The state law that permits video lottery terminals in Nassau and Suffolk counties contains no guarantee that gambling winnings will trickle down to the counties.

The legislation only provides for the counties to get the profits left over after a state education fund, the state gaming commission and racing interests get their cut and all operating expenses are paid.

That is unlike almost all the existing VLT casinos in New York State, which are covered by formulas that provide local communities with a percentage of gambling revenue each year. A similar plan originally included in the Nassau and Suffolk authorizations was dropped during last-minute negotiations between the governor, Assembly and State Senate leaders in 2013.

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The proposals to build two VLT casinos on Long Island come as Nassau and Suffolk seek new ways to close budget gaps without raising taxes, and the counties' two off-track-betting corporations struggle to survive while carrying a large amount of debt. But critics question whether the casinos can be successful given the debtload and plans by the traditionally patronage-laden OTBs to hire hundreds more workers to run them.

Under state law, 45 percent of net VLT revenue after paying gamblers would go to boost state education spending. The State Gaming Commission would get 10 percent; 5 percent goes for horse-race purses, breeders and the New York Racing Association; and 10 percent is for marketing and advertising spending by the Nassau and Suffolk Off-Track Betting corporations. That largely mirrors the system for the existing VLT facilities.

The remaining 30 percent goes to the OTBs, to cover their operating costs and to pay the counties if profits exist.

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OTB officials estimate the VLTs will provide Nassau County with $20 million in new annual revenue.

While there is no state payment formula, Suffolk County, where the OTB is in bankruptcy, is guaranteed $2 million in the first year of VLT operations and $3 million the second year, according to bankruptcy documents.

That's a fraction of what Suffolk County Executive Steve Bellone promised when he was pushing Albany to allow video lottery terminals on Long Island. In his April 2012 State of the County address, Bellone said the county's VLT parlor would "create hundreds of local jobs" and "produce more than $25 million" a year for Suffolk.

The Nassau and Suffolk gambling parlors would join nine other VLT casinos operating statewide, including downstate competitors in Queens and Yonkers. While the state does not provide profitability data for the existing facilities, the casinos posted steady gains in annual net revenue until 2011-12, with revenue declining slightly since then.

John Sabini, a gaming consultant who was chairman of the New York State Racing and Wagering Board from 2008 to 2013, said the VLT parlors are crucial to the survival of the Long Island OTBs -- and can be profitable if run properly.

"They're low-maintenance and don't need a lot of people to run them," he said. "The revenue stream could be there, if they're run efficiently."

 

Officials deny concerns

Nassau and Suffolk OTB officials who would control the VLT casinos say any concerns about the county revenue are unfounded.

"There's no guarantee, but based upon what everyone is telling us, this is going to be profitable," Joseph Cairo, president of the Nassau Regional Off-Track Betting Corp. and vice chairman of the county Republican Party, said of conversations he's had with gambling industry experts.

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Suffolk OTB president Phil Nolan said the agency's casino will be successful -- and not burdened by unnecessary patronage hiring -- in part because day-to-day operations will be handled by a private contractor, Delaware North of Buffalo, which needs to turn a profit.

The company would earn 1.75 percent of the casino's take after paying gamblers and 5 percent of profits after expenses are paid, according to the contract with the company. Delaware North also has agreed to loan Suffolk OTB $76 million to build the facility, at a 4.25 percent interest rate that rises to 7 percent.

"Any reasonable person sitting in this chair is going to want the professionals running this place," said Nolan, a former Democratic supervisor of Islip Town.

Cairo said Nassau OTB hasn't decided whether to hire an outside operator to run its VLT parlor, or run it itself. He said OTB will put out a request for proposals once it finds a location and then make a decision.

But critics doubt that the casinos would be profitable, citing the Suffolk OTB bankruptcy and Nassau OTB's $16.25 million in debt. Suffolk OTB hasn't turned a profit from horse race betting since 2006, and Nassau OTB hasn't been profitable since 2008.

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Adding to the concern that profits won't materialize is the intention of both OTBs, already run by political-patronage employees, to hire several hundred more workers to handle the new business.

"Obviously, the OTBs are well-known as patronage mills," said Assemb. Michael Fitzpatrick (R-St. James). "And they don't do it very well," he said, noting the Suffolk OTB bankruptcy. "We're going to let them run casinos?"

Fitzpatrick this year introduced legislation to repeal state authorization for the Nassau and Suffolk VLT parlors because he opposes state-run gambling, although there is no Senate bill.

