Crying 'Wolf!' among the horses

September 24, 1997|By Jeff Hooke

MARYLAND'S thoroughbred racing industry isn't in the bad shape many people think it is. The industry's argument for a slot-machine bailout is a canard, based on the racetrack owner's desire to gain a lucrative new gambling concession, rather than to support the industry.

Substitute the words "leveraged buyout" for Maryland racing and you wouldn't be far off.

Both the Pimlico and Laurel tracks were acquired through a heavy use of debt and a minor commitment of owners' equity.

As a result, precious funds, which could have been devoted to growing the industry, went to pay interest on the debt. Additional monies were dedicated to building a large cash hoard. Falsely claiming hardships, the owners want the privilege of a state monopoly on slot machines.

By way of background, a De Francis-led investor group bought Pimlico in 1986 for $30.6 million, putting up only $2.6 million in equity -- less than 10 percent of the purchase price. Debt of $25 million provided the bulk of the acquisition financing. A similar De Francis group bought Laurel in 1984 with substantial debt financing.

The Maryland Racing Commission stood by and watched these tracks get mortgaged to the hilt.

In order to pay interest costs, the tracks have skimped on investments needed to grow the business. For example, advertising and promotion expenses, which are vital to attracting new horseplayers, have dropped from $4.7 million in 1987 to $2.6 million in 1996, a 45 percent decline. Adjusted for inflation, advertising and promotion expenses are only 37 percent of the 1987 level.

New capital expenditures, which are important to maintaining the facilities, have been consistently below the claimed depreciation charges. In an accounting sense, this means the owners aren't investing enough cash to reverse wear and tear on the facilities -- to say nothing about spending on significant improvements.

Over the last five years, for example, Pimlico's depreciation expense totaled $7 million, yet capital investment was only $4.8 million. In contrast, Churchill Downs, which hosts the Kentucky Derby, had $19.2 million in depreciation, yet invested $46 million -- nine times Pimlico's total. The tired appearances of Pimlico and Laurel are testament to the owners' lack of interest in supporting racing.

More importantly, the daily purse distribution at the two tracks remained virtually static, while other prominent tracks registered sharp increases. Since 1987, Churchill Downs purses have more than doubled and Belmont's purses have risen more than 40 percent.

Large purses attract successful trainers, who bring in the quality horses, which inevitably attract a higher pari-mutuel handle and larger attendance.

Instead of complaining, the Maryland tracks should have followed the other tracks' example.

Static purses, reduced investment and decreased advertising contributed to a decline in attendance at the two tracks.

Higher betting

Despite this trend, the total amount of bets attributable to Pimlico and Laurel grew more than 30 percent during the last 10 years, thanks to national simulcast and local off-track betting. This larger pari-mutuel handle fueled an earnings increase.

On a combined basis, operating income (i.e., before interest and income taxes) rose from $3.1 million in 1987 to $4.4 million in 1996, and cash-on-hand was an impressive $9.8 million at year's end. With rising earnings and a substantial cash reserve, the owners can't justify subsidies.

Despite the good times, the De Francis groups say the Delaware tracks -- which have slot machines -- hurt Maryland thoroughbreds, so the state should give them a similar concession.

The evidence is hardly supportive. Since December 1995, when Delaware introduced slots, pari-mutuel betting at Pimlico and Laurel has hardly changed, dropping 3 percent in 1996 and rising about 1 percent through July 1997, according to the Maryland Racing Commission.

Harness racing, which represents less than 16 percent of Maryland racing revenues, is a horse of a different color. Its problems are obvious, with a 12 percent attendance drop and 19 percent betting decline since 1995.

Insiders place the blame on Delaware slots, but ownership and management changes at the tracks are major contributing factors. Furthermore, the appeal of harness racing is declining nationwide: Rosecroft and Ocean Downs may simply be dinosaurs, incapable of sustained recovery. Why should taxpayers subsidize them?

The interaction between slots and racing is sometimes misunderstood. Slot machines don't divert racing income, since slots enthusiasts tend to be separate from horseplayers. In fact, the "casino" at Dover Downs is located in a building detached from the track. The entire operation is run by Caesar's Palace for 363 days a year, 18 hours a day.

This is a far cry from the four hours of daily track time spread over Dover Downs' 70-day harness racing season. The basic connection is that a portion of the slot winnings is dedicated to boosting purses at the track.

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