NEWS

Industry News

Most Popular Stories

Most E-mailed Stories

Q&A with New York City OTB chairman Frucher

Posted: Wednesday, May 26, 2010 12:30 PM

If the hottest seat in New York politics is occupied by embattled Gov. David Paterson, surely the second-hottest must belong to Meyer “Sandy” Frucher, chairman of New York City Off-Track Betting Corp. A pro bono appointee of Paterson, Frucher succeeded David Cornstein as chairman in June 2009. A vice chairman of NASDAQ OMX Group, he has extensive public and private sector experience, including service as an adviser to former New York Gov. Mario Cuomo. 

Opened in 1971 as the nation’s first off-track pari-mutuel betting facility, and currently one of six regional off-track wagering corporations in the Empire State, New York City OTB handled almost $1-billion in wagers and earned nearly $250-million in revenue at the close of its fiscal year ending June 30, 2008. Per its statutory obligations, the company paid out $93-million to Thoroughbred and Standardbred racing, another $20-million to New York City and other local governments, and $15-million to the state despite posting monthly losses estimated between $600,000 and $800,000.

In an attempt to staunch the continued hemorrhaging of red ink, the state stepped in and took over the corporation from New York City in June 2008. In December 2009, New York City OTB filed for Chapter 9 bankruptcy protection in order to reorganize its operations, a move that is expected to include eliminating jobs and extricating itself from burdensome lease agreements. While agreeing with the rest of New York racing’s factions that “the state’s racing model is broken,” Frucher now finds himself at the eye of a political firestorm with critics on all sides questioning the corporation’s motives and “lack of transparency.”

Buffeted by the worst economic crisis since the Great Depression and a dwindling fan base abetted by declining racing handle and purses, the “elephant in the room” for New York racing continues to be the decade-long procrastination in the state capital to award a contract to a video lottery terminal operator to install 4,500 VLTs at Aqueduct. Absent a $300-million upfront licensing fee payment as part of the contract, which would provide a badly needed cash infusion to racing’s purses, that fiasco in combination with New York City OTB’s inability to meet its level of mandated statutory payments has ratcheted up the level of rhetoric considerably among all segments of New York’s racing industry.

Amidst reports it was seriously considering shutting its doors on April 11, New York City OTB announced on April 9 it would postpone that potential move by another week. As its 1,300 employees continued to exhale, the company announced on April 18 it would stay open and pursue a restructuring plan by its bankruptcy creditors’ committee. Five days later, the axe fell for 35 non-union management employees who were terminated with a resulting savings of $2-million. Frucher also announced the corporation could stay afloat for another year if it continued to cut costs while delaying statutory payments to racetracks and breeders. That was met with vociferous calls for his resignation by two prominent New York racing groups, who also demanded an investigation by the state attorney general. 

Frucher recently took time away from his busy schedule to discuss New York City OTB’s future and the perilous economics of New York racing with THOROUGHBRED TIMES correspondent Reg Lansberry.

THOROUGHBRED TIMES: What were the circumstances surrounding your appointment by Gov. Paterson and what marching orders did he give you?
Meyer “Sandy” Frucher: I was asked to take over NYCOTB with the specific mandate to try and fix it. There’s a general recognition that it was about to implode, and with it, potentially, the horse racing industry in New York state. Additionally there was, and would be, a $700-million cost to the public treasury in one form or another if NYCOTB closed because there are 40 years’ worth of pension and contractual health benefit obligations due employees over that period of time. So there were two obvious issues. One was sustaining the industry and the other was not having a massive hit on the treasury of the city or the state at a time when you have a $9.5-billion budget gap at the state level.

TT: How long have you known the governor?
Frucher: I’ve known the governor for many years. I don’t know exactly how many, but I knew his father [Basil] pretty well and worked with his father.

TT: How would you describe your relationship with him? Do you “check in” with him periodically?
Frucher: I’d say it’s cordial. It’s not intimate. Since he gave me this assignment, I’ve checked in with him a few times.