 

OTBs have 'a job to do'

Westbury Mayor Peter Cavallaro, who led the successful fight against Nassau OTB's plan to put a casino at the vacant Fortunoff store in Westbury, said the VLT proposals have more to do with shoring up OTB finances than boosting county coffers. "OTB as an organization has a job to do -- and that's to sustain itself," Cavallaro said.

State Sen. Phil Boyle (R-Bay Shore) sponsored an early version of the 2013 legislation that included a fee for the local governments in which the facility would be located. He said the provision was dropped before final negotiations, though he said he wasn't told why.

John Ciampoli, who was Nassau County attorney when the VLT legislation passed, said the reason no "host fee" was provided for Nassau and Suffolk counties was because unlike upstate VLT parlors, the Long Island parlors will be run by the OTBs, which are supposed to benefit the counties.

"The OTBs have a statutory obligation, as a public-benefit corporation, to turn over any profits to the counties. Why have a host fee when you're getting the profits?" Ciampoli said.

 

Gambling parlors opposed

Bellone and Nassau County Executive Edward Mangano, both of whom lobbied state lawmakers for the gambling parlors in 2013, did not respond to requests to be interviewed.

In July 2013, Gov. Andrew M. Cuomo signed the upstate New York Gaming Economic Development Act, which allowed as many as seven casinos upstate. State voters approved the casinos in a referendum in November 2013.

The legislation also allowed Suffolk and Nassau each to build a gambling parlor with 1,000 video lottery terminals, which operate like slot machines.

Suffolk OTB bought 31.6 acres in Medford for $10.95 million in October to build a nearly 100,000-square-foot facility, with restaurants and the video lottery terminals. OTB officials are moving ahead, even though some local civic groups oppose the project because of fears about crime and traffic issues. The groups have sued Suffolk OTB to stop the project.

Nassau OTB is still searching for a location after fierce opposition derailed its plan in Westbury.

Nassau County has budgeted $9 million from VLT profits for 2015. In 2014, Suffolk budgeted $4 million, anticipating a temporary facility to open, which never did. Suffolk officials have budgeted nothing for 2015.

Bankruptcy documents show that Suffolk OTB will provide the county with $2 million in the first year of casino operations and half of any VLT profits over $3.4 million. In the second year, Suffolk will get the first $3 million in VLT profits, plus half of profits over $5.7 million. Over the next nine years, the county will get a maximum of $1 million a year until the OTB's $17 million in debt is paid off, according to the bankruptcy settlement.

Suffolk Deputy County Executive Jon Schneider said that in estimating multimillion-dollar annual revenue for the county, the administration relied on an earlier state Division of Budget estimate that Nassau and Suffolk each could get distributions of $17.2 million a year. Officials didn't factor in the bankruptcy costs, Schneider said.

Nolan acknowledged the lower payment structure set out in the bankruptcy documents. He said Suffolk OTB plans to refinance its debt within two years of the VLT parlor's opening to secure a better interest rate and allow more money to go to Suffolk.

 

OTBs' fiscal problems

Cairo said Nassau OTB based its prediction of $20 million in annual revenue for the county in the first full year of VLT operations on an estimate by its consultant, Union Gaming of Las Vegas, that the casino would generate $150 million in net slot revenue.

Nassau and Suffolk OTB officials blame their fiscal problems on the waning interest in horse racing, increased competition from Internet gambling and state legislation mandating that a percentage of winnings go toward supporting race tracks, horse breeders and other interests.

Both OTBs have reduced management staff, and the number of lower-ranking union employees.

Nassau OTB has $16.25 million in debt, plus $45.8 million in unfunded retiree health benefit costs. It expects to have lost more than $3 million last year, though final audited numbers were not available.

Nassau OTB also says the new VLT revenue could be used to pay off debt.

"Revenue generated by the VLTs is intended for operating costs and debt service related to that operation. Financial circumstances at that future time will dictate if said funds are used for other purposes," OTB said in a statement.

Suffolk OTB filed for bankruptcy protection in 2011 and finalized its bankruptcy plan in October. To emerge from bankruptcy, it is depending on VLTs. Under the bankruptcy settlement, its four unsecured creditors, who hold a total $17 million in debt, will be paid in full -- including $6 million on or before the day the VLTs open. The creditors are Yonkers Raceway, New York Racing Association, Monticello Raceway Management and Teamsters Local 237.

