Poor OTB. New York City's Off-Track Betting Corporation gets no respect from anybody.

Not all its critics and bad-mouthers make the same discreditable points, however. Voting against OTB with their feet and wallets are the horse-players of New York, who now do far less loitering than previously at the organization's betting parlors. OTB's "handle" (total bets received) is slipping badly. It was $742 million in fiscal 1994, down from over $1 billion in 1988. What gripes horse-players is not that they lose—to the tune of $185 million a year—but that their payoff is so meager when they win. The house keeps about 25 percent of the total handle, compared with the 19 percent that the betting operations at the tracks themselves take. The difference mainly reflects OTB's much-loathed 5 percent surcharge on most winning tickets.

The crowds in OTB's 80 betting parlors also have cause to complain about the service and amenities. The rooms are dirty and paper-strewn. Only a few have rest rooms, even though a high fraction of the patrons come to stay for the whole afternoon.

But after all, the New York City OTB, like its five smaller counterparts upstate and on Long Island, was not established for the convenience of bettors. It was established to extract as much money as possible from them, while giving back as little as possible. Their grievances are largely ignored by both the media and the political establishment, not to mention OTB management: every politician and consumer advocate knows in his bones there is no percentage in sticking up for gamblers.

Anyone poking his head into an OTB parlor will instantly observe that he is among politically cloutless lowlifes. On a recent afternoon at the West 48th Street branch, near Rockefeller Center, I observed that my own was the only necktie in the place, that English was a second language for most of the patrons, and a good bet for their median occupation would have been security guard. The betting-parlor crowd is boisterous, talkative, full of little big shots making loud, authoritative pronouncements: "I like the six. I don't like the two." Several years ago, when I was visiting Edinburgh, I stopped in at several of the Ladbroke betting parlors and was struck by the eerie similarity between OTB's downscale customers and those in Scotland.

In the interests of full disclosure, I need to mention that I am a veteran patron of OTB and look forward to a time when its customers have a better deal. I have my share of sad and hilarious stories—all instructive—about the agency's management style, as seen at ground level.

February 15, 1988: my Superclub saga begins. I have recently opened an OTB Superclub account, which enables one to make bets by telephone (against previously deposited funds) and to dodge the surcharge on winning bets. OTB officialdom has written to tell me that I can go to my neighborhood branch anytime after the 13th and get my green card validated. The Superclub account owner can take this "withdrawal privilege card" to an OTB branch anytime he has made a decent score and withdraw his winnings. Before the card can be validated its owner has to show up at one of the betting parlors and sign it in a special invisible ink readable only by OTB machines: if the card is lost, the finder won't be able to forge the card-owner's name and withdraw his hard-won balance. So I show up at my local betting parlor on East 69th Street in Manhattan, eager to sign, and instantly discover that the first teller I speak with has never heard about Superclub green cards. He disappears into the back office, returning with the message that I cannot sign up today, since "their pen ran out." I look blank but finally realize he is talking about the pen that writes in invisible ink. He says to come back in a few days. I come back on February 23, but the pen is still not working. I learn on March 26 that it is still not working. The helpful teller now suggests that I sign up at another branch. Meanwhile, I have made no progress figuring out how he can know that his invisible ink has vanished.

Months later I finally do succeed in signing up properly at East 69th Street, but my first big score with the new account does not take place until a year later. On Saturday, May 14, I show up at the branch to withdraw $2,500. I present the green Superclub card, fill out a withdrawal slip, show the manager my photo identification, and state that I prefer to be paid by check. I then wait impatiently for 40 minutes.

Finally, a branch official comes out of the back room with a check. I observe with dismay that the paper is smudged, that my name has been rendered in a near-illegible childish scrawl; also—and arguably more important—that the two zeros in the $2,500 are distinctly smaller than the other digits, so that someone could read the check to be for $25.00. I start to complain but then decide it will surely be okay, since elsewhere the check-writing machine has plainly written out "Two thousand five hundred dollars." So I deposit the check in the ATM and learn in midweek that my account has been credited for $25.00. The whole summer passes before the remaining $2,475.00 is in my bank account.

