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AUGUST  2002

Resurrecting Racetracks 

Slots, VLTs pump new blood into Sport of Kings 

By Janet Plume

Racehorse and racetrack owners have watched the "Sport of Kings" decline steadily amid a rising plethora of other gaming venues.

Until the return of state lotteries in the 1980s, horseracing was the only legal gaming in most states, and a vital industry in many regions-from California to the Blue Grass State of Kentucky. But the industry has been in a steady decline during the past two decades with the rise of state lotteries, gaming cruises to nowhere, and commercial and Indian casino gaming, all of which have commandeered younger players.

Fourteen racetracks across the country closed for business this past June, including the Santa Anita Racetrack in Arcadia, Calif., which was built during the Great Depression and was home to thoroughbred champion Seabiscuit.

Several Kentucky breeding and training farms have been replaced by strip malls. Pimlico officials have talked about shutting down Maryland's oldest track.

Many tracks have supplemented live races with other income: with simulcasts and off-track betting, and-in a half-dozen states-with slots or video lottery terminals.

In Delaware, Iowa, Louisiana, New Mexico, Rhode Island and West Virginia, racetracks have added slots or VLT rooms, turning them into racinos. West Virginia pioneered racinos in 1990 when MTR Gaming's Mountaineer Park Racetrack added 165 VLTs to its thoroughbred track in Chester, W.Va.

"Slots not only boost the financial condition of the tracks, breeders and jockeys, they also improve the overall quality and long-term appeal of racing," says Adam Steinberg, gaming analyst at CIBC World Markets. 

ARIZONA

The Arizona Racetrack Alliance is promoting racinos and wants to place an initiative on the ballot this fall. Gov. Jane Hull has threatened to veto any racino legislation, but would not be able to overturn a public vote.

The issue became more complicated this past spring when the racetrack alliance obtained an injunction against Gov. Hull that prevents her from negotiating new compacts with Indian tribes. A federal judge ruled that the Legislature, not the governor, has the authority to negotiate compacts.

DELAWARE

Delaware legalized gaming at its three racetracks in 1995 and racetrack revenues account for 10 percent of the state's economy. Dover Downs is considered more of a casino than a racetrack, with a 240-room hotel for guests and a ballroom for entertainers. 

Revenues from the 5,200 VLTs at Harrington Raceway, Dover Downs and Delaware Park have grown nearly tenfold since 1996, to more than $526 million last year. Delaware Park, the only thoroughbred track in the state, accounted for more than half of that amount, and has the nation's highest racino daily win-per-position of $362. 

Dover Downs' harness track is unique among racinos in that it has aggressively tried to duplicate the traditional casino experience. When the late John Rollins, a well-heeled businessman, took over from the original owners, he hired a management team from Caesars World, who decorated the racino in a garden theme-with a slightly Roman flair-and successfully positioned the racino as an entertainment resort with many of the amenities found at the casinos in nearby Atlantic City. 

Dover Downs has expanded four times since the racino opened in 1995, and is planning a fifth expansion that will double its size under the management of many of those same Caesars World executives initially hired by Rollins.

Today, about the same number of horse players attend the races at Dover Downs as did before the track added slots. But the purses have ballooned from an average of $8,000 a day before slots to $140,000 a day now. The races are broadcast to more than 300 venues.

FLORIDA

In Florida, Gov. Jeb Bush in June vetoed a bill that would have allowed players to win more money at card games at dog tracks. The bill was initially intended to help find homes for retired greyhounds, requiring adoption information be placed in programs. But provisions were added that increased the hours that card rooms could operate at dog tracks and the amount wagered.

Gov. Bush and Florida's state attorney general have long been anti-gaming, and didn't budge after dog track proponents said the veto could force the dog tracks to close. 

While Florida's more than 20 racetracks and frontons have experienced a slight decline in overall handle-6.7 percent-between 1991-2000, horseracing purses have grown nearly every year since 1993, for an eight-year increase of nearly 40 percent.

"Many of Florida's parimutuel tracks, including Pompano Park, are well-managed and have been able to avoid the sharp declines experienced in other states," says Jack Gallaway, president of Isle of Capri, which owns Pompano Park. "However, the increase in other forms of gaming in Florida is certain to impact our future."

Allowing racinos could compromise the stance of state government in Florida, which is home to one-third of all North America's greyhound tracks and has battled Indians in court for more than a decade by refusing to allow Class III slots at Indian casinos.