Officials say they expect Suffolk OTB to add $3.1 million in losses from 2014 when annual audited figures become available later this month.

The Long Island OTBs are public benefit corporations set up to provide revenue to the state and local governments. Each has three board members appointed by the county legislature who can be removed at any time. The boards appoint the presidents, who control daily operations.

In Suffolk, board members make $1,500 per meeting, while Nolan earns $152,000 a year. In Nassau, board members are allowed to receive $250 per meeting. Cairo makes $198,000 a year.

The Nassau OTB is run by the GOP, which controls the county legislature. Republicans hold two OTB board seats and an Independence Party member occupies the other. Cairo also is vice president of the Nassau Republican Party.

In Suffolk, control of the OTB is split between Republicans and Democrats under an informal agreement between Republicans and Democrats. Nolan, a former Democratic supervisor of Islip Town, serves as OTB president because Democrats hold the majority in the Suffolk County Legislature. Anthony Pancella III, Babylon Republican Committee chairman and vice president of the Suffolk County GOP, is vice president.

Nassau OTB in 2014 spent $9.74 million on salaries for 101 full-time employees and 120 part-time workers. They include 21 appointed, nonunion workers.

In 2005, the agency paid $13.4 million in salaries to a total of 183 full-time employees and 193 part-time employees, when it had 37 nonunion employees.

Suffolk OTB in 2014 spent $6,839,386 on salaries for 68 full-time employees and 154 part-time workers. Of the total, 53 are nonunion.

In 2005, the agency paid $13,169,599 in salaries to 117 full-time employees and 238 part-time employees, including 92 nonunion workers.

Nassau's payroll is 40 percent higher than Suffolk's, primarily because of the number of full-time positions, officials said.

 

Surcharge passed on

Both Suffolk and Nassau OTBs noted that they collect a surcharge on winning bets that are passed on to the county. While it's been declining, along with interest in horse racing, Suffolk received $1.2 million in 2014, while Nassau collected $2.9 million. Nolan called big patronage payrolls "definitely more the case in the past. Over the past 10 years, we've seen this organization downsize conclusively."

But the OTB's "revenue source has declined as fast or faster," he said.

Still, politics remain a part of the OTBs.

For example, both agencies use politically connected firms as consultants. Nassau OTB pays Park Strategies, run by former U.S. Sen. Alfonse D'Amato, a Republican, $96,000 a year and Brian R. Meara Public Relations Inc. $48,000 a year. Meara, a veteran state lobbyist, had close ties to former Assembly Speaker Sheldon Silver (D-Manhattan), before becoming a witness against him in a federal corruption case earlier this year, according to news media reports. Nassau OTB pays Zimmerman/Edelson, considered a Democratic firm with political ties, $72,000 a year.

 

Political patronage

Suffolk OTB in 2013 hired Park Strategies for $5,000 a month, Nolan said. Delaware North has hired Meara, paying him $120,000 in 2014, according to state records.

Hiring by the agencies also is based largely on political connections.

Suffolk Legislature Minority Leader Kevin McCaffrey (R-Lindenhurst), president of Teamsters Local 707, which represents most Nassau OTB workers, said of the typical new hire by the Nassau and Suffolk OTBs: "Generally, it's somebody who knows somebody. That's the world we live in."

Paul Sabatino, a former chief deputy Suffolk County executive and legislative legal counsel, said that because of the political hiring, the OTBs aren't "built to run efficiently. It's got a built-in constituency for the spending -- political jobs."

E.J. McMahon, president of the Empire Center for Public Policy, a conservative think tank in Albany, called the state law that allotted VLTs for Long Island "a conveniently timed bailout for a couple of patronage-ridden operations that should have been privatized a long time ago."

Supporters of the VLT casinos acknowledge past problems at the OTBs but say they are cautiously optimistic the agencies can manage the new operations.

While the new Suffolk casino workers will be employees of the OTB, Delaware North will do the hiring. The company said it has committed to interview all candidates that are referred from the OTB, but would make all decisions.

"I'm hopeful the leadership of Suffolk and Nassau OTBs will run a tight ship," said Boyle. "They've had problems in the past. I'm hopeful and confident they are on their way to [being] righted."

Suffolk Republican chairman John Jay LaValle said, "If you think Delaware North is going to let this turn into a patronage mill, running out of control -- it's not going to happen. It's no longer the OTB our grandfathers knew . . . The party's over."

With Robert Brodsky

and Yancey Roy