August 2014 | Equine Industry a Bellwether for Pennsylvania
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Equine Industry a Bellwether for Pennsylvania

August 2014 - Suzanne Bush

Pennsylvania’s Auditor General Eugene DePasquale says that money in the state’s Racing Fund has been misused. His review of the Department of Agriculture’s management of Racing Fund money has been criticized, celebrated, quoted and misunderstood. DePasquale says it’s true that money was diverted from the Racing Fund to cover other expenses in the Department of Agriculture, but that’s not the real problem. Disagreements in the legislature about how to fund government, declining casino revenues, a lack of promotion of horseracing and the proliferation of gaming choices for a static pool of gamblers are eclipsing the optimism that accompanied the introduction of casino gaming in Pennsylvania.

Does Racing Need a New Plan?
Established in 1981, the Racing Fund covers Department of Agriculture drug testing costs and funds the two racing commissions that oversee the industry. The money also supports other related agricultural programs such as the Farm Show.

State employees, DePasquale says, understand that they may have stretched the rules to use the Racing Fund money for other purposes, but they had few other choices. He says they maintain they didn’t do as much misappropriation as the report contends, “but then they would also say, which goes to the heart of the matter, that running these programs is very expensive.” The State Legislature has not reshaped the Racing Fund law since its inception; but the horseracing industry has changed dramatically in the intervening 33 years.

“You have a lot of very good people trying to stitch together the Department on less and less money,” DePasquale explains. Last fall, the cash-strapped racing commissions were rescued by $5 million in emergency funding. Senator Elder Vogel (R., Beaver, Butler, Lawrence Counties), chair of the Senate’s Agriculture and Rural Affairs Committee that approved the rescue, has proposed a plan to eliminate both the Department of Agriculture’s Harness Racing Commission and Thoroughbred Racing Commission. Their duties would be consolidated under the State Gaming Control Board, created when the state approved Act 71, the Race Horse Development and Gaming Act, in 2004.

Vogel says that DePasquale’s report is troubling, and that it reinforces the need to take another look at the way racing is governed. Vogel’s plan has been approved by the Pennsylvania Senate, but the House is still reviewing it, and it may be a harder sell there.

Representative John Maher (R., Allegheny, Washington Counties) chairs the House Agriculture and Rural Affairs Committee. He says that he is still not sure what Vogel’s planned restructuring of racing oversight is intended to accomplish. “A wide variety of proposals have been floated. Frankly I need a bit of clarity on what disease people are trying to cure.” He disagrees with DePasquale’s report, and believes that it reveals a fundamental misunderstanding of cost-accounting principles. Beyond that, Maher says that the state needs to look at the horseracing industry differently. “If we look to other states, like Kentucky, that have incentivized the equine industry, it’s a very different…and I would say a considerably more successful model than we use here. It’s not just about racehorses.”

Kentucky created the Kentucky Breeders Incentive Fund in 2007, to encourage breeding of both racehorses and non-racehorses in the state. Supported through a sales tax on stud fees, the majority of the money goes to Thoroughbred breeders, but 13 percent goes to Standardbred breeders and seven percent is distributed among non-racing horse breeds. The racing industry sets the payouts for various purse initiatives, and participating non-race breeds base allocations on several factors, including success in the show ring. In 2007, the fund generated $19 million.

Maher says that “with an expansion of racing there’s certainly going to be an expansion of oversight costs. The tools necessary to manage racing will need to be expanded as racing expands.”

Where will the money come from? DePasquale says that this is a bridge that too many policymakers are unwilling to cross. “The Racing Fund was supposed to be self-funding. You’ve gone to a race, you’ve bet on a race, you’re one of the people who runs the races, you pay the bills. There’s money in that fund that is used to supplement other Agriculture Department programs. Either keep the money in the Racing Fund, or eliminate some programs,” he says. He points to the current budget as an example of pitting short-term thinking against long-term problems.

“It is filled with one-time fixes and rosy revenue projections. As Pennsylvanians, we need to have a discussion of what kind of Pennsylvania we want. Eliminate programs or raise revenues. You’re getting close to the breaking point on that.” Governor Tom Corbett has challenged legislators to take a harder look at the state’s finances by vetoing millions of dollars in expenses in the recently-approved budget though he does not support new or increased taxes.

