Gift horses: Slots players send $1.5 billion bouquet to Pa.'s race industry

This Saturday is Pennsylvania Derby Day, the state's richest day in horse racing. Parx Casino will once again award more than $2.3 million in stakes money, including the $1 million Cotillion Stakes and the namesake $1 million Pennsylvania Derby.

Last year, Parx became the first track outside the Breeders' Cup to offer two $1 million races during one event, although not one Pennsylvania-based horse placed in any of the three stakes races that day. In fact, the entire $2.3 million in stakes money was won by non-Pennsylvania owners.

Yet, few might know that most of that money, as well as most of the purses that go to owners of winning horses, is not funded by people placing bets on horses. Rather, it's funded by the tens of thousands of small-time Pennsylvania casino patrons who play — and lose at — slot machines. Thanks to a law written primarily by the horse-racing industry itself, slots players — many of whom are retired and elderly — are the primary funders of what some consider a massive corporate welfare program that props up the state's horse-race industry, and often benefits rich horse owners.

In just six years, more than $1.5 billion has gone to horse owners, race-horse breeders and others in the industry, thanks to a little-known state subsidy that feeds 12 percent of casino slot revenues to the horse-race industry. Last year, slots pulled in $2.4 billion in revenue. While schools struggle, pension funds decline and the state's roads and bridges crumble, many of the recipients of the horse-race subsidy are out-of-state multimillionaires. Some are billionaires several times over.

In fact, big winners during last year's derby included Sheik Mohammed bin Rashid Al Maktoum, prime minister of the United Arab Emirates, who captured $196,000 when his 3-year-old filly placed second in the Cotillion Stakes. Meanwhile, Saudi Prince Faisal bin Khalid bin Abdulaziz captured $202,000 in the Pennsylvania Derby when his colt took second. First place in the Derby? A colt owned by wealthy California businessman J. Paul Reddam. Another wealthy Californian, George Bolton, co-owns the horse who won the Cotillion.

An industry trailing off

The 2004 gaming law — dubbed the Pennsylvania Horse Race Development and Gaming Act— has provided a remarkable boon for an industry that had been languishing for years throughout the country.

Once, hundreds of thousands of fans went to cheer Man o' War, Seabiscuit and Secretariat as they raced to glory. But as easy gambling has proliferated, horses have taken a backseat to lotteries, casinos and online poker. By the time the state Legislature legalized gaming, the state's horse-race industry was not exactly destined for the glue factory, but was bringing up the rear. The state has always had stiff competition from Maryland, Delaware and West Virginia: Purses in Pennsylvania were low, tracks were shabby, and many worried the industry would actually collapse.

The gaming law, referred to as Act 71, was sold by then-state Sen. Vince Fumo and then-Gov. Rendell. The idea was to offer property-tax relief. Indeed, property-tax relief (wage-tax relief in Philadelphia) is the biggest recipient of the tax on slots revenue that casino operators pay the state. Homeowners see an average tax cut of about $200 a year. Local municipalities who host casinos get 4 percent, and tourism gets another 5 percent.

Job growth claims a stretch?

 The gaming act that would provide such a bounty for horse owners and their industry was crafted by, among others, members of the Pennsylvania Thoroughbred Horseman's Association. One such member was Salvatore DeBunda, a partner in the Archer & Greiner law firm, and the current president of the Horseman's Association. In his online biography, he takes credit for being "the primary drafter of the horsemen's sections" of the bill that became law.

 The law's specially crafted provisions were intended to make Pennsylvania more attractive to horse breeders, increase the number of racing-related jobs, improve living and working conditions of personnel, and position the state to be more competitive with Delaware and West Virginia, which had built up their instate racing as a result of new slots money.

But other than enriching horse owners, the effect of Pennsylvania's law is debatable.

In addition to increasing purses, two measures of the law were to increase employment and encourage breeding. Gauging employment is never a hard science — especially if your job is to shine the best light on an industry. Horse-racing advocates will claim new-job creation ranging from 40,000-80,0000, citing "multipliers" that take into account ancillary jobs created. Hard numbers, however, suggest that optimism is inflated. The Pennsylvania Racing Commission oversees the racing industry, and requires that anyone working in the vicinity of a race track be licensed — from owners and jockeys to blacksmiths, vendors and restaurant workers. The number of licenses issued for thoroughbred and standard horse racing has risen from 10,324 in 2005 to 34,290 in 2012 — a gain, though not a big one.

Remarkably, though, in recent years no studies have attempted to quantify how many jobs have been created with the $1.5 billion going to the industry.

"Penn State would have done a study," said Pete Peterson, spokesman for the Pennsylvania Equine Coalition, "but they had budget issues."

'At least we're in the majors'

A more accurate picture of job creation might be seen in the number of foals bred: more foals mean more jobs, more races, more activity. That measure, however, is less than impressive. In 2004, the year Act 71 passed and started providing millions in breeding incentives each year, the state produced 984 thoroughbred foals. That number rose every year, but by 2012, dipped to below pre-slots levels. Estimates for 2013: 800 foals.

"If this were a Tastykake factory and we put a billion [dollars] into it and didn't get any more Tastykakes out of it," said state Rep. John Maher, R-Allegheny, who heads the House Agriculture Committee, "would you think we'd done anything useful?"

Meanwhile, purses pocketed by horse owners have risen stratospherically.

In late 2006, Mohegan Sun at Pocono Downs, the state's first casino opened and generated $3 million for racing purses. Last year, purse distributions from casinos totaled $177 million, reflecting 5,749 percent growth over six years. Once, almost all of horse-racing's prize money came from bettors. Now, 86 percent of it comes from the losses of small-time slot-machine players.

