02/26/2016 1:20PM

Decoupling at racing's doorstep

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Legislation in Florida that would allow many of the state’s parimutuel facilities to close while retaining their casino licenses has the potential to usher in a day of reckoning for the U.S. racing industry, with $400 million in annual casino subsidies at stake at tracks throughout the country.

If the legislation is passed in its current form, Florida will become the first state to allow parimutuel facilities, including three horse tracks, to forfeit their parimutuel licenses while retaining licenses for casino-type games. Hialeah Park, the historic south Florida track that once held one of the country’s most prestigious Thoroughbred meets and now holds a brief Quarter Horse meet, and Pompano Park, a harness track, are both expected to drop their live-racing operations if the bill becomes law; Calder Race Course, owned by Churchill Downs, is expected to completely disassociate itself from its racing operation. Every greyhound track in the state is expected to close.

The Florida effort to allow “decoupling” – the legislative repeal of statutory requirements for casinos to also have parimutuel licenses – has raised concerns in the racing industry that the state might become the first in a line of dominos to fall, a reversal of the dynamic that led to casinos being allowed at racetracks in the first place, beginning more than 20 years ago in Iowa.

In more than a dozen states over the past two decades, racetracks and horsemen have convinced legislatures to either allow casino-type games at their facilities or to cut the racing industry in on revenue from new casinos, usually by citing the legalization of casinos at tracks in competing states. Now, U.S. purse accounts and funds for breeders’ awards currently reap $400 million annually in casino subsidies, approximately 35 percent of the total purse outlay of $1.2 billion in the United States, according to figures compiled by the Thoroughbred Racing Associations, a racetrack trade group.

But those relationships are now showing signs of unraveling. While efforts to decouple are not widespread, legislators in West Virginia introduced bills last year and this year that would allow the state’s two greyhound tracks and two Thoroughbred tracks to decouple. In Iowa, owners of greyhound tracks have offered the legislature tens of millions of dollars in payments if they are allowed to cease live racing operations. Other legislatures have clawed back subsidies or given serious consideration to restricting or eliminating the awards, harbingers of efforts to come.

While greyhound racing is likely dead in Florida if the bill passes, the Thoroughbred racing industry is arguably better off under the legislation, at least in the short term. During negotiations over the bills, Florida horsemen and breeders publicly maintained a hard-line “no decoupling” message, emotionally testifying at state hearings that allowing a single track to decouple would jeopardize the entire industry. But in the bill that is before the Senate, both Gulfstream Park and Tampa Bay Downs, the state’s most popular tracks, would be prohibited from decoupling and would receive an estimated $45 million annual subsidy for purses from casino interests, including those that were once parimutuel tracks as well. In addition, the tax rate for Gulfstream’s slot-machine casino would drop from 35 percent to 25 percent, giving the track a larger share of its own casino revenue.

Florida produces the second-largest foal crop in the country, and breeding and equine care in the state generates more economic impact than spring-training baseball, according to a report commissioned by the Florida Thoroughbred Breeders’ and Owners’ Association. In addition, both Tampa Bay Downs and Gulfstream were not interested in decoupling, at least not under their current ownerships. By most accounts, both tracks run profitable racing operations.

“Here in Florida, we’re blessed,” said Lonny Powell, the FTBOA’s chief executive, who has been at the forefront in lobbying the state legislature. “We have an old-school track in Tampa Bay that puts up huge business ontrack and in the simulcast market. We have Gulfstream that has put God knows how much money into the creature comforts of the facility and to their own way of branding. And then we have Florida itself, the second-largest Thoroughbred breeding jurisdiction in the country. If we were the 20th, I don’t think we could make a compelling case.”

All of the tracks that would be allowed to decouple in Florida specifically requested that the legislature give them the ability to cease their live racing operations, according to Florida lobbyists, and legislators were more than willing to satisfy their wishes. That is an indication that legislatures in other states also will be open to similar pleas, especially at a time when casino revenues have stagnated and the casino industry, like racing, is facing significant questions about its ability to attract younger generations.

Efforts by casino-racetrack operators to be allowed to decouple also might gain support in the future by the election of conservatives with tea-party ties. Although the political right has historically been anti-gambling, the new wing incorporates tenets of libertarian philosophy, which preaches that businesses should be allowed to operate unfettered by government regulation – or constrained by subsidies to other businesses.

That wing of the party also treats the mere mention of a tax increase as a venal sin, putting pressure on the left to find revenue from existing sources to close stubborn budget deficits in states across the United States. Increasingly, the two sides will land on the tens of millions of dollars flowing annually to a relatively unpopular industry, especially in states where the breeding industry is largely inconsequential to the overall economy.

“The pressure is going to be bipartisan,” said Chris Scherf, executive vice president of the TRA. “There’s money there, and you don’t want to raise taxes or cut the budget, so you take the money. Both sides have an interest in getting that done.”