This year, the Sunshine State faces a $1.3 billion budget deficit.

ILLINOIS

In Illinois, fierce partisan warfare over the state budget blocked a last-minute dash to approve racinos. Lawmakers had sponsored bills that would have helped consolidate Sportsman's Park and Hawthorne Race Course, allowed tracks to operate slots and advanced the cause of a new riverboat casino targeted to provide funding for racing operations.

Gov. George Ryan, who faces a $2 billion budget crunch, has said racinos are a bad idea, but has admitted they could raise much-needed revenue.

IOWA

Iowa legalized riverboat gaming in 1991 and a year later Prairie Meadows Racetrack, which had no live racing, fell into bankruptcy. Live racing resumed in 1993, but by the end of 1994 horseracing revenues were down more than 38 percent from 1991. 

In an effort to save them, lawmakers in 1995 legalized reel slots (banning video games) at the state's three tracks. Since then, Iowa's slot revenues from its two greyhound tracks and single horse track have increased nearly 50 percent to top $307 million last year, according to the Iowa Racing and Gaming Commission.

Competition from 10 riverboat casinos and three Indian casinos has kept racino revenue growth to 3.6 percent annually since 1996, while win-per-position increased only twice. But racino revenue has been credited with helping Prairie Meadows return from bankruptcy. Since the racino opened at Prairie Meadows, purses have grown 35 percent.

The three tracks have always paid a high tax rate, and it was scheduled to rise even higher, to 36 percent this year. But the state Supreme Court in June ruled the state couldn't impose different tax rates on racetrack slots than on riverboat casino slots.

The justices returned the case to the district court, which was expected to either reduce racetrack taxes from their current 32 percent to the 22 percent that riverboat casinos now pay, to increase riverboat casino taxes to the 32 percent that the tracks now pay, or to find a compromise rate for both gaming venues.

KANSAS

After tabling racino legislation last spring for Kansas' three tracks, The Woodlands in May aired its first broadcast to 10 out-of-state racetracks and the Kentucky Derby and Preakness to local fans. On May 27, the Great American Futurity, the single richest dog race in the country, was beamed to bettors at 25 tracks. The result for May was record attendance and revenues.

Gov. Bill Graves has endorsed racinos, but opposition remains strong among lawmakers.

KENTUCKY

Since the mid-1990s, Kentucky racetracks have lost tens of millions of dollars to neighboring states' riverboat casinos. At Turfway, live wagering has declined 43 percent and purses have dropped 24 percent since 1995, the year that Indiana's riverboats opened. 

Kentucky lawmakers last spring killed a bill to allow slots at racetracks, but supporters have pledged to revive it. The push for VLTs at racetracks gained new momentum this year with the release of a study by two state economists revealing residents spent more than $400 million at Indiana and Illinois casinos last year.

Louisville's Churchill Downs, the home of horseracing's Holy Grail, has seen its average field drop from nine to eight horses per race over the past three years, a trend that translates to lower bets, which in turn reduces purses, setting the downward cycle in motion again. The home of the Kentucky Derby has embarked on a $127 million renovation of the 128-year-old track. The famous twin spires will remain, but just about everything else will be replaced by November 2004. The new tract will include 66 premium suites, the creation of a large club and meeting space, renovation of the Jockey Club and new elevators.

LOUISIANA

Last February Boyd Gaming kicked off its entry into the racino market with the opening of the 1,492-slot Delta Downs Racino at Vinton, just outside Lake Charles in southwestern Louisiana. The immediate hike in Boyd's stock price was attributed to the successful opening, which generated nearly $8 million in slot revenue during its first 16 days, for a daily win-per-position of nearly $330. 

Delta Downs General Manager Jack Bernsmeier says Boyd decided to enter the racino market because of limited growth opportunities in the commercial casino industry.

"A racino in southwestern Louisiana represented an opportunity for growth that we might not otherwise have had," Bernsmeier says. "We are looking at going forward with more [racinos], as are other casino operators, and to expanding this facility." 

The track, with quarterhorse and thoroughbred races, is the closest gaming property to the Houston feeder market. Slot revenues have averaged $11 million per month since opening, placing it on a par with some of Louisiana's best-producing riverboat casinos. Delta Downs' purses totaled $3.5 million last year without slots; this year it's forecast to do more than $15 million with income from the slots and from simulcasting at Las Vegas casinos.