TT: When you took over as chairman, was there anything about the job specifically, or the landscape of racing, that surprised you?
Frucher: Yes. I was surprised at how fractionalized the industry is. And that people were rowing in different directions. There isn’t an easy way to sit down with the entire community to try and work out rational solutions. That in a lot of ways people are all, understandably, playing for their own accounts, which, when you’re looking at the distribution of diminishing resources, you can understand why. But at the end of the day, it’s very hard to get a cohesive, rational resolution.

TT: New York’s racing business model has long been castigated as outdated and nonsensical. What were your impressions of it when you began?
Frucher: I would agree with the characterization. One of the things that was clear to me, when I did my due diligence, was that the law that set up NYCOTB was broken. At the inception. That the NYCOTB business model is horribly out of date so that when you put it together, it forces the dysfunctionality of the industry. Particularly given that it is a major revenue raiser for the industry.

TT: As a businessman, is there anything on a personal level—without the ad hominem attacks—that you like about the racing industry or are the economics of it such that all the back-and-forth criticism needs a referee?
Frucher: First of all, I like the components of the industry. I’ve gone to the track on occasion, mostly at Saratoga [Race Course]. I’ve been to the Belmont [Stakes (G1)] a few times, but I like “the scene.” It’s quite lovely up there. When I come up from my house in Columbia County, it’s a wonderful day. Not just at the races but the whole town of Saratoga [Springs]. I’m on the board of the Saratoga Performing Arts Center [SPAC] so it’s a whole wonderful cultural event from beginning to end. When I ran the Philadelphia Stock Exchange, I did a four-day retreat with our customers. We brought them to Saratoga. People went to the races, played golf, went to SPAC, went out to nice places for dinner. So I’m quite familiar with that aspect of it. I’ve had a home in Columbia County since 1975 and I’m well aware of the importance of the breeding industry and how important that is to the upstate economy, how important it is to the agribusiness and jobs. Also, I’ve always loved horses and watching that whole world—not just the highfalutin aspects of it with the high-end riding and jumping tournaments but just people having horses, raising horses, and enjoying the animal. A horse is just a magnificent, beautiful animal. What has struck me is how the perception of horse racing has evolved from the family-friendly, National Velvet to ... just folks hanging around outside an OTB parlor. Or strictly the wagering components of it, which in a lot of ways is sad because you don’t get to see the whole gestalt.

TT: NYCOTB handles close to $1-billion in wagering annually. The criticism aside, do you think there is anything about the business itself that New York City OTB does well and for which it does not get enough credit?
Frucher: Well, yes. First of all, NYCOTB does something very well: It handles $1-billion worth of revenue and most of it goes either to the bettor, the person who does the wagering, the customer, which is 80%. And the industry has, over time, and the governmental entities have received $4-billion. And not one cent of public dollars has gone into it. So fundamentally it has been a pretty effective transfer agent. Unfortunately, the model is broken, and for the last eight years while the industry has continued to get its money, by and large, the structure of OTB has started to crumble and over that period of time there has been an accumulation of $100-¬million in arrearages. Which is preposterous. And it needs to be addressed.

TT: Do you have a good relationship with Charles Hayward and the New York Racing Association?
Frucher: I would say at the moment it’s all very stressful. I would say for most of this we’ve had a constructive dialogue. Recently it has been stressed. But I don’t think that’s relevant. He hasn’t, nor I, have allowed it to degenerate to where it’s become a personal fight. I understand where he’s coming from. And I’m a firm believer in understanding that old truism: “Where you stand depends on where you sit.” So I respect his challenges and his position. On the other hand, I have a broader mandate. Part of my mandate is to ensure that the public doesn’t get stuck with a $700-million bill in one form or another. I’d say on most issues, if you peel it away, you’ll find that we’re not too far apart. But I believe, firmly, that NYCOTB has to stay in business, in one form or another, until you clean up the balance sheet. And when you do that, I think it’s all up for grabs. And I think the public policy makers should decide how they want to proceed with it. It all has to be done within the context of the public not holding a $700-million bag.

