRA. NYRA, which is owed about $15 million from NYC OTB and is its second largest creditor, believes that NYC OTB should not have been allowed to file for Chapter 9 protection as a municipality, which it did on December 3, 2009, from an executive order issued from Governor David A. Paterson. “We believe it was an unauthorized filing,” argued Weil, Gotshal to Cravath’s contention that “the Governor was empowered by state law to issue executive through state legislation as the first legal offtrack pari-mutuel wagering entity in the US. Columbia-educated Sandy Frucher is physically unprepossessing but speaks confidently and has an air of noblesse oblige to him. He’d been associated with the regimes of former Democrat governors and senators – he was Chief Labor Negotiator for New York State from 1978 to 1983 – and most recently had turned around the fortunes of The Philadelphia Stock Exchange. He took on NYC OTB in June of 2009, he said, after being “asked by the Governor and chief of staff, [who described a] perilous situation that would have a serious negative impact, especially on the upstate economy where agribusiness and breeding is” a large part of the economy. He said he quickly realized that the public benefit corporation’s mode of operation was flawed and that NYC OTB “was in effect bankrupt.” He said, “Expenses were exceeding revenues, much to my dismay,” and it was “cascading toward the abyss – literally running out of cash.” He felt NYC OTB would run out of cash by November of 2009 unless some changes were made. NYC OTB filed for bankruptcy protection and reorganization on December 3, 2009, Frucher said, partly because Monticello Casino and Raceway, a creditor, was going to sue. He now feels the company will be out of money and business by the first week of April if changes to the NYC OTB business model that have to originate in the state legislature are not made. The health of NYC OTB has far-reaching ramifications, and not just for New York. Its interconnectedness to other racing jurisdictions around the country, for example, is illustrated by its relationship to Hawthorne Park, whose signal it takes from Illinois. At the end of the Hawthorne meet this past winter, on January 30, 2010, the track found that it was unable to pay breeder awards in a timely manner as mandated by the state of Illinois because it said it was owed $10 million from various sources, including monies from NYC OTB. Likewise, the New York Breeding and Development Fund said recently that it could not make payments of $2.4 million in awards to breeders because NYC OTB owes it money. In a similar vein, the three in-state NYRA tracks – Aqueduct, Belmont, and Saratoga – will be severely compromised without the $15 million that’s owed to NYRA by NYC OTB, said Charlie Hayward, President and CEO of NYRA. “We are taking every contingency to get us through the Saratoga meet,” he said via e-mail. Meanwhile, the video lottery terminals (VLTs) that were anticipated to boost NYRA’s bottom line will not materialize any time soon, either. Governor Paterson had awarded the VLT contract in January to Aqueduct Entertainment Group (AEG), but with several stiff requirements imposed on it by the legislature, the deal fell through. The state, city, and the breeding industry in New York also count on the monies that NYC OTB is legislatively obligated to distribute in New York – statutory payments. For NYC OTB, however, Frucher testified that the only way for short-term survival was by “delaying payments to creditors and using that money to operate NYC OTB, pursuant to law.” While buying NYC OTB time through Chapter 9, he’s put together a team of consultants with whom he’s worked with before to design a plan for restructuring a behemoth he calls outdated and out of sync technologically. One name that came up repeatedly in Frucher’s cross examination was that of Bret Engelkemier, who’d worked with Frucher during his latter days at the Philadelphia Stock Exchange. Engelkemier, who’s had restructuring experience at Citi, sat in the back row of the courtroom with several others that Frucher had brought aboard, including the JPMorgan Chase banker Kent Hiteshew and Ben Branham of the swanky Edelman PR firm. Hiteshew had testified on behalf of NYC OTB that there was viability to reorganization and capitalization if certain contingencies were met – namely legislative changes that would lower the statutory payments NYC OTB had to make. Branahan arranged a private conversation with Engelkemier a few days after the court appearance, and Engelkemier, a former head of systematic trading at Citi, was nonplussed by the tasks at hand to technologically overhaul and streamline NYC OTB, if given a chance to proceed. He reiterated that NYC OTB was bloated with a workforce of 1,300 and was operating a model that hadn’t accounted for technological innovations available to streamline and trim its operational bottom line. “My experience is from the business/finance side,” Engelkemier said, “having managed businesses that had significant revenue and were highly technological. The problems that face this industry are not that complicated. The process engineering that has taken place through the financial industry just really hasn’t taken hold here. Technology in this business is like the early ‘90s from the financial world.” That said, the major piece to Frucher’s reorganization plan hinges on changing – lowering – the statutory payment scheme currently in place. Some, including NYRA, consider this a massive longshot because legislative change is required, and the state legislature has shown no inclination in the past to lessen the