Purpose

To assess the New York Racing Association, Inc.’s financial condition and selected expenses. Our audit covers the period January 1, 2012 through December 31, 2014.

Background

The New York Racing Association, Inc. (NYRA) holds the exclusive franchise to operate New York State’s three major thoroughbred racetracks: Aqueduct Racetrack, Belmont Park, and Saratoga Race Course. NYRA’s annual on-track attendance approximates 1.8 million people, and annual allsource wagering on NYRA races (e.g., on-track, simulcast) totals about $2.3 billion. In November 2006, NYRA filed for bankruptcy due to its poor financial condition, including a cumulative operating deficit of more than $135 million. In September 2008, upon renewal of its exclusive franchise, NYRA entered into a bankruptcy settlement agreement conveying all rights, titles, and interests in racetrack properties (land and buildings) to New York State. In return, the State forgave nearly all of NYRA’s debt obligations. In addition, a Franchise Oversight Board (FOB) was formed to oversee NYRA’s financial operations.

In October 2011, Resorts World New York City Casino (Resorts) opened adjacent to Aqueduct Racetrack. According to NYRA’s Franchise Agreement (Agreement), a percentage of Resorts’ Video Lottery Terminal (VLT) revenue is directed to NYRA for enhanced purses, operational support, and capital expenditures. The Agreement directs that NYRA receive VLT funding until 2033 unless the franchise is terminated before that time. However, the FOB stressed the need for NYRA to develop a plan to become profitable without reliance on VLT subsidies. In 2012, a temporary, State-controlled Reorganization Board of Directors was created by the Governor to provide further oversight of NYRA operations. Currently, the Reorganization Board is scheduled to expire in October 2016.

Key Findings

• NYRA’s overall financial condition, as a result of VLT revenue subsidies, is sound. However, NYRA’s traditional racing operations (which exclude the VLT revenues) have generated multimillion dollar annual deficits. Excluding VLT revenues, NYRA would have generated cumulative operating losses of $109.3 million from 2010 through 2014 (or an average annual loss of about $22 million). Moreover, NYRA has not developed a sufficient plan to make operations profitable without VLT subsidies.
• According to senior officials, NYRA generated a surplus of $1.7 million in 2014, excluding the VLT subsidies. However, officials overstated NYRA’s actual financial condition by excluding certain ordinary and necessary expenses (including pension contributions, post-employment health benefits, and depreciation) totaling $13.2 million from profit and loss calculations. Thus, NYRA actually lost $11.5 million when VLT funding is excluded. NYRA officials contended that the exclusion of the aforementioned expenses from profit and loss calculations was justified because the costs were beyond NYRA’s control. However, there is no authoritative accounting or financial reporting justification for this practice.
• We questioned certain expenses that were not properly supported or did not appear to be ordinary or necessary for racing operations. These expenses, which included unsupported performance incentives and horse transportation, contributed to NYRA’s racing operation deficits.

Key Recommendations

• To calculate the results of NYRA’s racing-related financial operations, include all ordinary and necessary expenses, such as pension contributions, other post-employment benefits, and depreciation.
• Develop a detailed plan to eliminate NYRA’s annual deficits from racing operations (excluding VLT subsidies) with specific actions to enhance racing and track-related revenues and diminish unnecessary and unsupported expenses.
• Formally assess the propriety of the questionable expenses we identified and develop and implement written policies to minimize the risk of excessive payments for the goods and services in question.

Agency Comments

In their response, NYRA officials generally defended the practices cited in our report. In particular, officials stated that it was appropriate to exclude certain costs in calculating NYRA’s profit or loss from racing operations, and they cited non-GAAP compliant measures as justification for their methodology. According to officials, the exclusions of certain costs were justified because they were “non-controllable by management” and constituted “non-operating expenses.” Nonetheless, the excluded expenses directly resulted from management decisions, and therefore, we maintain that such expenses were controllable. Specifically, post-employment benefits resulted from the numbers of employees NYRA hired and the compensation former employees received through salary and benefit plans negotiated by management. Further, depreciation was the result of management’s conscious decisions to invest in new capital assets and/or to improve existing assets.

We also doubt that NYRA’s classification of these expenses as “non-operating” is substantively consistent with accounting and financial reporting guidance. Typically, non-operating expenses are not related to core business operations and can include costs for items such as organizational restructuring and losses from security sales or currency exchanges. In contrast, depreciation and post-employment benefits are common “operating” costs and are directly related to core operations.

Further, NYRA asserts that EBITDA (earnings before income tax, depreciation, and amortization) is commonly used by financial analysts to value businesses. However, the use of EBITDA to assess financial performance was not prescribed by the Franchise Oversight Board (FOB) or any other authoritative NYRA guidance. 

Other Related Audit/Report of Interest

NYRA: Financial Condition and Operating Practices: First Interim Report (2010-S-54)