TT: In layman’s terms, describe Chapter 9. How much leeway does the creditors’ committee give you to operate, whether quarter to quarter or …
Frucher: Chapter 9 has the same rules as it relates to that aspect of it as any bankruptcy proceeding. Chapter 9 only protects you against your “pre-petition” obligations. We’re obliged to pay “post-petition” obligations. That’s the first thing. Number two: Chapter 9 is different than Chapter 11 because it relates specifically to public entities. By that, it means we don’t get the same kind of directive mandates from the court that a private company would and that’s because, as a state entity, or as a derivative of the state, we’re actually, for the purposes of Chapter 9, classified, ironically, as a “municipality.” That being defined as a “subdivision of the state”—a public benefit corporation. 
The judge can’t mandate a final resolution where that resolution conflicts with state law because of the constitutional separation of powers between state governments and federal governments. So the judge can’t order a settlement. The third major difference between Chapters 9 and 11 is that under Chapter 9 you can’t be put into Chapter 7—which is liquidation. A federal judge cannot liquidate a state-related entity.
The value of the creditors’ committee is that it will force a process by which we can have everybody sitting at the table discussing these issues, hopefully rationally, with everyone there—or being represented—at one time so that you can cut through a lot of difficult issues. For example, clearly, the harness industry is in a different place than the Thoroughbred industry. Particularly NYRA. [Harness tracks] already have their VLTs, they are functioning, and as a consequence, virtually all of the harness tracks are running at a profit. Which is different than NYRA, which does not have VLTs and is not [operating at a profit]. So there clearly are significant differences. They all have to be worked out.
The problem with the legislative process is, and was, that it’s not easy—it’s virtually impossible—for all the interests to be gathered in one place. What happens is that you have revolving doors of lobbyists all representing their clients legitimately. Except that, in that process, it’s very hard to have anybody willing to allocate any losses. It’s always, and has traditionally been, how you allocate gains. We’re now at a time when that’s simply not possible. So the question is: How do you limit the downside?

TT: Given the budget challenges in Albany amidst this tough economic environment, are there things the governor can do to help you by promulgating a regulation or by emergency regulation?
Frucher: I would say that’s a “yes, but.” Yes, we could try to accelerate and make efficient the “siting” process so that we could get technology out there, but that’s only a relatively small piece. If the industry is going to remain whole in this process without any significant losses, there has to be an infusion of revenue. I mean, it’s pretty axiomatic: If the pie is fixed and it’s getting smaller, you’re going to be distributing less money. Now, the problem from the OTB side is that, if you start cutting back simultaneously at the expense base, which is clearly what we have to do, you also start cutting back simultaneously at the revenue base. And you reach a point where the savings you get really is offset by the revenue you lose. By that, I mean, 66% of the revenue that comes into OTB comes in through the parlors. And, frankly, that’s where the bulk of your costs lie. So, in order to get the expense cuts that you need, you basically have to cut. You have to close parlors. But you have brick-and-mortar [facilities] and a labor-intensive organization that has union work rules, which are legitimate. But they tend to be expensive: overtime and double overtime on Sundays. It’s a very, very expensive business to run. You can’t, for example, have credit for gambling. Which means that you’re dealing with a lot of cash, you need a high-security operation, have to collect the cash—you have to distribute all kinds of different things.
So you have not just the parlors, which are expensive in and of themselves, you have an infrastructure that is necessary to sustain the parlors. So when you start cutting the parlors, which is really where your expenses are, you’re cutting your revenue base. And remember, the statutory distribution in New York state mandates that the [racing] industry gets its distribution off the gross handle. And as a consequence there is a disproportionate outlay against the expense savings, and thus the revenue side that is distributed takes a bigger statistical hit than you get on the expense side.
It isn’t like this is an easy exercise; it becomes very, very complicated. The challenge here is: How do you replace the revenue that you lose when you close the parlors? That’s why we were looking for technological solutions that allow you, at a significantly lower cost basis, to harvest revenues.

TT: In addition to the governor, who would be some of your allies in Albany that have been helpful?
Frucher: Well, I think the Legislature, on balance, privately understands the dilemma. Obviously, the union understands the dilemma. I don’t think there are enemies who are out to scuttle you. What there are are people who have multiple constituencies who try to balance the needs of those multiple constituencies. That becomes a very complicated piece of business.

