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INSTANT RACING

Horse racing is dying for lack of fans, many of whom have been stolen by the faster and simpler action at casinos. Casinos attached to the racetrack (racinos) were supposed to save racing. They have increased purses, and in some states improved the quality of racing and field size. Unfortunately, the casinos have reduced attendance at races and gambling at the attached track. The racinos have actually dramatically reduced the fan base, in some cases as much as 80%. Simulcasting, which has given a big boost to racing because the gambling is fast paced, is now threatened by betting on previously run races. With betting on previous races, the profits to the track may be increased, and the purses may be increased, but the patrons raised on computer games would rather bet every few seconds on a partial video of a race than watch live racing. Instant Racing (named after the main provider) will be yet another nail in horse racings coffin. Just what is Instant Racing? Racing on previously run races draws upon videos of up to 250,000 previously run races. Amtote, the proprietor, says they are using about 60,000 of these races, although only 720 races are in a given machine at any one time.. The bettor sits at an electronic gaming machine that looks essentially like a modern slot machine (proponents say it looks like an ATM). The modern slot machine has a video screen which displays pictures of spinning slot reels and is operated by pushing a button. Instead of simulated slots play the Instant Racing machine takes a quarter or a dollar, whichever the bettor wants to bet, and then displays a Skill Graph of generalized information about the horses. This information usually includes the horses, the trainers and the jockeys previous winning percentages. The trainers and jockeys names, the date and location of the race are all unknown, although occasionally a glimpse may allow the frequent simulcast player to identify the track. The horses are identified only by a number. The horses previous time may be displayed, as well. The bettor can then watch the stretch run or none of the race. Do the bettors have access to the same information they would have in any race?1 While enough information is given for the game providers to claim that handicapping information is available, in reality much information is restricted, ostensibly to prevent the identification of the race and the outcome before the bet is placed. Information available on the daily racing form is much more comprehensive. For example, the number of days since the horses last race is not available which many horse handicappers believe is essential. A horse that has not raced in 40 days, seldom wins. The pre-race odds on the date of the race may be available, although this is irrelevant according to Janet Patton.2 Many bettors would disagree since the favorite wins only about a third of the time, and so they bet on horses other than the favorite. The most essential
1

This claim was in Associated Press, Bill offers new form of gambling as transportation salve, DailyPress.com, September 18, 2006. 2 Janet Patton, Why are tracks lukewarm about Instant Racing? Lexington Herald-Leader, July 23, 2010.

limitation is that only some special bets are allowed, although perfectas and trifectas are. The most common bets are win, place and show bets, which require getting the three horses in the right order. Amtote claims that the bettor is allowed to box the bets, that is, get the correct three horses, but in any order for a much smaller payout. There are lesser payoffs for getting the top two, or the winner and one other of the top three.3 The result is that the claim that this is a game of skill is dubious. Simulcast races provide more information, and a daily racing form can be purchased for races being simulcast. True handicapping does involve skill, but the information available for gambling on previously run races does not appear to be true handicapping. Kentucky Senate President David Williams indicated he did not believe that Instant Racing is pari-mutuel betting, but did not plan to intervene in the judicial decision.4 Does gray skin make an animal an elephant? The end result of these limitations of information and type of bets allowed is that it pushes the outcome back into the realm of chance (odds based). The payoffs remain relatively small. In an effort to defend betting on previous races as a form of pari-mutuel, one Ohio representative claimed that since the winners were paid from a pool of bettors on a given race, that made it pari-mutuel betting which was legal in Ohio. This was disputed by Rob Walgate of the Ohio Roundtable, who stated that the individual was playing against the machine (and not a pool) and thus it is an odds based game which is illegal except at the four recently approved casinos. 5 The truth seems to be somewhere in between these two views. Multiple machines in a given time frame do pool bets, even though the bettors are betting on different races. The bettors are not betting against each other on the same race as in pari-mutuel gambling, but are betting against the machine and when they win, the size of the win is determined by how many machines were played in the timeframe. The first winner receives a larger payout than subsequent winners within the time frame. This is not the pooling and payout structure of pari-mutuel gambling. What is not clear is whether having one characteristic of pari-mutuel gambling while lacking several others makes it pari-mutuel, as the Kentucky Horse Racing Commission claims. Although claimed to be identical with parimutual betting, Instant Racing is not identical at all. The Kentucky Racing Commission changed the definition of pari-mutuel in order to include instant racing. Where is Instant Racing legal? Instant Racing is currently legal in Arkansas, where it originated about ten years ago at Oaklawn Park. It also operates at Southland Greyhound Park in Arkansas, and Portland Meadows in Oregon. Oregon waffled back and forth before finally approving it. Whether it is legal in Kentucky remains to be seen, since the Legislature has not approved this
3

