PREFACE

When the equine enthusiasts of Colonial New York vied in fields and on dirt roads for

the title of owner of the fastest horse, it is improbable that they knew they were establishing the

tradition of horse racing not only in New York, but in America. Yet they did, and the most

storied track in the nation arose in Saratoga Springs, a track over which so many legendary

thoroughbreds have run that summer crowds still shatter attendance records.1 Most recently,

McMahon Thoroughbreds foaled the champion Funny Cide, a horse whose humble New York

hooves and two Triple Crown race wins drove people wild. Funny Cide proved that the sport is

far from dead, and New York must act to reposition this state treasure at the forefront of horse

racing in America.

GAMBLING IN AMERICA: THE PARI-MUTUEL SYSTEM

Pari-mutuel betting is a French system that differs from the traditional parlor betting

games involving cards and dice where a player bets against the “house.” In the pari-mutuel

system, all bets are pooled together and players essentially bet against each other. In 1877, the

New York state legislature passed the Ives pari-mutuel pool law to allow gambling on horse

races during certain times of the year. It taxed the revenues at a rate of five percent and

dedicated these proceeds to horse breeding.2 Prior to this introduction of pari-mutuel betting,

bookmakers controlled the betting, and even after the Ives law bookies still accepted bets at

fixed odds at a number of tracks. However, moral indignation over gambling arose late in the

19th century, and New York outlawed all forms in its fourth constitution.3

1
A record crowd of 66,122 people attended the 2003 Travers Stakes.
2
Laws of 1887, Chapter 479
3
Constitution of 1894, Article I, § 9

1
 One year later, in 1895, the Governor established the State Racing Commission.4 Three

men composed the commission, and it was empowered to grant annual licenses to corporations

and associations, whose existence could not exceed fifty years, to hold race meets for purses,

prizes, premiums or stakes. While betting was held a public nuisance and a misdemeanor, The

Jockey Club’s honorable commitment to the sport carried horse racing forward until the Great

Depression and its ensuing fiscal disaster.

In November 1939, New Yorkers voted to amend the state constitution to permit pari-

mutuel wagering on horse racing. The law amended Article I, § 9 to allow pari-mutuel betting

as the legislature shall prescribe and “from which the state shall derive a reasonable revenue in

support of government” as well as to promote “agriculture generally and the improvement of

breeding of horses particularly.” The New York State Thoroughbred Breeding and

Development Fund arose to establish awards to breeders of New York bred horses. Thus, horse

racing took root in New York as a statewide industry.

THE 1950’S PREDICAMENT

In 1949, Jule Fink applied to the Jockey Club for a license to run horses in New York

State. The Jockey Club refused to issue the license to Fink, and Fink appealed the denial to the

“joint board,” which consisted of two members of the Jockey Club and three members of the

State Racing Commission. The board upheld the refusal. Fink applied again in 1950, and

again his application met the same fate. The parties stipulated that they remove the matter to

the courts, and the Appellate Division heard the case of Fink v. Cole, 302 N.Y. 216 (1951).

The court affirmed without opinion the board’s decision. Fink appealed to the Court of

Appeals, and that court reversed on the grounds that the State legislature had unconstitutionally

vested its power to issue racing licenses to owners, trainers and jockeys in the Jockey Club, a
4
Laws of 1895, Chapter 570

2
private corporation. This delegation of power violated § 1, Article III of the New York State

Constitution, and court reversed the Appellate Division.

The Fink decision resulted in the formation of the Wicks Committee, a special seven-

member committee assembled to undertake a comprehensive study of New York racing

industry, as well as a legislative revocation of the Jockey Club’s licensing authority, which was

re-vested in the State Racing Commission. The first Wicks Committee of 1952 concerned itself

with the minutia of the racing rules, but it also affirmed that “thoroughbred racing is a private

industry subject to state supervision. The Committee has found no reason for the State to

intrude upon the already designated orbit . . . of thoroughbred racing.” (p.57) In the second

Wicks Committee report of 1953, it again echoed this sentiment: “Our racing commission has

done an excellent job of administering the State’s racing laws. . . Only those who embrace the

economic philosophy of the socialists or the communists would advocate that racing be

conducted by the state itself.” (p. 21) Racing competition was also growing and New York

tracks now needed to keep pace with the modern facilities at Santa Anita and Hollywood Park.

