Faltering economy puts racing casinos in tough situation

It seems as if the house hasn’t been winning lately.

The highly regulated gaming industry brings in more than $1 billion to the state annually, but a faltering economy and strict tax structures have slashed profits and placed some gaming entities, specifically the racetrack casinos, in a complicated situation.

Gambling is Indiana’s third-largest source of revenue, trailing only behind sales and income taxes, but Americans have cut way back on recreational spending. A survey from the American Gaming Association found 60 percent of Americans had spent less on casino gambling.

That, along with increased competition from neighboring states, have the two racetrack casinos calling for parity: an equal playing field with French Lick, Indiana’s only land-based casino, and the 10 riverboat casinos, which have different regulations.

“These facilities are well run, they have positive cash flow, but it is not enough to cover our debt load and ongoing tax payments,” said Jim Brown, general manager of gaming at Hoosier Park Racing & Casino in Anderson, Ind.

Hoosier Park’s parent company, Centaur LLC, defaulted on a $13.4 million loan payment last week, and the company is currently working to restructure its debt. But Brown said the heavy restrictions on racinos don’t add up to a successful business model.

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Last year, Indiana was second only to Nevada in casino tax revenue, and gaming makes up around 7 percent of the state budget.

The taxes feed a number of state funds, including the Build Indiana Fund, Teacher’s Retirement Fund and the General Fund, and the two racinos alone account for 1,400 jobs. Collectively, they bring in more than $205 million in revenue, $51 million of which goes to the state.

Hoosier Park became Indiana’s first racetrack casino when its owners tacked on a 92,000-square-foot gaming facility in June 2008. The state required a $250 million licensing fee each from Hoosier Park and the state’s other racetrack, Indiana Downs, when each added casino gaming to their facilities, and they were required to invest a minimum of $100 million in the construction project.

The taxes were determined from a forecast of the racino’s future revenue, a number that Brown said is hard to pin down.

“That is a matter of conjecture on many people’s parts without getting to an actual number,” he said.

In addition, the racinos are limited to 2,000 slot machines and are only allowed electronic games as opposed to live tables. They’re also required to pay fees to the horse racing industry, as well as 1 percent of their profits to French Lick as an offset to their competition, something Brown says is “more political than anything.”

The French Lick payment “sunsets” in 2012 unless legislators vote to renew it, which Brown said is unlikely.

“That is what has led to the situation we are in now,” Brown said. “We simply do not
cash flow enough to meet the debt load that was created by the $250 million licensing fee and the investment.”

The racinos also lost a subsidy from riverboat admission taxes when they opened their own casinos. The subsidy amounted to $27 million a year: $17 million to the horse racing industry and $10 million to the racetracks. The situation is sort of a catch-22: The racetracks opened casinos to compensate for a decline of interest in horse racing, but by opening the casinos they lost a major source of revenue in the subsidy.

“The racing industry has long seen its golden days die and that’s throughout the country and throughout the world,” Brown said, though he stressed that racing is still a relevant industry and an integral part of Hoosier Park, which was also Indiana’s first racetrack.

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In all, 47 percent of the racinos’ revenue goes to the state, compared with 38 percent of riverboat casinos’ and 29 percent of French Lick’s. The difference is mostly due to royalties paid to the horse racing industry – the racinos’ gaming tax is several points lower than those of some riverboats.

Still, Indiana racinos pay the highest effective tax rates in the Midwest, and they’ve been petitioning for a change from the Indiana General Assembly’s Gaming Study Committee. Sen. Luke Kenley, R-20th District, is co-chairman of the committee and said the group has heard testimony from the racetracks, casinos and riverboats but has yet to decide on any sort of recommendation to the House and Senate.

“Whether or not someone introduces a bill on this is open for discussion,” Kenley said.

The committee last met Oct. 19, discussing the issues of out-of-state competition as well as concerns with horse racing fees and French Lick payments. Out-of-state competition has been a concern, Kenley said, since Ohio has approved casino expansions and Michigan has recently added tribal casinos.

In fact, competition within the casino business is so high, it’s often referred to as “cannibalization” by industry workers. Because a casino can attract such a far-reaching customer base, the game is extremely territorial and a new casino can be a major controversy.

Indiana casinos in the Lake Michigan area attract 68 percent of their patrons from out of state, and 64 percent of patrons at Ohio River casinos are from out of state.

“If you add more gaming facilities that are in the same geographical area as our facilities, it’s not realistic,” Brown said of trying to increase profits.

Mike Smith, president and CEO of the Casino Association of Indiana, said the recession, coupled with the tax structure and competing facilities created the “perfect storm” for the racinos. Smith said the legislature will have to make some sort of change if the racinos are to survive.

“It’s probably not going to be successful for the state of Indiana,” Smith said.

As far as solutions go, Brown said the Gaming Study Committee didn’t seem interested in what he thought were the best solutions, so he and the rest of the company have since switched tactics, presenting facts and dilemmas and allowing the committee to decide for themselves what the best plan of action is.

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Although the racinos have been clamoring for some help from the government, Brown said they realized what they were getting themselves into when they accepted the terms to start up operations.

“We’re not placing blame,” Brown said, noting they would not have opened a casino in hindsight. “This will go down in history as the way not to set up a business model.”
Sen. John Broden, D-10th District, is a member of the study committee and said although legislators see the problem, the racetracks were aware of the stipulations before opening the casinos.

“I think there is a commitment amongst committee members to look at various options, to look at casinos and racinos, in order for them to compete with surrounding states,” Broden said. “There probably needs to be some modifications made or tax incentives provided.”

Some sort of restructuring is likely because of the state’s heavy dependence on gaming revenue. But Broden said it might not be wise to rely so heavily on a fluctuating industry.

“I think that’s what we’re hearing right now. It’s not exactly a stable source,” he said, noting the potential competition from neighboring states. “It’s not stable in the sense that it’s always under threat from other states. That’s something that’s very real.”

Yet the general consensus is that, with a recovering economy and a little tax relief, the industry and the racinos will survive.

“I think it’s realistic to brace ourselves for some level of falloff in revenue,” Broden said. “But they’re not going broke and they’re not losing their heads, and they’re still pulling a strong base of customers, and they’re still making a profit.”