Last year's total gift to the horse-racing industry: $225 million. That's more than the budget for the Pennsylvania State Police ($195.2 million) or the Department of Health ($189.9 million) — and nearly twice that of the entire budget for the Department of Agriculture ($129.5 million).

"Pennsylvania racing was like Double A baseball before Act 71," said Jeb Hannum III, president of the Pennsylvania Thoroughbred Breeders Association. "Now, we may not be the Yankees, but at least we're in the majors. That wouldn't have happened without Act 71."

A disinterested public

There's no question the massive subsidy has helped to stall the collapse of Pennsylvania's race-horse industry. But it has done little to fuel more public interest in the sport.

Despite a king's ransom in daily prizes, the lack of interest in the sport can be seen at all of Pennsylvania's race emporiums, where attendance and the sum wagered at the track have both taken a hard fall. At Parx, for instance, average daily attendance last year stood at about 700, according to a state audit filed by the Horseman's Association. Even on Pennsylvania's biggest racing day — with prize money rising to more than $2.3 million — only 9,306 walked through the gate. (An average Penn State football game attracts 96,000.)

The state Gaming Commission's benchmark report also points out other forms of gambling — phone and off-track — are in decline. And in all forms of betting, the actual sum wagered — the parimutuel handle — has dropped from $52.9 million in 2006 to $33.5 million in 2012.

Nationally, the amount bet on horses has dropped more severely, from $15.1 billion in 2004 to $10.9 billion in 2012, according to the Jockey Club, a breeding and racing association.

Despite the decline, racing has remained extraordinarily lucrative. And although much of the loot goes out of state, Pennsylvania horse owners have also benefited. Pennsylvania-bred horses nearly doubled their winnings from $31.4 million in 2004 to $58.5 million in 2012.

So if the law was designed to transform the industry — and not just the wallets of winning horse owners — it's fair to ask whether the law has worked, and whether it should be rewritten.

State Deputy Secretary of Animal Agriculture Mathew Meals would not offer an official opinion on whether the law had achieved what it set out to do.

"Has it met the legislative intent?" Meals asked. "That's not a question for us. That's a question of the General Assembly."

Meals conceded that in at least one respect, the law has not delivered results.

"In regards to foals, the answer is no," Meals said. "It has not increased our foal numbers in Pennsylvania."

A $100 million exodus

Law and policy makers in other parts of the state have also wondered if the money might be better spent, especially since so much goes out of state — and the state's public schools, universities and public transport remain underfunded.

"An estimated $100 million is going out of state every year. It's tough to pin the exact amount down. That money, Pennsylvania public money, is being sent out of state and even overseas in the name of improving Pennsylvania thoroughbreds," said the Agriculture Committee's Maher. "There's no other industry where we'd think it would be appropriate to send economic development money to other states. There's no other case I can think of. That needs to be fixed."

Tad DeHaven, who runs the Harrisburg office of the libertarian Cato Institute, asks: "Is the horse-racing industry the absolute best target of that money? Who would make that argument other than the horse-racing industry itself?"

The horse-race industry can be very persuasive.

Last year, Gov. Corbett attempted to divert $72 million of the $275 million horse-racing gift to other agricultural-related projects. Some of that money was slated to pay for veterinary programs at Penn State and the University of Pennsylvania. The diversion had precedent. Even Ed Rendell had redirected $47 million of the gift money for three years to help balance the state budget.

But last year, horse owners and breeders denounced any diversion of gift funds as a raid that would put thousands out of work. One breeder, in a published report, likened the move to "rape" and threatened to move his horses out of state. Thoroughbred and standardbred breeders and owners formed the Pennsylvania Equine Coalition and lobbied against the cuts. They won.

Supporters of the horse fund, such as state Rep. Gene DiGirolamo, R- Bucks, who introduced the original legislation, say it's short-sighted to divert money for other purposes — sort of like penalizing a program just because it's doing what it was designed to do. He said the fund has saved the industry, preserved jobs, and improved the quality of life for jockeys and other backstretch help. Without it, he believes tracks such as Parx, which is in his district, might not have survived.

"I think we'd set a bad precedent," DiGirolamo said, "if we outline what we intend to do, and when things are going along well, change the rules in the mid-stream."

One of DiGirolamo's biggest campaign contributors, according to VoteSmart.org, was the Pennsylvania Thoroughbred Horsemen's Association, which represents owners and trainers at Parx.

'Why should we get the money'

PTHA's DeBunda has also heard questions about the horserace subsidy.

"The questions are legitimate: 'Is the money going out of state?' The other is, 'Why should we get the money?' " DeBunda said. "Why shouldn't it go elsewhere, or even to nonrace horses? Even my aunt has said that, and she has riding horses. Why not give her the money?

"If you build a bridge, traffic goes over and it's safer, but it doesn't throw back money. But if you have a vibrant race-horse industry it generates money for years to come. But you have to ask, 'Where's the best investment of money?' Where can it best enhance the economy? People can differ on that. But it's our view on it."

Critics also lament that so few people know how much money is being poured into horse racing — a sport that even many fervent fans concede is on life-support.

"A lot of people around here don't support gaming because they are socially conservative," said Susan Spicka, a Democratic candidate for state House who tried to make the money spent on horse racing an issue last year during her unsuccessful bid to represent Cumberland and Franklin counties.

Every voter she spoke to was stunned at the revelation.

"They thought the money was going to senior citizens," Spicka said. "It doesn't."

This story has been updated.