Dec 08 Slots

Slots: The State Has Delivered Now, Will The Racing

Industry Deliver?

December 2008

by Timothy Capps

A former executive vice president of the Maryland Jockey Club and executive director of the Maryland Horse Breeders Association, Tim Capps is currently teaching at the University of Louisville in the College of Business, Equine Program.

Tuesday, November 4, 2008, might certainly be remembered as a momentous day in American political history, the day when the nation elected its first African-American president. After perhaps the most prolonged, enervating, sometimes torturous campaign in the country's history, Barack Obama was chosen to become the 44th president of the United States.

Of course, the campaign and election are only chapter one in the Obama presidential saga, and the real history is about to be written over the next four or eight years, as Obama, his advisors and appointees, and the Congress grapple with the many foreign and domestic challenges facing the nation.

In a sense, the much more protracted debate over bringing slot machines to Maryland, settled on the same day as the presidential campaign, bears comparison. For those who were "in the trenches" of the slots discussion (including this writer for several years), which began in earnest in the mid-1990s, the outcome of the referendum on slots in Maryland was greeted with more of a sigh of relief than any sense of elation.

Maryland has become the 12th state to authorize slot machine gaming in a way that will benefit the state's horse racing industry, although the constitutional amendment and attendant authorizing legislation do not much resemble the original concepts being floated during the years when Parris Glendening was governor of Maryland. Glendening was unalterably opposed to slots, but the authorization of slots at race tracks in Delaware and West Virginia during his time as governor, and the revenues that flowed from those slots to state and local governments, as well as to racing, assured that slots would be an agenda item in Maryland.

When Bob Ehrlich began his campaign for governor in 2002, he made slots at the tracks one of his priorities, and once elected, he continued to advocate the idea, although unsuccessfully, during his term as governor. Political junkies and local historians will have their opinions over why Ehrlich never managed to steer slots legislation through the General Assembly's raw partisan politics (Democratic legislative leaders who were determined NOT to let the issue be settled on Ehrlich's watch), a naively crafted plan for slots that wouldn't have met either political or economic "smell" tests, failure to comprehend the complexity of the issue, etc., but the fact is that it did not happen.

His successor, Martin O'Malley, was a cautious supporter of slots, but chose (wisely, in our judgment) not to take up the debate during his first legislative session, and decided instead to make it the centerpiece of a special legislative session he called in the fall of 2007.

Special sessions are unpopular with legislators, in part because they bring the bright lights to bear on a particular issue, often one that is controversial, forcing people to choose sides in a highly exposed environment. Controversy, of course, invariably erupts during regular legislative sessions, but is easier to obscure because there is so much legislative "noise," much of it centered around getting the budget passed, which always happens near the end of the session, after which there is a flurry of activity passing bills that have been hung up by the budget battles. Special sessions isolate issues, even if they are budgetarily related, and the Maryland special session in 2007 was all about the budget, and taxes, and spending choices. Governors and legislative leaders typically don't call special sessions unless they have a very good idea of the outcome, but Governor O'Malley took a calculated gamble that he could persuade enough legislators to support a plan for five slots facilities in specific jurisdictions in the state, with a clearly defined method of distributing revenues, to get agreement to place the matter on the ballot in November of 2008. He did, they agreed, however grudgingly, and the long, winding, often agonizing slots debate was finally put to the people, and to rest, on November 4. It is a testimonial to the arcane politics of gaming that, after so many years of public dialogue and discourse, the legislature decided to engage in "chicken politics," i.e., afford taking the tough vote and pass it on to the people who elected THEM to take the tough vote. Isn't representative democracy a thing of beauty?

An overhanging irony, both politically and among the outspoken opponents of the idea of slots in Maryland, has been the notion that the state should not promote gambling as a means of raising revenues to support education or other missions of government, while conveniently ignoring the fact that Maryland's biggest purveyor of gambling is the state of Maryland itself, through the state sponsored and operated lottery, which is far more pervasive as a form of gambling than anything this side of the internet. And how would you like your dose of hypocrisy served?

There could be a long and boring book written about the path that led to the 2008 referendum in Maryland, but who would want to write it, much less read it?

The Road from Here
Spleen venting aside, the next step for the state is where the proverbial rubber meets the road, which is to set up the structure whereby license applications are entertained and licensee and locations chosen.

That will be accomplished by a seven-person commission chosen by the governor (three of them), Maryland Senate President Mike Miller (two) and Maryland Speaker of the House Mike Busch (two). Think there is any jockeying, so to speak, for position among those who would like to be members of this panel?

The legislation provides that the management of the system will be handled, including machine procurement, by the Maryland Lottery Agency, which has certainly been preparing for this moment since the Ehrlich years, and one can presume will be ready to move the licensing process forward expeditiously, once the commission is in place and prepared to assume its duties. Complicating this scenario is the state of the economy and the financial system, which is weak and getting weaker in the case of the former, and less stable than a bass boat in a hurricane in the latter instance.

