Commentary

Betting on the Future

By Jeff Hooke and Thomas A. Firey
This article appeared in The New York Times on February 26, 2006.

The future of thoroughbred racing in New York State will take shape in the coming weeks as a committee assembled by Gov. George Pataki and state lawmakers drafts recommendations for reorganizing the industry. The committee’s ultimate decisions could have major effects on consumers and taxpayers in the state.

Committee members will hash over a number of issues, the most important of which involves something that has little to do with thoroughbred racing itself: the 4,500 video slot machines that will open at Aqueduct Race Track in January 2007, and that could one day be at Belmont Park and maybe even Saratoga Race Course.

Horse racing has long been an important contributor to New York’s history, economy and culture, but for years crowds at the race tracks have been dwindling as more and more New Yorkers wishing to gamble have turned to the state lottery, Off-Track Betting salons and casinos in Connecticut and Atlantic City. As a result, the New York Racing Association, a nonprofit corporation that operates Aqueduct, Belmont and Saratoga, has fallen on rough financial times.

The association, which will operate Aqueduct’s expansion into slots along with a casino company, MGM Mirage, is hoping that revenue from the machines will allow it to get out of the red and make some money. But the problem is that the association’s lease on the three tracks expires by the end of 2007. Hence, the committee’s recommendations on how the thoroughbred industry will be reorganized — and who will receive the future slots bonanza — is of utmost importance to the financial success of thoroughbred racing.

Of course, a number of different groups would love a cut of that action.

Last summer, a coalition of racing and gambling interests known as the Friends of New York Racing proposed that New York merge the three race tracks and the state’s six off-track betting operations into a for-profit entity that would be granted the Aqueduct slots license and a second slots license for Belmont. In return, the state would sell off this new entity for $465 million but continue to receive gambling tax receipts. The state would also receive a commitment from this new entity that it would use $130 million per year of slots revenue to subsidize track purses.

A half-billion dollars sounds like a good deal for taxpayers in the state, but New York will give up too much if it accepts such a deal. We calculate that if New York reduced the annual purse subsidy to $44 million, which we believe is a more reasonable figure, and sold off those assets in an auction before multiple qualified bidders, the state could receive a whopping $2.1 billion — with the majority of that value attributable to the revenue from slot machines. Even if New York required the $130 million annual purse subsidy, we estimate the slots licenses and other gambling assets could sell for more than $1.5 billion.

In the best of worlds, if New York is going to expand slots, the state should allow a free, competitive market that would benefit consumers. But if the state is bent on having a constricted market tied to thoroughbred racing, then the state should extract most of the value of the slots and the racing assets and give the resulting money to state residents as tax rebates.

Are our estimates accurate? They might not be, but that is all the more reason for New York to auction off the slots, thoroughbred racing and off-track betting assets instead of agreeing to some stipulated price. An auction would be the best way to identify what those assets are truly worth. Taxpayers cannot afford for the state to leave hundreds of millions of dollars on the table.

Jeff Hooke is the founder of a corporate finance consulting firm. Thomas Firey is the managing editor of Regulation magazine.