Furthermore, New Jersey’s race track plans emerged as a threat, and to this end the committee

advocated the consolidation of the Empire City Racing Association, the Metropolitan Jockey

Club, and the Queens County Jockey Club “to engage in a cooperative undertaking to build a

modern racetrack in the metropolitan area of New York City.” It also recognized that

“financing such an undertaking is difficult because of the nature of the racing business,

dependent as it is upon the granting of an annual license by the State. It would be difficult to

raise the necessary capital for such an enterprise.” The capital need hovered between $25 and

$30 million, but the committee averred that the “only delaying factor in carrying out the present

New York plan is the financial one of providing the tracks with such a share of the pari-mutuel

3
revenue as will make it possible for them to finance needed track improvements.” The

Committee dissolved before this need reached fruition.

THE JOCKEY CLUB PLAN AND THE ERA OF NON-PROFIT RACING

By 1955, the sport of kings was clearly an aging industry in New York that needed a

sustained vision. The State Racing Commission turned to the revered Jockey Club for a

solution. The Jockey Club proposed the merger of the privately-owned and closely-held

corporations that operated Belmont Park, Jamaica, Aqueduct, and Saratoga into a new, non-

profit racing association. The debt of this association would be capitalized through long-term

borrowing with its principal and interest secured by a first charge against all association

income. (MEL REWRITE THIS SENTENCE: Stock ownership of association and of all

real properties proposed to be acquired with part of the debt capital to be vested in the Jockey

Club through non-dividend paying stock).

Outside of its veneration of the sport, The Jockey Club’s justifications for this plan were

numerous. The plan wished to:

• Place flat track racing in the hands of responsible community members

• Keep the sport free of political influence
• Ensure that franchisees would meet their obligations to the public
• Give the state its fair share of the revenue
• Eliminate private profits
• Establish the most efficient operation of tracks through salaried, professional managers
• Increase attendance and state revenue
• Decrease the public tax burden
• Make New York racing competitive again with modern facilities with modern amenities

Naturally, the plan had its opponents who decried the plan as socialized racing. These

opponents saw the plan as a 25-year monopoly that gave the State Tax Commission an

incentive to question all operations, from purses, to expenses and salaries – all of which

4
amounted to political control of racing. To these opponents, the profit motive should drive

racing.5 Regardless, Governor Harriman signed a version of the plan into law in 19556 and the

Greater New York Association filed its certificate of incorporation the following month.

Twenty “leaders of the turf” paid $50 each for their shares of the aggregate stock valued at

$1000, along with their membership on the Board of Trustees.7 The new statute expressly

required that the certificate of incorporation contain these provisions:

• No assets shall be paid or distributed on its capital stock by way of dividend or

otherwise
• All assets after payment of or provision of liabilities will be assigned,
transferred or conveyed and distributed among one or more “exempt
organizations” as defined in § 501(c)(3) of the Internal Revenue Code of 1954
and as designated by the governor “upon termination of the existence or earlier
liquidation of such association”
• The number of directors or trustees (unpaid) who shall each be a stockholder
with at least five shares of stock shall be not less than 5 nor more than 20 (25%
elected annually)

The law also required the association to apply for a franchise of not more than 25 years and to

pay an annual franchise fee equal to the taxable income of the association for the preceding

calendar year. The association’s federal tax liabilities, amortization of debt, and the

maintenance of a reserve, not to exceed 3 million for contingencies, would reduce its taxable

income, provided however that the minimum annual fee for each racing day was $1000. The

association subsequently acquired Aqueduct, Belmont, Jamaica, and Saratoga for $32.6 million

for 25 years.

