By T. D. Thornton
Todd Mostoller, the executive director of the Pennsylvania Horsemen's Benevolent and Protective Association (PHBPA), painted a dire economic picture of the state's Thoroughbred and Standardbred racing industries on Tuesday when he told commissioners at the monthly meeting of the Pennsylvania Horse Racing Commission (PHRC) that the 20-year-old legislative funding mechanism for purses has become “cannibalized” by increased competition among casinos that is harming the state's Race Horse Development Fund (RHDF).
“The business model that was created by Act 71 [the Pennsylvania Race Horse Development and Gaming Act of 2004] that incentivized hundreds of millions of dollars of investment, by my members and members on the harness side, is being destroyed,” Mostoller warned commissioners. “And that destruction is not slowing down, it is only increasing.
“We're impacted from a purse standpoint,” Mostoller continued at a different point. “The breeders are impacted; the breeders get 16.67% of the RHDF. We've seen the foal crop drop from 1,700 to the neighborhood of 500 that is projected this year. So every participant in the industry, both Thoroughbred and Standardbred side, is impacted.”
Mostoller explained that his sounding of the alarm bell was meant to educate commissioners about what is going on as the state ponders reexamining Act 71 with reference to games of skill.
As a state regulatory agency, the PHRC itself is powerless to make direct changes to the statute-established RHDF. But Mostoller said at the May 28 meeting that he wanted commissioners to be familiar with the same pitch he has been making to legislators over the past three or four months.
“We didn't feel the commission really understood the issue and why we continue to see a decrease in race dates,” Mostoller said.
“I can tell you, Hollywood Casino, I lose two race days a month from cannibalization, year over year. And it's only accelerating,” Mostoller said. “You guys are acutely aware that we continue to decline in race days at both Penn National and Presque Isle.”
Mostoller framed his case by asking the rhetorical question of why are race dates in decline if the news media is full of stories about Pennsylvania's flourishing overall gaming industry?
He then supplied his own answer: The advent of online gaming and the issuance of Category 4 “satellite casino” licenses have taken a huge revenue bite out of the RHDF's sole source of funding, which comes from 18% of gross revenue at Category 1 (gaming at racetracks only) slot terminals.
Some of Pennsylvania's satellite casinos and online gaming entities are owned by the very same corporate parents that operate the state's horse-track racinos, although Mostoller did not venture off into this aspect of the problem during his presentation.
Mostoller did say that the RHDF has been in contraction since achieving its high-water mark of $280 million in the fiscal year 2011-12.
“The problem is we have seen that number decline considerably. And why is that?” Mostoller asked. “Well, there's been legislative actions that have transferred [$50 million annually for four years] out of the fund [to shore up a state budget shortfall]. But the real issue now is cannibalization. The gaming market in Pennsylvania has changed dramatically since 2017,” which is when Category 4 licensees and internet gaming were first permitted.
“At the Category 1 facilities, cumulatively, we have seen a decrease of almost half a billion dollars in gross terminal revenue on slot machines,” Mostoller said. “And it's important that we talk about slot machines, because that's the only revenue that we get. We don't get revenues from any of the sports [betting], any of the table games. It's slot machine revenues only.
“When they created the Category 4 casinos, they put facilities within the demographics of the existing Category 1 facilities,” Mostoller continued. “A perfect example is Hollywood Casino at Penn National Race Course. We now have York, which is 20-25 miles to our south. We now have Morgantown. We now have Shippensburg, and soon-to-be State College. Well there's only so many gaming dollars to go around. And what we've seen, strictly at Penn National, is we've seen a decrease of $100 million in gross terminal revenue since fiscal year 2011-12.”
Mostoller said those downward-spiraling Penn figures match what is happening on a larger scale statewide.
“I think COVID had a huge role to play in people moving to the online gaming thing. Nobody had predicted that. But that's reality,” Mostoller said.
Mostoller then noted that the projected amount for the RHDF in the 2024 fiscal year is only about $17 million higher than it was in 2020.
“If that doesn't slap you in the face a little bit to the problem that we're having, I don't know what does,” Mostoller said. “I mean [because of the pandemic] we were basically shut down, for month upon month, every Category 1 facility. And yet we are on pace to only beat that year by $17 million.”
PHRC chairperson Russell Redding, who also serves as the state's Secretary of Agriculture, asked Mostoller, “What's the answer? You need [to come up with] more money, but there's only so many options to find the money.”
Mostoller replied that there are currently “discussions of regulating games of skill. If the Gaming Act is opened, there are certainly ways that our industry can be 'made whole' [via] the promise that was made in the original act.
“The original act was a business model that worked,' Mostoller said. “People invested hundreds of millions of dollars in that business model. That [model] is now in the process of being destroyed. And if we were to get back to the high-water mark, which we believe [would] give the industry the stability and the incentive [to move forward], the original promise of Act 71 would be fulfilled…
“The Gaming Act being opened, in conjunction with games of skill, may be a mechanism,' Mostoller summed up. “We're not here to solve the problems. We're simply letting people know of the issue and what the problem is so that they firmly understand it.”
Mostoller said his efforts at educating legislators about what's at stake for the racing industry is important because there has been substantial turnover among elected officials since Act 71 first passed two decades ago.
Redding estimated that legislative turnover could be as high as 70%.
“When you talk about what was sort of the business model and the expectation of the [original Gaming Act] agreement, you have to go all the way back and build up to the point of what the drivers are, the problem, and then the potential solutions,” Redding said. “Because there aren't folks who fully appreciate how we got here.”
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