Are racinos saving the horse industry in other states?

John Cheves

Jun. 15, 2009 (McClatchy-Tribune Regional News delivered by Newstex) -- The dozen states that already have racinos -- horse racetracks with some casino gambling, usually slot machines -- prove that such places can rake in billions of dollars.

What they don't necessarily do is save the horse industry.

That's what some legislators, horsemen, economists and others in those states report. No one knows whether a law authorizing Kentucky racinos will emerge from the General Assembly session that starts Monday, but these other states give some indication of how racinos might work here.

Nationally, horse racing's popularity has waned for years. Track attendance is down. So are handles, the sums wagered. Thoroughbred handles have slumped 10 percent since 2003, to $13.6 billion.

This is true even in states with booming racino operations, where a slice of casino money goes to fatten track purses and breeder incentives, making the states more attractive places to race and breed horses.

Take Pennsylvania. Racinos are so hot there that a new racetrack has opened -- a rarity for a fading sport. But most of the $1.6 billion in 2008 racino revenue came from the slot machines, not the tracks. And although the sums slipping into slots exploded, the handles shrank.

Take Florida. That state has a chain of racinos and casinos elbowing each other along the Interstate 95 corridor near Miami, with more to come. But the number of Thoroughbred horses starting races is falling. And horsemen who lobbied for racinos now complain that slots -- less profitable than predicted -- failed to double the purses, despite promises from gambling interests.

"We got pimped on the legislation," horse trainer Michael Deters told the Miami Herald this spring.

Rather than revive the sport of kings, casino gambling claims the throne for itself, national experts say. Horses are forgotten amid the clanging slot machines.

"They just can't be dependent on slots," said Richard Thalheimer, a gambling economist who runs Thalheimer Research Associates in Lexington.

"For the racing industry, racinos provide a breather," Thalheimer said. "They give the industry a chance to experiment and do research on how to survive. ... That doesn't have to mean bringing people back to the tracks physically, but it does mean getting them to bet on horses again."

Nobody seems to know the future of horse racing.

Fewer, but higher quality, races are a possibility, said Doug Reed, director of the Race Track Industry Program at the University of Arizona.

"We've perhaps overdosed on racing. The NFL doesn't play five football games a day all year round," Reed said. "It just gets tired if you try to run hundreds of small meets a year. The audience for that isn't there anymore."

That's one reason many gambling experts and state officials warn against more states leaping into the racino business right now.

Another is the recession.

This is not a good year to expect lucrative competitive bids for racino licenses or the capital investments needed for high-quality restaurants, concert halls and hotels, they said. In Indiana, several casinos are in bankruptcy or limping toward it, while both of the year-old racinos struggle with financial problems.

For all their money, racinos bring a fresh set of problems.

Lawmakers warn that the gambling industry constantly pushes for more leeway -- table games, sports betting, anything to one-up other gambling states -- even as it begs for relief on how much money it's required to give the government through taxes and fees.

More than half the states have considered gambling legislation this year, including eight racino states that sought to further expand gambling or give financial breaks to the industry, according to a report by the National Conference of State Legislatures.

"The current wave of gambling expansion may be gathering more momentum as national economic and state fiscal conditions continue to deteriorate," the NCSL wrote in its report. "States continue to consider the expansion of gambling as a possible way to fund government."

Add to this the legal and ethical concerns. Gambling's massive profits fuel the fear of government corruption as gambling interests seek favors. The parade of politicians sent to prison in gambling-related scandals includes former Louisiana Gov. Edwin Edwards and members of the Kentucky General Assembly caught in Operation BOPTROT, an FBI investigation that led to the conviction of more than a dozen legislators in the early 1990s.

In West Virginia, a former state lawmaker who now owns a slots distributorship was named in a federal indictment last week on charges of bribery, racketeering, gambling and obstruction because of his ties to state lottery officials.

"Gaming carries with it a stigma. Government must not enhance that stigma," said Indiana state Rep. Trent Van Haaften, a Democrat who supported racinos in his state but has since butted heads with the industry. "States that come to depend on gaming revenue need to be sure that they have a solid regulatory environment to control how everyone operates."

For their part, racinos and horse owners grumble about politicians squeezing them so hard for money that it's difficult to invest in facilities or fatten the purses enough to attract horses to their tracks.

Elected leaders cite saving the horse industry as their motivation when they allow racinos. But the resulting cash piles are tempting honey pots as they struggle to balance state budgets. Tens of millions of casino dollars have been clawed back from track purses to pay for the daily operations of government.

Three nearby states provide interesting case studies.

West Virginia

West Virginia launched the racinos concept, legalizing them and opening the first one in 1994. It now licenses four that reported $951 million in gambling revenue last year, about $430 million of which went to state and local governments.

Expanded gambling noticeably boosted West Virginia's horse industry by giving it larger purses and breeder incentives, according to a study several years ago by Arizona's Race Track Industry Program.

West Virginia's share of the U.S. Thoroughbred foal crop leapt 232 percent over the last decade, although with just 1.9 percent of the market -- 645 foals -- it's barely a blip on Kentucky's radar. Kentucky dominated the industry with nearly one-third of the crop in 2007, or 10,424 foals, up 4 percent from 1997.

West Virginia has suffered a decline since 2004 in Thoroughbred purse size (down 11 percent to $70.3 million) and in the number of Thoroughbreds starting races (down 17 percent to 8,569).

