Thursday, December 21, 2017

The GOP Tax Bill, Horses, and the Rest of Us

Someday soon, the ignorant, incurious, lazy, lying, racist, sexist, narcissistic, sociopathic, kleptocratic dotard who, incredibly, is President of the United States will sign the Republican tax bill, making it, at least until the 2018 election, the law of the land.

For those still reading, I don't intend to rehash here the many odious features of the bill. They have been analyzed well by experts here, here and here, among many other places. A complete summary of the bill, by the usually reliable lawyers at my former firm, is here. In this piece, I just want to consider (1) what the bill does for (mostly rich) thoroughbred breeders and owners; (2) what it does for, or perhaps to, gamblers; and (3) what those of us in New York, California and other Blue states targeted by the GOP with its limit on state and local tax deductions can do to sabotage the bastards.

I. Impact on Breeders and Owners

Like every one of the 535 members of Congress, I have not read every word in the new tax bill. I have, however, read the horse-relevant sections, and my conclusions are much the same as those of the National Thoroughbred Racing Association, which lobbied hard for the provisions and whose analysis can be found here.

First, the bill accelerates what was already a favorable depreciation regime for owners and breeders. Under the new legislation, the maximum "Section 179 deduction," which permits immediate deduction of capital expenses -- rather than having to depreciate them over a period of years -- is increased from $500,000 to $1 million, and eligibility for the deduction is extended to businesses with up to $2.5 million in income, increased from current-law $2 million.

Second, for operations that are too big to benefit from Section 179, the bill expands "bonus depreciation," which allows 100% expensing of both new and used property in the first year it is placed in service -- including yearlings, breeding stock and farm equipment.

Third, the bill shortens the depreciable life for farm machinery and equipment from seven to five years and allows farms to use a faster depreciation schedule that front-loads the tax deductions in the first couple of years. Race horses already benefit from an accelerated three-year depreciation schedule.

Taken together, all these provisions significantly increase the ability of breeders, and to some extent owners, to write off their capital expenses faster, thereby reducing their tax bills in the short term. And in the long term, as economist John Maynard Keynes said, we're all dead.

Fourth, the bill reduces the nominal corporate tax rate from 35% to 21%. For those breeding operations organized as corporations, that means an immediate cash windfall. Trump and his sycophants say that will lead to increases in jobs and wages. More likely, it means that the farm owner or corporate CEO will be driving that new Maserati SUV.

Fifth, for the majority of breeders and racing stables that are organized as partnerships, limited liability companies and "S" corporations, the bill exempts roughly a quarter of income from tax, under the "pass-through" provisions that have been in the news. Coupled with the reduction in the top personal income tax rate, that means a successful breeder or owner would pay tax at less than a 30% rate, compared to nearly 40% under current law.

Sixth, the bill doubles the estate tax exemption from $11 million to $22 million, resulting in a windfall of more than $4 million (at the 40% estate tax rate) for the heirs of those who are smart enough to die before the Democrats retake Congress and return (I hope) to a sensible, progressive estate tax that makes deserving heirs like Paris Hilton or Donald Trump Jr. actually work for a living.

All of this, I guess, is good news for the country-club set and other richies, a few of whom do in fact participate in racing. And, while their new-gotten gains are unlikely to be translated into wage increases for their employees, they may be tempted to spend more for high-end race horses. Whether that does any good for the rest of the industry is quite another question.

II. Effect on Gamblers

As we all know, the tax treatment of gambling on horse racing has been unfair for years. The NTRA scored a major victory earlier this year, when the Treasury Department revised regulations to reduce withholding and the issuance of W-2G income-reporting forms with respect to exotic bet payoffs. There's already some, as yet inconclusive, evidence that the change has increased "churn," the amount that horseplayers put back into the mutuel pools.

The new tax bill leaves intact another unfair piece of tax law affecting gamblers, by requiring that gambling losses be used to offset gambling winnings only by way of an itemized deduction. With the elimination of the personal exemption and the doubling of the standard deduction to $24,000, fewer taxpayers will itemize deductions and, therefore, fewer will be in a position to offset their gambling winnings. Balancing that, perhaps, is the fact that, as a result of the regulations change, fewer taxpayers will receive W2-G forms at the end of the year and therefore feel that they have to report gambling winnings at all. So in this, as in many of its provisions, the new bill actively encourages tax cheating. Good work GOP.

In addition, for the relatively small number of people who can convince the IRS that they are in the "trade or business" of gambling, the bill effectively eliminates the possibility that they could have a loss in one year carried forward or back to reduce taxes in other, profitable years. It does so by lumping in such a gambler's ordinary expenses, like travel and lodging, along with winnings in the amount that can be offset by losing tickets, so that those additional expenses cannot be used to create a tax loss in any year. Nobody's going to win an election campaign by promising to make things better for professional gamblers, but, still, it ain't fair. If you trade in pork bellies or Bitcoin futures, you can deduct those expenses, but not if you trade in the chances of number 6 in the feature.

III. The Bill's "Fuck You" to Blue States

As we all know by now, the bill limits the deductibility of state and local taxes (SALT) to $10,000, with no doubling for a married couple's joint return. This is just pure vengeful payback aimed at states like New York and California that have (a) lots of Democratic voters, (b) relatively high property values and, hence, property taxes; and (c) high state and local income taxes that support decent public services. For ordinary middle-class taxpayers in these states, the bill will mean a significant loss of itemized deductions and, therefore, a significant increase in the amount of federal tax that they'll owe. Every taxpayer's situation is different, but broadly, taxpayers with household income of between $75,000 and $600,000 in New York City, where I live, are virtually certain to face federal tax increases because of this one provision.

(The bill also reduces the amount of a mortgage that will qualify for the mortgage interest deduction from $1 million to $750,000. I'm less outraged by this, though it will affect some homeowners in New York and California; people with million-dollar homes aren't the most deserving objects of our concern.)

But, because the bill was rushed through Congress, there's a gigantic loophole that, with the cooperation of state and local governments, could completely eliminate the SALT limitation. The estimable Martin Sullivan, chief economist of Tax Analysts and a former Treasury and Joint Committee on Taxation staff member, laid out the strategy yesterday on Twitter. A state or local government sets up a charitable fund to carry out government functions, then gives a taxpayer a 100% credit against state taxes for "contributions" to that fund. The state gets just as much money, the taxpayer gets a reduced state or local tax bill and can come in under the Republicans' punitive $10,000 limitation. Such a system is already partially in place in Arizona and Maryland and has been endorsed by the IRS in its taxpayer publications and in an IRS chief counsel's memorandum and a Tax Court case, both dating to 2011. 

So now it's up to us to make sure that our state and local officials know about the loophole and that they promptly take steps, in the 2018 legislative sessions, to provide relief for their endangered taxpayers. Let's fight back against the rape of Blue states by the troglodytes in Washington.

Wednesday, December 6, 2017

What Do the NYTHA Election Results Mean?

The New York Thoroughbred Horsemen's Association (NYTHA) election results are in, and, in my view, it's a definitely mixed bag. With NYTHA President Rick Violette stepping down, after 25 years on the Board of Directors and nearly a decade as President, there was bound to be a change of direction, but the results overall, including the change in owner and trainer spots on the Board, raise some troubling questions.

Replacing Rick as President, having run unopposed, is Joe Appelbaum, who joined the NYTHA Board as an owner-director in 2014. Joe, who runs the Off the Hook pinhooking and racing operation, has lots of energy and has been a fast learner in his first term on the Board. He'll certainly do what he can, and he's been working hard to find solutions for the outrageously expensive workers compensation premiums that make New York the highest-cost state in the country for owners and trainers. But there will inevitably be a steep learning curve.

