10/17/2013 3:03PM

Illinois racing faces its own fiscal cliff


CHICAGO – The Illinois Racing Board awarded 510 racing dates to the state’s three Thoroughbred and two Standardbred tracks for 2013. Imagine a scenario in which those dates were reduced by 83 percent, a season when a grand total of 13 harness-racing programs were conducted, Hawthorne had no spring meet and raced only 15 days in the fall, and Arlington’s long summer meeting was reduced to just 49 days. That is not just imaginable but possible.

Those brutal details are spelled out in an Illinois Racing Board document, and the scorched-earth landscape that it would create in the state does not exist merely in some distant fantasyland. A 2014 racing season with only 87 race dates is the most radical of four possible outcomes for horse racing here depending on what transpires in the Illinois legislature between now and January.

The entire state of Illinois has fallen into a financial pit – Illinois’s credit rating ranks 50th among the states – and the racing board, known as the IRB, is no exception. The IRB, charged with regulating Illinois racing, gets its funding mainly from taxes on betting handle. Illinois handle has fallen sharply in the last decade and with it the IRB’s revenue. And when advance-deposit wagering, or ADW, was shut down in Illinois for about five months earlier this year, it cost the IRB about $725,000.

At the IRB’s annual dates hearing Sept. 25, the board dropped its bombshell: Unless ADW is fully restored for 2014 and the lost $725,000 paid by the state to the IRB’s budget, there would not be sufficient funds to regulate a full racing season next year.

To account for various financial scenarios, the IRB released four possible 2014 schedules – the choice to be determined by Jan. 31, depending on the actions of the legislature – that run from business as usual to basically out of business. The ADW law expires again in January, and if the legislature renews it and finds $725,000 in supplemental funding for the IRB, Illinois racing, warts and all, will be able to operate at full capacity. If the legislature does neither of those things, a fiscal cliff is fast approaching.

“At this point, it looks as if this is going to be put in the hands of the legislature,” Arlington General Manager Tony Petrillo said.

The impulse is to assume that the Illinois legislature would not allow the state’s racing industry to be decimated, but that assumes a degree of functionality and rationality no longer necessarily applicable to elected bodies, as evidenced by the national debt-ceiling crisis. When the Illinois legislature convenes Tuesday for a so-called fall veto session that runs through November, most of its members will have little to no awareness of the drastic measures outlined by the IRB in September. They will be focused on other issues, such as the state’s public-pension crisis. Racing, in the grand scheme, is a bit player. 

“I’d say no, I do not sense urgency or perhaps even awareness in the legislature,” said state Sen. John Sullivan of Quincy, which sits in an agricultural region on the Mississippi flood plain about 135 miles north of St. Louis. Sullivan, with an agribusiness constituency, has kept up with the state’s racing issues to a much greater extent than most of his colleagues.

“It hasn’t been too long since the [IRB] proposal came out,” he said. “I think there’s a lot of work to be done between now and the end of the veto session making folks aware what this would mean to the racing industry, to families, and to individuals.”

Precedent for legislative inaction can be found last January. As Illinois tracks and horsemen’s groups engaged in their annual fruitless battle to enact legislation to allow slot machines at tracks (the law passed the House and Senate but was vetoed by Gov. Pat Quinn), the law governing ADW expired and – to the surprise and dismay of many – was not renewed during the legislature’s winter session. Until it was restored in June, stay-at-home horseplayers were shut out, and the IRB budget was hit hard.

“I think what happened was ADW got caught up in that whole gaming expansion,” Sullivan said.

Differing splits from ADW

Factions within the Illinois racing industry hold competing visions of what the ADW law should look like, and those disagreements persist even with Illinois racing on the brink. The state’s racing powerhouse, Arlington, is happy with the current ADW law. Arlington is part of Churchill Downs Inc. (CDI), which operates its own account-wagering platform, Twinspires.

This is why Arlington likes the current law: Say an Illinois resident makes a bet from home on an Arlington race. More than 6.5 percent of the takeout from that bet goes to the host track, which is Arlington and, by extension, CDI. About 6 percent goes to the ADW provider, which is CDI, and, by extension, Arlington, and Arlington gets a cut of a further 2.8 percent that goes to the state’s tracks. By comparison, just 2.8 percent of that bet is directed to the state’s purse accounts, a distribution both Thoroughbred and Standardbred horsemen find inequitable.

This is the most extreme example of how ADW bets get divided, and only about 15 percent of Illinois ADW bets are on Illinois racetracks, but even that relatively modest amount of revenue is enough to incite conflict.

“To allow ADW companies to continue taking half or more of the profit would be to continue plundering Illinois purses,” Illinois Thoroughbred Horsemen’s Association President Mike Campbell wrote in the ITHA’s October newsletter. “Horsemen can’t allow that.”

Hawthorne, which does not own an account-wagering provider and therefore does not get to double dip into the ADW handle like Arlington, has no love for the current ADW law, and last winter, Hawthorne was not especially upset that cutting off horse players from betting at home would result in more gambling at offtrack betting parlors and the racetrack itself.

With the fall veto session at hand and radical contraction on the horizon, a naïve soul might figure the skirmishing parties would make peace over ADW law, but that has not happened.

“Everyone has a perspective that is vastly different at this time,” said Petrillo from Arlington.

It would be a classic case of the tail wagging the dog were the failure of an industry’s regulatory body to bring down an industry itself. But the IRB insists it cannot continue to staff race meets and perform essential functions like drug-testing under the current budgetary scheme.

“We’ve reached a point where the cost of regulation is being outstripped by the expenses of the board,” said the IRB’s executive director, Marc Laino.

The IRB used to be funded through the Illinois Department of Revenue, but it was decoupled from that department in 2010 and reconstituted with a budget based on pari-mutuel taxes, admission taxes, licensing taxes, and fines. The first thing the IRB did when it realized it would have no alternative source of revenue was to lay off 12 employees in 2010. But even operating with a bare-bones staff, regulatory costs have outstripped revenue that has declined alongside betting handle, which dropped almost by half between 2000 and 2012.

IRB funding also is impacted by a real estate tax credit that Illinois tracks have been allowed to deduct from their pari-mutuel tax since 2000. Tracks pay no pari-mutuel tax during a calendar year until that tax credit is exhausted, and Arlington’s credit was so large that its first pari-mutuel tax payment does not come due until mid-autumn.

Hovering as a backdrop to all this chaos is the gambling expansion bill that passed both legislative chambers last winter before being vetoed. Were such a bill to become law, it would wash away the mess associated with ADW law as well as IRB funding, but Quinn has steadfastly insisted that pension reform must be tackled before gambling expansion can be considered. Hawthorne President Tim Carey has said on multiple occasions this fall that he does not understand why gaming must be bound to pensions, but understandable or not, slots-at-tracks is not likely to happen anytime soon.

“I don’t see anything happening on a gaming expansion at this point in time,” Sullivan flatly said.

It is simply not clear what horse racing means to the state of Illinois right now. Tens of thousands of jobs are directly or indirectly associated with racing, which has a rich history in Illinois. But at its peak, when annual statewide handle approached $1.3 billion, racing generated about $47 million for the state. In 2012, handle of about $673 million produced less than $7.5 million in state taxes. In the current gambling world, the 10 casinos in Illinois are the major tax generators, and in a budget crisis of historic proportions, the small stuff tends to get short shrift.

“The challenges are huge right now,” Sullivan said. “We’re talking about a small operation within the state’s budget. But it’s not just the 15 or 18 people that work at the racing board, it’s the thousands of people in racing. And this essentially would shut racing down in Illinois.”