Even With 'Smarty Slots,' Challenges Continue for Racetracks

It has been almost two years since Smarty Jones won the Kentucky Derby (gr. I) and slot machines were legalized in Pennsylvania. And while the horse has begun his career at stud, racetracks are still waiting for slots and may encounter some challenges when they finally get them.

Legislation to authorize slots at racetracks and several non-track locations in the Keystone State was signed into law in early July 2004. But during the Pennsylvania Gaming Congress March 6-7 in the state capital of Harrisburg, officials said the devices won't be operating until this fall--at the earliest.

"It has been a 10-year struggle for me," said Sen. Robert "Tommy" Tomlinson, whose district includes Philadelphia Park in Bucks County. "(When riverboat gambling was being considered), I said, 'Why can't we do something at the racetracks?' The racetrack has been very important to my community. And then a little horse named Smarty Jones came along and made gaming very popular."

Smarty Jones, a Pennsylvania-bred by Elusive Quality that was based at Philly Park, won the Derby two months before the slots bill became law. Though he eventually lost his chance at a Triple Crown, his exploits are believed by some to have invigorated the racetrack slots debate in Pennsylvania.

Existing tracks in the state have begun preparations for gaming, and the state anxiously awaits about $1 billion a year in property-tax relief. But a court challenge to the slots law cost the Pennsylvania Gaming Control Board about six months worth of work, so the first Class 1 licenses, primarily for the tracks, won't be granted until September at the earliest, said Mary DiGiacomo Colins, a gaming control board commissioner.

"We are on a fast but steady track to bring gaming to Pennsylvania," DiGiacomo said.

Though it won't stop slots parlors from opening, officials indicated the state's tax rate of 55% could serve as a deterrent to capital investment. The watchword of the gaming congress was "convenience gaming"--officials believe the Pennsylvania slots parlors will cater mainly to locals and won't prove much of a threat to established full casino gambling in New Jersey and Connecticut.

A group of Wall Street analysts all agree gross revenue, when all the parlors are built out, will total $2.5 billion to $3 billion a year in the state. Some of the Pennsylvania developers, such as Harrah's Entertainment, also have casinos in Atlantic City, N.J., where the tax rate is 9.25%.

"If you owned a business and had two outlets, and one outlet keeps 90% of revenue and the other one 50% of revenue, where would you spend your resources?" said Andrew Zarnett, the gaming, lodging, and leisure high-yield analyst for Deutsche Bank.

Still, the Pennsylvania tax rate isn't the highest in the country for gaming, and analysts predicted Pennsylvania would hold its own, even against New York, where racinos are planned Aqueduct and Yonkers Raceway in the New York City metropolitan area, and upstate New York at Tioga Park near the Pennsylvania border.

"New York has a 69% tax rate--I don't think that's a threat at all," said Aimee Marcel, vice president in the equity research department at Jefferies & Co. "People would rather go to Mohegan Sun or Foxwoods (in neighboring Connecticut)."

"What's proposed in New York is not competitive," said Eric Hausler, a managing director for Bear Stearns.

(For comparative purposes, racetrack casino legislation in Kentucky calls for a state tax rate of 35% of adjusted gross revenue. Track operators would get more than 49%.)

Track operators believe they can find a niche, be it serving mostly locals or tourists. Racinos in Pennsylvania must compete with non-track slots parlors in major cities such as Philadelphia and Pittsburgh.

John Finamore, senior vice president of regional operations for Penn National Gaming Inc., said the company would build on its experience at Charles Town Races & Slots in West Virginia when it comes to Penn National Race Course near Harrisburg.

"We're going to raze the existing grandstand and start from scratch," Finamore said. "I think we learned some lessons from Charles Town (where the existing facility was initially renovated). We want to develop a fully integrated racing and gaming operation."

Penn National will close its grandstand and move all simulcast and live racing operations into a temporary facility on the property during construction beginning in April.

MTR Gaming Group, which owns Mountaineer Race Track & Gaming Resort in West Virginia, will build a racino in Erie, which hasn't had live racing since the 1980s. Edson "Ted" Arneault, chief executive officer of MTR Gaming, said Presque Isle Downs also would be an "integrated" facility.

"That design came about just from the experience of running a racetrack that's separate from the major part of the gaming facility (at Mountaineer)," Arneault said. "A lot more creativity had to come in for use of space."

Arneault said he believes Presque Isle Downs can benefit from cross-promotion with Mountaineer as the facilities are located less than three hours apart. He also said Erie is ripe for tourism development, and that could benefit the new track. Arneault, however, expressed concern about another challenge as more and more tracks in the area get gaming and greatly increase purses.

"You're going to see a compelling argument coming from the horse side with all these different facilities," Arneault said. "Will there be an adequate number of racehorses, and can we put on a good show? The (slots) market will regulate itself. My fear truly is on the racing side. We have to make sure we have an adequate supply of good horses to put on a great show."

Arneault later said Mountaineer, with 1,200 stalls and a year-round racing program, has a "feeding program" for Presque Isle Downs, scheduled to open in September 2007. The track eventually will race from June through September.

"We have a group of horsemen committed to bringing horses to Erie," he said. "Without Mountaineer, I don't think Erie could be successful. (Director of racing) Rose Mary Williams has a great reach-out to the horse community. We're lucky. I wouldn't want to have the (Erie) track and not have Mountaineer."

Track operators also said they're seeing some cross-over play--slots to horses and horses to slots--at their existing racinos. Finamore said about 40% of the customers in the dining room that overlooks the racetrack at Charles Town are slots players, and they're becoming more comfortable playing horses, even if on a limited scale.