Part of that is due to competition from nearby states that added racinos, carving up the gambling pie into smaller slices. Part of that is due to the recession: West Virginia's original racino, Mountaineer Casino, Racetrack and Resort, has laid off 268 workers since November.

The chief cause, though, is the West Virginia legislature, which decided in 2005 to drain millions in casino money from racing purses to pay for other government needs, such as the workers compensation program and a state employee pension fund.

The horse industry should be warned that casino money can be given and taken away with equal ease, said Reed of the Race Track Industry Program. It needs a specific plan for investing its windfall, and it needs to move on that plan fast, he said.

"Racing can't just say, 'We have slots now, so we're set,'" Reed said. "Especially when you're in hard economic times, the legislature might view your purse money as a more tempting target than, say, raising taxes. You shouldn't assume that this money will be there for you forever."

Indiana

Indiana legalized racinos in 2007 and opened two of them a year ago at Hoosier Park and Indiana Downs, racetracks in the center of the state.

"The racing operations were not financially feasible on their own," said Jeff Smith, general manager of racing at Hoosier Park.

Their gambling revenue for the first year with racinos was $205 million, about $51 million of which went to state and local governments.

Horse industry officials say they're optimistic, although it's still too soon to tell how much the industry is being helped.

Thoroughbred purses rose 1 percent last year to $13.9 million; the number of Thoroughbred horses starting races fell 3 percent to 2,585. Indiana is only a minor player in Thoroughbred breeding, producing 1 percent of the 2007 foal crop.

The first coin had barely dropped into a slot machine before the racinos returned to the statehouse to lobby for better terms.

They complained that the $250 million in up-front licensing fees that each racino had to pay was killing them. They wanted a partial refund, $75 million in tax breaks and the ability to offer table games such as blackjack.

So far, the legislature has shrugged off these entreaties.

"Both racinos borrowed the money to pay their licensing fees, and in this economy, they had to accept a fairly significant interest rate. Now both of the tracks tell us they're not doing as well as expected, so they're having a hard time keeping up the payments," said Indiana state Rep. Scott Pelath, vice chairman of the House Ways and Means Committee.

"Indiana has a lot of lessons to offer other states," Pelath said. "Once you get into the business of gaming, you're always going to be stuck refining the system, trying to keep the industry healthy so you maximize its contributions to the state. Casinos are not the kind of business where you can just open it up and leave it alone and all goes well."

Indiana's horse and gambling interests say it's partly the legislature's fault that the racinos are stumbling.

Most racino states charge a small licensing fee and then make their revenue on taxes after the facilities open. Pennsylvania set a precedent when it charged $50 million for a racino license.

Indiana lawmakers -- desperate for immediate cash to offset rising property taxes that infuriated voters -- set their price at five times Pennsylvania's.

"For other states contemplating such a thing, they should look long and hard at these licensing fees," said Michael Brown, executive director of the Indiana Horse Racing and Breeding Coalition.

"Two hundred and fifty million dollars just to sit down at the table when you apply is really a crippling amount," Brown said. "It truly stunted the development that the tracks were capable of and forced them to borrow huge sums in a very bad market. It will make things very hard for the tracks for years to come."

Pennsylvania

Pennsylvania legalized racinos in 2004 and launched the first of a half-dozen two years later. In 2007, it welcomed a new racetrack at Presque Isle Downs and Casino.

However, the focus of Presque Isle is clearly not on the tracks. Horses run in the evening four or five days a week from May to September, whereas the 2,000 slot machines are open around the clock and throughout the year.

Results are impressive: Racino revenue in 2008 of nearly $1.6 billion, of which $752 million went to state and local governments; racing purses up 157 percent since 2006, to $110 million; and the number of horses starting races up 70 percent, to 9,256.

Pennsylvania's share of the U.S. Thoroughbred foal crop nudged upward from 3 percent to 4 percent in the decade ending in 2007. That number will grow like a weed thanks to breeder incentives that have more than tripled with slots, the horse industry predicts. Among the prized stallions now calling Pennsylvania home is Kentucky-bred Real Quiet, 1998 winner of the Kentucky Derby and Preakness.

"Pennsylvania's Breeding Fund Program distributes more money, on a per-foal basis, than nearly every other state-bred program now in operation," declares the Pennsylvania Horse Breeders Association.

Robert Hoffa, president of the Pennsylvania Equine Council, credits slot machines for boosting his state's horse industry. Racetracks are improving their facilities and horse farms are winning new business, Hoffa said.

Yet the fortunes might not flow forever, he said. Pennsylvania is the exciting new destination for gamblers along the Northeastern seaboard. "Atlantic City alone has probably taken a tremendous hit from our racinos," he said. But this, too, can pass.

To the south, Maryland has approved five casinos with slot machines, which are expected to draw gamblers away from Pennsylvania and West Virginia. New York wants to expand its network of racinos. In Delaware this year, the legislature legalized sports betting and allowed its casinos to offer table games. To the west, Ohio is debating whether to legalize casinos around the state.

"We're the new thing for now," Hoffa said.

But can states keep fighting each other for gamblers' dollars?

"Who knows?" he said. "This amazes me, it really does, but I don't have an answer on that one."

Newstex ID: 35753591