Racetracks warily embrace slots, video gambling

HOT SPRINGS, Ark. -- As D. Wayne Lukas sat in a tiny office in his Oaklawn Park barn, the conversation turned to the horse track's newest attraction -- a large gambling parlor featuring games from blackjack to Texas Hold 'Em. After joking that he has never seen anyone in the room hit a jackpot, the Hall of Fame trainer and video poker aficionado turned serious and offered a word of caution to his industry. "Here's what's going to happen: With casino involvement, once it gets a foothold, the horses become a nuisance. They're expensive," Lukas said shortly before the end of Oaklawn's live racing season. "The casinos are much easier to maintain. ... The horsemen need to make sure that when they embrace casinos, that they have a locked-in contract, because the casinos will eventually wake up and say, 'We don't need the horses. We're doing fine without the horses."' According to the National Conference of State Legislatures, at least a dozen states now have horse or dog tracks with some sort of additional gambling option. Oaklawn's parlor includes more than 800 electronic gambling stations, Massachusetts lawmakers are deciding whether to allow slot machines at racetracks there and there's an ongoing effort to put video gambling machines at New York's Aqueduct Racetrack. Lawmakers who support the expanded gambling say it's a way to increase revenue, support a local business and stay competitive with neighboring states. The American Gaming Association said racetrack casinos paid $2.63 billion in direct taxes to states and communities in 2009, money used to fund things like education and tourism. The association also said consumer spending at racetrack casinos, excluding Arkansas, increased 5 percent in 2009 to $6.4 billion despite the recession. While horsemen welcome the extra revenue in the form of bigger purses, there are questions about whether the so-called racinos are a reliable business model. Richard Thalheimer, an economist with Thalheimer Research Associates Inc. puts it bluntly. "Without the slot machines, these racetracks, many of these racetracks would have gone out of business," he said. "When they got slot machines at the racetracks, in almost all cases, the revenue from the slot machines -- given the statutory percentage that had to be paid to purses -- the purse revenue went way up." According to The Jockey Club, gross purses for Thoroughbred races in North America fell 5.9 percent in 2009 to $1.23 billion even as Indiana, Pennsylvania, Louisiana and West Virginia -- all states that allow racinos -- offered at least $1 million more in purse money than they did in 2008. Additional gambling at tracks, however, doesn't seem to be creating a surge in horse betting. According to The Jockey Club, total pari-mutuel handle on U.S. Thoroughbred races in 2009 dropped 9.8 percent to $12.3 billion -- with 89 percent of that coming from the off-track sector. "When the slot machines were placed at the racetracks, on-track horse race wagering goes down," Thalheimer said. "The new people that it's attracting basically bet on the slots, and the original people, the people who have been betting on horses, also bet on the slots. "In the long run, we are seeing at many of these racinos, pressure by the operator of the racino to reduce the live race days and to reduce purses because the racino operators see this as a drag on their profitability. The slot machines are much more profitable than horse racing." And that's not all the horsemen have to worry about. State governments have priorities, too, and gambling money set aside for racing purses can start to look like an unnecessary subsidy. In West Virginia, soaring slot profits helped draw better horses, but lawmakers diverted $11 million from the purse fund a few years ago to help pay down a shortfall in a workers' compensation fund. "With economic conditions the way they are for the states, the counties and the cities, if the racing industry isn't contributing, how long do you think the awards for purses in these jurisdictions is going to last?" asked Tom Chuckas, president of the Maryland Jockey Club. In Maryland, where the Preakness will be held at Pimlico this weekend, the number of races dropped from 2,123 in 2001 to 1,413 last year. Chuckas said a 2008 referendum authorized sites in the state for video lottery terminals and although Pimlico isn't in the mix, the horse racing industry is being allocated some of the funds. That won't stop him from trying to find alternative ways to grow the sport. "If you take a look at the racetracks across the country, if you take a look at their demographics, most of them is male, 55," Chuckas said. "So somehow, you have to create programs that reach out to the 21-, 25- and 30-year-olds, and it's not only creating the programs, it's how you reach them. ... We spend significant dollars in social media reaching out to the younger people." To Chuckas, the challenge is taking advantage of the quick fix that expanded gambling can provide without becoming dependent on it. "It's an equalizer, it's a leveling factor," Chuckas said. "But at some point in time, a model does have to be developed that makes racing profitable." In Arkansas, expanded gambling is in its infancy, but Oaklawn is enjoying a renaissance. Kentucky Derby winner Super Saver raced in the Arkansas Derby last month, joining Smarty Jones, Curlin and Rachel Alexandra on an impressive list of recent horses that came through the state en route to success in Triple Crown races. Last week, Oaklawn announced it had paid out a track record of nearly $16.5 million in purse money this season, an increase it said came in part because of the expanded gambling center. The question is whether the arrangement is sustainable. Oaklawn's president, Charles Cella, has run the track since 1968 and he said the racing program would be "dead in the water" without additional gambling options. Yet he's mindful of concerns that the track stay true to its roots. "I'm a racetrack guy. We can't fall into that hole that other racinos have and that is be mesmerized by the numbers and forget about racing," Cella said. "Racing is what this operation is all about, and we must remember that always."