Horse Racing Industry Saddled With Financial Meltdown

The 2010 thoroughbred horse racing season has seen its Triple Crown races pass, yet thoroughbred racing fans can still look ahead to some key summer races such as the Travers Stakes at Saratoga Race Track in upstate NY this August, and of course the Breeder's Cup World Championships in the first weekend of November, to be held for the first time in back-to-back years at Churchill Downs, in both 2010 and 2011.

So, we will now see the end of the 2010 thoroughbred racing season in the same venue in which it began, for a historic first.

This year's Triple Crown races, however, not only did not produce a Triple Crown champion again, leaving 1978 champion, Affirmed, as the last to do so, but what was most unsettling was the fact that each leg was won by a different horse; with Super Saver winning the 136th Kentucky Derby, Lookin' At Lucky wining the 135th running of the Preakness Stakes, and Drosselmeyer prevailing in the 142nd running of the Belmont Stakes.

And the contending Triple Crown horses' trainers and owners had no small part in creating a Triple Crown drought. Both the Kentucky Derby winner, Super Saver, as well as Preakness Stakes winner, Lookin' At Lucky, were not even entered in the Belmont Stakes. And at a time when the horse racing industry is in a seemingly fiscal free-fall, if ever there was a time necessary to create interest for the casual fan, it is now.

In fact, just days before the very running of this year's Preakness, its future to remain in Maryland was in serious doubt. And equally remarkable, the third leg of the Triple Crown, the 142nd running of the Belmont Stakes, coming up June 5, 2010 at Belmont Park, in Elmont, NY, also remains in a fiscal crisis. It was loaned $25 million by the state of New York just days before the running of the Belmont, in order for it to remain open for the rest of the 2010 racing season.

And it is with the Triple Crown races, still clearly in mind, that it is worth exploring the present state of the thoroughbred industry's challenges away from the track, especially in those states now hurting, that once could be counted on to provide the essential businesses necessary to support those horses we get to see on race day.

Largely, it comes down to the horse breeding farms and all of the ancillary businesses that have evolved from it and that earn their livelihood by benefit of the horse racing industry, in their respective states, which have taken a big hit over the past two years. However, the global recession has but exacerbated an industry clearly in decline for the past decade.

Yet, the actual running of thoroughbreds is dependent upon the farms and businesses in various support cast roles, in order to remain in business. As such, the entire horse racing industry is intertwined and therefore collectively now faces one of its biggest challenges in its history.

And that most horse racing fans both in attendance at Pimlico on May 15th, as well as bettors across the United States and internationally were unaware that the fate of Pimlico was in peril, was in part done by design by the powers-that-be. An industry already within an ongoing recession cannot afford to suffer any further negative publicity.

It was not until May 7, 2010 that a deal was finalized to keep the Preakness Stakes in Maryland. MI Development, Inc. (MID), a Canadian real estate conglomerate, and Penn National Gaming, Inc., a Pennsylvania-based national racino-casino owner and para-mutuel betting operator, announced a joint-venture to own and operate the Maryland Jockey Club, which conducts Pimlico Race Course thoroughbred racing, as well as Maryland's Laurel Park thoroughbred racing.

The prior owner, Magna Entertainment Corp., a subsidiary of MID, and the largest owner of race tracks throughout North America, also including California's Santa Anita Park, declared bankruptcy in 2009. The MID-Penn National transaction is expected to get approval from the Maryland Racing Association and close by the summer of 2010, after all regulatory matters are met. Prior to the deal being struck, Magna intended to sell Pimlico at auction.

However, although MID's ownership will guarantee that racing remains in Maryland at least for the short-term, over the next few years, a new approach in raising revenues for the industry and counted on by many by way of slot machines at the race tracks remains in doubt.

And also, in light of an aging generation, which once regularly patronized race tracks in the U.S., opportunities to keep a younger generation engaged may have been lost. And with Maryland and New York State both competing for corporate sponsorships and ticket sales, states once flush with certain race track revenues are losing out to other states who subsidize their tracks and racing bonuses with slot machines, video lottery terminals, or video poker machines at track racinos.

So, therefore, there remain the haves and the have-not states. And while state politicians nationwide embrace slot machines as the only answer to keep the racing industry solvent, the industry, too, has largely embraced such.

Maryland's local breeders have seen promises for slot machines as the magic bullet required to sustain their industry in order to continue to compete with Pennsylvania, West Virginia, Delaware, and New Jersey nearby, in addition to Kentucky and California.