On October 1, 1955, the association negotiated a credit agreement with Morgan

Guaranty Trust and a consortium of twelve other banks for a $47 million loan at 4.5% interest
5
Cyrus S. Julien, President of Queens County Jockey Club and operator of Aqueduct, James Butler, a major
Aqueduct stakeholder, William C. Langley, member of the Racing Commission, and Assemblyman James J.
McGuiness all opposed the plan.
6
Laws of 1955, Chapter 812
7
The Jockey Club Plan proposed that the Club hold the stock and assets.

5
payable over 10 years. One by one, Saratoga, Belmont, Aqueduct and Jamaica sold out to the

association for a total price of $24.5 million.8 The association refurbished Belmont, Aqueduct

and Saratoga, but the initial loan proved too low. The price tag was ultimately $63 million.

NYRA’S FINANCIAL TROUBLES: 1970-2004

The inability of NYRA to stabilize its expenses in accordance with its revenues has

plagued the industry almost since its inception.9 The discrepancy has forced much legislative

tinkering to keep NYRA solvent and help it withstand the ebbs and flows of the handle, daily

track attendance, and the advent of the Off-Track Betting Corporation. In 2003, Comptroller

Hevesi concluded that the principal cause of NYRA’s persistently frail financial condition was

the inability of its revenues to keep pace with its expenses. Thirty years prior, the Governor’s

Commission (the “Delafield Commission”) reached the same conclusion. The Delafield

Commission had asserted that “NYRA’s long-term problems stem from its inability . . . to

produce growth in revenues equal to the rate of growth of expenses.” The state tasked many a

task force with the analysis of this situation.

The Delafield Commission attributed a variety of causes to NYRA’s problems. First,

OTB’s newly-minted presence on the racing scene10 affected handle and attendance to the

detriment of NYRA’s revenues. Second, NYRA’s purses lagged behind the inflation rate, a

sentiment echoed in a 1994 report.11 Third, the State primarily treated horse racing as a

convenient cash cow, rather than a sport. To this effect, it heavily taxed the handle and the

8
Jamaica was ultimately sold and the proceeds were used to repay some of NYRA’s long-term debt. Racing was
discontinued one month before the new Aqueduct Track opened.
9
At this point, the law is literally pockmarked with changes in NYRA’s tax burden, its takeout and breakage rates,
changes in OTB’s contribution, determination of the franchise fee, changes in the length of the meets, and debt
restructure.
10
Laws of 1970, Chapter 143 legalized OTB in New York to specifically curb illegal bookmaking and organized
crime. See Report to New York State Commission on Gambling, Joseph J. Weiser (1973).
11
See Harness Racing, Thoroughbred Purses and The Backstretch, Advisory Committee on Racing in the 21st
Century (June 1994) Vincent Tese, Chair.

6
price of admission, and threw its weight behind the creation of OTB for its revenue promise.

Traditionally, the extension of the racing season acted as the standard fiscal remedy, but the

Delafield Commission now concluded that this was essentially “foreclosed.”

In response to the Delafield Commission’s findings, the legislature enacted Chapter 346

of the Laws of 1973. This chapter merged the several racing regulatory agencies into one,

authorized an experimental reduction in State takeout, granted tax relief (albeit it temporary),

forced OTB to contribute more to the tracks, and created the new “exotic” wager. Yet despite

the Delafield study and the 1973 legislation, NYRA’s basic structural flaw remained unsolved.

The industry still suffered from the inability to produce revenues equal to the growth of

expenses.

By 1975, NYRA’s on-going insolvency forced another temporary solution. Chapter

577 of the Laws of 1976 granted NYRA the right to conduct winter racing for three years

beginning in 1976, but this required the winterization of the tracks to the tune of $6 million.

That loan fell due on July 1, 1976 - two years before NYRA’s $22 million balloon payment

from its long-term debt obligations ripened – and despite the previous efforts at tax relief and

takeout reductions, NYRA was operating at an $8 million deficit. The imbalance in its cash

flow preordained its default on the $6 million loan, and NYRA’s very existence was in

jeopardy.