"The better purses will drive us right up there to be very competitive with other tracks and attract better jockeys and horses," Bernsmeier says. "We're also seeing a crossover of horse players to slots, but not so much the other way around." 

In June, former riverboat casino developer Louis Roussel III proposed opening a second quarterhorse racetrack in northwestern Louisiana near the Texas border. Several of Louisiana's Racing Commissioners opposed the idea, saying it was little more than a ploy to open a slot parlor and had little economic viability. His application for a racing permit was expected to be heard this month.

MARYLAND

Maryland's Gov. Parris Glendening has stonewalled attempts to legalize slots at the state's five racetracks for the past eight years. A proposal to allow voters to amend the constitution to allow 2,500 VLTs at racetracks was defeated by lawmakers last spring.

A new governor will be elected this fall. Studies have been ordered by lawmakers to assess the impact of racinos in neighboring Delaware and West Virginia.

Despite competitive pressures from neighboring states' racinos, handles and purses held fairly steady between 1993 and 1999, when Maryland's handle grew 6.4 percent and purses increased 12 percent. But since 1999, purses have declined to less than $49 million.

NEBRASKA

Nebraska is considering legalizing racinos and Indian casinos. Nearly 85 percent of the players at Council Bluffs-Iowa's two riverboat casinos and single greyhound track-hail from Nebraska.

The state has thoroughbred tracks in Omaha, Lincoln, Columbus, South Sioux City and Grand Island, all within a two-hour drive of Bluffs Run, Iowa, which has a greyhound racino.

NEW MEXICO

Racetracks in New Mexico installed video and reel slot parlors in 1999. Each track was originally permitted 300 machines, with 20 percent of slot revenues going toward purses. Legislation passed last year raised the number to 600 machines per racetrack and allows them to transfer up to 150 machine licenses to other tracks.

Sunland Park Racetrack was the first to add slots, followed by Billy the Kid Casino at Ruidoso Downs. Last year the state's 1,200 slots at racetracks reported revenues of nearly $88 million, with a daily win-per-position of $201. Sunland Park, with its monopoly on the El Paso, Texas area, accounts for nearly half the state's racino slot revenue, topping out at nearly $39 million.

NEW YORK

New York has lost several old racetracks in recent years and others are struggling. Roosevelt Raceway was razed in 2000. Attendance at Saratoga Springs thoroughbred track is less than 10 percent what it was in the 1960s.

Last October, state lawmakers authorized five racetracks-Aqueduct, Yonkers, Vernon Downs, Monticello and Finger Lakes-to install VLTs. Three harness tracks-Saratoga Springs, Batavia and Buffalo-were included with the special status that VLTs could be added only with local approval. 

The five racetracks are expected to open slot parlors next year.

Meanwhile, off-track betting corporations in New York, still upset about being left out of the gaming expansion, want to simulcast thoroughbred racing at night.

PENNSYLVANIA

After seven years of strong opposition to racinos from Pennsylvania's governor, bills to allow racinos at the state's four tracks are being floated after a group with ties to the horse industry formed in May to promote legalization of racinos. Both major-party gubernatorial candidates in November's election-former Mayor Edward Rendell (D-Philadelphia) and GOP state Attorney General Mike Fisher-support the idea.

The bills, which would allow each track to operate 2,000 slots, call for a 30 percent tax on slot revenues with 44 percent toward purses and 7 percent toward breeders' funds.

Penn National Gaming wants to develop a new horseracing facility in Erie, Pa. The company owns 11 OTB facilities around the state as well as a track in Grantsville, Pa., and The Downs at Pocono in the Scranton/Wilkes-Barre area. The Meadows racetrack is in Washington County and Philadelphia Park is in Bensalem.

Handles at Pennsylvania racetracks grew 75 percent between 1993 and 1999, but much of that total originates from OTB, which aren't as profitable for the tracks. Purses are 3 percent below 1993's $53 million, as track attendance has plummeted by half.

"Having the two major gubernatorial candidates supporting slots creates a very strong climate for legalizing slots," says Steinberg. "I think it's reasonable that we will see slots at tracks in the future." 

Pennsylvania lawmakers rejected previous gaming bills in 1996 and 1999, but this year the state faces a $1.2 billion budget shortfall.

RHODE ISLAND

In 1992, Rhode Island allowed the Lincoln Greyhound Track and the Newport Jai Alai to add VLTs. The tracks now have a combined total of nearly 2,500 VLTs with gross revenues of nearly $230 million, according to the Rhode Island Lottery. Lincoln Park accounts for more than 75 percent of those revenues.

