A Government-Run Betting Monopoly Goes Broke

September 2nd, 2009 10:04 AM

New York State's Off-Track Betting Corp. (OTB) is filing for bankruptcy "as a municipality" under Chapter 9 of the Federal Bankruptcy Code "after four years of losses totaling $38 million."

You read that right: A government-run gambling monopoly has gone broke, after losing money for years.

How was this seemingly impossible feat accomplished? There are clues in stories at Reuters and Bloomberg:

(Reuters) Despite taking more than $1 billion in bets every year, the OTB has been unable to cover its operating costs for years and has accrued liabilities of $220 million.

(Reuters) A complete shutdown of the OTB would cost more than $600 million, (OTB Head Meyer) Frucher told the news conference. "A shutdown is unthinkable," he said.

(Bloomberg) Last year, the corporation paid winning betters $760.9 million, leaving it with $244.7 million. After providing $93.2 million to the horse racing industry, $20.2 million to local governments and $15.2 million to the state, the corporation was left with $116.1 million of revenue, or less than its $133.9 million of operating expenses.

(Reuters) New York State took control of the OTB from the city last July. In June, Paterson appointed Meyer Frucher head of the organization, which employs 40,000 people across the state.

(Reuters) Adding to the gloom are unfunded liabilities of more than $500 million, most of it related to employee retirement, health and other benefits.

(Bloomberg) The corporation’s biggest liabilities are unfunded payments to 1,366 workers’ pension and health plans, Frucher said. The workforce is represented by District Council 37, New York City’s largest public employee union, whose leaders are cooperating with the plan, he said.

Some context: The Empire State's "All Funds" budget for its 2009-2010 fiscal year is $121 billion. The state's $15.2 million take from OTB is less than 0.013% of that. The budget of New York City, OTB's primary municipal beneficiary, is about $60 billion (see Page 2 at this PDF link).

From here, it seems that OTB probably has hired too many people, paid the people they hired too much, provided overly generous benefits, couldn't eliminate unprofitably outlets, and perhaps fell behind on technology and investment in the future. All in all, as a government operation, it has turned what should be a fairly simple-to-run money pot and into a money pit.

Allowing OTB to file for bankruptcy as a municipality would appear to be a gambit to get around the constraints imposed if a regular corporation files for Chapter 11; otherwise, why do it? Perhaps others have more insight on this, but I would not be surprised if OTB's bankruptcy filing ends up stiffing general and other creditors in the name of preserving as much of workers' accumulated unfunded benefits as possible. While their stories were relatively evenhanded, Reuters and Bloomberg should have explored how this will all work out, and didn't. A "who wins, who loses" breakdown of the type the press frequently employs when a piece of tax legislation, especially a tax cut, comes along would have been quite useful -- especially if they had compared Chapter 9 to Chapter 11.

So what will OTB be like after it emerges? These paragraphs from Bloomberg are not comforting (bolds are mine):

With updated technology, “We could go head to head with pornography and win,” Frucher said, referring to possibilities such as an around-the-clock horse-racing channel or virtual racing.

A reorganization plan, which must be approved by a federal bankruptcy court and state lawmakers, would trim the corporation’s workforce, reduce the number of betting parlors from 68 currently, and introduce technology that might eventually quadruple the $1 billion a year of bets now collected, Frucher said.

It would appear that Frucher is awkwardly expressing is a desire to introduce highly addictive and arguably predatory gambling formats accessible from the comfort of home. Even if the extra money materializes, why should we think that the state isn't setting itself up for a long-term, four times as serious train wreck?

Cross-posted at BizzyBlog.com.