Archives for November 2010

Miracles do occur—people in the Kentucky horse racing industry and their major nemesis have found common ground.

A recent headline on Kentucky.com read:  “In 2011 Governor’s Race, Candidates Offer Different Routes to More Jobs.”  One of the three candidates is state Senate President David Williams.  He, more than any other person, is the bête noire for Kentucky horse racing interests. 

Kentucky has a 10 percent unemployment rate and state government under the incumbent governor, Steve Beshear, has cut programs and furloughed employees.  Beshear, a Democrat, is currently the favorite for reelection in spite of his state’s stagnant economy and above-the-national-average unemployment rate.  His opponent will be either Williams or Louisville businessman Phil Moffett, who are Republicans.

Senator Williams has been a persistent opponent of the racing industry in Kentucky, bottling up legislation that would permit racetracks to install video lottery terminals by statute or legislation that would allow the voters to decide whether to alter the state constitution to allow for expanded gaming.  The irony is that many and probably the vast majority of the prominent American racehorse farm owners in Kentucky are free enterprise advocates who are strong supporters of market-oriented economic precepts and Republicans.  Williams’ “I know what is best for you” nanny approach is far removed from the consumer-sovereignty tenet of Republicanism. 

The Kentucky.com article explained that the trio of gubernatorial candidates differ on how to get the state’s economy moving:  “Williams says Beshear’s economic development model is ‘broken,’ based on an antiquated tax system and an anti-growth culture in state government.”  Further, “Williams thinks the tax system should tilt toward a consumption model” or, in other words, the Commonwealth should tax people more on what they spend. 

According to a Kentucky government website, “The Sales Tax is imposed on the gross receipts derived from both retail sales of tangible personal property and sales of certain services to the final customer in Kentucky.”   Evidently, the expansion of the Kentucky sales tax to include additional services is what Senator Williams has in mind–or an increase in the sales tax rate, or both. 

If accompanied by investment tax incentives, a consumption tax is a commendable idea in that it fosters savings and capital formation, stimulates new businesses and products, and promotes job creation.

Most folks in the Kentucky horse racing  enterprise would undoubtedly wholeheartedly agree with Senator Williams when he says that the Commonwealth has “an anti-growth culture in state government.”  How well they know.   Senator Williams has been and remains the point man for antigrowth, at least as it pertains to horse racing commerce.  Yet the Senator has before him a method for initiating his consumption-tax policy and at the same time becoming pro-growth toward his state’s flagship industry and most important tourist attraction.  In the parlance of negotiation, this is a “win-win” for Senator Williams and the Kentucky horse racing industry.

The installation of video lottery terminals at Kentucky racetracks would coincide precisely with Senator Williams’ stated public policy preference for taxing people on what they spend, especially for hedonistic non-essential consumption.  An individual playing a slot machine is engaging in exactly such consumption.  What’s more, Kentucky’s tax rate on video lottery terminal revenues would be much higher than the state’s existing 6% sales tax rate.  A whole lot more money would pour into government coffers from taxing slot machine play at 35% to 40% or more than it would from taxing expenditures for such services as haircuts and palm readings at 6%.  

Copyright © 2010 Horse Racing Business

Presque Isle Downs & Casino in Erie, Pennsylvania concluded its 2010 meet with purses paid out that far exceeded what handle would support. Like other racinos, purses are subsidized. But can this symbiosis continue to be justified to state elected officials?

In 2004, Pennsylvania legalized slot machines at select locations under what was known as Act 71, The Pennsylvania Race Horse Development and Gaming Act. In 2009, the Pennsylvania Equine Coalition commissioned a study by Pittsburgh-based Tripp Umbach to assess the economic impact of Act 71 on the state’s equine industry. Tripp Umbach is recognized as a leading firm for this type of analysis that has completed over 100 studies for an impressive list of blue-ribbon clients.

Tripp Umbach researched the economics of the Pennsylvania equine industry in 2008 and then compared the findings to results from a similar study that had been done by Pennsylvania State University for 2001. Thus it was feasible to contrast the pre-slots and post-slots eras.

The racehorse sector (Thoroughbred and harness) of the overall equine industry in Pennsylvania had an estimated total economic impact of $344.5 million in 2001 and $1.6 billion in 2008. These figures included the direct dollar contribution of racing businesses in addition to indirect contributions from feed suppliers, veterinarians, and the like. The number of employees rose from 6,430 in 2001 to 23,028 in 2008. Racing produced $6.9 million in taxes for federal, state, and local coffers in 2001 and $78.3 million in 2008.

Interestingly, Act 71 also apparently boosted the overall equine industry in Pennsylvania of which racing is a component. The total economic impact from all equine activity jumped from $780 million in 2001 to $3 billion in 2008.

The Tripp Umbach report stated: “…regardless of where a person stands on the issue of slots and gambling, having a viable and strong agribusiness in the state involves the equine industry.” Further, “as a result of Act 71, horse racing actually provides people a chance to make a sustainable living and grow the equine industry segment.”

Under the provisions of Act 71, racing’s share of slot machine revenues is divided as follows: 80% to purses, 16% to breeders, and 4% to a health and pension fund. Tripp Umbach wrote: “For the first time in the history of the sport, members are receiving basic health insurance that includes eye and dental.” Moreover, “an overall impact of investment in new farm facilities and bloodstock helps a slumping economy.” Todd Mostoller, the Executive Director of the Pennsylvania HBPA, tells of prominent out-of-state racing interests looking for farms to buy in Pennsylvania. The state had a 22 percent increase in live foals for 2010, the sole venue to show a positive.

