Governor Ted Strickland of Ohio, a Democrat, was steadfastly opposed to expanded gambling in the Buckeye state as recently as June 2009.   Since his election in 2006, he has promised to veto any bill that the legislature might send him permitting racetrack slots.   In addition, he campaigned against a 2008 ballot initiative that would have installed a casino in Clinton County.   The Ohio Senate, with the Republicans in the majority, has also opposed alternative gaming, while the Ohio House has supported racetrack slots since the Democrats gained control in 2008.   The Ohio State Racing Commission, whose members are all Strickland appointees, have strongly supported racetrack slots.

With a huge budget deficit and a looming cut in state services, Strickland had a 180 degree change of mind if not of heart.   In a compromise agreement with Senate Republicans to break a budget deadlock, the legislature crafted language enabling the governor to permit Ohio’s seven racetracks to each install 2,500 video lottery terminals.   The operation is to be under the auspices of the Ohio Lottery Commission.  

This rapid turn of events has created flux and questions and the fallout is likely to greatly affect the fate of racing entities in Ohio and states surrounding it.   The many “what ifs” and “what will they do” would perplex a soothsayer in predicting how things will eventually shake out.   Here are the major contingencies.

1.  The governor and the legislature are about to be challenged in court, mainly on the basis that any expansion of  gambling must be sanctioned by Ohio voters in a statewide referendum.   A nonprofit named the Ohio Roundtable and a couple  of church groups have already promised as much.   Ironically, the United Methodist Church is a leader in the anti-slots movement and Governor Strickland is an ordained Methodist minister.   The Ohio Supreme Court may quickly dismiss legal objections or the justices might agree with the plaintiffs.   Even if the constitutional authority of the governor and the legislature is ultimately upheld, the case could drag on.   Moreover, there is the possibility that the antigambling forces will sponsor and win a statewide vote repealing the work of the governor and legislature.   In that event, racetracks would have to give up slots and take a heavy loss in the process owing to the machines that were purchased and the facilities that were remodeled or built from scratch  to accommodate slots.

2.  A casino initiative is planned for Ohio for  the November 2009 ballot.   It would allow for a total of four casinos–in Cincinnati, Cleveland, Columbus, and Toledo–and 20,000 slot machines.   A key player is Dan Gilbert, who is the founder of Michigan-based Quicken Loans and the majority owner of the Cleveland Cavaliers NBA franchise.   Should the casino referendum be approved, then the quasi-geographical monopoly on slots enjoyed by the racetracks would disappear.     Six of Ohio’s seven racetracks are located in the metropolitan areas of Cincinnati, Cleveland, Columbus, and Toledo and the other track, Lebanon Raceway, is considering a move to near Dayton.   The racetracks would still have a lucrative franchise, just not as valuable.

3.  Prior to the slots authorization by the governor and the legislature, Penn National Gaming (owner of Raceway Park harness track in Toledo and an Indiana casino near Cincinnati) was reported to be in favor of the November casino initiative.   Now, with its harness track in line for slots, Penn National Gaming’s top management has a decision to make regarding supporting or not supporting the November ballot initiative.   (Penn National Gaming hugely funded the campaign to defeat the 2008 ballot referendum on the casino in Clinton County because it would have competed against its Indiana casino.)   Interestingly, Penn National Gaming  did not join with management of the other six Ohio racetracks when they recently wrote to Governor Strickland to embrace his slots plan.   If Penn National Gaming assists in funding a winning marketing campaign for passage of the casino ballot initiative and then does not secure the casino license for Toledo, it will have seeded competition for its own racetrack.

4.  MTR Gaming Group owns Mountaineer Casino Racetrack and Resort in Chester, West Virginia, Presque Isle Downs and Casino in Erie, Pennsylvania, and Scioto Downs (harness track) in the Columbus, Ohio, area.   MTR Gaming Group is no doubt opposed to the proposed November Ohio casino ballot issue.   On the other hand, the slots authorization is a two-edged sword.   Scioto Downs will gain slots but MTR Gaming Group’s West Virginia and Pennsylvania properties will be damaged financially by slots at  Cleveland’s Thistledown (Thoroughbreds) and Northfield Park (Standardbreds).   MTR Gaming Group’s racinos in Chester and Erie are very dependent on Ohio customers.  Whether stock market investors see slots in Ohio as a net gain or a net loss for MTR Gaming Group looks to be the former.   On July 10, 2009, the day when Governor Strickland and the legislature came to an agreement on slots, MTR Gaming’s stock opened at $2.35 per share and closed at $3.48 per share for a 48% gain.

