03/15/2012 10:25AM

Battle over slots revenue heating up

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Two weeks after a report suggested that the government in Ontario, Canada, reconsider its agreements providing payments to the racing industry from the province's racetrack casinos, approximately 500 horse racing supporters rallied at the provincial capitol building. While the racing supporters chanted, calling for the legislature to protect racing, an armada of trucks pulled empty horse trailers around the racetrack-shaped roadway surrounding the building, a symbolic show of the impact that a clawback could have on the industry.

The message didn’t get through. Last Monday, 19 days after the rally, Canada’s racing industries were stunned when the state-owned Ontario Lottery and Gaming Corporation, which owns and operates the slot machines at the province’s 17 racetrack casinos, said that it would pull slot machines from a number of racetracks as part of a larger reorganization of gambling. The plan will seek to reduce payments to the racing industry, putting in jeopardy a sizeable portion of the $345 million that Ontario racetracks have been receiving annually from casino revenues.

The impact of the plan is far from clear, especially at Woodbine, the high-profile racetrack that has the province’s biggest racetrack casino. But Ontario racing officials are preparing for significant cutbacks.

“The announcement was a total shock to us,” said Sue Leslie, president of the Ontario Horsemen’s Benevolent and Protective Association and a lobbying group representing horse racing and agricultural industries. “We certainly had some fears, we certainly had some concerns, but we had no idea they were going to go this far.”

Racing subsidies are not just in jeopardy in Canada. Across the border, legislatures in a handful of states have targeted hundreds of millions of dollars flowing to racing from casinos as a way to address stubborn budget gaps.

In Pennsylvania, where annual subsidies to racing from casinos total $275 million, Gov. Tom Corbett has proposed reducing that figure by $72 million for each of the next three years – one year after reducing horsemen’s share of casino revenue by $49 million. In Indiana, where the racing industry received approximately $60 million in subsidies in 2011, the state’s inspector general has recommended cutting the share in half. In Maryland, where tracks and horsemen share 9.5 percent of the revenue from the state’s casinos, a legislator has introduced a bill that would direct all of racing’s subsidies to school construction, just 18 months after the state’s first casinos started operating and only several months short of the scheduled opening of the state’s biggest casino.

Although the measure in Pennsylvania is considered the only stateside effort to have a serious chance of passage this year, other states that are considering either an expansion of gambling or the legalization of casinos have debated the issue. In New York, a proposal to expand a lucrative casino at Aqueduct is widely expected to cap racing’s share of the revenue from any new games. In Kentucky – the center of racing business in North America – legislators in February denounced the racing industry for seeking a “monopoly” on casino gambling when shooting down a bill that would have asked voters to legalize casinos. And last year in New Jersey, Gov. Chris Christie sided with Atlantic City casinos when the casinos refused to re-negotiate an agreement providing direct payments to the racing industry. Christie has insisted that the state will no longer provide any breaks to racing.

According to gambling experts, these efforts reflect the pressure that state governments are facing to maintain gambling revenues at a time when the landscape is becoming increasingly competitive – casinos will be operating in 39 states by the end of 2012. In addition, despite billions of dollars in subsidies over the past decade, racing has struggled. The North American foal crop has declined about 40 percent since its peak in 2007, while betting handle has dropped 26 percent during the same time.

“A lot of states are in fiscal stress right now, so they are trying to get money any way they can,” said Mark Nichols, a professor of gambling economics and public policy at the University of Nevada-Reno. “And the perception is that these subsidies haven’t worked, to be honest with you. You haven’t seen any rebound in the amount wagered on racing. Some of that is related to the recession, but for the amount of money that you’re talking about, there doesn’t seem to be any impact to grab on to.”

Nichols said that efforts to reduce racing’s share of casino revenues in one state may have an impact on other states.

“Certainly, once you see one state take that action, other states will copy it,” Nichols said. “It’s like the spread of slot machines and casinos in the first place. If one state does it to make their casino industry more competitive, another does it, and then another.”

The Pennsylvania effort, which is supported by both the governor and the state’s agricultural department, has driven the state’s horsemen and breeders to join with related industries in a lobbying group seeking to protect their share of the revenues. The group does not include the owners of the state’s racetracks, whose revenues would not be threatened under the proposal.

Supporters of the clawback, including the agriculture department, did not return phone calls for this article. Neither did the owners of Penn National racetrack and casino, or the Parx Racing racetrack and casino in suburban Philadelphia.

Racing supporters in Canada point to growth in the province’s foal crop as proof that the casino payments have generated results. In 1998, the year the slots-at-racetracks program was started, the Thoroughbred foal crop in Ontario was 905, according to Jockey Club data. It peaked six years later at 1,483, but by 2010, the number was down to 1,313. Over that same time frame, Ontario Thoroughbred purses doubled, jumping from $47.5 million to $93.4 million (purses peaked in 2002 at $117.3 million). Tens of millions of dollars more were distributed each year in breeding awards, which supporters say helped revive the agricultural economy.

“We believe this is going to decimate the rural economy and the rural community,” Leslie said, in reference to the proposal to cut the payments.

The racing industry is having a difficult time convincing the Ontario government that its needs are more important than funding shortfalls in social programs. The government, in announcing its decision to end the slots program with racetracks, said on its website that the amount of money flowing annually to the Standardbred and Thoroughbred racing industries is “more than is spent on road safety or water safety. It’s also enough money to pay for more than two million house calls from doctors, nine million hours of home care, or 27,800 hip or knee replacement surgeries.”

Under the Ontario lottery corporation’s new proposal, which seeks to shift the operation of casinos to private companies in more populous markets, casinos may still be located at racetracks. Although the lottery has already announced that it will pull its slot machines from three tracks, including Fort Erie, Woodbine is considered a leading site for one of the two casinos the government wants operating in the greater Toronto area, according to Canadian officials.

Nick Eaves, chief executive of Woodbine, a not-for-profit company, said in a statement that the track intends to fight not only for the continued operation of a casino, but that it also intends to use the casino to support its horse racing. His statement underlined how important it will be for horsemen to share goals with racetrack operators if subsidies from casinos are to continue to flow to the racing industry.

“Given the success of our long-term partnership, [Woodbine] is committed to immediately commencing work with the government and [lottery corporation] to develop a mutually beneficial long-term plan,” Eaves said in a statement distributed after the government’s announcement. “A plan that will best serve the customer, the government’s revenue objectives, and our company’s mandate to maximize financial performance in order to achieve the highest quality of horse racing.”