In the five trainer slots, Pat Kelly and Jimmy Ferraro were voted out, to be replaced by John Kimmel and George Weaver. Linda Rice, Rick Schosberg and Leah Gyarmati were re-elected. Kimmel, with his veterinary background, will be a great addition to the Board. But Pat Kelly's absence will be felt, especially because of his deep web of connections on the backstretch. Pat has been the guy to go to to solve small problems involving backstretch workers, toiling away in obscurity on the Backstretch Violations Panel, staying in touch with the stewards and the NYRA folks who had direct responsibility for what happens on the backstretch. The voters, collectively, made a mistake by not retaining his expertise.

As for the owner slots on the NYTHA Board, again, there was a loss of expertise. Mike Shanley, a former legislative staffer in Albany with a wide range of government contacts, was voted out, and the new Board includes West Point Thoroughbreds' Terry Finley and two of his co-owners, Bob Masiello and former race-caller Tom Durkin. Tina Bond and Jack Brothers were the two incumbent owner-directors to be re-elected.

I often disagreed with Mike Shanley, and thought he was frequently too cautious in confronting NYRA, but his departure, combined with that of Rick Violette, means that NYTHA has lost some 50 years worth of experience on dealing with Albany. Remember that, unlike the situation in all other states, NYTHA has no statutory right to negotiate a contract with NYRA. Elsewhere, horsemen can cut off a track's simulcast signal if they fail to reach agreement with track management on the number of racing days, contributions to the purse account from handle and other relevant issues. In New York, thanks to the lobbying efforts of the Jockey Club grandees some 30 years ago, that right doesn't exist. As a result, issues that would be decided in contract negotiations in other states are, in New York, settled by legislation in Albany. Under Rick's leadership, NYTHA achieved a lot of success there, especially in locking in a significant portion of slot-machine revenues for purses and in getting NYTHA a seat on the "new NYRA" Board of Directors. Future battles in Albany will need to be waged without that accumulated expertise.

Moreover, the election of Terry Finley and his two co-owners (Masiello owns a number of horses in partnership with West Point, and Durkin owns a share of Kentucky Derby winner Always Dreaming) worries me. In Terry's last stint on the NYTHA Board, as an owner-director from 2011 through 2014, he talked a lot about getting more involvement in NYTHA from owners, but produced few results; tellingly, he refused even to provide the names and addresses of his own West Point partners to NYTHA so they could be added to the organization's email list. And then, when he narrowly lost the presidency to Rick in the 2014 election, he first verbally assured Rick that he wouldn't challenge the results, but later reneged on that commitment and embarked on a legal challenge, ultimately dismissed in the courts, that cost the organization more than $200,000. I just can't get over seeing that as a commitment not to NYTHA as an organization, but to the cause of Terry Finley.

I don't know Bob Masiello. I do know Tom Durkin, and I admire his commitment to the welfare of backstretch workers, reflected in his longtime membership on the Board of the Backstretch Employee Service Team (BEST). But the interests of horsepeople often require a willingness to stand up and fight, especially to fight against the suits with little racing acumen who run NYRA these days. I'm just not sure that Terry and his co-owners are up to the task.

A final thought: when I joined the NYTHA Board back in 2002, Linda Rice was the only woman member. Now, there's a better gender balance, with three of the 10 Directors being female. But there's still a complete lack of black and Hispanic owners and trainers on the Board. It's not just window-dressing for its own sake. As we've seen in many other fields, inclusion of diverse life experiences and perspectives makes the entire organization stronger, fairer and better. It didn't happen this time around, but perhaps in the next election cycle, NYTHA should reach out to, for example, Rudy Rodriguez, Charlie Baker or Carlos Martin and get a bit more diversity on the ballot.

Monday, November 13, 2017

FWIW, My Choices in the NYTHA Election

I spent 14 years as a member of the New York Thoroughbred Horsemen's Association (NYTHA) Board of Directors, before leaving in 2016. I was deeply involved in defending horsemen's purse accounts during the NYRA bankruptcy proceedings, in marshaling the evidence for our defense of Lasix -- at least until a better option is available -- and in restoring NYTHA's finances after previous administrations had left us near insolvency. I've also seen NYTHA Board members come and go, and so perhaps I have some perspective on those who are on the NYTHA ballot this time around.

As I noted in my last post, Rick Violette is retiring as NYTHA President, after 25 years on the Board, the last 10 of them as President. Running unopposed to be Rick's successor is Joe Applebaum, a principal in Off the Hook Racing, among other things. Joe has been on the Board the past three years, as an owner-director, and has been very involved a number of efforts, especially dealing with the Jockey Injury Compensation Fund and workers compensation issues generally. He's a good choice, though he faces a steep learning curve.

Seven candidates are running for the five trainer-director slots. Of the incumbents, I think Pat Kelly, Leah Gyarmati, Linda Rice and Rick Schosberg deserve re-election. Pat has for many years been a voice of calm and reason in resolving backstretch issues; Leah has been very helpful on backstretch welfare issues, especially BEST; Linda has effectively managed the scholarship program for the children of backstretch workers; and Rick has been instrumental in establishing and expanding NYTHA's thoroughbred retirement and retraining programs, along with NYTHA executive director Andy Belfiore.

For the remaining spot, I'm casting my vote for recent Breeders Cup winner John Kimmel, who brings a needed veterinarian's perspective to what will undoubtedly be contentious discussions on raceday medication. Nothing against Jimmy Ferraro or George Weaver, the other trainer-director candidates, but the five I prefer all have specific skills and experience that would be helpful to horsemen.

When it comes to owner-directors, there's a real contest. West Point Thoroughbreds' Terry Finley is running for an owner-director spot, as are three other candidates closely associated with Terry, as co-owners, business associates or West Point partners -- Andy Aaron, Tom Durkin and Bob Masiello. In my view, this represents a coordinated attempt by Terry to control the NYTHA Board and needs to be firmly resisted. Terry was a Board member until 2014, when he unsuccessfully ran for NYTHA President against Rick and cost the horsemen's association a quarter of a million dollars defending against his challenge to the election -- a challenge that was ultimately dismissed in the courts. I was a Board member back when Terry was also an owner-director, and, while he had a lot to say, there wasn't much follow-through. On issues he was supposedly concerned with -- updating the NYTHA website and modernizing our membership database, any progress that we've made came only after he'd left the Board. And, tellingly, he refused to share West Point's partner information with NYTHA, a step that would have made it easier to update the membership rolls. I was the other NYTHA owner-director representing a partnership, and I gave all my partner information to the NYTHA office.

Andy, Bob and, especially Tom Durkin, may sincerely believe they have something to contribute to NYTHA, but their close association with Terry, in my view, disqualifies them from consideration. For a less tactful view of the situation, see Indian Charlie's comments. It's not often I agree with staunch Republican Injun Chuck, but he's dead-on on this one.

So, who to vote for? Tina Bond and Jack Brothers are each finishing their first term on the Board. They're both well informed and, especially Tina, willing to educate the Board on matters that they know a lot about. I'm voting for them. I'm also voting for three new candidates that, to my knowledge, aren't associated with Terry Finley: Jim Caterbone, Kim Laudati, and Aron Yagoda. Jim Caterbone was previously a partner in my own Castle Village Farm and now runs horses in his own name, with trainer Gary Sciacca. Jim's a little rough around the edges, but would bring the needed perspective of a blue-collar owner to the Board. Kim is a former trainer who, like John Kimmel, would bring valuable hands-on experience. Aron, a scion of the Streit's matzo dynasty, knows a lot about doing business in New York's high-cost environment, whether that business is baking matzos on the lower east side or racing horses at Belmont and Saratoga. If it turns out that any of these folks are allied with Terry Finley, then I'd vote for long-time Board member Mike Shanley, who has good contacts in Albany, but has been, in my opinion, far too reticent in aggressively asserting horsemen's interests.

Good luck to all.

Tuesday, October 24, 2017

Rick Violette, Ave atque Vale

After 25 years on the Board of the New York Thoroughbred Horsemen's Association (NYTHA), the last 9 years as President, Rick Violette is stepping down. This year, for the first time since the early 1990s Rick's name will not be on the triennial NYTHA election ballot.