Gaming Is Not a Growth Industry
Gaming’s future is not as safe a bet as legislators once thought. Recently several casinos in Atlantic City, NJ have shut down or announced plans to do so, citing competition from neighboring casinos in Pennsylvania and New York.

Despite tax breaks and millions of dollars spent promoting the casinos—much of it funded by New Jersey’s taxpayers—Atlantic City’s gaming industry is facing steeply-declining revenues. But all that revenue is not necessarily showing up in Pennsylvania’s casinos. Statewide revenue from casinos is declining, largely driven by the decline in revenue from slot machines. And it is slot machine revenue that supports the Race Horse Development Fund.

The most recent report from Pennsylvania’s Gaming Control Board shows that year-over-year revenue from slot machines declined nearly 4.5 percent.

“What you’re seeing, there’s only so much gambling money out there, and as new casinos and new racetracks open…people have more options,” DePasquale says. New Jersey casinos have added online gaming to entice more gamblers but it has brought little relief to the industry so far.

Market Horseracing’s Unique Values
One of the fundamental principles of marketing is product differentiation – the added value that makes a product or service different from all others. Casino advertising in Pennsylvania offers a blur of gaming tables, well-dressed young people, fancy restaurants, etc. And horseracing? Not in the picture, despite the fact that horseracing adds significant value to the gaming industry. Beyond the fact that every race is unpredictable, horseracing has thousands of compelling stories and features extraordinary human and equine athletes.

The discounting of horseracing is more than disappointing to the legislators who crafted the Race Horse Development and Gaming Act. “We’ve had lengthy discussions with the casinos over that,” Vogel says. “Some of them don’t want to have racing on Friday and Saturday because they want to save the parking spots for the casinos. This whole thing was set up for horseracing. The reason they have a casino license is because they have a racetrack.”

DePasquale agrees. “There’s no question the industry itself was supposed to be in partnership with the casinos. The initial reason for the slots law was to protect the state’s breeding industry,” he says. “It is easy to look at horseracing and think of the rich owners. But that’s not a true picture.” Besides the fact that not all horse owners are rich, “there are people who work at the stables, the jockeys, the veterinarians, there’s a whole industry that goes with it that people don’t see.”

Despite the legislators’ best intentions, the law does not require that the casinos promote horseracing. Vogel says that it would be difficult to force the casinos to promote racing, even when they are renewing their licenses. Yet, if horseracing were to disappear in Pennsylvania, new legislation would be required for the casinos to continue to operate.

Vogel and Maher are concerned about the significant investment the horse breeders have at stake. “The horse people have put millions of dollars into the state,” Vogel says. “It’s a huge amount. We put my bill together, because nothing had been done since they put the racing industry together.”

Maher says that the state should look at the equine industry in aggregate. “Something that’s becoming clear to policymakers is that the resources that come from slots are supposed to go to horse development.” But he says that much of that money is leaving the state.

In 2012, Parx Casino hosted two prestigious races the same day with purses totaling more than $2 million. Not one Pennsylvania-bred horse placed in those marquee races. The prize money went to out-of-state breeders and owners, two of whom were Middle Eastern millionaires, Sheik Mohammad bin Rashid Al Maktoum of the United Arab Emirates and Saudi Prince Faisal bin Khalid bin Abdulaziz.

Pennsylvania’s horseracing industry provides an opportunity to see what’s good and what’s troublesome about government and the industries it regulates. Act 71, a remarkable feat of legislative will, set out to support and stabilize one of Pennsylvania’s most diverse agricultural industries, without explicitly taxing those outside of horseracing. It created a new industry—gaming—in the state, with the understanding that the casino operators would not forget the raison d’etre for their opportunity. Success was swift. Revenue cascaded into the state’s coffers and created an attractive pile of money that could be used to plug holes in the state’s budget.

Pennsylvania legislators have another chance to make sure that both the spirit and the intent of Act 71 are realized. But they need to adjust their thinking to a longer time frame in order to make meaningful changes.