The State reacted with Chapter 840 of the Laws of 1976. This legislative response

represented a significant departure from the “short-term tinkering with tax rates and takeouts

that had characterized earlier state efforts.” It represented both a major change in the method

by which NYRA would be taxed and in the traditional relationship between the State and

NYRA. Fiscally, the law intended to buoy NYRA’s ability to operate without annual

7
legislative rescue by infusing it with long-term financial stability, despite trends in handle and

attendance. It granted 50% pari-mutuel tax relief and revised the franchise fee to equal 90% of

NYRA’s net income, or all of its net income in excess of $1.75 million. It also deferred the

1982 and 1983 fee payments to 1984 and 1985 in order to permit NYRA to complete

repayment of its outstanding debt under a modified credit agreement extending through 1983.

In theory therefore, NYRA would have no debt service in 1985, which would be especially

helpful since the Meadowlands Sports Complex in New Jersey had since opened.

Then Alydar and Affirmed exploded onto the racing scene to captivate the nation’s

attention in one of the greatest rivalries in all of thoroughbred history. In 1978, their rivalry

culminated in the third leg of the Triple Crown, the Belmont Stakes. At the wire, race

announcer Chick Anderson nearly lost control as he yelled, “And Affirmed puts his nose in

front! It’s Affirmed!” Affirmed won the Triple Crown, is still the reigning Triple Crown

champion, and NYRA enjoyed a record handle that year. Despite this phenomenal year in

racing history though, NYRA’s revenues to the state were their lowest since 1959 and the

franchise structure still hobbled its ability to raise capital investment funds. In response,

NYRA submitted a proposal to the governor that outlined a new vehicle to provide the

necessary capital and a franchise extension for the life of the financing.12 According to its

proposal, an undesignated state agency would issue long-term tax-exempt bonds totaling $70

million. The state would then purchase NYRA’s properties with the proceeds from the sale of

the bonds and lease them back to NYRA. NYRA’s lease payments would equal its debt service

on the bonds. The state’s share of the pari-mutuel handle would secure the bonds through their

maturity of 25 years. At the end of the lease term, NYRA would have the option of purchasing
12
The Wicks Committee touched on this and Stanley Fink emphasized it in his 1981 report, discussed later in this
paper. Basically, financing has always been dependent upon franchise extension because creditors must be assured
of the existence of their debtor.

8
the facilities from the state at a nominal price. NYRA’s debt service and lease payments would

reduce its taxable income, leaving the state to finance a significant portion through the ensuing

reduction in franchise fees. The proposal left the state with the bulk of the risk, and the plan

died.

The 1980 Joint Legislative Task Force that evaluated and disapproved of NYRA’s

proposal offered an alternative financing scheme. It found the bonding mechanism a viable,

long-term approach, but preferred that the State assume sole ownership of NYRA’s assets as

bond security. It then explained,

The law establishing the franchise would have to be amended so that the Governor is
not mandated to dispose of these assets to one or more “exempt organizations.”
There appears no justification for the inclusion of a provision enabling NYRA to
purchase the properties at a nominal price when the bond obligations have been
met . . .The NYRA manages the facilities and its shareholders derive no direct
financial benefits from their positions of the Board of Trustees. Capital investment
is provided from external sources and the revenues generated by operations are used
to repay this debt. Historically, the State of New York has reduced its share of
revenues from the NYRA on several occasions so that viable operations were
assured. The cost of these reduced revenues has ultimately been borne by the
taxpayers of the State. In light of these investments and probably future
investments, the State, on behalf of its taxpayers, should assume ownership of the
NYRA facilities.

This proposal eliminated the need for a 25-year franchise extension, which was necessary to

secure private financing for capital improvements, and enabled the state to “adopt a performance

evaluation policy with respect to track management.” Furthermore, the task force criticized the

franchise fee structure. It recognized that,

precedents have been established whereby additional revenues could be made

available to the NYRA if it were subject to tremendous financial pressures by
increasing its share of the takeout. However this myopic approach has been utilized
before and apparently perpetuates a deteriorating situation. The salient flaw in the
present franchise structure is that the State taxes all profits above $1.85 million at a
rate of 100 percent.