Instant Racing, from a promotional description by Amtote. Accessed at www.amtote.com on July 21, 2010. 4 Gregory A. Hall, Williams say he wont intervene in Instant Racing suit, Louisville CourierJournal, July 23, 2010. 5 Associated Press, Instant racing plan rekindles gambling debate, Beacon Journal, April 24, 2007.

particular expansion of gambling. Instant Racing while a proprietary name used by the partnership between Amtote and Race Tech, is rapidly coming to represent all betting on previously run races, just like people use the name Kleenex for any tissue regardless of manufacturer. Amtote, Race Tech, Oaklawn and Portland Meadows are all owned by Magna Entertainment Corporation (MEC). Oaklawn has added $17.6 million to purses over the decade it has been functioning, including $1.9 million in 2009. Oaklawn has paid over $600,000 in royalties to other tracks whose races have been used. Royalties have also been paid to Race Tech which owns the intellectual property rights to the programming that runs the machines. Instant Racing combined with video poker accounts for about one-third of the current purses at Oaklawn.6 Whatever we call it, (historic racing is another name) it has been under consideration in California, Virginia (considering a 49% tax rate, but tabled February 2010), Nebraska (debate began in Nebraskas unicameral legislature March, 6, 2012), Maryland and Ohio during the past three years. Indian casinos opposed Instant Racing in California and called the machines de facto slots. David Quintana, political director of the Tribal Business Alliance stated that, It looks like a slot machine and it plays like a slot machine 7 One promotional article claimed historical racing provided all the fun and flash of video gambling with the wagering excitement of racing.8 Legislation proposed in Ohio was more explicit about the division of the money gambled. Twelve percent was to be retained by the track with 88% returned to the bettors, a worse percentage than slots or VLTs, but about the same as some casino table games. Ohio proposed to break out the amount retained as follows: 20% in taxes, 19% to purses, 1% to the Racing Commission and 60% to the racetrack operator. Of the 19% for purses up to half could be directed to breed development, health and benevolence.9 This is a sweet deal for the tracks, since the 19% for purses ought to be coming from the track portion, rather than the state tax portion. The Kentucky proposal calls for approximately an 7.5% takeout which is nicer for the bettors. The current regulations would allow only for a 1.5% tax rate on bets placed which seems ridiculously low, since the handle would have to reach $1.2 million per day for the tax rate to increase to.3.5%. The effectual tax rate on the takeout would amount to about 20%, which is still low. Has any state rejected Instant Racing? North Dakota legislators refused to change the definition of horse racing which includes the word live. This change would have allowed the introduction of the machines. At issue there and in other states is whether this represents an expansion of gambling, which most state
6

Janet Patton, Why are tracks lukewarm about Instant Racing,? Lexington Herald-Leader, July 23, 2010. 7 Michael Gardner, Copley News Service, Gambling bill allows bets on yesterday/s races today. The Torrence (CA) Daily Breeze, June 22, 2006. 8 Oaklawn Jockey Club, Instant Racing, Accessed at oaklawn.com on July 21, 2010. 9 Tim LaMarra, Instant Racing Bill Introduced in Ohio Legislature, Posted March 22, 2007. Accessed through www.bloodhorse.com on July 21, 2010.