My service on the NYTHA Board as an owner-Director overlapped with Rick's for 14 of those 25 years; I also won't be on the NYTHA ballot this year. So it's an appropriate time to take a look back at what Rick, and the rest of us on the Board over those years, have accomplished.

I know some in the business, and especially some in racing's Twittosphere, have decried Rick's positions, and some, including myself, may have been dismayed by his somewhat uninclusive management style, but on balance, I can't imagine that anyone else would have done a better job of steering New York owners and trainers through difficult times.

But first, what exactly is NYTHA? At most tracks in the US, the horsemen's association, by virtue of the Interstate Horseracing Act of 1978 (for the lawyers, 15 U.S.C. secs. 3001 et seq.), has the right to bargain collectively with the track management over terms and conditions of racing; if no agreement is reached, the horsemen have the legal right to block that track's export of its simulcast signal. That's an important right, since 90% of thoroughbred betting now happens online. In New York, however, NYTHA, despite being the official representative of the horsepeople, doesn't have this bargaining right. Thanks, Jockey Club, for slipping in an amendment that applied only to NYRA and NYTHA. As a result, decisions that get made by collective bargaining at most tracks are made in New York in the political arena, fighting over legislation that determines how many race days there are, how much of betting handle goes into the purse account, etc.

And that's where Rick Violette shone. Rick created relationships with the power brokers in Albany, hired effective lobbyists, and generally kept the wolf away from the door to a greater extent than in many other racing jurisdictions. Where California owners and trainers engaged in mutual self-destruction, and Florida horsemen caved in to the corporate might of Churchill Downs Inc. (at Calder) and then to the Stronach empire, Rick was effective in preserving, and even improving, our position in New York.

Here are a few of the things, in vaguely chronological order, that happened on Rick's watch.

1. Rescuing NYTHA's own finances from years of mismanagement. Rick was installed as President in 2008 when a majority of the NYTHA Board rebelled against then-President Richard Bomze's lackadaisical (to put it mildly) stewardship, which had virtually bankrupted the organization. We adopted a serious budget process (I chaired the NYTHA Finance Committee) and, as a result, the organization is now on a sound financial footing and able to put more than $1 million a year into benevolence work, including support of the BEST backstretch health care program, scholarships for children of backstretch workers and, increasingly, thoroughbred retirement and retraining. We've also been able to finance new equipment to improve the quality of drug testing in New York.

2. Establishing the Jockey Injury Compensation Fund. Rick has been the driving force behind setting up and maintaining the JICF, a separate workers compensation pool that covers exercise riders and jockeys on New York tracks. The JICF saved money for both owners and trainers, previously responsible for covering riders' injury expenses, at the bearable cost of 1% or less of the purse account. Sadly, Rick's continuing efforts to expand the notion of a NYRA-wide workers comp pool to backstretch employees in general has been less successful. Trainers today pay as much as 25% of their payroll in workers comp premiums, a major factor in driving up trainers' day rates, which are now at or above $100 a day for trainers stabled at NYRA tracks. It will be up to Rick's successor, Joe Applebaum (who is running unopposed for President) to bring that effort to fruition.

3. The NYRA bankruptcy. In 2006, NYRA filed for bankruptcy protection. That filing threatened millions of dollars technically in NYRA bank accounts but really owed to horse owners who had won purse money at NYRA tracks. NYTHA took a tough stand in bankruptcy (I was the lead plaintiff in a lawsuit we filed) and eventually took that "purse cushion" money out of the reach of NYRA's other creditors and set up a separate trust account, protecting owners large and small. (According to racetrack apochrypha, the issue first came to light when NYRA didn't have enough cash ion hand to honer a high-six-figure withdrawal by Sheikh Mohammed.)

4. Slot machine money. When slots were finally introduced at Aqueduct, years after the authorizing legislation had been approved in Albany, there was considerable uncertainty over how much of their profit would go to the purse account, rewarding owners who had spent years putting on the show while getting back in purses only about half of what it cost to keep their horses in training. Thanks almost entirely to Rick's political work in Albany, the purse account now gets 7.5% of the profit from the Resorts World facility at Aqueduct, which became the most profitable casino operation in North America. As a result, we owners now get back in purses almost 75% of what we pay to keep our horses running, instead of the 50% that we received pre-slots. Such a deal.

5. Lasix. Much to the dismay of animal-rights advocates and other critics, Rick has been a steadfast and effective supporter of the raceday use of Lasix, which reduces fluid levels in horses, reduces weight and lowers blood pressure that, scientific studies generally agree, is a contributory factor in horses' bleeding. When the New York State Wagering and Racing Board (now renamed the Gaming Commission) was seriously considering a proposal to return to the pre-1995 rule that banned raceday Lasix, NYTHA's comprehensive legal submission (I was the principal author) and Rick's forceful advocacy were instrumental in preserving the current rules, at least until a better solution for bleeding appears. While much of the rest of the world disagrees and opposes any raceday drugs, including Lasix, Rick did vigorously and effectively represent his constituency in the Lasix fight.

6. Drug Regulation generally. In addition to being President of NYTHA, Rick has also been President of the national THA, a group of horsemen's associations, mostly in the mid-Atlantic, that have broken away from the hidebound and reflexively anti-change national Horsemen's Benevolent and Protective Association (HBPA). The THA groups have been instrumental in promoting better and more uniform drug regulation, which started in their states and is now an ongoing nationwide effort, though not so effective that the industry grandees -- principally folks associated with The Jockey Club -- haven't been kept from drumming up considerable support for their plan for uniform national regulation by the same group that polices Olympic athletes. Like the effort on workers comp for backstretch employees, this is still a work in progress.

7. Backstretch health care. BEST, originally started as a program for drug and alcohol treatment, had by 2010 blossomed into a more comprehensive medical care effort for backstretch workers. But the $1 million that NYRA was putting into the organization wasn't enough to deliver an effective program to all the folks that needed it. NYTHA (in the persons of Rick, former executive director Jim Gallagher and myself) came to the rescue with another $500,000 (nearly $1 million if one includes the NYTHA dental and vision programs and the $12.50 per start that owners paid directly) and we were instrumental in remaking the BEST Board and installing professional management. BEST now runs free walk-in clinics at Belmont and Saratoga, helps pay workers' health insurance premiums, and offers specialist and hospital care for those without insurance. Sadly, that progress is now threatened by NYRA President Chris Kay's actions in cutting NYRA's contributions.

8. Thoroughbred retirement and retraining. As the fate of horses that have reached the end of their racing careers has become more of a social media issue, NYTHA, through its Take2 and Take the Lead programs, has been a leader among horsemen's organizations supporting a decent post-racetrack life for our athletes. Trainer Rick Schosberg and current NYTHA executive director Andy Belfiore have been doing the heavy lifting on these programs, but Rick has been effective in supporting them and, perhaps from his background as a show-horse rider, has been particularly strong in promoting events for thoroughbreds at horse shows.

That's a lot to have accomplished. True, you can't satisfy all of the people all of the time. If you hang out at the Belmont training track, you'll hear complaints about how Rick doesn't listen enough, and if you go to NYTHA Board meetings, you might be dismayed by the length of the opening monologue. But it's a solid record of accomplishment, and whatever one's disagreements with Rick -- and I certainly have some -- his efforts on behalf of owners and trainers over the years deserve some recognition.

Ave atque vale.

Wednesday, September 27, 2017

Treasury/IRS Finally Recognize Reality

A mere 22 years ago, I wrote a law review article arguing, among other things, that the tax reporting and withholding rules for horse-race betting were punitive and irrational. (For those so inclined, you can find it at 49 Tax Lawyer 1 (1995).)

At the time, the only horse racing insiders with an audience much larger than the seven people who read law review articles and who were making the same case were Andy Beyer and Steve Crist. But, whatever our logical merit, the US Treasury, which writes the regulations that the IRS then enforces, continued on its boneheaded merry way.