While the political establishment ignores the views of the customers, the politicians have a gripe of their own that cannot be ignored. OTB was established in 1970 primarily to generate revenue for New York City and has manifestly done a rotten job. The original plan was that OTB would make certain specified payments to the state, to the New York Racing Association (which runs the tracks), to several upstate cities and a few other minor claimants, and then, after taking care of its own operating expenses, turn over the "residual revenue" to the city. OTB's residual revenue was expected to be perhaps as much as $200 million a year—around $750 million in today's prices. An additional wrinkle, added during the city's 1975 fiscal crisis, was the 5 percent surcharge, whose entire proceeds would also go to the city.

It was all fantasy. The city never received much more than $60 million a year from OTB, and since 1992 the residual revenues have turned into residual deficits—$5.3 million last year. New York City received only $24 million from OTB during the year, all from the surcharge. The organization's long-run decline leaves one unable to exclude a possibility once mentioned by Edward V. Regan when he was State Comptroller: that the city would end up supporting OTB. At both the state and city levels, the political establishment speaks publicly of OTB with ill-disguised contempt. "The only bookie operation in the world to lose money" was one of Rudolph Giuliani's guaranteed applause lines when he was running for mayor in 1993.

Also difficult to ignore is the hostility to OTB manifested by the New York Racing Association. NYRA is a quasi-public corporation created and regulated by New York State. Its mission is to operate the state's three Thoroughbred race tracks: Aqueduct during cold weather, Belmont Park during most of the warm-weather months, Saratoga for several summer weeks. NYRA is a not-for-profit corporation, but it is not supposed to lose money, and in recent years its operating losses have mounted as track attendance declined. In 1993, the most recent year for which complete figures are available, the loss soared to $28 million.

Twenty years ago Aqueduct would get a minimum of 12,000 hardened horse-players even on a snow-blown day in February, and Belmont Park would get overflow crowds of 70,000 on Belmont Stakes day in June. The comparable figures today are perhaps 3,000 and 40,000. NYRA executives blame the losses on competition from lotteries, casinos, and the Meadowlands race track in New Jersey, on excessive New York State tax rates (the state takes around 5 percent of all bets at the track), on politicians who force Aqueduct to stay open all winter and run races in front of near-empty grandstands to keep those tax dollars flowing—and, of course, on OTB.

NYRA sees the off-track competition as unfair and unnatural. The racing association, after all, creates the product; why should this interloper sell it, in the process taking the lion's share of the betting revenues? Steve Crist, once a racing writer for the New York Times and now marketing director for NYRA, asks: "Is there any other business where the producers and retailers are competitors?" On an average day, OTB's handle is now about twice that at the track.

In some measure offsetting all this bad news, NYRA receives payments from OTB. Anticipating some shrinkage in on-track activity, the original law establishing OTB-incorporated formulas requiring that it pass revenue from various kinds of bets to NYRA. The formulae resulted in payments of around $40 million in the late eighties, but the total has been tumbling as OTB's own economics have weakened, and last year it was around $28 million. No longer having any hope that OTB will just go away, NYRA people now hope to take over the organization—and have some prospects of success.

Should the city continue to run OTB? The answer seems obvious: of course not. If not the city, then who? Here the answer is less obvious, but I shall argue that the best bet is private operators (plural). I take it as a given that legal off-track betting in New York should continue to exist in some form, as preferable to illegal betting.

The case against the city as OTB proprietor seems overwhelming. For 25 years, under five mayors (counting Giuliani's first year), the agency has been badly run. The bad-management experience has not always been quite the same. The prior regime, headed by civil rights activist Hazel Dukes, was marked by horrifying racial tensions and left OTB with multiple, still-unresolved lawsuits by senior executives claiming they had been forced out of their jobs because of their race (white). But certain other themes seem to recur in every administration.

Begin with the fact that successive mayors have used OTB as a patronage vehicle for supporters. I am far from sure that Mayor Giuliani is now doing the same thing, but some reporters and City Council staff people clearly believe it is happening; they argue that patronage is the most parsimonious explanation for his curious reluctance to move toward privatization, despite much pro-privatization campaign rhetoric. Indeed, a month after the election, Giuliani was still talking privatization, indicating his receptivity to any decent bid for OTB by NYRA. This script didn't last long, though; it was replaced by one in which the mayor has given OTB yet another opportunity to turn itself around and get profitable—after which it will get sold.

