STATE AUDIT: “SIGNIFICANT FLAWS” IN NYRA CALCULATIONS

On the morning before Saturday's GI Belmont S., the office of the New York State Comptroller released an audit of 2012-14 finances for the New York Racing Association (NYRA) that detailed “significant flaws” and “very misleading” revenue calculations for racing operations while criticizing the organization for having no formal written plan to make the non-gaming side of the business profitable.

Although the audit stressed that the once-bankrupt NYRA's overall financial condition is “sound,” the report underscored that such broad financial health is only a result of video lottery terminal (VLT) revenue subsidies. Excluding the money gleaned from gaming, the report noted that NYRA's traditional racing operations at Aqueduct Racetrack, Belmont Park, and Saratoga Race Course “have generated multimillion dollar annual deficits” for a block of five consecutive years.

A “Key Findings” overview that accompanied comptroller Thomas P. DiNapoli's full audit pointed out that when VLT revenues are subtracted from the overall financial picture, “NYRA would have generated cumulative operating losses of $109.3 million from 2010 through 2014 (or an average annual loss of about $22 million).”

The racing-only profit/loss figures cited in the audit are at odds with what NYRA has reported in recent years. The comptroller gave the example of 2014 alone, when NYRA reported a surplus of $1.7 million, excluding VLT subsidies. However, the audit explained, “officials overstated NYRA's actual financial condition by excluding certain ordinary and necessary expenses” from calculations, like pension contributions, post-employment health benefits, and depreciation totaling $13.2 million.

“Thus, NYRA actually lost $11.5 million [in 2014] when VLT funding is excluded,” the comptroller wrote.

The audit further reported that when the state questioned NYRA about why those expenses had been excluded, the NYRA controller gave the response that the organization considered those expenses “non-controllable” for accounting purposes.

The state comptroller disagreed: “Pension, OPEB, and depreciation expenses are routine and necessary costs of doing business; operating expenses in accordance with generally accepted accounting principles; and recognized as such on NYRA's financial statements. Thus, to assert that NYRA generated profits from racing-related operations, through the exclusion of 'non-controllable' costs, is very misleading.”

NYRA director of communications Patrick McKenna defended the organization's practices. He wrote in an email that “the purpose of the OSC's audit was to determine if NYRA received, spent and accounted for its revenues and expenses properly, and the OSC's report clearly states that we did. This finding has been previously reported by our accounting firm, KPMG, who has issued a “clean audit” for each of the last four years.”

In a section of the audit titled “Questionable Operating Expenses,” performance bonuses for NYRA executives topped the list.

In 2014, NYRA paid $897,000 in incentives to employees. While the audit found that “most of these incentives appeared to be reasonable and [were] based on specific goals, such as sales achievements or productivity…some incentive payments were not adequately supported.”

The audit continued: “In particular, NYRA's CEO [Christopher Kay] received a $250,000 bonus for 2014. According to the evaluation criteria for this bonus…the CEO was to address revenues and expenses and develop a strategic plan for new technologies, with the goal of a balanced (“break-even”) operating budget, excluding VLT funding.

“However, as previously noted, NYRA incurred a loss of $11.5 million in 2014…If a break-even budget was developed, it was not executed. Thus, significant objectives of the incentive program were not achieved, and therefore we question the propriety of a bonus of this magnitude.”

The audit also scrutinized a portion of $4.36 million that NYRA spent for consultant services in 2014 “to determine if the contracted services were actually provided and necessary for a racing operation.”

The state comptroller found that five of 10 sampled payments to consultants “were not supported by contracts, agreements, or other sufficient documentation…Further, in four of the five cases, we could not determine if the consultants actually rendered the specific services for which they were paid.”

A total of $89,000 that NYRA spent on air and ground horse transportation for horses that raced at Belmont was also questioned: “According to NYRA officials, the handle generated from the horses offset the shipping expenses. However, officials were unable to support this assertion with documented facts and analysis.”

Yet after this fairly significant block of “questionable” expenses, the audit concluded the section by seemingly quibbling with far smaller expenditures. For example, the comptroller took issue with a total of $7,500 paid to five assistant starters who manned the gate at Saratoga's training track through November 2014. The biggest flaw that the audit found was that “there was no documentation of how many days–or hours each day–these individuals worked to earn the $7,500.”

The audit concluded with four recommendations to NYRA:

1) Moving forward, that it calculate the results of racing-related financial operations by including all ordinary and necessary expenses.

2) Develop a detailed plan to eliminate NYRA's annual deficits from racing operations.

3) Formally assess the propriety of the questionable expenses identified in the audit and develop and implement written policies to minimize the risk of excessive payments.

4) Determine general horse racing industry “best practices” regarding the questionable expenses and other material cost items to enhance revenues and reduce costs.

NYRA has 90 days from the release of the audit to report to the state what steps were taken to implement the recommendations, or in instances where the recommendations were not implemented, the reasons why.

This is the second consecutive year in which NYRA has been mired in unsavory off-track news in the days prior to the Belmont S. In 2015, Anthony Bonomo resigned as chairman of the NYRA Reorganization Board when his company was revealed to have allegedly provided a “no-show” job to the son of the former state Senate Majority Leader.

This year's timing of the audit is additionally complicating because state lawmakers are currently considering various NYRA re-privatization options that might be enacted before the June 16 end of the legislative session.