Here's what was wrong: the Treasury regulations provided for mandatory IRS reporting any time a bet returned at least $600 at odds of 300-1 or higher. And for mandatory withholding whenever those 300-1 bets produced winnings of $5,000 or more. Where the regulations erred was in treating the winning bet (say, a $2 Pick Six ticket) as a separate entity, and not as part of a larger bet that included all the losing tickets on the same event. So, for example, if someone bet $500 on the Pick Six, with 250 separate $2 tickets, and had one winner, and had the sole winning ticket, returning, say, $75,000, then that winner was subject to withholding, because the IRS treated it as getting $75,000 for $2, odds of 37,499-1, rather than what it really was, $75,000 for $500, or actual odds of 149-1.

Withholding was imposed at 28% -- roughly $21,000 in the case of our $75,000 winner. And in some states, state income tax withholding was added in on top of that. Even without any state tax, though, our happy $75,000 winner would be taking home only $54,000. A nice payday, but a lot less than what she thought she won.

As the popularity of complex exotic wagers -- Pick 4/5/6 bets, superfectas and such -- has grown in this century, the amount of money locked up in withholding has also grown, to perhaps $1 billion a year, as estimated by the National Thoroughbred Racing Association (NTRA). As the late Sen. Everett Dirksen used to say, a billion here, a billion there, pretty soon you're talking about real money. And in the little corner of the economy that's horse racing, $1 billion is pretty close to 10% of total annual handle. To be sure, horseplayers can get some of that withheld money back the next year, when they file their tax returns, either by deducting losses as an itemized deduction on Schedule A of their 1040 or by treating their gambling as a trade or business on Schedule C, The documentation of those losses is easier now, since most serious horseplayers use online accounts that generate a precise record of all their betting -- no more shoeboxes full of losing tickets, many with heel prints on them -- but it still (1) leaves out those bettors who don't itemize deductions and (2) decreases "churn," the ability to recycle wins into more wagering.

Now, finally, thanks in large part to the untiring efforts of Alex Waldrop and others at the NTRA, and to the more than 1,700 comments sent to the Treasury by us ordinary horseplayers, sanity has prevailed. New regulations, published in the Federal Register today and scheduled to become effective in 45 days, on November 11th, take the sensible step of treating all a bettor's wagers on the same opportunity -- say, a Pick Six pool on a given day -- as a single bet. In our example above, the $75,000 winning ticket on a total bet of $500, that would mean the odds would indeed be calculated at 149-1 and the bettor would not face any withholding. So our hypothetical bettor would go home with $75,000, not $54,000, and would most likely put a good chunk of that extra money right back into the parimutuel pools.

So, from November 11th on, the tax environment for horserace (and greyhound and jai alai, if you care) bettors will move one step closer to fairness. It's still not all the way there, for reasons explained in my 1995 article, but every little bit helps. Thanks to all the folks at the NTRA who made this happen, and to David Bergman of the Treasury's legal staff, who wrote the new regulation. Now, all we have to do is wait for those Pick Six carryover days with a positive expectation (when the amount of the carryover exceeds the takeout on new money) -- and actually pick winners.

Sunday, September 24, 2017

Claiming Jail Has Its Day(s) in Court

Most US racing jurisdictions impose some sorts of limits on what an owner can do with a horse that she just claimed. In almost all states, the new owner can't transfer ownership of the just-claimed horse -- except in another claiming race -- for at least 30 days, to avoid possibilities of collusion. In some states, like New York, the owner must run the horse back, if it runs in the first 30 days after the claim, for a price higher than the price at which she claimed it. And in many states, the owner may not enter the horse in a race at another track, or in another state, for the balance of the race meet at which it was claimed or for some specific period, usually 30 or 60 days.

The sum of these limits, which vary a bit from state to state, is usually referred to as "claiming jail," or just "jail." Racetracks and state racing commissions impose the limits, which have their origin more than a century ago in England and the US, in order to prevent raids on the horse population at a track by aggressive claiming owners who then move the horses elsewhere, depleting the horse population available for racing at the original track. Owners who race in more than one jurisdiction may not be happy with the rules, but, by and large, they accept them as part of the bigger picture of the claiming game. If you want to claim horses, then you play by the rules.

Enter Jerry Jamgotchian, the litigation-happy California-based owner who seems to think rules were made for the little people, not for him. Starting in 2011, Jamgotchian has spent years and, probably, hundreds of thousands of dollars, challenging the claiming-jail rules in Kentucky, Pennsylvania and Indiana. Last year, he was soundly rebuffed by a unanimous Kentucky Supreme Court, and the US Supreme Court declined to hear his appeal. Then in August this year, a federal district court in Pennsylvania agreed, upholding that state's claiming-jail rule. But just last week, Jamgotchian finally got a win. The federal district court in Indiana said that state's claiming-jail system violated the Commerce Clause of the US Constitution. So now there's an apparent conflict among the courts and, who knows, this arcane bit of racing regulation may yet make it to the Supreme Court. Can't speak for the rest, but I'm pretty sure Justice Sonia Sotomayor, who looked pretty happy in the "Judge's Chambers" (named for American League home-run leader Aaron Judge) at Yankee Stadium, wouldn't mind spending a day at Belmont.

So how did the three courts arrive at two different results? In each of the cases, Jamgotchian had claimed one or more horses and wanted to race it elsewhere before the relevant race meet ended. And in each case, there was a rule that said no you can't, at least without the stewards' permission. But there were differences, both in the specific facts of the cases and in the wording of the claiming rules in each state. Let's look at each of the cases in a bit more detail, in the order in which they were decided.

In the Kentucky case, Jamgotchian v. Kentucky Horse Racing Commission (488 S.W. 3d 594 (KY 2016), for the legal nerds out there), Jamgotchian had claimed a well-bred filly named Rochitta (Arch-Lady Ilsley by Trempolino) for $40,000 (plus $2,400 tax) at Churchill Downs on May 21, 2011. Something of a bargain, despite the filly's less than stellar career on the race track (one win in 15 starts, earnings of $44,416), since she'd been a $160,000 Keeneland September yearling and went on to be sold as a broodmare prospect in England for $480,000.

But the Kentucky claiming rule provided that:

Unless the Stewards grant permission for a claimed horse to enter and start at an overlapping or conflicting meeting in Kentucky, a horse shall not race elsewhere until the close of entries of the meeting at which it was claimed. 810 Ky. Admin. Regs. (KAR) 1:015 Sec. 6.

In fact, there are no overlapping or conflicting race meetings in Kentucky, as only one track at a time has the right to operate, using dates granted by the Commission. So the rule effectively bans a horse from racing anywhere other than the track at which it was claimed until the end of the meet.

In reality, Rochitta did not race again until after the end of the 2011 Churchill Downs spring meet, showing up in the starting gate next on July 8, 2011, at Presque Isle Downs in Pennsylvania. From there her career continued its downward trajectory, with stops at Mountaineer and Tampa Bay Downs before a subsequent owner realized he had a filly worth a whole lot more in the auction ring than on the track. But while Jamgotchian still owned Rochitta, and while she was still in claiming jail at Churchill, the owner attempted to enter her in a minor stakes at Penn National and in a claiming race at Presque Isle. It's not clear from the Kentucky Supreme Court opinion whether Rochitta was actually entered and then scratched or whether the entries were aborted earlier in the process. In any event, the disgruntled Jamgotchian filed a complaint in court in Kentucky in July, 2011, claiming his constitutional rights were being trampled on. Despite Rochitta's eventual move to the greener pastures of a breeding farm, the case dragged on, as they tend to do, through a trial court decision in November, 2012, an appellate court decision in February, 2014, and finally the Kentucky Supreme Court ruling in May, 2016. The US Supreme Court denied certiorari, , effectively dismissing the final appeal, in November, 2016. All three Kentucky courts held that the state's claiming-jail rule was valid, and that Jamgotchian had suffered no loss of constitutional rights.