5.  River Downs in Cincinnati could be a big winner and Kentucky’s racing industry a big loser.   River Downs is only 14.7 miles away from Kentucky’s Turfway Park, across the Ohio River, 90 miles from Keeneland, and 107 miles from Churchill Downs.   A racino at River Downs might be the death knell for Turfway Park (thanks to the gift from the Kentucky Senate in keeping slots out of Kentucky) as racing and slots customers in the Cincinnati metroplex, including Northern Kentucky, gravitate to the River Downs racino.   At the moment it is uncertain how much Ohio purses will be augmented by slots.   If the horsemen are treated well and purses increase dramatically, then convenient River Downs will likely be a favored place for Kentucky stables to race.   Incredibly, a down-on-its-luck River Downs reinvigorated by slots could detract significantly from the quality of summer racing at Churchill Downs.   Think about the lure to sports and racing fans from Louisville and Lexington of a day at River Downs followed by a Cincinnati Reds game at night.

6.  Thistledown near Cleveland is soon to be auctioned off  by the bankrupt Magna Entertainment Corporation.   Suddenly, with the prospect of slots, Thistledown’s market value has escalated.   Thistledown is likely to recover from the verge of extinction to become a healthy going concern once it is able to compete on more even terms with racinos at Mountaineer Casino Racetrack and Resort (which has both slots and table games) and Presque Isle Downs and Casino.   However, a buyer has to value Thistledown not knowing whether a new casino is coming to Cleveland, depending on how the November ballot comes out.

7.  The Cleveland-area racetracks–Northfield Park and Thistledown–are within seven miles of one another and the Columbus-area racetracks–Beulah Park and Scioto downs–are nine miles apart.   This proximity should assure a battle royal.   If Ohio voters in November 2009 approve casinos for Cleveland and Columbus, the competition will escalate even more.   

8.  Assuming that the slots installations are not slowed by legal challenges, how soon the racetracks can get them up and running remains to be seen.   The governor’s goal is to have them functioning by at least May 2010 so that the state can apply its slots revenues to the budget, which would be much quicker than other states (e.g., Pennsylvania) were able to do so.   One of the racetracks is planning on temporarily housing slots in its grandstand while it builds a state-of-the-art slots/hotel complex adjacent to the track.   It ambitiously wants to have slots open to the public by the end of 2009.

How these matters turn out should have a profound effect on horse racing in Ohio and contiguous states.   Fortunes will be enhanced and impaired in the process.

Copyright © 2009 Horse Racing Business


Specifics of the slots legislation:

• Each racetrack must pay a $100,000 nonrefundable application fee and a $65 million licensing fee.   The first payment on the licensing fee is due in mid-September 2009 with four installments thereafter.

• Licenses will be awarded for a 10-year period.    A racetrack must agree to make at least $80 million in facility improvements within the first five years of operating slots.  The initial year’s investment must be at least $20 million.

• Half of the net revenues generated by the slots will go to the state of Ohio, which is one of the largest percentage cuts in the United States.   Part of the state’s revenues will be used to cover operational costs and the remainder will go to school funding.    Horsemen’s groups will negotiate directly with racetracks to determine the portion of slots revenues that will go to purses.


“Yesterday’s Winner is a Loser Today”

                            Ernest Tubb

Whether or not you agree with the Federal-government bailout of Chrysler and General Motors is a personal preference, mostly depending on your ideology.  But anyone would concur that the elected officials in Michigan, Democrat and Republican alike, and the business community fiercely rallied behind the Wolverine State’s signature industry and spoke with a unified voice.  This “golden goose” was not about to go bankrupt if they could prevent it.

In Kentucky, the industry comparable to automobile manufacturing in Michigan is, of course,  the breeding, selling, and racing of horses, which directly and indirectly employs thousands of citizens, attracts significant out-of-state and foreign investment, promotes tourism, and undeniably contributes plenty of state and local tax revenues.

Yet all is not well, not by any means.   The racing industry does not need a bailout, but it does require a chance to compete on a more level playing field with casinos.

