Analysis: 'Smarty Slots' Take Lead
Photo: Dave Black
The 2004 Kentucky Derby victory by Smarty Jones apparently has done more for Pennsylvania racing than more than 100 Derbies and a long racing history have done for Kentucky, at least as far as legislation goes.

The first Kentucky Derby was held in 1875. The first pari-mutuel horse race wasn’t held in Pennsylvania until 1963, and it was a harness race. 

Perhaps by coincidence, legislation to authorize slot machines at racetracks in Pennsylvania became law in 2004--the year Smarty Jones became only the second Pennsylvania-bred in history to win the Kentucky Derby. The Kentucky racing industry has pushed for alternative gaming since 1994, with no success.

There’s no doubt the Smarty Jones story had something to do with the groundswell of support for the gaming bill in Pennsylvania. Meanwhile, Kentucky’s valued horse industry for a variety of reasons--take your pick--seems unable to gain legislative traction.

The “Smarty slots” have been jingling for more than a year. In Kentucky, where the racing industry views Pennsylvania as a major threat, casino legislation broke from the gate in a tangle yet again this year.

In Pennsylvania, Democratic Gov. Ed Rendell sold slots as a means to provide property tax relief and help boost the flagging horse racing and breeding industry. The legislation was even called the “Pennsylvania Race Horse Development Act” in a state better known for the Pittsburgh Steelers and soft pretzels than horse racing.

The Kentucky legislation, pushed by Democratic Gov. Steve Beshear, calls the horse industry “signature” and says it needs a mechanism to compete. But don’t count on any references to the horse in the title if the legislation makes it through the General Assembly.

“We all want to help the racing industry, but I don’t think that can be the compelling reason for going to expanded gambling in this state,” Democratic Rep. Tim Firkins said during a Feb. 19 meeting of a Kentucky House subcommittee on expanded gambling.

In early 2006, led by the Kentucky Equine Education Project, the horse industry was front and center in the push for a constitutional amendment on racetrack casinos. This year, the industry has been rather reserved and at times reluctant to comment.

There are similarities and differences in the Kentucky bill and the Pennsylvania gaming law. (For instance, both call for up-front license fees: $50 million in Pennsylvania, and $50 million to $100 million in Kentucky). Surprisingly, the Pennsylvania law, barring future legislative changes, actually appears more horseracing-friendly even though facilities are more heavily taxed.

In Pennsylvania, the base state tax rate on gross gaming revenue is 34%. In Kentucky, it’s 35%. Pennsylvania racetrack casino operators also must pay 5% for economic development and tourism, and 4% in local taxes.

That leaves operators with 57% of gross revenue before racing gets its share. Purses and breed development receive 12% of gross revenue, which leaves operators with roughly 45% to build and operate slots casinos.

Under the Kentucky legislation, casino operators would keep roughly 49% of gross gaming revenue after the state tax and payment of 14.65% to purses and breed development. But no money from non-track casinos would go toward racing; in Pennsylvania, horsemen and breeders get another 6% of gross revenue generated at non-track slots casinos.

That gives Pennsylvania racing the potential for up to 18% when all facilities are built. (To date, only one non-track slots parlor is operating at a resort in the Pocono Mountains.) The Kentucky percentage doesn’t figure to increase should the legislation be revised by lawmakers.

Despite indications Beshear favored use of some casino revenue to promote horse racing and support related programs, the legislation dedicates all but 0.67% of the 14.5% to purses and breed development. The 0.67% would be split between the Kentucky Horsemen’s Benevolent and Protective Association and the Kentucky Thoroughbred Association for use as they see fit.

Kentucky would spend 81.33% of the 14.5% on purses, and 18% on the Kentucky Thoroughbred Breeders’ Incentive Fund.

In Pennsylvania, racing’s share of gross gaming revenue--currently about 12%--goes to purses (80%), breed development (16%), and horsemen’s health insurance and pension funds (4%). Another $250,000 a year goes to a fund for jockeys and harness drivers. The Kentucky bill sets aside no dedicated percentage for health insurance and pensions.

It should be noted that before slots, no track in Pennsylvania offered more than $140,000 a day in base purses. Kentucky has two tracks that regularly pay $400,000-$500,000 a day on average depending on the meet.

Though not part of the revenue splits, Pennsylvania racetracks in the law are mandated to spend no less than $5 million in the first five years on barn area improvements, maintenance, and related structures. For the second five years, a track must spend between $250,000 and $1 million a year for the same purposes.

There are no such mandates in the Kentucky legislation.

The lack of coordinated promotion of horse racing at tracks with gaming is becoming a growing concern around the country. The Pennsylvania slots law makes no such provisions, but officials with the Pennsylvania Gaming Control Board noted the board will begin asking tracks for regular updates on marketing and promotion of racing, and the Pennsylvania Department of Agriculture, which oversees the state’s two racing commissions, is getting involved in the statewide marketing of racing.

Like Pennsylvania, Kentucky would have a gaming commission. Pennsylvania now has two individuals whose purpose is to bridge the gap between racing and gaming and improve relations with tracks and horsemen’s groups.

Overall, the Pennsylvania law authorized 14 slots facilities, at least seven of them racetracks. Beshear’s bill called for 12 casinos, seven of them at tracks, though lawmakers already are recommending the total figure be reduced to nine, with perhaps five at racetracks.

Pennsylvania has a population of more than 12 million, and three of the states it borders--New York, Ohio, and New Jersey--have respective populations of 19 million, 11 million, and eight million.

Kentucky’s population is roughly four million. The most populated states that border Kentucky are Illinois (12 million) and Ohio (11 million).

From November 2006-January 2008, gross terminal revenue from slots in Pennsylvania was $1.1 billion, so the state is ahead of projections with only one non-track slots casino open.

 

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