In the Pennsylvania case, Jamgotchian v. State Horse Racing Commission (2017 WL 3713395, U.S. Dis. Ct. M.D. PA), Jamgotchian had claimed two horses, Super Humor for $25,000 at Presque Isle on August 29, 2016, and Tiz a Sweep for $25,000 at Presque Isle later in the meet, on September 8, 2016.

Pennsylvania's claiming jail rule, 58 Pa. Code Sec. 163.255, provides that:

If a horse is claimed . . . . nor may it race elsewhere until after the close of the meeting at which it was claimed. The Commission has the authority to waive this section upon application and demonstration that the waiver is in the best interest of horse racing in the Commonwealth.

Unlike Kentucky, Pennsylvania does have overlapping or conflicting race meetings. Penn National, near Harrisburg, and PARX (formerly Philadelphia Park) both race essentially year-round, and the Presque Isle meet in Erie, in late summer, competes with both of them.  Penn National and PARX do divide their racing year into several different "meetings," so claiming jail is not a year-long sentence, but it still can keep a horse on the grounds for a considerable period.

After the claims, Jamgotchian requested a waiver for Super Humor, which was granted by the Pennsylvania Commission, and for Tiz a Sweep, which the Commission deemed moot, since the Presque Isle meet had ended before the Commission ruled on the request. Nonetheless, Jamgotchian filed suit in October, 2016, in federal court in Pennsylvania, making much the same arguments he had raised in Kentucky. On August 29, 2017, the district court, in a relatively brief opinion, rejected his claims that the claiming-jail rule violated the Commerce Clause of the US Constitution. Thus far, no appeal has been filed in that case (checked Westlaw September 24, 2017).

Enter Indiana. In Jamgotchian v. Indiana Horse Racing Commission (2017 WL 4168488, U.S. Dist. Ct. S.D. Ind.), decided just this past Wednesday, September 20th, there were three claimed horses involved.

In a brazen violation of the claiming-jail rule, Jamgotchian claimed Majestic Angel for $25,000 at Indiana Grand on June 16, 2016 and then, without receiving permission from the Indiana stewards, entered the horse for a July 17 allowance/optional claimer at Mountaineer in West Virginia, while the Indiana Grand meet was still in progress, and in which she finished second. Only after the fact did the Indiana stewards become aware the the horse had been moved from Indiana Grand in violation of the claiming-jail rule.

Jamgotchian's other Indiana claims were Found a Diamond, a three-year-old filly haltered for $30,000 on August 3, 2016, and Tiz Dyna, claimed for $25,000 on August 11, 2016. In both cases, Jamgotchian asked the Indiana stewards for permission to race outside Indiana, and in both cases the stewards said no.

Indiana's claiming-jail rule, 71 Ind. Admin. Code 6.5-1-4, Sec. 4(h), provides that:

No horse claimed out out of a claiming race shall race outside of the state of Indiana for a period of sixty (60) days without the permission of the stewards and racing secretary or until the conclusion of the race meet.

Indiana has only one thoroughbred track, Indiana Grand, which in 2016 had a meet that stretched from April until the end of November, so, except for horses claimed in the last two months of the meet, the jail sentence was effectively 60 days. That's similar, in practical terms, to the Kentucky rule, since no Kentucky race meet, except the Turfway winter meet, lasts longer than 60 days.

Once again Jamgotchian had his lawyers file suit, despite his somewhat unclean hands stemming from the Mountaineer entry for Majestic Angel. And this time, mirabile dictu, the federal court agreed with him, holding that the ban on claimed horses' being able to race outside Indiana, even if only for 60 days, was a Commerce Clause violation. Once again, it's too early to know if there will be an appeal, this time by the state. But, although both cases were filed in federal court, their appeals would go to different federal appellate courts, in the Indiana case, to the 7th Circuit in Chicago, and in the Pennsylvania case to the 3rd Circuit in Philadelphia. So it's entirely possible that the two different results will hold up on appeal, in which case the US Supreme Court -- or at least the Justices' law clerks -- might have to learn a little about horse racing.

Do the claiming-jail rules have some sort of (very limited) impact on interstate commerce? Of course they do. Is that impact discriminatory to the extent of being a Constitutional violation? Hardly. But, as any lawyer knows, nothing is certain when you go into court. The Indiana decision thus raises the prospect that, if it is not overturned, as it should be, on appeal, a fundamental element of the legal structure that has governed claiming races for over a century will be abolished. I would hope that, if there is an appeal in the Indiana case, the entire racing industry, especially the lawyer-heavy NTRA, will join in on the side of preserving this particular piece of the status quo. Without it, the Michael Gills and Jerry Jamgotchians of the world could quickly destroy the claiming game as we know it.

Legal nerds please continue. The rest of you can probably stop here.

First, as described above, the claiming-jail rules, and the attendant circumstances of actual race meetings in a particular state, are all a little different. And in law, the facts matter.

For comparison, the New York claiming-jail rule, 9 NYCRR 4063.3, reads as follows:

If a horse is claimed . . . . nor shall such horse race elsewhere until after the close of the meeting at which such horse was claimed.

At NYRA tracks, most race meetings are six to 10 weeks long. The longest, the Aqueduct winter meet, is about three months, so that is the maximum "jail" term for a claimed horse, and it's at the meet that has the greatest difficulty in maintaining a horse population large enough to provide something approaching full fields on race days. Preserving the horse population at a track is by far the strongest justification for the jail rules.

Now, on to the legal reasoning. Jamgotchian's lawsuits all raised the issue of the "dormant" or "negative"  Commerce Clause, something that a few of us remember from law school, but that hardly any lawyer pays much attention to in real life.

Article I, Sec 8, cl. 3 of the US Constitution gives Congress the power to regulate commerce "among the several states." By implication, if Congress has the power to regulate interstate commerce, then the individual states don't have that power, and if they try to set up restrictions on interstate trade, then those restrictions are invalid. See, e.g., Dep't of Revenue of Ky. v. Davis, 553 U.S. 328 (2008). Lots of cases on this issue, most involving some sort of protectionism that favors in-state business and disadvantages out-of-state competitors. E.g., New Energy Co. of Indiana v. Limbach, 486 U.S. 269 (1988).

The claiming-jail rules certainly impose some kind of burden on interstate commerce. Without them, an aggressive claiming owner, named, perhaps, Michael Gill, could simply raid a track, claim dozens of horses, and ship them out of state. See Gill v. Delaware Park LLC, 294 F. Supp. 2d 638 (Dist. Ct. D. Del. 2003). The result of such a raid would be that the track from which the horses were claimed would have a sharp and sudden reduction in its horse population, with the result that the size of its fields, the quality of its racing and, eventually, its betting handle and the state tax revenue derived from that handle would surely decline. It's to avoid these consequences that most states have some sort of claiming-jail rule.

The Kentucky Supreme Court opinion, by far the longest and best-reasoned of the three claiming-jail cases, sets out a number of reasons why the dormant Commerce Clause does not apply to claiming jail.

First, the claiming-jail rule is really, the court points out, part of an implicit contract. In exchange for the right to claim horses, the buyer agrees to abide by the rules, including not transferring ownership of the claimed horse for 30 days, and not racing outside the claiming track for a period without the permission of the stewards or the racing commission. If you want a horse, you can buy one other than through the claiming process -- though it might cost you more, since the seller will want compensation for the possible purse the horse might have earned in the race. 

Second, the Kentucky court pointed out that the claiming-jail rules don't discriminate between in-state and out-of-state residents; everybody's subject to the rules if they claim a horse. 

Third, the court asked whether the rule imposed any incidental burden on interstate commerce. To be sure, it did, if of a brief and fleeting nature, since horses were all released from "jail" within a short period after the claim. In cases of such incidental burdens, the court looked at whether the benefits of the rule -- maintenance of the horse population at a track and the consequent support of state tax revenues from racing as well as support of the industry -- outweigh those incidental burdens. The Kentucky court concluded that they did. The Indiana federal court, after an extremely brief and cursory analysis, reached the opposite conclusion.