Continued slots-subsidized handle can only be justified using an iceberg-like argument: handle does not come close to revealing the full picture of the documented economic importance of horse racing to agribusiness in racino states like Pennsylvania.

Copyright © 2010 Horse Racing Business

Originally published in the Blood-Horse. Reprinted by permission.

A scheduling conflict kept me from attending the Breeders’ Cup in person, but I watched the Saturday card on television.  The next day I went to see the NFL game between the Cleveland Browns and the New England Patriots.  The league-leading Patriots were heavily favored, but the Browns jumped out to a 10-point lead and ended up winning 34-14.  The day was clear and crisp and Lake Erie next to the stadium was glistening.   The pregame ceremonies honored military veterans and some surviving  members of the Tuskegee Airmen were introduced to a huge ovation.  The playing of the Star Spangled Banner was followed by a thunderous and proud flyover by four US Air Force jets.  As the game wore on, the large crowd grew increasingly loud and sometimes raucous.  All of this got me thinking about the recipe that makes the NFL so attractive.  The main ingredients are:

Hometown Rooting Interest.  Fans in the cities and states with NFL franchises spend the season talking about how the home team is doing and devote the offseason to debating hypothetical and real trades, draft choices, and coaching changes.  Horse racing does not have this built-in advantage because there is little continuity with the horses running at local tracks.  Even during the Triple Crown season, when the most media attention is focused on racing, the horses are in the limelight for five weeks and then disappear from the public radar.  The nearest I’ve seen to a hometown rooting interest was in 2004 when Smarty Jones was at Philadelphia Park.

Star Power.  At the Browns-New England game, the main stars were the celebrated New England quarterback Tom Brady, arguably the best in the business, and Cleveland’s baby-faced University of Texas rookie quarterback Colt McCoy (his backup is racehorse owner Jake Delhomme).  A woman sitting near me said she had traveled from Michigan to see Brady play because he once quarterbacked the University of Michigan.  A twenty-something man from Nashville, Tennessee, told me he drove to Cleveland to watch the game because he is a lifetime Browns fan.  Zenyatta is racing’s star.  I have not seen this kind of outpouring of sentiment for a racehorse, including for Secretariat.  Funny Cide and Smarty Jones evoked emotion, but the intensity quickly dissipated after they lost the Belmont Stakes.  The support that Zenyatta has received from fans for Horse of the Year–more so since she lost the Breeders’ Cup Classic–is visceral.  Previous champions have been admired, Zenyatta is loved.

Familiarity with the Game.  Football is well understood by the general public because so many people play it and/or watch little leaguers, high schools, colleges, and the pros.  Sports-radio call-in shows demonstrate that lots of people think of themselves as experts.  When America was an agricultural society, racing had the same interest.  The average citizen was familiar with horses and racing was a popular pastime going back to colonial days.

Competitiveness.  Unlike Major League Baseball where there is no salary cap and the major-market teams dominate, the NFL has a salary cap and the lowliest teams have a structural basis to improve their lot.   Horse racing has this sort of competitiveness and favorites can be upset, even Man ‘o War, Secretariat, and Zenyatta got beat.

Television.  More than any other sport, football is compatible with television in that it is easy to follow.  The 1958 NFL title game between the Baltimore Colts and the New York Giants was shown nationwide and went into a nail-biting sudden-death overtime.  This is often referred to as the greatest NFL game ever played and it certainly launched the NFL into prominence, so much so that it passed baseball as the most popular sport in the United States.  By contrast, racing executives in the 1950s were afraid that television would ruin their live gate and therefore did not embrace the new medium.  Racing has a detrimental history of resisting innovation, including exchange wagering today.

Central Control and Brand Equity.  Because the NFL is a league, the commissioner has broad powers of authority to establish and enforce rules and to punish unacceptable behavior.  He can also ensure that each and every team works to maintain and build on the NFL’s mega brand equity.  Racing, being decentralized and under individual state control, has no power to enforce anything across all states.  Efforts to install a commissioner or a coordinating body like NTRA have largely been unsuccessful because the central entity is or would be toothless.  Churchill Downs has the most brand equity in the sport with the Kentucky Derby.  The Breeders’ Cup has made progress toward building brand equity, but, the judgment here is that the name does not resonate with the public.  A better choice than Breeders’ Cup is necessary to achieve cachet.

Years ago, an oldtimer from Chicago told me a vignette about his friend George “Papa Bear” Halas, who co-founded the NFL in an automobile showroom in Canton, Ohio (near the present Pro Football Hall of Fame) and was the owner/coach of the fabled Chicago Bears.  In the earliest days of the Bears franchise, Halas would write checks on Sunday after the game to cover expenses, such as player salaries, and then rush to the bank on Monday morning to deposit the game receipts so the checks would not bounce.  What I saw last Sunday at the Browns-Patriots game is the lineal descendent of this meager beginning.

Thoroughbred horse racing cannot become a force like the NFL (only European pro soccer is on par with the NFL), but it can incrementally increase its popularity through the crafting and implementation of at least a few of the same ingredients that the NFL has leveraged.

The NFL is facing a contract dispute with the players union for 2011 and there could be a lockout.  The owners want to redo the 60% of revenues that is currently paid out to players and to increase the season to 18 games.  Racing does not have these kinds of problems, as the players in racing can be satisfied with a clean stall and ample servings of hay, oats, and water.

Copyright © 2010 Horse Racing Business