Extremely Well Presented Analysis Of Threat To Saratoga Race Course

[From Thoroughbred Racing Commentary]

The distribution of the proceeds from Aqueduct’s VLT casino to NYRA

Charles Hayward  |  June 15, 2016

Aquaduct

The casino at Aqueduct Race Track. Revenue streams from VLTs there are used by NYRA for capital improvements, operating expenses, purses and breeder awards

Disclosure: I was fired as President and CEO, along with our general counsel, from the New York Racing Association on May 4, 2012, by the NYRA board after NYRA was alleged by the State Racing and Wagering Board to have knowingly overcharged our betting customers 1 percent on all exotic wagers. At the time and to this day, I have continued to assert my innocence regarding this allegation.

Shortly after my termination from NYRA, Governor Andrew M. Cuomo took control of NYRA, announcing that he was creating a new board. As reported by Joe Drape in the New York Times on May 22, 2012: “Racing in New York will now be overseen by a board dominated by appointees of the governor and senior state legislators. But Mr. Cuomo stressed that the state takeover was designed to be short-lived, and last no longer than three years. ‘We know that the long term this is not a venture for government to run,’ Mr. Cuomo said.”

It has now been over four years since that announcement, but last Wednesday (June 8), according to an article written by Tom Precious in The Blood-Horse: “The New York Racing Association would be returned to private hands, though with a tiny leash from the state government that has controlled its operation over the past four years, according to legislation proposed June 8 by Gov. Andrew Cuomo.”

Deeply saddened

The article went on to say: “The bill’s introduction also comes a day after Saratoga Springs’ John Hendrickson resigned as Cuomo’s special adviser to the NYRA board; Hendrickson said Cuomo did not take his advice, did not listen to him and was poised to take measures – including the VLT payment reduction in the new bill – that are hurting the state’s Thoroughbred racing industry.”

Anyone at all familiar with racing in New York had to be deeply saddened by this development.

It is not my intention here to write about the past, present or future of the NYRA franchise. However, I think that it is very important to review the public records regarding the NYRA 25-year franchise renewal. It is important to note that all the information contained in this article came from documents available to the general public.

NYRA went through a protracted process in securing a new 25-year franchise to run Aqueduct Race Track, Belmont Park and Saratoga Race Course and to receive contractual payments from Aqueduct video lottery terminals (VLTs) for the term of the franchise.

Installation of the VLT facility

During this period, on November 2, 2006, NYRA filed for Chapter 11 bankruptcy protection to stabilize and protect its business pending the completion and implementation of the VLT facility. The debtor, NYRA,  continued to manage its properties and operate as a debtor in possession, in accordance with sections 1107 and 1108 of the Federal Bankruptcy Code.

On September 4, 2007, a Memorandum Of Understanding (MOU) was signed by Governor Eliot Spitzer, representing the State of New York, awarding NYRA a 30-year franchise (later reduced to 25 years in the legislation) to run Thoroughbred racing at its three tracks, and for NYRA to receive Aqueduct VLT revenues for capital expenses, operating expenses, purses and breeder awards, and other financial considerations, in exchange for NYRA’s agreement to relinquish any present or future rights with respect to ownership of the three racetracks.

This MOU was contingent upon legislative approval.

The Senate Majority Leader at that time was Joseph Bruno, and he was critical of the Spitzer MOU and announced three State Senate public hearings to be held in September and October 2007 to review a number of aspects of the plan.

The hearings and discussions went forward, and on February 13, 2008, the New York legislature approved legislation awarding NYRA a new 25-year franchise to operate its three tracks, allowing installation of a VLT facility at Aqueduct and conveying ownership of the three racetracks to New York State.

Agreements to be negotiated

The payments to NYRA and the racing industry were set as a percentage of the net win of the Aqueduct gaming facility. Under the legislation, NYRA was to receive 4 percent for capital expenses, 3 percent for operating expenses, 6½ percent, increasing to 7½ percent in the third year, for NYRA purses and 1 percent, increasing to 1½ percent in the third year, for breeder awards. No caps or limits were set on these payments. A Federal Bankruptcy Court hearing to seek approval of the NYRA reorganization plan was set for that March.

