Bunch of horses assets

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, racehorse 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 $202,000 when his 3-year-old filly placed second in the Cotillion Stakes. Meanwhile, Saudi Prince Faisal bin Khalid bin Abdulaziz captured $196,000 in the Pennsylvania Derby when his colt, Macho Macho, took second. (First-place winners of both races hailed from California.)

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 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 bringing up the rear. 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, who had bought a horse farm the prior year, and then-Gov. Ed 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. Local municipalities who host casinos get 4 percent, and tourism gets an additional 5 percent.

The law was 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.

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. Horse-racing advocates claim new-job creation ranging from 40,000 to 80,000, 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 must be licensed - from owners and jockeys to blacksmiths and vendors. The number of licenses issued for thoroughbred and standard horse racing has risen from 10,324 in 2005 to 34,290 in 2012 - a jump, but not a very high one, given a $1.5 billion in investment.

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. In 2004, the state produced 984 thoroughbred foals. With millions directed toward breeding incentives, 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.

The king's ransom in daily prizes has done little to spur more public interest in the sport. Track attendance and the sum wagered at the track have both taken a hard fall. At Parx, for instance, an audit found average daily attendance last year stood at about 700. Even on Pennsylvania's biggest racing day - with prize money rising to more than $2.3 million - only 9,306 walked through the gate.

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.

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, it's fair to ask whether the law has worked, and whether it should be rewritten.

"Has it met the legislative intent?" Mathew Meals, state deputy secretary for animal agriculture, asked. "That's not a question for us. That's a question of the General Assembly."

Meals did concede that in 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."

Lawmakers and policymakers in other parts of the state have also wondered if the money might be better spent.

"An estimated $100 million is going out of state every year. 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. That needs to be fixed."

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, like veterinary programs at Penn State and the University of Pennsylvania. The diversion had precedent. Even Rendell had redirected $47 million of the 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. Breeders and owners lobbied against the cuts. They won.

Next year, the state is set to award a second license to build another casino in Philadelphia. Judging from the performance of SugarHouse, the city's first casino, the horse industry will get another big bump. In the three years since it's been open, the money that slots players have wagered (and lost) on Delaware Avenue has enriched the state's horse-race industry by $54 million.

It's a safe bet that few of those players know their losses have made at least one sheik and one Saudi prince a little bit richer.