Sunday, December 20, 2009

New York Schools Lose To Empire City Casino

While New York’s schools are scrambling to replace state aid that’s being withheld by Governor David Paterson and anticipating even bigger shortfalls in funding for next year, a little-noticed change in a formula in the regulations covering Empire City at Yonkers Raceway is taking even more money out of their budgets. It’s part of a bailout just like those that Washington used to save Wall Street banks, multinational insurance companies, and Detroit automakers. But Washington didn’t step in to rescue the casino—this particular $56,000,000 bailout was funded by New York’s school children.

Even without the bailout, the casino has generated some exceptionally good income for the Rooney family, owners not only of the Yonkers Raceway and Empire City Casino but also of the six-time Super Bowl Champion Pittsburgh Steelers. Before I get into some mind-boggling numbers, a little background might be helpful. Empire City, the home of what must be one of the world’s largest collection of 25-cent slot machines (more than 5,000 coin guzzlers of all denominations), opened in October 2006, five years and many lawsuits after the New York legislature authorized it. Advocates of video gaming pointed to the economic boon it would bring to the city and their arguments eventually won the day.

Today, thousands of gamblers flock to Empire City from Westchester, the Bronx, and beyond, filling the 5,000-car parking lot and streaming off buses from Long Island, Queens, and Northern New Jersey. There seems to be a crowd at any time of the day or night, a mix of the under-employed, the over-worked, retirees, guys with dates, gals in groups, butchers, bakers, and candlestick makers, all looking for a little escape and a chance to stick their hand in the pot of gold at the end of the rainbow. According to Empire City General Manager Robert Galterio, the average visitor spends $75 in the casino, less than the cost of a ticket to a Broadway play or two tickets in the cheap seats at the new Yankee Stadium.

Empire City is certainly a major contributor to the local economy. The casino and track is Yonkers' biggest single taxpayer and largest private employer with 1,250 on staff, up from about 300 in 2005 before the casino opened. The annual payroll is now about $30 million and the majority of the employees are from lower Westchester and the Bronx.

Here’s the mind-boggling part: in the fiscal year ending in March 2009, Empire City raked in nearly $500 million dollars after paying off the winners. Of that, the Rooney family kept about $212 million, which they used to cover operating expenses, marketing, and debt service on the $285 million construction cost of the facility. While they don’t reveal net profits, Galterio doesn’t deny that there’s plenty left over.

The state education fund comes out a winner, too, since it receives a big chunk of all gaming in New York as part of the incentive for communities to allow the casinos and lottery to operate. In the 2008/09 fiscal year, though, the state’s school children did without a cool $56 million less than they should have received because the share of casino profits allocated to the education fund was cut as part of a bailout of Empire City engineered to help them meet mortgage payments and increase the amount spent on marketing the casino and racetrack. The loss in the current fiscal year will be the same if not larger. The original formula included in the legislation authorizing the establishment of the casino called for nearly 59% of the “Net Win” from the gaming machines (the amount lost by bettors) to go the state education fund. Under the new formula approved by the state legislature, that share became 44%, with the difference going to the casino operators.

Galterio explains that the formula was temporarily corrected to adjust for a planning error. He said all the studies done to arrange construction financing for the facility proved to be grossly optimistic. "In the summer of 2007, our lenders came down pretty hard on us and our interest rates went up," he says. "We borrowed $285 million to do the job, and our interest expense went up to $30 million per year." Without that big interest payment, he says, the operation would be profitable. That shortfall was covered by reducing the amount sent to the state education fund.

This year’s casino revenue grew as a result of another change in the formula. The amount allocated to marketing was doubled, again at the expense of the education contribution. "They allowed us to promote more, to advertise more, do better marketing, increase direct mail, do a lot more promotions and contests on the property," Galterio explains. He also said that the company is now allowed to use those funds to promote the racetrack as well as the casino.

The idea was that more advertising would increase the revenue, which would pay off in the long run with more dollars for everyone, including the education fund. Play has indeed increased, with average revenue per machine per day growing substantially this fiscal year so far. While the distribution formula phases back to the original levels starting in 2010 (unless there's another bailout), the education fund will be short-changed in the meantime, although it will receive some benefit from the additional marketing. For the April-November, 2009, period, the casino's "Net Win" is up about $47 million over the same period last year. Of that increase, $17 million went to the schools, which is nothing to sneeze at. Under the old formula, though, the state education fund would have received $43 million more at a time when it sorely needs it.

In all fairness, it should also be pointed out that the "lost" funding for schools wouldn’t exist in the first place if the casino hadn’t been opened. And the City of Yonkers receives about $20 million which goes to the city's schools. Still, Empire City’s owners seem to have profited most from the latest deal. If the operation was profitable before the interest rates increased, it must be considerably more so now that their entire interest expense is covered—-and then some—-by the shift in fund distribution away from schools and into their coffers.

The bargain is one that NY State Assemblyman Mike Spano of Yonkers had no trouble supporting. He and Assemblyman Gary Pretlow of Mount Vernon sponsored the legislation. "This is the big kahuna," Spano says. "The biggest beneficiaries of that track are Yonkers and the state of New York. No one wants to see it falter. It is imperative that that track operates and thrives and continues to do well."

The school children? Their well-being is apparently not quite so imperative.

Dave Donelson, author of Heart of Diamonds a about in the

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