9
This flaw was the underlying cause of NYRA’s inefficiency and lack of an expense conscience

because it removed the free market incentive to produce more for less. The task force proposed

the formation of a public benefit corporation similar to the New Jersey Sports Authority that

operated the Meadowlands; an alternative that would give the state the option of, preferably,

leasing the facilities to an operator who now had a profit motive. The task force concluded “the

profit incentive is the basis of the following alternative to the present NYRA structure.”

In 1981, the Speaker of the Assembly Stanley Fink issued a legislative proposal to

enhance racing. He agreed that a public benefit corporation should be created – the New York

State Thoroughbred Racing Facilities Corporation (NYSTRFC) – which would be vested with

title to NYRA’s tracks. The state would retire NYRA’s debt through a first instance

appropriation of $22 million, and the NYSTRFC would be authorized to issue up to $100

million in long-term bonds to rehabilitate and modernize the tracks. NYRA would continue

under its current franchise, but only be vested with management and operational

responsibilities. Fink faulted NYRA’s plan because “it would perpetuate the worst feature of

the present NYRA structure by, in effect, giving the association a perpetual franchise, since the

ability of NYRA to periodically generate capital funds is an inseparable function of the

duration of its franchise.” Furthermore, the state needed to recognize the millions of dollars of

the people’s money invested in NYRA’s track properties. He asserted, “the public and the

public alone has paid for the facilities, and the title to the properties should clearly be vested in

the public’s name. NYRA and its directors have absolutely no equity invested in the facilities.

Yet NYRA’s proposal . . . would continue this unconscionable practice of vesting title in

NYRA.” NYRA strongly opposed on the grounds that the state would need to buy its three

10
tracks at the then current market price for the real estate, some $1 billion. To its credit, NYRA

knew far more about racing than bureaucrats.

SIMULCASTING: THE FIRST NEW YORK EXPERIMENT

In 1981, the legislature passed the first law authorizing simulcasting experiments in

New York. New York City OTB and Suffolk OTB would be each permitted to provide

telecasts of live audio and visual signals of harness racing in two existing facilities.13 This

“experiment” expired on June 10, 1983. On March 6, 1983, NYRA telecast its racing signal to

Caesar’s Palace in Las Vegas, Nevada where 1000 people viewed the races. In 1984,

simulcasting of thoroughbred racing allowed New York bettors to wager on the Kentucky

Derby, the Preakness, and the Breeder’s Cup at tracks and OTBs. NYRA was now authorized

to negotiate an agreement with the Breeder’s Cup sponsors for out-of-state simulcasting of its

races so that they may be held at Belmont Park. Then, simulcasting of all race tracks to OTB

parlors and teletheaters arrived, and the “experiment” became permanent in 1990.

THE 1983 LEGISLATION

Meanwhile, in 1983 the state extended NYRA’s franchise through December 31, 2000,

but now it included a mechanism for a state takeover of NYRA in 2001, if so desired. On

September 1, 1997, the state could select an entity other than NYRA, or extend NYRA’s

franchise. The governor would form an ad hoc committee to solicit proposals from

organizations interested in the operation of the three tracks for a franchise period of ten years.

This enactment also amended NYRA’s charter to eliminate the phrase “charitable

organizations” from the clause that provided for asset liquidation by the governor. The phrase

“in accordance with all applicable provisions of law” replaced the prior language. Of even

greater significance, the law required a new additional provision in NYRA’s charter (deemed
13
Laws of 1981, Chapter 604

11
“inserted” upon passage, regardless of whether NYRA actually filed an updated charter) that

said, “the existence of such association shall terminate at any time that [its] franchise expires,

or at any earlier time that such association dissolves itself . . . or at any time that such

association relinquishes [its] franchise.” Lastly, this 1983 legislation created the Thoroughbred

Racing Capital Investment Fund (“CIF”).