On April 28, 2008, the U.S. Bankruptcy Court approved the NYRA reorganization plan. Here is a link to that publicly available NYRA confirmation plan.

The final approval by the Bankruptcy Court of the NYRA reorganization plan was contingent upon NYRA negotiating a series of agreements with the State. These agreements included:

  1. A settlement agreement with the State regarding the transfer of the NYRA land to the State and other outstanding disputes;
  2. A franchise agreement that would contractually bind NYRA and the State to the terms in the franchise legislation;
  3. Individual lease agreements for each track regarding financial terms and approved uses of the properties. Each of these agreements that was subsequently negotiated includes the specific percentages that NYRA would receive from the Aqueduct VLT operation for capital expenses, operating expenses, purses and breeder awards, as noted in the legislation for the term of the franchise.

It was essential that NYRA secure the terms of the legislation with contractual obligations on behalf of the State of New York both to conform to the bankruptcy reorganization plan and to have secure legal protection for the Aqueduct VLT payments.

Bankruptcy reorganization plan

It is important to note that NYRA’s legal team negotiated directly with legal staff from all major state government entities. The bankruptcy court had requested that these negotiated agreements with the State be finalized by June 30, but the complexity of the issues and the number of negotiating parties resulted in the negotiations continuing throughout the summer.

On September 12, 2008, NYRA emerged from Chapter 11 bankruptcy under a plan of reorganization reliant upon a new 25-year state franchise and secure revenue streams from VLTs at Aqueduct for capital improvements, operating expenses, purses and breeder awards.

Under the franchise agreement and the related contracts negotiated between NYRA and the State, NYRA deeded the three racetracks to the State in consideration for the operating expenses, capital expenditure, purses and breeder awards and other financial considerations.

Fast forward to where we are today.

In recent weeks, two Saratoga organizations, Concerned Citizens of Saratoga and the Saratoga Race Course Local Advisory Board, which was created by the 2008 franchise agreement to act as a liaison between NYRA and the Saratoga community, spoke out about their concerns about the State’s privatization plan for NYRA and its impact on New York racing and the Saratoga community.

Serious threat to racing and breeding

However, what concerned me most in the June 8 Tom Precious Blood-Horse article mentioned above was the suggestion from some unidentified “sources” that some reduction in payments to NYRA from Aqueduct VLTs for capital and operating expenses would be instituted. Further, NYRA would be required to seek an annual state appropriation approved by the legislature for capital expenses.

This is a far cry from the contract negotiated with the State and approved in the bankruptcy reorganization plan. This is a very serious threat to the future of Thoroughbred racing and breeding in New York.

There were some brilliant legal minds working on the NYRA bankruptcy to make certain that the contracts and obligations of the State for Aqueduct VLT monies would be unencumbered and not reduced for the term of the 25-year franchise. While the State took control of the NYRA board in May 2012, there currently are six NYRA board members, including the former chairman and two former vice chairmen, that were serving on the previous NYRA board. They most certainly are well informed regarding the existing contracts for Aqueduct VLT payments to NYRA, and equally well informed of their fiduciary responsibilities as NYRA board members.

Reporting on performance standards

One further point about the use of VLT distributions paid to NYRA: under the NYRA franchise contract, there are numerous performance standards that NYRA reports on annually to the Franchise Oversight Board (FOB), and the FOB is required to formally review the compliance with these performance standards every four years.

The standards include conditions relating to racing dates, NY state-bred races, stalls, jockey and equine safety, CAFO (Concentrated Animal Feeding Operation) requirements, backstretch environment, Saratoga training, handle and attendance, purse accountability, expenses and community interaction.

As a careful observer of racing jurisdictions, the issue that is consistently discussed by NY State administration officials and regulators is that “NYRA needs to be profitable before accounting for VLT distributions”. Nowhere in the NYRA performance standards is there any reference to NYRA’s use of VLT distributions, nor is there any mention anywhere else in the franchise or settlement agreements regarding this point.

The NY State legislature is scheduled to adjourn its spring-summer session tomorrow (June 16). Whatever happens this week regarding the NYRA franchise, the issue of ongoing and full payments to NYRA, horsemen and breeders from the Aqueduct VLTs needs to be properly and legally resolved.

 

 

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