NEWS
Winning with casino gaming
Posted: Saturday, August 11, 2001
Purses have grown dramatically at racetracks where alternative forms of gambling are legal
An increasingly important feature on the face of the North American Thoroughbred industry is the racetrack casino, a marriage of racing with forms of gambling historically considered to be the sport's competition.
In each of the six jurisdictions that have legalized on-track casinos-West Virginia, Iowa, Delaware, New Mexico, Ontario, and Minnesota, listed in order of legalization-the result has been an infusion of money for track owners and horsemen and a rejuvenation of racing. In Iowa and New Mexico, a dramatic expansion of the state breeding programs has resulted.
There perhaps is no more graphic example of the impact of track casinos on racing at those facilities than Mountaineer Park in Chester, West Virginia. When slot machines were introduced at Mountaineer in 1995, average daily purse distribution was $22,000. Five years later, average daily purses had zoomed to a total of $135,000-with the slot machine revenues providing 70.5% of the purse money.
The casino to open later this year or in 2002 at Louisiana Downs holds the promise of having the same effect. Another casino has been planned at Delta Downs in Vinton, Louisiana.
The bottom line at racetrack casinos only tells part of the story, however. Differences in legal and economic arrangements from one jurisdiction to another hint at the complex process of negotiation and compromise among competing interests and constituencies that precede the establishment of any racetrack casino.
What does it take to pass legislation that will allow expanded gambling? How are new dollars distributed among governments, track operators, and horsemen? What has been the downside for horsemen of this new breed of gaming institution?
Following is a state-by-state review, including the Canadian province of Ontario, that may suggest some of the answers to these questions.
West Virginia
The on-track casino story began at Mountaineer in 1989, when the West Virginia Lottery Commission allowed the track to install 165 video lottery terminals (VLTs) on an experimental basis. The machines were removed in June 1993 when the state Supreme Court ruled that the experiment violated the state constitution and that an act of the West Virginia Legislature would be required to authorize the machines. The State Lottery Act, which legalized on-track VLTs pending approval in local referendums, passed in 1994, and the VLTs were returned to Mountaineer later that year.
The distribution of revenues from the machines is fixed by the law, with 30% going to the state lottery fund, which invests in education, state parks, tourism, and other public projects. Another 47% is slated for the tracks, 14% for purses, and the remainder to local governments, the racing commission, and miscellaneous special projects.
The number of machines per track is allowed to vary with market demand, and Mountaineer has increased its VLTs incrementally to the current number of 1,950. Purses have followed along, climbing an astronomical 513%, from $22,000 per day in 1995 to over $135,000 in 2000.
VLTs also are responsible for a renaissance at Charles Town Races, the track in Charles Town, West Virginia, that closed on December 11, 1994. Relations between track officials and horsemen were strained at that time, and, after a local referendum failed in 1994, Charles Town closed, reopening only after an infusion of monies from both the local Horsemen's Benevolent and Protective Association and Showboat Operating Co., which had purchased an option to buy the track.
Then, in 1995, representatives of Penn National Gaming Inc. approached horsemen about working together to support a second referendum if Penn National purchased the track. With the backing of the Charles Town HBPA, Penn National poured $486,000 into the referendum, which passed in 1996.
After buying Charles Town, Penn National proceeded with major renovations to the clubhouse and backstretch areas, and the track opened with the VLTs in 1997. Since then, purses have risen from $21,000 daily to $96,000, an increase of more than 457%, and Penn National has continued increasing the number of machines at the track to a current total of 2,000.
Although Penn National Chief Executive Officer Peter Carlino said earlier this year that the company does not predict a flourishing future for horse racing, Dick Watson, head of the Charles Town HBPA, said that "Carlino, (past President) Bill Bork, and Penn National have been terrific in working with the horsemen. We have one of the best contracts in the industry and as good a relation with management as any track in the country."
Despite its roots as the owner of Penn National Race Course in Grantville, Pennsylvania, and Pocono Downs Standardbred track near Wilkes-Barre, Pennsylvania, as well as 11 off-track betting sites in that state, Penn National has recently focused on acquiring casino properties, including two in Mississippi.
Iowa
After one year without live Thoroughbred racing in 1992 and race meetings that were barely sustained by simulcast revenue in '93 and '94, Prairie Meadows Racetrack and Casino in Altoona, Iowa, opened in April '95 with about 1,100 slot machines. This year the number of slots was increased to 1,500 with the opening of a 50,000-square-foot casino addition to the grandstand.