legislatures control. The proponents claim that this form of gambling is the same as betting on live races and therefore is not an expansion. Opponents claim it increases the pace of losses, even though smaller amounts are bet on each race. So many more bets are placed and the likelihood of winning is so small, it represents an expansion of gambling, due to an increased pace of losses. The evidence for the increased pace of losses is that In Arkansas it has been a success at Oaklawn Park, raising purses about $100,000 per day of racing.10 Has the Kentucky Horse Racing Commission over stepped its authority? This is a question to be answered by the courts. Rick Capone in the Horse Racing Examiner gave an accurate summary of the action by the Commission on July 20, 2010.11 The article did include the usual tub-thumping by the track presidents, with the usual claims that the Kentucky tracks are not competitive. This is only true of Turfway Park and Ellis Park. Churchill and Keeneland are competitive with any tracks in the country, when they want to be. Yes, Saratoga pays the highest purses in the land, but they are under the umbrella of the New York Racing Authority which is in bankruptcy. This article correctly indicates that only some of the handicapping information is available. The regulations stipulated that tracks who apply for an Instant Racing license, may not reduce the number of live racing days below what was run in 2010. At Kentucky Downs that was five days in 2011. Instant Racing would be run year around like simulcasting, and as it is in Arkansas. Whether other governmental branches must approve is unclear. On January 6, 2010 Attorney General Jack Conway indicated while not allowed under current Kentucky regulations, the Horse Racing Commission could approve Instant Racing by means of regulatory changes with the approval of the Governor. The opinion was requested by Damon Thayer who proposed Instant Racing legislation in the 2010 session. The legislature (Senate) has resisted the expansion of gambling in recent years, but the horse racing enterprise has the advantage now, since it may be as difficult to get the legislature to pass disabling legislation as it was to get them to pass enabling legislation. While some race executives hailed this as a big step, others said it was a temporary fix and they still needed slots. They did not expect the Instant Racing machines to perform as well as slots or video lottery terminals. Churchill estimated that it would only increase purses there by $3 million per year. Churchill recently lost $5 million on a music festival they sponsored.12 They could clearly increase purses if they wanted. Since bettors losses will increase, this is definitely an expansion of gambling. Opposition from gambling opponents was expected.

10

Jonathan Rivoli, House rejects horse racing gambling measure, Bismarck Tribune, February 13, 2007. See also LaMarra in the immediately above footnote. 11 Rick Capone, Instant Racing clears major hurdle for Kentucky horse racing industry, Horse Racing Examiner, July 20, 2010. Accessed on www.examiner.com July 21, 2010. 12 Janet Patton, New option underwhelms Churchill, Lexington Herald-Leader, August 6, 2010, p. B-8.

Will the Courts make the final decision? The answer is yes. The Racing Commission rewrote regulations for Instant Racing and then immediately asked for a declaratory judgment from the Courts. While a declaratory judgment is appropriate only when there are two contesting opponents, the Franklin County Judge Thomas Wingate, however, seemed willing to render an opinion on an expedited basis.13 The petition asked for the court to approve this as a form of pari-mutuel wagering that is under the jurisdiction of the Commission. While the Commission defined racing on previously run races as pari-mutuel gambling, this issue remains in doubt because of the lesser information, the limitations on betting and especially the different pooling structure. The second issue is whether historical racing is subject to the current pari-mutuel tax system which the Commission also wrote into the regulations. This rate is very low compared to other proposals (1.5% of the handle in Kentucky or about 20% of the hold compared to proposals for 49% in Virginia). The tax rate also depends on whether the court decides whether this is pari-mutuel or odds-based gaming. The Commission recognized the lack of some exotic wagers and passed new regulations seeking to make that possible with Commission approval. The computer programs can probably be written to allow multiple race exotics to function even when each race is randomly selected, if multiple races are randomly selected at the same time. This is an interesting complication. What is the next step? The new regulations were filed with the Legislative Research Commission to go through the administrative review process. The governor is fully behind this action. Attorney General Jack Conway has stated that he believes that the rules are within the authority of the Racing Commission. Conways father sits on the Racing Commission. As indicated above, the Racing Commission has asked for a declaratory judgment from the Franklin County Circuit Court.14 Following that, agreements with the horsemen would have to be worked out on the division of the revenue, assuming the pari-mutuel tax rate prevailed. The regulations were approved. When did the Instant Racing begin? Kentucky Downs began Instant Racing on September 1, 2011. They opened with 200 slot machine look-alikes. They looked like slot machines because they were. The Racing Commission had further complicated matters by approving six games, only one of which involved racing. The other five were typical slot machine games with names like Klondike Gold that can be played every seven seconds. That these were not Instant Racing games seemed clear. The Kentucky Downs President also settled the issue over whether this was gambling expansion by his statement that Kentucky Downs was leading the way in expanded gaming operations in Kentucky. This was the most blatant offense against the law since Boptrot.