TT: The governor mentioned that if New York City OTB is to survive, a reduction in payments to breeders of 48% would be necessary. Is that a hard-and-fast number?
Frucher: That was not my number. The number he used was based on an attempt to, once again, have some sort of rational process put into place without the infusion of new dollars in terms of how you would allocate the losses. Frankly, personally, that is the wrong way to go. I don’t think, in the short term, the industry in New York state would be well served with any reductions. On the other hand, I don’t believe that state money can or should be used to bail out any of the parties involved—whether it’s OTB, NYRA, breeders, or any of the tracks. The question is: How do you do that? I say the way you do that is through the issuance of bonds, which is permissible under Section 611 of the OTB statute. You’d have to develop a business model that works that would allow for an investor to come in and choose to invest in OTB bonds.

TT: How complicated would that be?
Frucher: I don’t think it’s complicated intellectually. We know what to do. It becomes problematic politically because the industry wants to hold on with all its might to what they know and what they like, which is a statutory distribution process that distributes the dollars from the gross. And that’s not possible. It’s simply not possible to do and find any kind of outside investor who would be willing to invest in any form. Anybody who’s going to come in with any kind of venture capital or anybody who is coming in to buy your bonds is going to insist that their investment be in first position. By definition, that requires a change in the statutory distribution process.

TT: In terms of NYRA, the governor also cited a reduction in payments of 15%.
Frucher: I’m not really going to comment on those bills. Those ideas were put together by the governor and the Legislature, the governor’s staff, and the two legislative houses, somewhat out of frustration. Being that the industry and OTB could not come to a resolution and therefore they were trying to figure out how to make some rational cutbacks. The problem was, I believe, that everybody in that ended up suffering. At the end of whatever length of time that was going to be, everybody would have come out significantly weaker. I go back to: How do you get an infusion of new capital at this point? One way the industry has gotten an infusion of new capital has been through VLTs. And as far as we’re concerned, we believe that the way to do it is to provide that kind of financing.
It’s important to look at the arguments that are put forth. The industry has two arguments about why they like the gross distribution process. Number one: The industry should get paid for services it provides. I heartily agree 100%. There’s no disagreement. Where there is a disagreement is that I think that applies to all races in-state. But I don’t think people realize that two-thirds of all wagers, all the bets, that go through NYCOTB are for races outside of New York state. And that of the revenue distributed to the industry in New York state, 55% of that revenue comes from out-of-state races. Which means that the New York state industry, on that distribution formula, already gets a premium for the races run in New York. If one-third of the races and the wagers are in New York state, you get 45% of that revenue. So you already get a 12% premium for New York state races. The out-of-state races have nothing to do with the product you provide in-state. There are no services that are being provided. OTB, I might add, pays for that by paying the out-of-state tracks for their simulcast costs. The first argument isn’t as strong as people would like to think it is.
The second is an even more bizarre argument: Well, if you give those bums unfettered expenses to run their operations they’ll run themselves into the ground. Hello! Has anybody noticed? If that’s the thinking, it hasn’t worked. There are a lot of other governance mechanisms that could be put into place that would protect against that. So the rationale for the current formula isn’t there. The real argument is: We get this amount of money, we’re in troubled times, and we need the money. Okay, that’s a more rational conversation than trying to justify something that from any business vantage point simply doesn’t make sense.

TT: There is also an argument to be made that if VLTs had been up and running at Aqueduct at any time within the last decade, or the economy was better, pick one or the other, that the “noise level” of back-and-forth bickering wouldn’t be what it is right now.
Frucher: Well, let’s recognize I’m doing this pro bono. I’m doing this to avoid a disaster to the state. I don’t have any fat in the fire. I’m just looking at it objectively. This industry is blessed with a public policy in New York state that says, “These failed businesses, because they are failed businesses, they cannot operate on their own and make a profit on their own in New York state, need an additional public subsidy,” i.e., the awarding of franchises to run the only legal casinos in New York state, at these tracks. Now that clearly was a public policy that said, “Let’s consolidate gambling in New York state, at the tracks, for the purposes of sustaining this industry.” If it was, “Let’s have gambling to get money for the public purse, the public treasury” … then you would put them at more strategic locations like in the middle of Manhattan. So clearly, that’s designed as a subsidy for the industry. That all needs to be looked at in context.