The CIF is a public benefit corporation that a board of directors administers. The board

consists of a director of the budget, the chairman of the Racing and Wagering Board, and seven

members that the governor appoints upon legislative recommendation. Its purpose is to provide

and assist NYRA with capital improvement finance and to authorize NYRA to enter into credit

agreements with private lenders. The CIF is financed with a portion of NYRA’s simulcasting

revenues and an annual franchise fee equal to NYRA’s entire adjusted net income less $1.85

million (increased in 1998 to two million). PURSE ALLOTMENT? The CIF would provide

$4 million in funds for capital improvements in its first year, and then another $50 million in

the ensuing five years. The mortgage liens on Aqueduct backed all loans. As of December 31,

2001, NYRA owed the CIF $64.6 million for prior loans and related interest. (Almost positive

this is correct but I don’t have the data). Lastly, upon the expiration of NYRA’s franchise,

the statute provides for the CIF to conduct races and pari-mutuel betting when necessary to

assure their continuation in the event that franchises have been terminated by law, or have been

relinquished or the corporation or association declines to continue or the existence has been

dissolved prior to the end of the franchise term and until a new franchise is granted. Basically,

racing in New York would withstand disruptive forces.

THE LAST DECADE OF THE CENTURY

12
 In 1990, NYRA lacked sufficient funds to operate after it met all of its obligations. In

1989, it could not pay CIF the franchise fee. The state returned the Omnibus Racing Bill of

1990, considered the most important racing legislation since the early 1970s. The bill shuffled

the ability of tracks to deal directly with off-track bettors to palliate the OTB drain and the

sport’s lack of a new, dedicated fan base. It made permanent the experimental audio-visual

simulcast law and expanded NYRA’s ability to send races out-of-state by allowing out-of-state

bets to accrue to track betting pools. NYRA could now offer telephone betting accounts, like

OTB, and OTB received its own capital improvement fund. Purses received 50% of any

compensation from simulcasting or wagering conducted outside of New York but within the

United States, and the remaining 50% of the same was channeled to the CIF. However, the

implementation of the 1992-93 budget hinged on the receipt of NYRA’s franchise fee payment,

which in turn hinged on the sale of a 40-acre portion of the parking lot at Aqueduct. NYRA

balked at the notion, but met the December 31, 1992 deadline. The governor received the right

to appoint eight additional members to NYRA’s board in the way of decision-making insurance

during times of state fiscal instability.

On May 15, 1992, Governor Cuomo issued Executive Order 155 to establish the New

York State Advisory Commission on Racing in the 21st Century under the auspices of re-

establishing New York’s reputation as the nation’s premier racing state. It determined that

New York’s pari-mutuel handle declined more than 40% between 1970 and 1991 (after

inflation), and its Chairman Vincent Tese quipped, “Unless there’s change, this industry is in

for a long, deep slide.” Therefore, this commission concerned itself with competition for the

entertainment dollar, which had risen due to the growth of the lottery, casinos and out-of-state

racing, the traditional fan base was aging and the younger crowd did not view racing as either a

13
sport or as entertainment. Furthermore, NYRA’s marketing efforts were feeble compared to

those of other professional sports. The commission identified various impediments to a healthy

racing industry. These included,

• Political infighting
• Business management through legislation, not management discretion
• Management accountability blurred by over-regulation
• Implied belief that horseracing “is what is was 20 years ago.”
• Self-interest v. Industry concerns
• Lack of coordination between distribution and product

The commission called for fiscal reform of the State’s regulatory system through a

consolidation of the current multi-agency regulatory framework, which the Delafield

Commission (1973) had endorsed. It called for structural reform through a merger of New

York City (OTB racing market) and NYRA into a joint venture to end destructive competition

between the two, along with the incorporation of the regulatory industry. It then called for a

transformation from non-profit agency to one driven by the bottom line. Once a track record of

financial stability and success had been achieved and sustained, the commission recommended

the consideration of an initial public offering. Flush with that cash, the profit-driven

corporation would purchase New York City’s 94 OTB parlors, real assets totaling $17 million,

and merge the tracks – which Tese asserted the state owns – into a single tax-exempt entity.