In West Virginia a decade ago, legislators targeted the casino subsidies flowing to the Thoroughbred and greyhound industries to help fund shortfalls in the state’s workers’ compensation fund, raking $11 million annually from the awards. In Pennsylvania, the state legislature and its governor have entertained various proposals to reduce the $250 million that annually flows from casinos to Thoroughbred and harness tracks.

Legislation introduced in West Virginia this year that would allow all tracks in the state to decouple is not likely to pass, according to lobbyists and horsemen’s officials. However, the chances of separate bills allowing greyhound tracks to decouple and eliminating the fund that provides for greyhound subsidies are much stronger, the lobbyists said, in part because one of the greyhound tracks has requested that it be allowed to cease racing operations.

Officials for the companies that own the state’s two Thoroughbred tracks have not publicly commented on their position on the bill that would allow Thoroughbred tracks to decouple, and they did not respond to messages seeking comment. But horsemen suspect that the companies would be in favor of decoupling based on comments the officials made to legislators suggesting that they lose money on their racing operations.

“In public, they say they are neutral,” said Joe Funkhouser, chief lobbyist for the Charles Town Horesemen’s Benevolent and Protective Association and the son of the organization’s chairman. “That’s all I can say about it since we don’t really know where they stand.”

Charles Town is owned by Penn National Gaming Inc., a huge, publicly traded casino company with racetrack and casino properties in 16 U.S. states. The company has rapidly grown over the past 15 years into a gambling behemoth largely by leveraging its racetrack properties to gain licenses for casinos. Mountaineer is owned by another publicly traded gambling company, Eldorado Resorts, that has used a similar strategy to gain casino licenses.

In West Virginia, the annual foal crop has held somewhat steady even as the number of mares bred has plummeted over the past five years. Nationally, the foal crop also has declined substantially over the same time period, and West Virginia’s share of the national foal crop is up from 1.8 percent at the beginning of the recession in 2008 to 2.4 percent in 2014. In 2014, the latest year for which the figures are available, the foal crop in West Virginia was 522, compared to 7,619 in Kentucky and 2,150 in Florida.

But even though West Virginia tracks have slashed racing dates over the past two years to maintain average purses, the average field size of 7.7 horses per race is at its lowest since the early 1990s, and the average purse is in a steady decline. The state’s total purse distribution is down by half since the high-water mark in 2004, from $89.6 million that year to $43.2 million in 2015. Attendance at the tracks is anemic.

Many of the states that have legalized casinos at tracks have not shown robust growth in either the racing side or breeding side of the business, and that is likely to work against horsemen and breeders who are seeking to protect subsidies from decoupling. Dan Metzger, president of the Thoroughbred Owners and Breeders Association, said horsemen and breeders in those marginal states need to be “proactive” in monitoring developments in the legislature so they have a strong lobbying message when and if that time comes.

“Those smaller states and those states with smaller Thoroughbred industries are facing an uphill battle,” Metzger said. “They have to be diligent, and they have to be forceful in conveying the message that the racing industry is important.”

Unfortunately for an industry that has been in a steep slide for most of the last decade, the facts may fly in the face of that message in many states.

In Indiana, for example, the foal crop peaked in 2011 at 770. But the numbers have radically fallen since then, to 380 foals in 2014, a drop of 51 percent, according to Jockey Club statistics, despite rich subsidies from casinos flowing to the two racinos in the state. In Pennsylvania, where three Thoroughbred tracks have distributed nearly $1 billion in purses since the legalization of slots at tracks in 2004, the 2014 Thoroughbred crop foal was 821 horses, down 47 percent from the peak of 1,540 in 2009. The overall U.S. foal crop was down about 32 percent during that period.

In the end, the most formidable enemy of the racing subsidies may be the racetrack owners themselves. In Florida, greyhound track owners were vocal in disparaging their own business, telling legislators that the era of greyhound racing had passed. They were joined by an unlikely ally – Grey2K, a nonprofit animal-welfare group that has mounted anti-dog-racing campaigns in multiple states and was successful in lobbying for a referendum in Massachusetts that outlawed dog racing there in 2010. Thoroughbred racing has its own opponents, and casino companies whose parimutuel operations are running losses while receiving a steady stream of subsidies from their own casinos may look to the Florida greyhound precedent as an effective strategy.

The FTBOA’s Powell, who has held positions in several racing states, said that racetracks in states where subsidies have not shown any effect on the health of the industry need to take more action to improve the product for horseplayers or face an inevitable showdown with the casino industry in the future.

“Anybody who has been on autopilot just collecting their slot-machine money and not investing back in the racing part of their facilities, and not trying to get new people into wagering and the racing industry, they are really going to be behind the eight ball because it just becomes a self-fulfilling prophecy,” Powell said. “If they don’t care, why should anybody else care?”