TT: You mentioned the possibility of putting kiosks in sports bars. Could that be done by regulation?
Frucher: Yes. One of the things that came about as part of the dialogue over the bill that did not pass was that if we modified what we were looking for in terms of the kiosks, and abandoned that concept, there’s something that would give us the ability to move in that direction without a change in statute. That is what we now are calling IATs—Internet Access Terminals. I wish we had called them that in the first instance because people really didn’t understand what a kiosk was. It led to a lot of confusion. What we’re saying is that there are already existing locations that have a culture that already incorporates wagering on sports events. It would not be out of character to have a terminal there that would allow people to place bets.

TT: Projecting 18 months to two years from now, are you hopeful that structure could be in place somewhat quickly?
Frucher: Yes. I would. I point to the French experience where, in fact, it has been. And that’s what in fact they did. And there were some very positive effects not just in terms of increased handle. When you look at the handle in France, for example, they have four times the wagering, per capita, that we do on horse racing through those IATs. They’ve also changed the demographic, which is one of the keys to helping. That needs to be done for the long-term viability of the racing industry, whether it’s here in New York or nationally.
The demographic here is 55 years old and older. Predominantly male. Eight percent is female. In France, the core customer group is 40 to 45, yes, male. But 42% of all the wagers [placed] is done by women. Obviously both the technology … and the familiarity [with racing and wagering] by the younger demographic who feel more comfortable in a different kind of setting. Which are essentially bars and bistros as opposed to our wagering parlors.  Let me say that an OTB parlor has three functions, and then there’s a fourth dynamic. First: It’s where you place your bet. Second: where you cash out your winnings. Third: where you watch the race and socialize at the same time. Now that doesn’t have to be a parlor. It could be a bar or bistro. So you can replace the elements of it in a different setting. And at the same time start to change the demographics. Which is absolutely necessary. Otherwise this industry is going to go the way of the horse buggy.

TT: If we could focus now toward the end of this year, are there two or three objectives that you are clearly hoping to accomplish between now and then?
Frucher: The first objective is clearly to come up with as close to a united approach to this as possible. Two, that approach would allow us to go out and get financing to allow us to pay all of the arrearages, and to capitalize five new Super Parlors. And [that] would allow us to give early retirement and severance to our employees. And [that] would allow us to downsize significantly. Those are the objectives for this year. To get past the silliness of the name-calling, to get everybody to sit down and professionally analyze the situation. To come up with what should be a united, rational plan, and to move forward constructively in a way that would try to unite the industry as opposed to continue to divide it and fractionalize it.
The next objective would be, as an adjunct of what I’ve been talking about, to create an industry-wide public “back office utility,” so that redundant services are brought together in one place under a single management.

TT: What elements comprise those “redundant services”?
Frucher: Tote, Internet, telephone, marketing, [and] television.

TT: That would require legislation, correct?
Frucher: Yes, that probably would. But it’s terribly necessary. Particularly in an era where a significant percentage of the revenue for the tracks is coming from VLTs. It’s very important that there be an across-the-board vehicle that would market the horse racing aspect of it. Right now, if you look at the tracks that have VLTs, horse racing has become not just secondary but almost irrelevant in terms of what’s being sold. What’s being “sold” is a casino. Not the horse racing track. So somewhere in this mix we have to remember the horse and the business that we’re talking about.

TT: Finally, as you are faced with making these constant decisions, a lot of them unpleasant, are there ever days when you wonder what you have gotten yourself into?
Frucher: Oh, all the time. I keep saying, “I must have been insane to take it on.” But then I go up to Columbia County on the weekends, and I see all the horse racing farms, and I see high school students and other folks whose meager livelihoods are dependent on the work that they can get at those farms, and I recognize the impact it would be to lose them, on places like Columbia County, all across this state. There are 400 farms in 39 counties. And I say, at the end of the day, if I can do something to help sustain that industry, if I can help sustain those jobs, it will be worth all of this.