The Iowa plan is unique in two respects. First, Prairie Meadows is a public, not-for-profit corporation owned by the taxpayers of Polk County, which encompasses the Des Moines metropolitan area. The Racing Association of Central Iowa, a 13-member board made up of representatives from various constituencies throughout the community, holds the gambling licenses and oversees the track's operation.
Second, except for the tax rate, the distribution of revenues from slot machines is not fixed by law but is determined by negotiations between the association, Polk County, and the Iowa HBPA. The law stipulates that Prairie Meadows cannot operate without a valid contract between the association and the horsemen's organization.
"We couldn't get a percentage guarantee," said state Senator Berl Priebe, a horseman who was influential in the passage of Iowa's original 1983 pari-mutuel bill as well as the '94 slots legislation. "A lot of people were really skeptical. We had to make a lot of concessions, and we still had barely enough votes to pass it."
One of those concessions was an escalating tax rate that began at 22%, the same rate paid by the state's riverboat casinos, but increased 2% a year up to a ceiling of 36%. An attempt this year to have that tax provision declared unconstitutional was unsuccessful.
Another concession was a repeat referendum, scheduled for 2002, in which Polk County voters must reaffirm their support for Prairie Meadows.
Iowa horsemen have been well represented on the association board. Both the chairman and vice chairman of the executive board, James Rasmussen and Gary Lucas, respectively, are Thoroughbred breeders and owners. With their support, the local HBPA was able to negotiate a five-year contract (running through 2002) that called for continuing capital improvements and a total purse structure that has risen from $11.8-million in 1999 to slightly over $15-million this year. Purses are expected to total $16.5-million in 2002.
Prairie Meadows pays Polk County $12-million annually in rent and, as a not-for-profit enterprise, returns profits above expenses to charitable and community betterment projects in the county and state. In 2000, the track provided $27-million to Polk County and another $3.6-million to state projects.
Although Iowa horsemen believe they were able to negotiate a better contract than any fixed allocation that legislators would have approved when the slots bill was passed, there is now discussion about changing the original agreement.
As the date to renegotiate the contract draws near, there is talk of relying on the demonstrated economic impact of the slot-supported horse industry to push a bill that would specify a guaranteed percentage of slot revenue. A recently released study of the economic impact of the equine industry in Iowa, prepared by Ames Economic Associates, reports that racing, breeding, and racing-related tourism annually account for $252.5-million in sales and contribute 3,261 jobs in Iowa.
Delaware
The Horse Racing Redevelopment Act of 1994 authorized up to 2,000 VLTs at Delaware Park in Wilmington and at each of the state's two Standardbred tracks. It also authorized Delaware Park Casino to open on December 29, 1995. The statute specifies 10% of the VLT revenues for purses, with the remainder to be distributed among the state, the vendors who lease and service the machines, the central lottery system, and the track under a blended rate formula that can fluctuate from year to year.
Unlike the harness tracks, Delaware Park manages its own VLT operation. Currently, the state receives 36.3% and the vendors and lottery system 5.1%, while Delaware Park retains 48.6% of its VLT revenues.
As at Charles Town, cooperation between track owners and horsemen has been a key to Delaware Park's success. The relationship has been enhanced by the fact that the track's owners, the Rickman family, also are horse owners with a long history of involvement in the sport.
Alan Foreman, chief counsel for the Delaware Thoroughbred Horsemen's Association who negotiates contract issues not specified by law (such as contributions for capital improvements and Delaware breeders' funds), said, "Negotiations have been consistently amicable. The Rickmans have spent millions of dollars on the backstretch and other related improvements."
The results at Delaware, once an aging dowager of racing with a grim future, have been tremendous. Daily average purses at the track have exploded from a meager $47,513 in 1991 to a projected $240,000 this year, a more than 400% increase.
Today, Delaware is viewed as a fierce competitor that has successfully used its higher purses to lure horses away from Maryland Jockey Club racetracks, which have unsuccessfully fought for legalization of slots to keep pace with the once-lowly Delaware track. Delaware Park now is in the midst of a 140-day meeting, which continues through November 4.
New Mexico
On-track casinos in New Mexico were authorized in 1997, and the first opened at Sunland Park outside of El Paso, Texas, in February 1999. Passage of the legislation came after a three-prong effort by track owners, the New Mexico Horse Breeders' Association, and the New Mexico Horsemen's Association. Before participating in the effort, horsemen first negotiated 20% of profits for purses with track owners.