Churchill Downs, Ellis Park, and Turfway Park are fighting for their economic lives–with one hand figuratively tied behind their backs–against nearby Indiana casinos.   Even were Kentucky to legalize video lottery terminals, the tracks would still be disadvantaged because the Hoosier-state casinos offer both slot machines and table games.

Currently, Thoroughbred trainers in Kentucky often send their horses to Mountaineer Casino and Racetrack in Chester, West Virginia and Presque Isle Downs in Erie, Pennsylvania, as well as to other racing venues where purses are supplemented by alternative gaming.

Presumably, as in Michigan, elected officials in Kentucky–from both political parties–and business interests would have put aside their differences and unified to do everything possible to rectify the situation that imperils Kentucky’s version of the golden goose and thereby affects so many people, present and future.   As rational as this supposition may be, it is false.

Defying common sense and the economic enhancement of his State, the most recent former governor, Ernie Fletcher, a Republican from Lexington, the heart of the Bluegrass region itself, never tried to take the bold actions that would conserve and strengthen Kentucky’s vital horse-racing enterprise.  Enter the present governor, Steve Beshear, a Democrat, who defeated a field of contenders in his party’s primary by focusing essentially on one issue–installation of racetrack casinos.   He won and then handily defeated Fletcher in the general election, again with a laser-like focus on racetrack casinos.

Once in office, Beshear promptly proved to be powerless to get the bi-cameral legislature, with one house overwhelmingly controlled by his own party, to pass the enabling legislation to allow the voters of Kentucky to decide whether to amend the constitution to permit racetrack casinos.   The new speaker of the Kentucky House of Representatives, elected on January 6, 2009, is much friendlier to racing than the individual he replaced.   Inexplicably, however, Beshear has indicated that he does not intend to revisit the racetrack casino issue in 2009 and the president of the Senate remains adamantly opposed to expanded gaming, so prospects don’t look bright in River City and the Commonwealth.

Gambling is usually debated along cultural, religious, and moral lines.   The view here is that the alternative gaming question for Kentucky is in fact really one of long-range economic development on which the Commonwealth’s fate heavily depends in the decades ahead.  To be specific, alternative gaming is not itself the focal point for economic development, but rather, is a means to an end:   generating some of the capital to expand and diversify the Kentucky economy of tomorrow.

Industries, like people and products, have life cycles.   

Pittsburgh, for example, was and still is known as the “Steel City.”   Its famous football team is appropriately named “the Steelers” and its “Steel City Beer” is another namesake.  But the Pittsburgh-area economy is no longer dependent on steel, as it has made a bumpy transition after steelmaking moved offshore and to mini-mills.  

Another illustration: Dubai is diversifying at a frenetic pace in response to peak oil, although it has encountered some problems of late stemming from the credit crunch.

Leaders of cities, states, regions, and countries who are farsighted and want to provide for future generations, begin to broaden their economies before they are forced to do so.  It is nearly a certainty that today’s most prominent industries will be eclipsed someday.

Kentucky’s key industries traditionally have been bourbon, tobacco, coal, and horse racing/breeding.  Bourbon and tobacco are in decline, owing to the lifestyles of contemporary consumers and to unfriendly government policies.   Coal is still in strong demand, but is most likely living on borrowed time.  President-elect Obama is on record as being hostile to coal and his choice for Secretary of Energy, Nobel Prize-winning physicist Steven Chu, said that new coal-burning power plants are his “worst nightmare.”   Lastly, horse racing is in decline in Kentucky and nationally.

Reliance on these industries and the status quo does not bode well for Kentucky.    It is already a poor state that ranks low on the most important factor that it takes to compete in an increasingly global high-tech society: quality education.   (My family has deep roots in Eastern Kentucky and I have visited there often and have seen up close the poverty and the extremely limited resources that dedicated teachers have to work with.  Kentucky’s Fifth Congressional District has the shortest life expectancy in the United States.)  Further, national ratings of private and public institutions of higher education do not have any Kentucky university remotely proximate to the top echelon on the criterion of scientific research output.

Where must the money come from to mitigate this unfortunate and ongoing situation, if at all?   The answer is evident:   mostly from the tax revenues that Kentucky collects from its mature industries of the present, the cash cows,  and uses to educate and train its citizens in the skills appropriate to a high-tech, knowledge-based economy.