Why rebuild OTB if you are planning to sell it? The standard answer given by the city—for example, by Richard J. Schwartz, Giuliani's chief adviser on privatization issues—is that no outside bidder would pay a decent price for the organization while it is losing money. Three years ago, when OTB's residual revenues had begun turning negative, the city commissioned a study by the Morgan Stanley investment banking firm on the organization's market value, hoping it would turn out to be several hundred million. Instead, the study characterized OTB as a "distressed entity" and said it should not be sold at all until it had been made healthy.

The standard response to those embracing this strategy is that (a) there is no reason to believe that OTB will ever have roses in its cheeks while the city runs it and (b) if by some miracle it did begin to look healthy, the pressure to privatize would instantly vanish.

Leading the turnaround effort is Allie Sherman, former head coach of the New York Giants, later a sports-marketing executive at Warner Communications, and now president and CEO of OTB. Sherman was brought in on the advice of OTB chairman David Cornstein, chairman of a privately held national jewelry store chain. (The OTB chairman presides at monthly board meetings but is not himself an executive of the corporation.) I spoke to both of them recently and came away with several impressions. One is that they believe they are under no particular time pressure from the state or city. Another is that they need a fair amount of time to create the kind of organization they envision. They are looking toward an OTB in which more and more customers can phone in bets and see races live on television. They also wish to promote viewing of live races at huge teletheaters. Clearly it will be years before this glitzy new OTB can possibly replace today's drab world of betting parlors. Meanwhile, one has a powerful sense that nothing is happening to shake up the OTB culture that has thwarted all past efforts at reform.

Over the years, the eternal obstacle to efficient management of the agency has been its high labor costs, dependably around 75 percent of total costs. For openers, OTB has a lot of managers. A study done in 1992 by the City Council's Finance Committee noted an incredible manager-to-employee ratio of 1 to 3, compared with typical private-sector ratios of 1 to 7.

A casual newspaper reader of countless stories over the years about OTB downsizing and betting-parlor closings could be forgiven for thinking that labor costs must finally be under control. But it never happens. OTB employees belong to a powerful municipal union, District Council 37, which has a tough, tough contract. OTB employees work five days a week, yet if one of those days falls on a weekend, they collect time-and-a-half pay for working Saturday and double time for Sunday. Last winter, with OTB losing money and closing down still more betting parlors, the union did not budge on these arrangements, so recently management has simply been closing 30 parlors on Sundays. Because OTB employees (like all city employees) are hard to fire, substantial buyouts generally accompany downsizing. Virtually all OTB workers are members of the New York City Employees' Retirement System, and the agency last year paid $6.8 million for pension and post-employment health benefits—about $5,000 per current employee. Altogether, OTB's personnel costs totaled around $70 million, a shade over $50,000 per head. That figure has increased six-fold since OTB's beginnings, while the consumer price index rose about fourfold. It is reasonable to suppose that Giuliani's team will work harder than its predecessors to extract concessions from OTB's labor leaders, but it plainly has a way to go.

OTB is sensitive about its labor costs, since so many critics keep noting that the agency, established mainly as a vehicle for steering millions to New York City, steers so much more to its own employees. A somewhat hilarious gauge of the sensitivity about labor costs appears in OTB's annual reports, which feature double-page bar charts breaking down the handle's disposition during each of the past ten years: so much was returned to bettors, so much went to NYRA, to the city, to personnel costs, and so on.

Now here is the hilarious part. When I looked at the bars in the latest annual report—for the year ending June 1993, since OTB is not too swift at getting out reports—I was struck by an impression that the critics must be wrong: the purple segment showing payments to New York City was at least as long as the yellow segment for personnel. A ruler confirmed this impression: the segment for the city was 2 centimeters, personnel only 1.8. It was only when I looked at the accompanying figures that I realized that the lengths of the two segments did not correspond to the amounts they were representing. Personnel that year accounted for $70.4 million, while contributions to the city, despite those extra millimeters, were $31.9 million. Or don't you think that's funny?

Another tale from the front lines. It is January 2, 1988, around noon. I am home betting the card at Aqueduct—that is, making some kind of bet on all nine races. The OTB telephone operator takes my account number and password, mentions the opening balance in my account, accepts all my bets, and tells me the total amount I have wagered and the closing balance in the account. I hang up and prepare to rush off, planning to watch the races that evening on cable TV's nightly screening of all the day's races.