Fourth, the Kentucky court looked at other cases on "export embargoes," or state rules that prevented the export from a state of, for example, electricity produced within the state (New England Power Co. v. New Hampshire, 455 U.S. 331 (1982)), cantaloupes that hadn't been processed within the state (Pike v. Bruce Church, Inc., 397 U.S. 137 (1970)), or unprocessed timber (South-Central Timber Dev., Inc. v. Wunnicke, 467 U.S. 82 (1984)). The Kentucky court pointed out how these cases differed from the claiming jail rule:

The differences are those between permanent and temporary, between total and partial, between serious and slight and between inescapable and voluntary. The laws challenged in the Supreme Court cases just referenced forbade export of the article of commerce entirely or forbade it for as long as the would-be exporter failed to do something, such as employ a local processor. Here, Jamgotchian simply had to wait thirty days to transfer his Kentucky-claimed horse, and, only had to wait forty-two days (May 11 to July 1) to race her in another state.

The entire Kentucky Supreme Court opinion, with its careful and lengthy analysis of how the specifics of racing fit into Commerce Clause jurisprudence, is well worth reading. If you don't have access to Westlaw or a similar service, you can find it here. If these cases ever reach the US Supreme Court, I suspect their opinion will look a lot like that of Justice Hughes in Kentucky, where they do know something about horse racing.

Monday, September 11, 2017

Fasig-Tipton's Turf Showcase Sale

With lots of well-heeled European, Middle Eastern and Asian buyers in town for the million-dollar yearlings in Book 1 of the Keeneland September sale -- which started today -- the number two auction company, Fasig-Tipton, tried something new. It held a "turf showcase" yearling sale last night, aimed specifically at foreign buyers, plus those few Americans that actually like turf racing, and featuring yearlings that arguably had turf-oriented pedigrees.

Whatever spin the folks at Fasig-Tipton may put on it -- first time trying a new concept, Keeneland snagged all the best turf pedigrees anyway, etc. -- the sale was by any measure less than a rousing success, failing to pull much cash out of the pockets of those wealthy foreigners. Of 171 yearlings in the catalogue, only 41 (43.3%) were sold, bringing an average price of $68,041 and a median of $52,500. Of the 97 that didn't sell, 71 -- nearly as many as were sold -- failed to meet their reserves (i.e., were "RNA"), and the remaining 26 were scratched from the sale. You can see all the results here. Any time 49% of the horses that go through the ring at an auction fail to sell, as happened last night, that's a sign that someone, usually the sellers, had unrealistic expectations.

Another odd result, given the stated purpose of the sale -- to attract foreign buyers -- was that hardly any of the buyers were in fact foreign. It's impossible to tell for sure, when so many purchases are made by agents, but none of the usual names representing non-US interests showed up in the F-T Turf Showcase results. Nor did the very best American turf pedigrees. There were more War Front babies (4) in the first 20 hips at Keeneland today than in the entire F-T sale (1). Lots of Kitten's Joy, Gio Ponti and Temple City yearlings in both sales, but that just suggests some over-breeding.

Some American buyers may have gotten a good deal, in the absence of serious foreign money. Ahmed Zayat (with, I trust, the advice of my friends Jeff Seder and Patti Miller at EQB) picked up two at the turf showcase, a Real Solution colt for $60,000 and a War Command filly for $75,000. And leading partnership West Point Thoroughbreds snagged a colt by English sire Noble Mission for $85,000. Apart from that, it was the usual mix of owners and agents, and even a pinhhooker, Nick DeMeric, who paid the co-high price of the evening, $250,000, for a Scat Daddy colt. One never sees pinhookers in Book 1 at Keeneland, as they don't have the bottomless bankrolls to compete that other Book 1 buyers seem to possess.

Was the experiment worth it for Fasig-Tipton? My guess would be, probably not. The prices they got, and the buyers they attracted, would be just as likely at the regular F-T yearling sale in October. Credit F-T for trying something new, but not everything new works.

Tuesday, August 22, 2017

Jews in Racing 1 - Sir Ellice Victor Elias Sassoon

"The only race greater than the Jewish race is the Derby."
 -- attributed to Sir E.V. E. Sassoon

Race, and racism, has never been absent from sports. Black jockeys, who won most of the early Kentucky Derbies, were forced out of the sport in the early 1900s by the pressure of Jim Crow zealots. Second-generation Americans, whether Irish, Italian, Jewish or East European, made their names in boxing, only to be supplanted by more recent immigrants and by African-Americans. John Carlos and Tommie Smith were ostracized and blacklisted for their Black Power salute from the podium at the 1968 Olympic games. And even today, Colin Kaepernick is blacklisted by NFL owners for taking a public stand against racism, and Orioles outfielder Adam Jones hears racial taunts when he jogs out to his position in Fenway Park. So racial awareness, and racism, are still alive and well in sports.

Sticking to the oft-given advice to write what you know, my own contribution to this discussion, which will occupy this blog over then next few months, is to chronicle the history of Jews in racing. While not all of us are as religiously observant as, say, Ahmed Zayat, who'll park an RV at the track on Friday so he doesn't violate the proscription against driving on the Sabbath, we all pretty much identify one way or another as Jewish. In my own case, it's the Karl Marx-Rosa Luxemburg-Emma Goldman-Upper West Side school of Judaism, but still, it's an identity.

So these next few posts will take a look at other Jews who've made an impact in horse racing. Owners, trainers, jockeys and gamblers. And, since he may indeed have actually uttered the quote at the top of the screen, what better place to start than with Sir Ellice Victor Elias ("Eve") Sassoon, 3rd Baronet of Bombay and four times winning owner in the (Epsom) Derby?

Yes it's the same family that gave us Vidal Sassoon's hairstyles and Sassoon jeans. The Sassoons were a well-established Jewish merchant family in Baghdad, perhaps having landed there after the expulsion of the Jews from Spain in 1492, or perhaps having more local roots. In the 19th century, Baghdad was part of the Ottoman Empire that was based in Constantinople, and several Sassoons served as financial advisers and treasurers to the resident Ottoman pasha in Baghdad. But the origin of their real money was the opium trade with China. The Sassoons, in fact, put together the first international drug cartel, and then invoked the armed might of Queen Victoria's Royal Navy to protect their interests (along, by then, with those of other British merchants), culminating in the Opium Wars in the mid-19th century, which resulted in the cession of Hong Kong to Britain and the opening up of Chinese ports, especially Shanghai, to western commerce. The World War I poet Siegfried Sassoon was also a family member, though he was disinherited when he had the chutzpah to marry a shiksa. Siegfried did, however, eventually produce "Memoirs of a Fox-Hunting Man," evidencing at least some familiarity with horses.

The Sassoons soon moved from Baghdad to the British Empire, establishing a commercial base in Bombay (as it then was) and earning a peerage from the British Crown. Young Ellice Victor Elias was born in 1881, while the family was traveling from England to India, attended Harrow and Cambridge, served in the Royal Flying Corps in World War I, suffering a leg injury that bothered him the rest of his life, and, on the death of his father in 1924, inherited the colonial peerage.

Sir Victor with unidentified friend
photo from Sassoon archive at SMU

Once settled into his new status as a colonial aristocrat and member of the Indian Legislative Assembly -- even if, as a Jew, he still couldn't get in to the British clubs in India -- E.V.E. Sassoon did what all self-respecting British nobility did, he bought a stud farm and started raising race horses. In Sassoon's case, it was the Bungalow Stud near Newmarket in England, which he promptly renamed as the Eve Stud (today, it's a rest and rehabilitation facility for Sheikh Mohammed's Darley operation).