monies that it now receives. Nevertheless, Frucher believes he has a chance to change NYC OTB’s operational model, which mandates by law that it make statutory payments to the industry, state, and local governments on a formula based on gross revenues, instead of net revenues. “The company is giving a dividend before determining what operating costs would be,” Frucher testified. “We need to go from gross to net” as most private businesses operate, he said, and called the existing formula debilitating to NYC OTB’s existence. Part of the problem for racing in New York is its bureaucratic reliance and relationship to state government – and its key players – and the $9 billion budget deficit the state faces. Chris Smith is the political columnist for New York Magazine and covers the scene and its players, and he says that nothing will get done in New York with the proposed NYC OTB issues unless Sheldon Silver, Speaker of the State Assembly, approves the deal. “Basically, Shelly Silver is the single most important person in New York state government. He has iron control of his side of the legislature – the assembly members are almost exclusively Democrats and loyal to him. He’s a tough negotiator, and he’s got the votes to back him up. For Shelly, it all comes down to what increases his power. And any alteration in the formula comes down to Shelly. If it’s not in his interest to change the formula, it won’t take place.” Smith said, in contrast, that the State Senate is split between Democrats and Republicans and “can’t agree when to go to lunch.” Meanwhile, Governor Paterson, a rival of Silver’s and the man who appointed Frucher to NYC OTB, is under daily siege and is for the most part a lame duck. When Governor Paterson awarded the VLT contract to AEG, “Shelly was furious, and he’s refusing to sign off,” Smith said. “And Paterson is totally incapable of making a decision; he’s broken his word repeatedly to the legislature, so they refuse to deal with him on basically everything. Now, Paterson has collapsed completely, and that just paralyzes things even more.” It’s under this suffocating political climate that NYC OTB and NYRA exist, and perhaps it’s no wonder why neither organization has thrived in recent years. On the face of it, then, Frucher appears to be in a no-win situation, but he doesn’t act like someone who’d walk into a gunfight without a gun. Smith thinks that Frucher’s ace in the hole is Lieutenant Governor Richard Ravitch, who was appointed to the post in July of 2009 by Govenor Paterson. An attorney with financial crisis experience, Ravitch, Smith said, was the behind-thescenes backer of NYC OTB’s Chapter 9 filing in December. “Ravitch and Frucher are very close and go back a very long way. They both worked together for Pat Moynihan in the mid-70s, and when Frucher was the chief Labor Negotiator for Hugh Carey in the late 70s and the city and the state were nearly bankrupt, Frucher hired Ravitch to run the formula debilitating to NYC OTB’s existence. Part of the problem for racing in New York is its bureaucratic reliance and relationship to state government – and its key players – and the $9 billion budget deficit the state faces. Chris Smith is the political columnist for New York Magazine and covers the scene and its players, and he says that nothing will get done in New York with the proposed NYC OTB issues unless Sheldon Silver, Speaker of the State Assembly, approves the deal. “Basically, Shelly Silver is the single most important person in New York state government. He has iron control of his side of the legislature – the assembly members are almost exclusively Democrats and loyal to him. He’s a tough negotiator, and he’s got the votes to back him up. For Shelly, it all comes down to what increases his power. And any alteration in the formula comes down to Shelly. If it’s not in his interest to change the formula, it won’t take place.” Smith said, in contrast, that the State Senate is split between Democrats and Republicans and “can’t agree when to go to lunch.” Meanwhile, Governor Paterson, a rival of Silver’s and the man who appointed Frucher to NYC OTB, is under daily siege and is for the most part a lame duck. When Governor BUSINESS 56 TRAINERMAGAZINE.com ISSUE 16 MTA (Metropolitan Transportation Authority),” Smith said. “Ravitch did a terrific job of turning around MTA, which was falling apart. Now, all these years later, if Ravitch were somehow to become governor, it would be much to Frucher’s advantage.” Plus, Ravitch would be a better negotiator with Silver than Govenor Paterson. Given Govenor Paterson’s downward trajectory – he’s under an ethics investigation now – it’s not out of the question that Ravitch could ascend, but Sandy Frucher needs things to happen fast to save NYC OTB. Over the next few weeks, Judge Glenn will decide the fate of NYC OTB’s Chapter 9 filing, but the company’s cash reserves may be gone before then. What happens next will have huge ramifications for racing and breeding in New York and beyond. ■ *On March 22, US Bankruptcy Court, Southern District of New York (Manhattan), upheld NYC OTB's Dec 3. petition for Chapter 9 protection and reorganization. Without the legislative support needed to put its reorganization plan in motion, however, NYC OTB announced five days later that it would lay off it 1300-strong workforce and shutter operations on April 11. An 11th hour intervention by the State Legislature was a remote possibility as we went to press.

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Sid Fernando First Published: (14 April 2010 - Issue Number: 16)

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