Just as I am leaving the apartment, I have a sudden queasy feeling about the final figures passed along by the OTB operator. The closing balance, the only figure I remember clearly, is $40 higher than I would have expected. Maybe this means merely that I was confused about my opening balance, but maybe—ominous thought—it means that some of my bets were not properly entered into the OTB computer. I call OTB back and talk to another operator, who patiently calls up my bets on his screen. Everything seems in order until we get to the ninth race.

My standard purchase in the ninth race is four $2 triple boxes. A triple is a bet where you try to identify the first three horses to cross the finish line, in order. This is undoable via any known logical process, so most bettors, including me, buy triple "boxes," in which you are covered for all six combinations of the three horses to win, place, and show. A $2 box therefore costs $12. What finally emerges in my review of the bets is that the first OTB operator had absentmindedly put me down for four $2 ordinary triple bets instead of four $2 boxes, so I had paid $8 instead of $48. I tell the second OTB operator to take the additional $40 out of my account and reenter the bets as boxes. This turns out to be my best decision of the day, since the bets originally entered got no place, but one of my boxes turns out to pay $14,166; the three top horses went off at 21 to 1, 72 to 1, and 12 to 1.

As Giuliani repeatedly stated during his 1993 campaign, and as his press spokesmen still agree when asked, New York City does not belong in the off-track betting business. It should announce plans to get out soon and put OTB up for bids by private operators. Any such auction would require permission from Albany, but it is hard to see the state resisting the city on bookmaker privatization, which even Mario Cuomo has endorsed.

In past discussions of possible OTB acquirers, two names have frequently surfaced: NYRA and Ladbroke, the British bookmaking firm, which is trying to establish a presence in the United States (it operates tracks in several states and runs an off-track betting operation in connection with one of them, outside Pittsburgh). In 1991, NYRA asked for the right to take over off-track betting and offered $43 million. The state and city rejected the proposition, but NYRA would surely be among the bidders in any serious privatization process. It already competes with OTB in offering telephone betting.

Though Giuliani briefly toyed with the idea of asking NYRA alone to make a bid, it is hard to see why NYRA or anyone else should have an inside track in bidding for OTB. Indeed, there is no good reason for privatization to result in only one private operator. OTB has many different kinds of customers, and surely something on the British model—where betting shops have different and competing owners, with different strategies for attracting customers—would also work in New York City. The privatized betting operators would presumably be regulated by the state, as legal gambling is everywhere, and would presumably pay their share of state and city income taxes.

Nobody today can gauge the extent to which privatized off-track betting would grow and flourish. Some analysts—including the New York State Senate Advisory Commission on Privatization (the Lauder Commission)—think it probably would generate increased revenues for the state and the city.

Here, however, we come to a depressing detail—or at least one that has to be rated bad news by any OTB customers following the privatization argument. The news is that everybody involved in the argument, the Lauder Commission included, takes it for granted that a privatized OTB would retain the basic mission of the existing organization: it would still be designed to maximize government revenues and extract every possible nickel out of the horseplayers. It would presumably be much more user-friendly than the existing OTB; however, the surcharge would remain in place, as a major conduit steering money from players' pockets to city coffers. The budget released by Giuliani's team in February shows OTB to be increasingly profitable in the late nineties, when it is presumably privatized. The residual deficit is gone, replaced by residual income projected to be $8.7 million in 1999. But the surcharge that year—still part of the deal—is put at $25.6 million. It is easy to understand why the city would not wish to give up a cash cow like the surcharge. Still, it seems surprising that nobody is focusing on another aspect of the case: an OTB that maximizes city income and hits its customers with an odious tax is an OTB that will fetch far less in the open market, because the surcharge drives away potential customers. John Long, who heads Ladbroke's American operations, has said firmly and repeatedly that he would not be interested in bidding on OTB in its present form; he specifically mentions the surcharge when asked why the existing organization looks so unappealing.

So the city might do well or better selling off OTB to operators unencumbered by the surcharge. OTB's customers would certainly do better in this scenario—in a world where privatization meant not just more efficient operation but paying the whole $12 on a 5-to-1 bet. Possibly the time has come to enter the customers' well-being into the equation. If that sounds like consumer advocacy, so be it.


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