Life After Slots? It's Sobering--at Best

The expansion of gaming beyond slots has horsemen protecting their interests.

The expansion of gaming at racetrack casinos doesn’t always guarantee more money for purses and breed development programs, horsemen said July 2 during a sobering discussion that showed horse racing’s challenge to stay relevant in a revenue-driven environment.

At racetracks with casino-style gaming, pari-mutuel operations usually are marginal at best. Yet, purses and breed development programs get anywhere from 10%-20% of gaming revenue. And with state governments facing billion-dollar budget shortfalls, racing’s share is getting a closer look.

Pennsylvania figures tell the tale. According to Joe Santanna, president of the Pennsylvania Horsemen’s Benevolent and Protective Association, two tracks in the state—Hollywood Casino at Penn National Race Course and Presque Isle Downs & Casino—will offer about $60.6 million in purses this year.

That’s the good news. The bad news is that at Penn National, which could pay $39.2 million in purses in 2009, $28.2 million will come from revenue from slot machines, and only $11 million from pari-mutuel wagering. At Presque Isle, it’s $20 million from slots and only $1.3 million from pari-mutuel operations.

The numbers have led some to ask the following: If gaming isn’t helping racing to stand on its own, what’s the purpose?

Santanna was one of several speakers on a panel titled “Life After Slots” during the National HBPA summer convention in Shepherdstown, W.Va. Another was Melinda Tucker, director of racetrack gaming for the Pennsylvania Gaming Control Board.

In 2008, slots produced about $155 million for purses and $14.6 million for Thoroughbred breeders, Tucker said. But declining handle despite and improved product is a red flag, one easily spotted by others looking for money.

Tucker said it’s too soon to judge, because major stand-alone casinos that will give 6% to racing haven’t even been built yet. And one track—Philadelphia Park Casino & Racetrack—won’t have its permanent casino operating until the end of 2009.

“It’s hard to gauge the impact of racetrack gaming until we get up and running the way the act intended,” Tucker said.

The act is the Pennsylvania Racehorse Redevelopment Act of 2004. Tucker said having racing in the name of the legislation should serve to fend off some criticism. In addition, the mission statement of the PGCB calls for development of the horse racing industry.

In Pennsylvania, life after slots could mean table games. One bill being circulated doesn’t give revenue from games such as blackjack, craps, poker, and roulette to racing; Santanna said the “assumption is that slots money is enough, and if you add gaming, you can exclude the horsemen.”

Santanna said an April 2009 study authorized by casino operators claimed slots revenue would increase 3.5% if gaming venues had table games. He said a review of figures from Mountaineer Casino, Racetrack & Resort in West Virginia for 2008, however, showed slots revenue declined about $22 million after table games were introduced, but net revenue for the track increased $26.6 million.

“How do you base introducing table games, excluding purses, when table games cannibalize slots play?” Santanna said. “If this happens in Pennsylvania, a $22 million decrease in slots revenue equates to a loss to purses of $1.9 million at one track, but overall, we’re at risk for almost $25 million.”

Santanna said in order for racing to be “held harmless,” it should get about 4.1% of revenue from table games. He said the state would need about 15.5% of table games revenue to offset decreases in slots revenue under a scenario in which casino operators would keep 88% of the revenue.

“We want a correct model,” Santanna said. “We want to be protected with a hold-harmless percentage, and I would think the state would want that, too.”

Delaware is another state preparing for table games. Bessie Gruwell, executive director of the Delaware Thoroughbred Horsemen’s Association, said the group used the West Virginia model—4.5% to racing from table games—as its model, but negotiations continue.

More pressing is sports betting, which could begin in Delaware this fall. The law that authorizes sports betting dropped the purse share from video lottery terminals at the state’s three racetracks from 10% to 9%, but horsemen will get 9.6% from sports betting, Gruwell said.

The law that authorized VLTs at tracks in Delaware is called the 1994 Horse Racing Redevelopment Act.

“It was not the slots development act,” Gruwell said. “Track owners complain they are losing money on horse racing, but the fact is, they are making money because of horse racing. We need to argue about the survival of our industry. We need to tell people what the equine industry brings to the state.”

Dr. Richard Thalheimer, an economist who has performed various studies on pari-mutuel racing and gaming, said a few of them indicated slots play declines when table games are introduced, and slots play increases during live racing seasons. He said of racetracks with gaming machines and table games, only those in Iowa award the same percentage of revenue to purses from both.

Thalheimer said when different percentages are paid to purses from games at the same facility, “you create winners and losers.”