Loans to gaming companies always carry a unique risk premium even if good economic circumstances because of the political risk attached to such entities. A sluggish economy and wary lending community will certainly cause some prospective licensees to pause, and the percentages of revenue flowing back to the operator are low enough to make the numbers crunchers nervous, so it will be interesting to see who surfaces once the licensing body is open for business. Had the referendum been on the ballot in, say, 2004, its passage would have led to a land rush to get into the licensing pool. Now, even though Maryland (and the District of Columbia and Northern Virginia) has a demographic to kill for, the uncertainty in the economy and financial world will likely pare down the list of applicants considerably.

However, where the color of money is visible, there is always interest, so one can presume that there will be a fair number of would-be slots operators bellying up to the bar.

Let's make a leap of faith and assume that the applications are reviewed with alacrity (it is in the state's interest to do so) and licenses are awarded during the 2009 calendar year or not later than the first half of 2010. When does the money start flowing? It is certainly feasible, as has occurred in other jurisdictions, for licensees to set up temporary facilities to get their slots operations underway while building the permanent sites next door. That, in fact, has happened in Pennsylvania, and could in Maryland if the operators are so disposed. An early start-up would be desirable for everyone and the state, the operators, the bankers and the horse people expect that to happen in at least a couple of places.

Projecting how quickly revenues start to flow and how much money will be generated is purely conjecture, but even under the most conservative estimates to which we were privy several years ago, there should be at least $1.5 billion a year in gross gaming revenues available once the facilities are operating at full tilt, likely much more.

What does this mean? Gross gaming revenue (GGR) is the amount that is taken off the top of every dollar wagered through the machines, then allocated according to statutory provision. At the $1.5 billion level, more than $900 million would be retained by state and local government, including the portion retained for administration of the system. This would leave about $500 million for the operators, with up to $100 million going to racing purses and breeders' funds.

For breeders, horse owners, trainers and others whose revenues are a function of purses and breeders' incentive funds, the implications are clear. With 80% going to Thoroughbreds and 20% going to Standardbreds, purses would more than double within a couple of years, and the breeders' fund would more than triple in size.

All of this means that there will be considerably more incentive to breed and own racehorses in Maryland, especially the locally-bred products. Combine that with the heritage the state has as a breeding and racing state that is second only to New York in longevity, and it is virtually certain that the "horse" side of the racing business in Maryland will become a very attractive place to be. An important economic ripple effect to all this is that Maryland's central location in the mid-Atlantic area and its reputation for producing the highest quality racehorses in the region will make it a magnet for owners in other states when they are shopping for racehorses (or breeding stock).

The racing side is a bit trickier because so much depends on how the revenues are utilized and the willingness of the entire industry to take advantage of what is an unparalleled marketing opportunity.

The facilities at the tracks need to be upgraded badly to compete with the stadiums, arenas, malls and other entertainment venues in the area, such as the Inner Harbor in Baltimore. Significant monies need to be allocated to marketing and customer service to attract customers and assure that they have a good experience.

Central to all of that is the product itself, and Maryland racing, like horse racing everywhere, needs a makeover. There is too much mundane racing that will attract no one other than the participants and the die-hard enthusiasts, of whom there will always be a limited supply.

As we have been reminded in recent political campaigns, you can dress up a pig, lipstick and all, and it is still a pig. Maryland doesn't need more racing, it needs better racing, which starts with more big event days. The stakes schedule at the Standardbred tracks was never competitive, and has to be made more so to attract higher class horses and give marketers something to talk about.

The Thoroughbred stakes schedule has been so eviscerated in recent years that it looks like something from the '70s. A new and highly embellished stakes program, creatively written to maximize Maryland's strengths in the region, would help set the stage for routinely having major racing events that can be attached to other promotions to sell the notion that Maryland racing is back in the big time.

An example would be to bring back the old Washington, D.C., International at Laurel, an event that if thoughtfully scheduled could be developed into the centerpiece of an international cultural festival.

The real test for Maryland racing, then, lies in how the industry will choose to use the resources it will see coming its way over the next three or four years. If those dollars are simply fed into the old racing "model" that evolved during a long period of scarce and declining resources, then nothing of lasting value will be accomplished.

Alternatively, if the track operators, horse breeders and owners in Maryland can find ways of effectively planning and cooperating in designing an imaginative marketing model for their business and it really IS all one businessthen they have an opportunity that will not come their way again to make the sport of racing in Maryland what they all would like to think it can be.

The history of relations among these stakeholders groups would not lead one to be sanguine about either their collective vision or ability to cooperate, but history does not HAVE to repeat itself, and one can only hope that pedestrian thinking and flights of ego do not lead to mishandling an historic opportunity. The state's racing people have long told elected officials they could revitalize the sport of racing in Maryland if given the appropriate tools.

The tools are about to be delivered. Will the racing industry do the same?

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