The Public Service Commission would regulate this new public-benefit state “super agency.”

By 1993, NYRA owned the state $4 to $5 million in back taxes on pari-mutuel wagers.

NYRA’s president, Gerard McKeon, warned that the state may have to forgive $9 million in

taxes before the end of the year or risk losing winter thoroughbred racing. In turn, Governor

Cuomo threatened to revoke NYRA’s license and seize some of its property in lieu of tax

payments. Other developments of the mid-1990s include:

14
 • The sale of Aqueduct, the proceeds of which would be applied toward the
purchase of the New York City OTB and renovations at Belmont Park.

• OTB receives the right to simulcast races from out-of-state on day when NYRA
races, thus placing it in direct competition with Belmont, Aqueduct, and
Saratoga. The state also retained the right to select another operator should
NYRA elect not to hold winter racing at Aqueduct. (NYRA lost $20 million
during the previous two winter meets.)

• NYRA released an independent audit that question its ability to survive and
warned that it may have to file for bankruptcy by the end of 1995.

• Home telecasts revived New York City OTB. OTB also opened 9,000 telephone
accounts that required no minimum balance, whereas NYRA only opened 400
accounts subject to a $450 minimum balance.

• The state enacts $20 million in tax and takeout relief.

• The state comptroller and attorney general issue a join report that criticizes
NYRA’s management for undertaking poorly planned and monitored capital
projects in which favoritism played a role in contract awards.

• In 1997, NYRA wins a ten-year extension of its franchise to December 31,

2007, but it is prohibited from selling any racetrack property without state
approval, which deems the sale in the best interests of racing.

THE NEW MILLENIUM

In June 2001, harness and thoroughbred breeders and track operators paid for a study of

video lottery terminals. The study revealed that the installation of 11,500 video lottery

terminals (VLTs) at eight harness and flat tracks would return $1.5 billion in revenues to the

state, including $700 million for education. These new “racinos” would draw gamblers from

Connecticut, Atlantic City and the Indian reservations. Consequently, the state authorized the

installation of VLTs for a three-year pilot period.14 As originally enacted, the balance of the

total revenue funds education, after deducting 15% for the Lottery Division’s operating and

administrative costs and a vendor’s fee payable to the racetrack. The law required the tracks to

14
Laws of 2001, Chapter 383

15
reinvest a percentage of that vendor’s fee into purses and breeding funds, but this provision was

subsequently held unconstitutional in a 2004 Appellate Division that found this diversion

violative of the restriction limiting the use of proceeds from state-run lotteries to educational

funding. The Appellate Division did affirm that video lottery is a form of a state-run lottery,

albeit a new method, thus rejecting the notion that video lottery should be banned. The Court

of Appeals will hear arguments on March 22, 2005. Furthermore, NYRA’s franchise would

enjoy an extension to 2012 if it could install and operate VLTs at Aqueduct by 2003 and then

by 2004. NYRA failed to meet this deadline and the franchise extension expired on its terms.

In 2003, Attorney General Eliot Spitzer issued an investigative reported titled “An

Examination of Employee Misconduct at the New York Racing Association, Inc., and

Management’s Response.” This report fault cash handling in the mutuel department and

outline “NYRA crimes,” which included money laundering, illegal gambling and loan

sharking, income tax fraud and various other petty teller scams. In light of these criminal

operations, the report found that,

As important as individual criminal liability is, this culture of criminality within a

government-chartered not-for-profit corporation raised larger questions of
corporate accountability and transparency. The evidence shows an organization
that is, at best, indifferent to corruption. Insistent that no one understands racing
but they, NYRA’s top officers have resisted reform, misled regulators and, when
forced to address glaring deficiencies -- including criminal conduct --adopted only
weak measures. NYRA’s insularity led its president to insist, during the
investigation, that it was proper to incur thousands of dollars of meal expenses at
luxury restaurants for him, his family, and employees, and thousands more for
meals entirely lacking documentation. When the expenses were questioned, the
President of NYRA responded, “Social life and racing life are two sides of the
same coin.”