And as the road to slots, through the state legislature of Maryland has failed and a drought in business has ensued, so too has interest in Maryland horse racing. As a result, foals born in Maryland dropped by approximately 38% between 1998 and 2008, according to The Jockey Club, the breed registry for North America.

The underlying problem is that in a struggling economy, were there not other revenue generators in other states, such as racinos, racing would be on even-par, according to many breeders in the field. And as such, some Maryland breeders are now shipping their mares to Pennsylvania, breeding them there while racing their offspring there for larger purses and larger bonuses, specifically reserved for Pennsylvania-bred horses.

Simply put, the larger the purse, the more horses are attracted. So it becomes more cost-effective to cross state lines to at least keep some sense of proprietorship amongst these breeders, not only in Maryland, but in other states, as well.

Likewise, in New York State, its Belmont Stakes' financial woes are being blamed on state politics, with legislators not yet approving slot machine operations there. But it is still difficult to fathom that the oldest of the Triple Crown races, which began in 1867 in Bronx, NY, might be no more, because of a lack of slot machines. Such thinking not only lacks ingenuity, but is unfortunately both lazy and foolish thinking.

After two World Wars, the Korean War, the Vietnam War, and most recently, 9/11, the only time the Belmont Stakes was not successfully run was in 1911 and 1912, when betting was outlawed by the New York state legislature during that time.

And ironically, as gambling is touted as the savior to the horse racing industry, it has also helped to cause its demise. Yet, unless legislated, racinos cannot legally conduct business at race tracks in order to attract more patrons. In turn, race track owners believe that revenue is necessary to attract more horses. Therefore, it is but a Catch-22 where both operations are setup to require dependence upon the other.

Of note is that at one time the only way for bettors to legally wage a bet in U.S. was at the race track itself, with the exception of the state of Nevada. (Grand National Odds is a good place to place a bet online.) But state lotteries soon started to infringe upon the guaranteed racing revenues. Added to that around the same time, in 1970, New York State approved an off-track para-mutuel betting system, which became a national phenomenon.

And with evolving computer technologies, the writing was long ago on the wall and that race tracks and the horse racing industry at large should have been well prepared for changes. For the industry to hitch its horse to one wagon, so to speak, in solely banking only on slot machines as a revenue generator, is at best short-sighted.

However, unaccountability must come into play, as well. As state legislatures such as New York State, which now runs New York City Off Track Betting (NYCOTB) as a state entity, as well as over-leveraged multi-national holding companies without any racing industry ties now operating race tracks, they must be held to a higher standard in conducting their business responsibly.

The New York Racing Association (NYRA), with its oversight of the Belmont Park Race Track, the Saratoga Race Course, and Aqueduct Race Track, amongst others, has found investors harder to come by. Amounts of breeding awards are dwindling and purses for races are shrinking. Thus, New York breeders and thoroughbred owners are also being forced out of business.

And astoundingly not immune to the declining fiscal health of the horse breeding industry is Kentucky. And as a result, most of Kentucky's race tracks, too, are toiling. Again, with smaller purses and fewer race dates, trainers are defecting to other states. And contrary to popular belief, most horse farms are not necessarily owned by the extremely wealthy, but rather by many smaller proprietors, collectively.

And like Maryland, in spite of deep connections to Kentucky, horse owners will continue to send their horses out of state to breed, without the necessary incentives in order to remain. Kentucky's history boasts the first-bred Kentucky Derby winner in 1872. And even though Kentucky outpaces horse breeding by a wide margin over any other state, it too believes that expanding gaming is its only answer to keep racing in Kentucky.

But the question remains. In a global recession, with bankruptcies continuing in every industry in the U.S., while many of its states, including the once-great racing state of California headed towards its own bankruptcy, will slot machines save the day?

Missing from any discussion by the horse racing industry, however, during the worst recession in 70 years, is the issue of consumers failing to part with their discretionary income, unlike when they did in the earlier part of the decade. And as evidenced by the revenues in casino gambling, having taken a big hit in the past two years from Las Vegas to Atlantic City to the race track, with a decent recovery not expected for another two years, such spending could remain flat, thereafter, for a good while.

Meanwhile, after a period of four or five years, discretionary spending habits may have changed enough that the gambling industry, and in particular the horse racing industry, may have been irreparably harmed by then. Let us hope not. Giddy up!