The racinos, which cater to a locals' market, currently accept currency but pay out with paper chits. Both the dog track and the fronton have asked the Lottery Commission to allow the VLTs to dispense coins and for permission to add some 1,800 more machines-1,300 at Lincoln Park and 500 at Newport. Some officials have wondered who has the authority to do that-lawmakers or lottery commissioners.

WEST VIRGINIA

Mountaineer Park track provided an early lesson in the racino equation: a critical mass of slots must offset the 20 percent decline in parimutuel betting caused by adding them. The track's 165 VLTs increased gross revenue at the track by only 6 percent in the early 1990s, and net income by barely more than 3 percent. Yet research indicated revenues would leap more than 30 percent with 200 machines.

Mountaineer added more video machines in 1994, as did Wheeling Downs, Tri-State Greyhound and Charles Town Races. Reel slots were legalized in 1999. All racetrack revenues go to the lottery, which takes an administration fee and 30 percent for the state. Racinos receive 47 percent of revenues, 14 percent goes toward purses and the remainder to county and breeders' funds.

Today, West Virginia tracks, which are the No.2 industry in the state, have nearly 11,000 video and reel slots. Last year, with 6,500 slots, total revenues topped $513 million, with Mountaineer Park, as market leader, topping $185 million. With all four racinos reporting double-digit growth last year, the statewide average was 39 percent. Revenues at Charles Town grew nearly 49 percent, topping $162 million.

Purses have nearly doubled since 1999 to $66 million, according to the state lottery commission.

Expansions are under way at all four racetracks. A riverside shopping center and golf course is scheduled at Mountaineer Park, while an outdoor amphitheater is on tap at Tri-State in Nitro.

Because West Virginia could face competition if neighboring Pennsylvania, Maryland or Kentucky approve racinos, Mountaineer President Ted Arneault is lobbying to allow blackjack and other table games in 2003 or 2004.

Gov. Bob Wise doesn't like that idea. Neither does Penn National Gaming, which owns the Charles Town Races & Slots.

Kevin DeSanctis, CFO of Penn National, says table games aren't necessary at Charles Town, which is undergoing a $70 million expansion.

"Charles Town continues to perform at record revenue levels, thus allowing us to make these types of investments in the facility and the region," DeSanctis says. "Accordingly, we see no need for the approval of table games and do not support the proposal."

FAVORABLE ODDS

Legislation to add slots to racetracks failed in all but one state that tried to pass it in the past year, but analysts say conditions remain good and should improve for passage next year. Despite failure in Florida, Illinois, Kentucky and Massachusetts, the on-again, off-again racino issue is expected to be revisited in Kentucky, Pennsylvania and Maryland

New York has approved plans for slots at five of the state's 10 racetracks. Saratoga and Belmont were not included. Other tracks want slots, too, from Hawaii to New Jersey, where tracks are run-down and purses are small. But their chances appear much slimmer than in the states neighboring West Virginia.

States that have strong pro-racino sentiment but equally strong opposition in the Legislature include Florida, Illinois, Kansas, Nebraska and Arizona.

Some industry observers believe live horse racing, as a form of gaming, faces too much competition these days to thrive like it once did. Attending a horse race is an event that requires preparation, whereas a lottery ticket is an impulse buy. And floating casinos offer more games and more amenities than the lottery or a racetrack.

The popularity of each form of gaming is reflected in Illinois' state tax revenues in 1998: the horseracing industry paid $20 million, riverboat gaming more than $350 million and the lottery more than $500 million. 

And others question whether racinos can take all the credit for the resurrection of racetracks, since the advent of racinos occurred at about the same time that simulcasting grew dramatically.

But the numbers don't lie.

While non-racino states experienced a decline of nearly 38 percent in live handle at racetracks between 1995 and 1999, racino states reported a 7 percent increase. Overall, racino states posted a 19 percent hike in total handle-live and simulcast-during that period, while non-racino states had an 8 percent increase. Simulcast handle was up 25 percent in racino states during that time, compared to 29 percent in non-racino states.

"Racetracks today need slots to continue to grow," Penn National Gaming's DeSanctis says. "There really is no growth in racing. It's a mature product. 

"But slots aren't necessarily the answer for every racetrack," he adds. "It can improve the existing situation, but in a highly competitive market where there are other types of gaming, it would be difficult for racinos to survive." 

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