"The tracks knew that without the support and the grass-roots campaigning of the horsemen in a rural state like New Mexico, the bill wouldn't have had a chance," said Roger Peterson, legislative liaison officer for the horsemen's association.
The original statute provided for 300 slots at each of the state's five tracks, but this year the New Mexico Legislature expanded that to 600 slots, with a provision that tracks may lease another 150 from one another during peak times. The law allots 20% of the net take from the machines to horsemen, with 80.7% of that portion going to purses and the remainder to breeders awards and other industry-related funds under rules established by the state racing commission.
The state tax is 25% of profits, while 55% goes to the tracks for operations. The tracks must contribute 0.25% to a compulsive gambling program.
Sunland Park, drawing from the metropolitan area of El Paso and Juarez, Mexico, has experienced the most dramatic growth among the state's tracks since the advent of slot machines. Purses rose 36% from 1998 to '99 and rose another 14% for the 2000-'01 meet that ended April 8.
Casino money has given a big boost to the state's breeding industry. The average stakes race for New Mexico-breds at Sunland has progressed from a purse of $80,000 to $125,000. Tracks are required to write two state-bred races (one each for Thoroughbreds and Quarter Horses) on each card, but during its most recent meet, Sunland wrote over 100 more state-bred races than required, with overnight purses for allowance races averaging between $15,000 and $20,000 per race.
With that incentive, New Mexico now stands twice as many stallions as in 1997, and the number of mares is up over 50%.
Ontario
Woodbine near Toronto opened its first racing season with slots in March 2000, and by year's end, the 1,700 machines had generated gross revenue of $283.2-million. By the terms of the 1998 law that legalized the machines, the horse racing industry received 20% of the profits, split 50-50 between the track and horsemen. Purses at Woodbine totaled $75-million in 2000, an increase of 50% over the total in 1999, and are expected to rise marginally this year.
In Ontario, all segments of the industry-track owners, breeders, and horsemen-are represented by the Ontario Horse Racing Industry Association. Jane Holmes, association executive director, said the government would only negotiate with the industry if it spoke with one voice.
"We agreed that whatever the industry got, we would share 50-50," Holmes said. "We gradually negotiated our way up. At first, the industry would get only 5%, then 10% plus operating costs. We had to get them (government officials) to understand the industry dynamics and what it would take to keep it sustainable and viable. And we had to be able to guarantee them that we could deliver all the tracks."
Purse revenues from Woodbine's 1,700 machines and Mohawk Raceway's 750 are combined and divided equally between Thoroughbred and Standardbred interests. All of the purse revenue from Fort Erie's 1,200 machines go to that track's Thoroughbred purses.
Of the 80% remaining after the horse industry's cut, 50% of the first 450 machines and 2% of additional machines at each track go to the municipalities where the track is located, 2% to a problem gambling program, and the rest, after expenses incurred by the Ontario Lottery and Gaming Corp.-the government agency that is the vendor-to government priority programs.
Ontario racetracks have proven to be good partners for the government. "Not only did we offer already established gaming facilities," said Holmes, "but problem gambling is a big concern in Ontario, and one of the things the racing industry has done, though it's not required by law, is to take a very active role in promoting responsible gaming. We've taken the extension of gaming at our facilities seriously, even though we don't operate it all."
Minnesota
At Canterbury Park in Shakopee, extended gaming has taken the form of a card club rather than VLTs or slots. The 1999 legislation that authorized the card club was presented specifically as a bill to help a lagging horse racing industry, so there is no specific tax on the card club revenues. The statute allots 10% of the first $6-million in revenue and 14% of all proceeds above that level to horsemen, with 90% of that total going to purses and 10% to a breeders' fund. Those percentages are minimums.
"The biggest objection to the bill," said Canterbury President and General Manager Randy Sampson, "was legislators saying that Canterbury might make too much money. So, we agreed to a clause which states that if the card club becomes significantly more profitable, the racing commission can direct that more go to the horsemen."
The card club opened in April 2000, and Canterbury was able to increase 2000 purses by 22.27% over the level offered in '99. For the 2001 meeting that extends to September 3 after beginning on May 18, average daily purse distribution is projected to be about $120,000, up from about $90,000 in 1999.