Thus it is difficult to fathom why elected officials would not do everything in their power to buoy the State’s current signature industry in order to gain more tax revenues for a longer period of time to foster economic development of nascent industries and companies.  Oddly, a democratically-elected body of legislators has persisted in denying their own constituents the free choice to decide for themselves, in a plebiscite, the fate of racetrack casinos. 

Kentucky’s bloodstock and racing enterprises need to be bolstered by allowing racetrack casinos, if, for no other reason, than for the economic vitality of the Commonwealth long after present-day elected officials are history.   Instead, the State’s restrictive laws on racetrack offerings have the unintended effect of promoting economic development in Indiana, West Virginia, and other rival venues, because countless Kentucky residents go there to eat, drink, gamble and stay overnight.

Contemplate a gloomy but plausible scenario for Kentucky, circa 2059:

The Commonwealth of Kentucky is about like it always has been in the economic pecking order among the states, muddling along in the lower ranks and never having found large-scale industries to replace coal, bourbon, tobacco, and horse racing.  This failure kept the State from making the investments in education, infrastructure, and business incentives necessary to compete effectively in the mid-21st century.

The Bluegrass of 50 years ago is mostly a memory.  Many of the farm owners tried to save their land from development, but the population growth ultimately swamped their efforts and the price of real estate and the faltering bloodstock business made it prohibitive for agricultural use.   Calumet Farm is now a residential development, Calumet Farm Estates, complete with white fences and the old red entrance gate.  The single remaining barn is a community center for subdivision residents.   The Kentucky Horse Park shows visitors a short movie depicting what the Lexington area looked like when it was blanketed by horse farms.  Churchill Downs and Keeneland are still in business, as shadows of their former selves, whereas the rest of the State’s racetracks are gone.   Most of the secondary and tertiary suppliers to the racehorse industry–veterinary clinics, feed vendors, bloodstock agencies, advertising agencies, and the like–have downsized or vanished.

After years of sleeping while the horse-racing industry plummeted, legislators finally came to and rose above personal agendas and politics.  The racetracks got alternative gaming, but it was too little too late.  By the time racetracks were permitted to install slots, the machines’ popularity had run its course.  Generations raised with far more challenging interactive electronic devices and 3-D Internet found the machines boring.

Indeed, no one knew it at the time, but the slot machines of 2009 would be passé in 10-15 years.  Web 3.0 was just beginning to emerge and it would be revolutionary.  With 3-D Internet, for example, a husband can try on a suit at a clothing retailer, look in a store mirror, and have his wife at work or home comment on the appearance.  Web 3.0 allows a poker player to be in his family room in Des Moines, Iowa, and occupy a virtual seat at a table in the poker room at a casino in Las Vegas, where he plays with electronic cards.  There is no distinction between betting at a racetrack and wagering from elsewhere, as everyone uses a mobile device. 

Governments long ago gave up the impossible task of trying to stop gaming within their borders and instead decided to regulate and tax it.

Looking back, people of 2059 are amused and perplexed when they learn about how controversial slot machines were to the Kentucky legislature of 2009.  Compared to today’s technologies, slot machines were pretty tame stuff.   However, a University of Kentucky history professor put the moral argument that took place over alternative gaming into perspective.  She told of how the Viennese waltz was scandalous when it was introduced, the product of lower class society and gin mills, because the man and woman held each other ‘sinfully’ close while dancing.   She said that about 100 years ago, an entertainment icon named Elvis Presley appeared on the top-rated television program of its day, the Ed Sullivan Show.   Presley’s hip-swiveling gyrations while singing were so ‘vulgar,’  many complained, that Sullivan ordered his camera crew not to take pictures of Presley below the waist.  

People are heard to lament, even now, how much better shape Kentucky would be in economically if the horse-racing industry would have been sustained earlier and longer by slot machines.  At least the machines would have filled tax coffers for awhile and provided some of the wherewithal for investing in the future of Kentucky.

The horse was out of the barn [pun intended] when elected politicians seriously endeavored to save the racing and breeding industry.

The January 31st edition of Horse Racing Business constructs a brighter future for the Commonwealth in When Kentucky Awoke and sketches how the horse-racing industry can be used as an economic lever to achieve it.

Copyright 2009 by Horse Racing Business.

Coming Attractions

January 31:  When Kentucky Awoke

February 14:   Racing’s Misguided Muhammad Ali Philosophy of Publicity

 February 28:   Churchill – Down or Up?