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Tom LaMarra, Ky. Judge Expedites Instant Racing Petition, July 30, 2010. Accessed through www.bloodhorse.com on August 5, 2010. 14 Matt Hegarty, Ky. Commission asks for legal opinion, Daily Racing Form, Accessed through sports.espn.go.com of July 21, 20010.

The track claimed that its commission (also called the hold or the takeout) would be 7.5% rather than the maximum 15% allowed by the Commission. This would be very competitive with other casinos along Kentuckys northern border. In the first five days the hold was $53,536 and the taxes were $8,916. 15 This amounted 16.7% of the hold rather than the expected 20%, implying that the hold was about 8.8%. For the month of February 2012, $12.5 million was gambled by residents of KY and TN. The track kept $875,305 and the state received $188,119, but only $44,000 of that went into the general fund. This is a tax rate of 21%, much lower than other casinos except Nevada and New Jersey. Sixteen hours a weekday and 20 hours on weekends, this is a casino, except on the expected six days of racing this year. Expect glowing reports of improved purses and improved horses as those days approach. Interestingly, the Horsemens Benevolent and Protective Association agreed to forego their share of the increased money for a year, in order to help the track defray start-up costs. (Rob Mitchell, Bloodhorse.com, July 30, 2011) The track called this a loan, up to $300,000, to be repaid after one year.(Gregory A. Hall, Horse owners to help game launch, Louisville Courier-Journal, July 28, 2011) The agreement calls for 14% of the commission (hold) is to go to increased purses. In February the track received Racing Commission permission to add 75 more machines. The Department of Revenue, Office of Miscellaneous and Excise Taxes, informed this author that the taxes are remitted to the state and verified weekly. This allows the track to draw interest on deposits for up to a week on money that belongs to the state. Most states require daily remittance. The method of verification is extremely important, in order to prohibit under-reporting of revenue. Since the Constitution that disallowed public gambling other than live horseracing and the Lottery has not been changed, and the legislature has not authorized gambling expansion, and five games are unrelated to horse-racing, The Family Foundation filed a suit against the Racing Commission and others. Their request for an immediate injunction was denied. An appeal was filed with the Court of Appeals. The outcome should be clear, but six months have passed and no decision has been forthcoming as of early March 2012. The lawyers for the Racing Commission and the tracks argued before the Court that to the bettors the Instant Races seemed as live as simulcast races, therefore, they were allowed under the Constitution. The Attorney General of Maryland has determined that Instant Racing is not pari-mutuel. Two other tracks have indicated their intentions to follow Kentucky Downs: Ellis Park in western Kentucky and the Red Mile, a standardbred track in Lexington. This could be a real money maker for The Red Mile since it is only about a

quarter mile from the University of Kentucky campus. Students will cheat with false IDs so they can be impoverished by the track. Kentucky Downs is very pleased with the results, and they should be. They have the portion of a casino that produces on average 87% of a casinos revenue, without the dangers of table games. They have low taxes, and light supervision by a state unprepared to handle casinos.16 The track said that for the six days of racing for 2012 they expected purses to increase by more than $150,000 to $250,000 per day of racing. The increases alone could exceed purses at Indiana Downs at $217,000 per day and Louisiana Downs at $132,500 per day, as well as many other tracks around the country.17 The track intended to spend about $3 million on remodeling the first floor of the club house and on leasing the machines, and claimed to have hired 85 additional people. So far, the result is that the Racing Commission, an appointed body, has made the decision for all Kentuckians to introduce slot machines at the tracks under the Instant Racing label which applies to one of six games. We are watching the erosion of rule by law to the rule by the rich and powerful. This is a first step toward the type of corruption that is ongoing in Pennsylvania and Illinois around the casinos and racinos.
16 17

Janet Patton, New games an instant hit, Lexington Herald-Leader, September 21, 2011, C-6. Gregory Hall, :Panel Oks slot-like games for Ky. Downs, Louisville Courier-Journal, July 15, 2011.

Ivan L. Zabilka, Ph.D. August 5, 2010, Revised March 8, 2012. 859-858-3381

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