Sassoon's Derby wins wouldn't come until later. Meanwhile, he moved to Shanghai, becoming the most important foreign real estate mogul in the city, at one point owning some 1,800 different properties. The move was reportedly caused by Sassoon's annoyance that, even in India, he was still subject to British taxation. In Shanghai and Hong Kong, by contrast, he was beyond the reach of the Inland Revenue. From then on, he had to ration the number of days that he spent in England, so as not to become liable to the hated tax man. As a side benefit, the British clubs in Hong Kong and Shanghai          were (marginally) more cosmopolitan than their analogs in India; they admitted Jews, if not Asians.

The gentry at Shanghai Race Course
photo by E.V.E. Sassoon, SMU Archive

Shanghai became something of a refuge in the 1930s for European and Russian Jews fleeing Hitler. Sassoon reportedly was heavily involved in the rescue efforts, sometimes in the face of opposition from others in the Jewish and British expatriate community in Shanghai, who thought everything would be fine under Japanese occupation, because, don't you know, the Japanese are so much more civilized than those dreadful Germans. And Sassoon's active social life continued, with lavish parties and an ever-changing cast of girlfriends, both white and Asian, though, as at least one reported, the old war wound caused some difficulties when it came to the physical.

While Sassoon, and his property holdings, survived World War II, they didn't survive the victory of the Chinese Communist Party in 1949. Seeing the handwriting on the wall, Sassoon had sold off most of his Shanghai property in the mid-1940s and moved to Nassau, Bahamas, where he lived until his death in 1961.

It was from his new base in Nassau that Sassoon made it to the peak of English racing, winning the Derby four times in seven years: Pinza (1953), Crepello (1957), Hard Ridden (1958) and St. Paddy (1960). Only the last of these was a homebred; the others had been purchased at auction, in one case -- Hard Ridden -- for the very low price, even for the time,  of 270 guineas (about $1,500).

Sassoon married late in life -- to his nurse -- and had no children. The racing stable died with him, with the property eventually ending up in the hands of Sheikh Mohammed. He was survived, or rather honored, by horses named for him in Australia, New Zealand and the U.S., the last a gray gelding by Promised Land (in turn by Palestinian), bred by Claiborne Farm in 1970 who went on to race 84 times, with record of 5-13-10 and earnings of $110,152. Sassoon the critter was perhaps less successful than the man for whom he was named, but, judging from that race record, a good deal more hard working.

Party time - Sir E.V.E. Sassoon in Shanghai
Photo: SMU Archive

Thursday, July 27, 2017

Partnerships at Belmont: How They Did

Being the obsessive that I am, and knowing that there are a lot of other racing partnerships out there in addition to our own Castle Village Farm, I naturally keep track of how the competition is doing. The result is a spreadsheet for every race meeting on the NYRA circuit, dating back half a dozen years and tracking every partnership that I know of that recruits publicly. I don’t count groups that are family, friends or neighbors, but I do everyone I know of whose website invites interest from new folks.

Even though Castle Village Farm basically sat out this year’s Belmont meet (our one horse stabled at Belmont had some physical issues and started just once), I kept up the scorecard anyway. (I’ll be happy to send you the spreadsheet if you email me directly at

There are, of course, methodological issues. What to do when two partnerships co-own a horse? What to do when a partnership owns a horse in a joint venture with another owner? My solution: if a partnership is listed on the program, the race is counted for that partnership. That means some races are counted twice; so be it. And the purse money for a horse with multiple ownership doesn’t all go to that partnership in a multiple-owner situation, but I count the whole purse for each partnership anyway. Not perfect, but it provides a reasonable comparison.

So here’s what I found at the Belmont meet.

Public partnerships accounted for 280 starts during the meet, winning 39 (14%), finishing in the money 44% of the time, and picking up a check (including 4th and 5th-place finishes) 70% of the time. All these percentage are just marginally above the numbers for all starters at the meet.

In the aggregate, partnerships averaged $13,755 per start, but that number is hugely skewed by Tapwrit’s win in the Belmont Stakes for Aron Wellman’s Eclipse Thoroughbred Partners and by wins in the Grade 3 Poker for Ballagh Rocks and the Grade 2 Suburban by Keen Ice, both for Jerry Crawford’s Donegal Racing. A more accurate reflection of how partnerships as a whole did is the median figure for earnings per start, at $5,000. That’s not bad; just about pays the bills for keeping a horse in training (see my most recent analysis of the cost of racing in New York, here.)

Eclipse and Donegal are high-end partnerships; a share in a horse costs $15,000 or more, and often $25,000 or more. How did the other high-end operations do? Sheila Rosenblum’s Lady Sheila group, whose horses are trained by Linda Rice, had an excellent meet, winning 6 of 16 and finishing in the money more than half the time. Team Valor ran only three horses at the meet, but all three finished second in high-level allowances. Centennial had only one win, but eight of their 10 starters finished in the money. And West Point, which ran more horses – 19, many as co-owners – than any other high-end group, had four wins and 52% of their starters in the money. I’d guess the partners in those operations felt reasonably satisfied, even though, in most cases, they’ll never get their initial “investment” back.

Two claiming partnerships dominated the entries at the lower partnership levels, both with decent results. Drawing Away Stable, which started with trainer David Jacobson but left him a couple of years ago, had 32 starters, with six winners (19%) and 14 in-the-money finishes (44%) and earnings per start of $6,888. Final Turn Racing, which took Drawing Away’s place in Jacobson’s barn, had 35 starters, winning four (11%) but finishing in the money 19 times (54%) with earnings per start of $7,033. Both those stables operate on a model where the trainer pays all the expenses and keeps most of the earnings, so partners get a lot of excitement with many entries and win pictures, but don’t really have a major financial stake beyond their initial partnership share.

Overall, 19 partnerships won at least one race. At the bottom end, 11 partnerships didn’t have a single in the money finish, though most of those started three or fewer horses.

Does all this signify anything? What it suggests to me is that racing results are fairly strongly correlated with the cost of the horse that’s doing the racing, notwithstanding the many million-dollar failures in Todd Pletcher’s and Chad Brown’s barns that never even reach the starting gate. But at all levels, what the numbers suggest is that horses have a decent chance of (mostly) paying their way on a New York race track, but that recovering those big yearling or two-year-old purchase prices is an elusive goal.

Caveat emptor.

Thursday, June 22, 2017

End of the Season -- the OBS June 2YO Sale

Ocala Breeders Sales Co. (OBS) held the last sale of the two-year-old auction season last week, concluding the juvenile auction calendar with neither a bang nor a whimper, but rather a continuation of the stabilization that has marked much of this year's sales. (See my reports on earlier two-year-old sales this year here, here, here, here and here.)

Overall, the OBS June sale continued its recent improvement in prices, albeit with a smaller catalog than in recent years. Of the 769 horses listed in the catalog, 424 (55%) sold for an average price of $36,000 and a median price of $19,000, both substantial improvements over last year, when 619 horses sold, most at lower prices. So the June sale, like most of the others on the calendar, continues to adjust to the new reality of smaller foal crops and a stagnant, if not decreasing, pool of potential buyers, especially in the "middle market," between, say, $25,000 and $100,000.

Still, there was some notable action at the high end at OBS June. For example, all five horses sired by Tapit -- North America's leading sire the past three years -- were sold, for an average price of $170,000. Without knowing what those horses' vet reports looked like or what kind of physical appearance they presented, it's hard to know whether the buyers got bargains. But, compared to Tapit's $150,000 stud fee in 2014, the year this season's sales horses were conceived (the fee is $300,000 now), it seems the buyers got a pretty good deal, if only based on their purchases' residual pedigree value.

The most active buyer at the high end of the sale was New York-based trainer Linda Rice, who bought seven horses for an average of $157,000 each. Her top purchase was a $320,000 Midnight Lute colt, who had the co-fastest one-furlong breeze of the sale, in 9 4/5 seconds. One might question the wisdom of breezing a two-year-old at the sale faster than they'll ever run again, but, in the aggregate, the horses that run faster at the sales do go on to do better on the race track than their slower colleagues, so if you're buying in bulk, time does count.