The report also noted that, in 1995, the CIF had retained Richard A. Eisner & Co., LLP, a

consulting firm to examine NYRA. The examination returned a host of poor practices and an

16
attitude of squarely stuck in the past. The firm said, ‘Curiously, many [NYRA managers]

appear to take pride in following procedures that are identical to those established 40 or more

years ago . . . NYRA is not functioning as an efficiently managed profit-making organization

would function facing similar financial difficulties.” Id. at 19. All in all, the report was a

telling condemnation, which culminated in an August 2003 federal investigation in which

sixteen pari-mutuel clerks were convicted of felony tax fraud and three for money laundering.

In December 2003, NYRA entered into a deferred prosecution agreement with the United

States Office in return for the payment of a $3 million fine. NYRA acknowledged

responsibility for the frauds and schemes and its subsequent lack of response, and it agreed to a

court-appointed monitor for an 18-month period, through July 1, 2005.

RECENT DEVELOPMENTS

On July 17, 2004 NYRA announced a record loss of $20 million in 2003 and it could

not pay its 2003 franchise fee. (NYRA has been unable to pay its franchise fee for years). On

September 4, 2004, the Racing and Wagering Board approved to a cable television agreement

between NYRA and the Television Games Network. The TVG Network televises races on

cable stations to allow people to bet from home. The Network obtained the exclusive use of

NYRA’s simulcast signal outside of New York and nonexclusive rights in the state where

NYRA also sells rights to OTB. Thirteen and one-half million from the agreement was

deposited into a special account to repay the horsemen’s account from which NYRA had

previously and improperly loaned itself money. That account is now fully funded at $16.9

million. On January 12, 2005, NYRA announced the suspension of two clerks of scales in

connection with an investigation of whether jockeys were carrying their correct weight. The

Attorney General’s Organized Crime Task Force conducted raids using information that NYRA

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provided. That same day, Comptroller Alan G. Hevesi issue an audit highly critical of NYRA’s

travel and entertainment expenses, including car rental payments and country club

memberships. Lastly, seventeen people were arrested on January 14, 2005 for running an

organized crime operation to dope horses using so-called “milkshakes” to the benefit of

anonymous telephone bettors. It occurs in New York, New Jersey, Florida, Nevada, and New

Hampshire. NYRA reacts by announcing random daily pre- and post-race testing for

milkshakes.

Governor Pataki also submitted 2004 budget legislation to establish a new State Gaming

Commission with broader powers than the State Racing and Wagering Board to oversee all

aspects of gambling, including pari-mutuel, Indian casinos, and video lotteries, in the state.

The proposal called for the creation of a Non-Profit Racing Association Advisory Board to

make recommendations regarding NYRA’s current franchise and the expansion of VLT

operations beyond race tracks. In the event that a new entity held the state racing franchise,

that entity would be required to pay a one-time fee to the state of $250 million.

CONCLUSION (me rambling)

Despite NYRA’s seemingly interminable woes, New York racing survives as a national

icon. This survival, however, neither guarantees its future nor its eminence in the industry.

The need for reform has long since past. New York racing needs a new vision for a new

millennium akin to the admirable efforts of the Jockey Club 50 years ago. This vision must

recognize that horse racing is a virtually untapped market in a country obsessed with sports,

because the average American remains oblivious to the difference between Las Vegas-style

betting and the pari-mutuel system. Furthermore, the game badly needs another Triple Crown

winner. The recent thoroughbreds Cigar, Funny Cide and Smarty Jones generated volumes of

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excitement and potentially thousands of new converts to the game. Yet stud fees so outpace the

glory of the winner’s circle that equine superstars are nonexistent or so fleeting that the public

hardly takes note. However, the history of the game reflects its enduring nature, despite human

error and myopia.

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