Louisiana
As in West Virginia and Iowa, the Louisiana law requires approval by local referendum in each parish where an on-track casino is proposed. Voters in Bossier Parish approved a referendum, and an 1,800 slot machine casino at Louisiana Downs is scheduled to open later this year.
The key provision of Louisiana law is that horsemen will receive 18% of gross revenues, before taxes or other allocations. "We insisted on that after having gone down the road with video poker in the early '90s," said Kevin Presley of the Louisiana HBPA. "With the video poker legislation, horsemen were the last to get a cut, and we had to file a lawsuit that's still pending to get anything."
Of the horsemen's 18% of revenues, 15% will go to purses (divided 70-30 between Thoroughbreds and Quarter Horses), 2% will go to Thoroughbred breeders, and 1% to Quarter Horse breeders. Louisiana Downs plans to inaugurate a special 15- to 20-day Quarter Horse meeting, which, according to General Manager Ray Tromba, "will be significant enough to draw full fields and give us something to grow from."
From the remaining taxable net proceeds, 18.5% goes to the state, 4% to the local government, 5% to the Bossier Educational Excellence Fund, and 2% to an agricultural development fund. Track management takes the rest, estimated at 40% to 50% of gross.
Tromba said he believes the 18% of gross for horsemen represents "by far the most generous deal at any track."
Presley said horsemen are satisfied that the legislation is fair and emphasized that without the support of the state HBPA, the bill would not have passed. "There are 5,500 HBPA members in Louisiana, and everybody from the big outfits to the one-horse stables came to Baton Rouge and voiced their support," Presley said.
Common theme
Despite the variations in laws and contractual arrangements, a common theme emerges in each jurisdiction: Unified support of the racing industry-breeders' groups, the local HBPA or its equivalent, and track owners-is essential, not only to pass the enabling legislation but to keeping the on-track casino operating successfully. To gain that support, horsemen must be guaranteed to benefit from operation of the casinos.
Bills in Ohio, Maryland, and Kansas all failed this year without unified support. In Ohio and Maryland, casinos were presented primarily as a means of producing tax revenues for the states. In Kansas, horsemen were divided among themselves and some were pitted against track management.
For track owners, casinos have been an unqualified success. If there has been a downside from the horsemen's point of view, it may be that the lucrative purses have attracted a surplus of horses, creating fewer opportunities to run and threatening to squeeze out smaller stables or those with lesser-quality stock. Ironically, these are often the very horsemen who kept the tracks going during lean years. Horsemen and track management are aware of this problem and have addressed it in a number of ways.
Delaware Park officials say they are aware of the need to be a "good neighbor" with other tracks in the Mid-Atlantic region. "We've kept purses at a reasonable level," said General Manager Bill Fasy. "We could cut our live racing days, offer $400,000 (a day) in purses, and dominate everyone else's signal, but we have no intention of doing that."
At Mountaineer and Charles Town, purses have been increased slowly and incrementally, giving horsemen time to upgrade their stock. "We've made a very concerted effort to make room for new stables without forcing the little guy out," Watson said. "That's why we've kept the $2,500 claimers. We've got full fields, and we try to provide a place to run with some frequency for the guy who's been here through thick and thin."
Other states, particularly Iowa and New Mexico, have emphasized races restricted to state-breds and state-bred supplements as a way to ensure that local horsemen are not squeezed out. Prairie Meadows holds three race meetings-a Thoroughbred meet in the spring and early summer, a combined Thoroughbred-Quarter Horse meet with reduced purses from July through September that tends to be dominated by state-breds, and a short Standardbred meet in October.
"The tracks have tried to help the little guy. But the bottom line is that everybody just has to upgrade the quality of their horses," Peterson said.
Another downside has been the relative failure of the racetrack casinos to convert slot machine players to horseplayers. With the exception of Sunland, where the improved quality of racing led to a 60% increase in on-track handle, tracks generally report that their casinos have had little impact on attendance at the races or on-track handle.
Marketing racing as a product sometimes seems to be neglected at the racetrack casinos, which has to raise a question about its long-term status at such facilities.
"If there's been one major frustration for horsemen," noted Foreman about Delaware Park, "it's that the track hasn't done enough to market racing. We're developing a terrific product here, with purses at the upper echelon, attracting some of racing's biggest names, and the quality of racing needs to be more widely recognized."
Todd Lieber is an Iowa correspondent of Thoroughbred Times.