Korean buyers were, as usual, out in abundance at the June sale, buying 19 horses for a total of $864,000, an average of $45,000, including three for $100,000 or more. Not so long ago, the Koreans were looking more at the bottom of the market, with a cap of $20,000 on their bids. Now, they've become a serious middle-market player.

At the bottom of the market, condolences to the 36 horses bought for low prices by C.H.P.R., all destined to be shipped to Puerto Rico and to run for very little money and less food at El Comandante. Having rescued some horses from Puerto Rico, I know the kind of treatment they receive, and it ain't pretty. It's hard to prevent older claiming horses from ending up at Comandante, but perhaps the sales companies could take the small step of prohibiting direct export from the sales to Puerto Rico (and other countries where conditions are known to be unacceptable) before a horse has even had a chance to run on a North American track.

So that's the end of this year's two-year-old sales. All in all, it's probably a relief to breeders, pinhookers,  consignors and the auction houses that things weren't worse, and even seem to have stabilized a bit, especially at the top end of the market. Now, on to the yearling sales, starting next month, and to looking for some of those high-end two-year-olds at Saratoga.

Thursday, June 8, 2017

Why NYRA Is Subject to New York's Freedom of Information law

If you look at the financial statements posted on the New York Racing Association (NYRA) website, you'll see that there are audited financials for every year going back to 2010, as well as quarterly statements for most recent years. In addition, in the section of the website devoted to NYRA Board of Directors meetings, you'll see that the meeting books for most Board meetings over the past half-dozen years include the most recent quarterly financials. In other words, for some years now, NYRA has been operating with admirable financial transparency.

But all that seems to have stopped sometime in 2016. The last quarterly financial report posted on the NYRA website is the one for the second quarter of 2016, there's no annual report for 2016, and the meeting book for the last publicly listed Directors' meeting, held in December 2016, had a budget for 2017, but no actual financial data.

So what's happened? Why is NYRA no longer transparent? From the time "new NYRA" was established in 2011 until mid-2016, it conducted itself as if it were a governmental entity, acting in ways that were consistent with New York State's open meetings law and freedom of information law. As well it should have. "New NYRA" was a creation of legislation in 2011 that rescued old NYRA from bankruptcy, transferred the land under NYRA's race tracks to the State, and gave the state, and in particular, Governor Andrew Cuomo, effective control over appointments to the NYRA Board of Directors, and subjected NYRA to close oversight by the State Budget Department's Franchise Oversight Board.

New legislation this year (2017) changed the composition of the NYRA Board of Directors while at the same time giving the Franchise Oversight Board even greater powers. That legislation was signed by Cuomo as part of the State's 2017-18 budget, but did not go into effect until this week, when "new" Directors -- who in fact were virtually the same as the previous Directors -- were appointed. But, whether NYRA is still a state entity under the new version of the law or not, there should be no question that it was one under the law as it was through the end of 2016 and at least the first quarter of 2017, and that therefore its records for 2016 and prior years should be open to the public. After all, it was our tax money that bailed NYRA out of bankruptcy -- along with a slice of the income from the Resorts World slot machine palace at Aqueduct -- and as taxpayers we should be able to see what's happened to our money.

Several months ago, when I noticed that there were no new financials being posted on the NYRA website, I filed a Freedom of Information Law (FOIL) request for them with NYRA. So far, the only response has been two adjournments of my request, the latest to tomorrow, June 9th. Here's why I think NYRA should make its financials public on its website and therefore should also honor that request and provide its recent financial reports -- which I will be happy to share online if NYRA doesn't post them -- and, more generously, why I think its apparent retreat from transparency is wrong.

New York has two important statutes that promote public access to state agencies. The Open Meetings Law (Sections 100-111 of the Public Officers Law) requires state agencies to conduct their business in public. The Freedom of Information Law (Sections 84-90 of the Public Officers Law) allows the press and individual citizens access to government agencies' records, subject to very limited exceptions. The preamble to FOIL states that:

government is the public's business  and . . . the public, individually and collectively and represented by a free press, should have access to the records of government.

Since FOIL was first enacted in 1974, and especially after amendments in 1977 that significantly broadened its reach, the courts have uniformly said that the statute is to be read liberally, with a presumption that disclosure is valid, and that the exemptions in the law are to be read narrowly.

Under FOIL, an "agency" must disclose its records when requested, unless one of the following exemptions applies:

  • Records specifically exempted by state or federal law;
  • records that would create an unwarranted invasion of someone's personal privacy; 
  • records whose disc;closure would interfere with current or imminent contracts or collective bargaining agreements;
  • records that are trade secrets or whose disclosure would cause serious competitive disadvantage to a private entity that submitted them to the agency;
  • certain law enforcement records;
  • records that could endanger the life or safety of an individual;
  • exam questions and answers;
  • records that would compromise an agency's computer security; and
  • certain intra-agency records, but specifically not including statistical and financial tabulations and records of audits.
If NYRA is an "agency" within the meaning of FOIL, then none of these exceptions would apply to its quarterly financial reports or its annual audited financials.  So the key question is, whether "new NYRA," as created in 2011, is an "agency."

Section 86(3) of the Public Officers Law defines an agency for purposes of FOIL as:

(A)ny state or municipal department, board, bureau, division, committee, public authority, public corporation, council, office or other governmental entity performing governmental or proprietary functions for the state. . . 

Obviously, NYRA isn't a direct state agency like, say, the Governor's Office or the Department of Taxation and Finance. But that's not necessary for an entity to be subject to FOIL. Generally, even private or semi-private entities can by "agencies" for purposes of FOIL if they are so involved with the state that it makes sense to bring them within the reach of FOIL.

New York's highest court, the Court of Appeals, has not yet ruled on whether NYRA or any entity like NYRA is subject to FOIL, but in 2009, the next level court, the Appellate Division in western New York, laid out a six-factor test to be used in determining whether FOIL applies to something that's not, strictly speaking, a government department. In the absence of a state-wide rule from the Court of Appeals, and in the absence of any competing rulings from other Appellate Divisions, that ruling is precedent in all of the state. Let's look at that test and see how it might apply to NYRA.

First, is the entity required to disclose its annual budget? In NYRA's case, the answer is yes; the budget must be submitted to the State Franchise Review Board for approval.

Second, does the entity maintain offices in a public building? In 2011, when "new NYRA" was established, old NYRA ceded whatever rights it had to the land under its racetracks it the State. So, while the grandstands may belong to NYRA, the land under them belongs to the state. This factor is also on the side of NYRA's being an "agency" for purposes of FOIL.

Third, is the entity subject to a government entity's approval over hiring and firing? This factor says NYRA is not an "agency."

Fourth, does the entity have a Board comprised primarily of government officials? Only two of the 17 NYRA Board members in the 2011-June 6 2017 period were actually government officials, but of the 17, eight were nominated by the Governor and two each by the State Assembly Speaker and State Senate Majority Leader, so 12 of the 17 slots were filled by government appointees. Comes down on the side of NYRA being subject to FOIL.

Fifth: was the entity created by a government agency? "New NYRA" was created by the state legislature, through amendments to the State Racing, Pari-Mutuel Wagering and Gaming Act in 2011. Without the authorizing legislation, it wouldn't exist. Another factor for FOIL.

Finally, does the entity describe itself as an agent of a governmental agency? NYRA hasn't explicitly said so, but it has structured itself as if it believes itself to be subject to FOIL. It has appointed a records access officer and an appeals officer, as required by the FOIL statute, and, up through the end of 2016, it conducted its Board meetings in public, as required by the Open Meetings Law.

On balance, then, NYRA was right when it decided back in 2011 that it should act like a public entity. Nothing changed between then and yesterday-- although the balance of factors may be different going forward now that "new" Directors have been appointed in accordance with the 2017 budget legislation -- and NYRA should continue to make its financial records public and hold its Board meetings in the open. I'm hoping NYRA's lawyers reach the same conclusion.