WHAT’S GOING ON HERE?

Colonial Downs and the Virginia H.B.P.A. are at an impasse over racing dates. The track wants to run 25 days while the horsemen seek 45 days. A logical compromise would seem to be 35 to 40, but so far that idea hasn’t been embraced by either party either. So what is really going on here?

As best we can tell, the horsemen are trying to hold the line in hard economic times while the racetrack is trying to upgrade its profitability while bracing itself for eventual schedule adjustments most likely caused by the impact of slots on racing in Maryland and throughout the Mid-Atlantic region. Colonial CEO Ian Stewart told the Virginia Racing Commission yesterday that the company has been rocked by the downturn in wagering (approximately 12% overall in 2008), and the current economic trends both inside and outside of the industry. Frank Petramalo, the Executive Director of the Virginia H.B.P.A., contends the racetrack is running a positive cash flow of over $1.2 million a year.

Yesterday, Colonial Downs led off the proceedings at the Virginia Racing Commission’s regular monthly meeting with a tale of woe they have been consistent with over the past four months. Stewart noted that Jacobs Entertainment principle Jeff Jacobs has over $66 million invested in the Colonial Downs project and that in many ways his patron has “lost interest” and “no longer sees the light at the end of the tunnel.”

While everyone in the room agrees that the Colonial is entitled to a profit, the difficult question remains “how much of one?” That question, which is always tricky for a company holding a monopoly, is only complicated by the current economic environment. The dilemma is only made worse by Colonial Downs unwillingness over the years to present any kind of financial documents that clearly demonstrate the operating losses they verbally articulate.

While plenty of paper has been pushed across the table over the past year, and Colonial continues to assert that each day of live racing cost them “an additional $23,000 per day,” they have yet to present a statement for a past meet or a pro-forma for a future meet to back-up there assertions. We hear about expenses, but never see any thing in writing which addresses revenues that would offset those costs no matter how short or long the live meet might be.

It is not irrelevant that Jeff Jacobs’ Jacobs Entertainment, the owner of Colonial Downs, is the largest stake holder in the MTR Gaming Group that owns Mountaineer Racetrack and Casino in West Virginia, and Presque Isle Downs in Pennsylvania. Neither does it seem irrelevant that back in November, Mountaineer reduced it’s workforce by 90 employees to, according to MTR president at the time, “ensure that Mountaineer is profitable.” Add to that this quote from the MTR director of public relations, Tamar Pettit, “Our focus remains on first-rate customer service and growing our profit margin,” and increasing profits is a recurrent theme.

According the Thoroughbred Times, the company has since cut another 175 jobs at Mountaineer and announced the closing of the Jackson Harness Raceway, a Michigan facility it purchased in 2005.

Petramalo followed and explained how the plan to achieve 50 days of live racing was on track until the recession hit and the pari-mutuel market, which had grown every year here in Virginia until last year, declined derailing the progress. He also reminded the VRC that the growing pains had been shared by the horsemen who agreed to reduce their share of purse dollars received on OTB wagers from approximately 6% to about 4.5% to help Colonial Downs cover the investment needed in new facilities and wagering platforms to ultimately create the growth. In doing all of this, Petramalo pointed out that average daily overnight purses had increased every year until last year.

Petramalo believes that, even with reduced purse estimates as a result of the continuing declines in wagering, the live meet can handle 40 to 45 days of competitive racing. He also believes that horsemen won’t ship to Colonial and fill the barn area or the races if the meet is but 25 days long.

An assembled group of horsemen including Carlos Garcia, Leanne Hester, Nellie Mae Cox, Stephanie Nixon and Tom Gardiner among others made comments to reinforce those concerns.

Garcia, a Maryland-based trainer, made it clear the extra expenses involved in coming to the New Kent track were both daunting and ever-increasing, saying “it’s not worth it.” He went on to say that a short meet would mean a drastically reduced rate of participation from trainers focused on West Virginia, Delaware and Maryland.

At the conclusion of all of this, it was left to the Virginia Racing Commission to ultimately “award” the racing dates. It is worth noting here once again that the VRC is a regulatory agency. It is their job to enforce the regulations that control horse racing in the state. It is not their job to tell any of the parties what they must do beyond whether or not what they are endeavoring to do is within the boundaries of the regulations or the enabling statutes. Simply put, they can’t tell folks what to do. They can’t make policy or business decisions. This is why they always advocate consensus among the parties to avoid litigation and to keep things moving forward, and most of the time their technique works.

After a 45 minute executive session, the Commissioners came back and Chairman Peter Burnett offered the parties two potential compromises. The first was that the VRC would assign 35 days of racing if Colonial Downs would provide the gap funding. The racetrack quickly refused saying that they simply could not provide the gap funding under any circumstances.

(Gap funding is a term used to describe borrowing the purse money up front for the summer meet. Wagering takes place from January 1 until the meet starts in June, and that provides a portion of the needed purse dollars, but not all of them. That leaves a “gap” in the purse money for all the purse dollars that will be generated between the time the track closes in August until December 31st – that time period creates a “gap,” so the purse account has traditionally borrowed those funds before the meet and paid them back at the end of the year. Colonial Downs, via Jacobs Entertainment or other sources, has arranged this financing in the past, but now asserts that the credit crunch makes such a loan impossible. Previously, and again yesterday, the Petramalo said the VHBPA can provide the gap funding loan.)

The second potential compromise was a 40 day meet with the VHBPA securing the loan for the gap funding. In addition, the VHBPA’s purse account would reimburse Colonial Downs $115,000. That’s $23,000 a day that Colonial Downs has said they will lose for each additional day for the five days between the two proposals of 35 days and 40 days.

As Let’s Make A Deal goes, one might figure there was a solution in there somewhere. Unfortunately, there was not – yet.

Colonial rejected both proposals sticking to their story that 25 days was their “best offer.” There is nothing to be gained by them agreeing to a compromise when ultimately they will be compelled (short of litigation or some other form of relief) to run as many days as ordered by the VRC. So they can save face while sticking to their assertion that 25 days is the best they can do. Even if they believe some compromise to be fair, they have nothing to gain by showing their cards on this matter. After all, in all likelihood, this situation will be duplicated in some manner in every year to come.

Petramalo and the VHBPA are not opposed to the concept of the second compromise of 40 days with the various contingencies, but they are unwilling to agree to such terms until the second major sticking point of this overall problem is resolved – a new horsemen’s purse contract. Now, every year there is some saber rattling over the purse account, but both parties always find common ground.

The horsemen have some pretty solid leverage in this manner (as self-destructive as it may be) in that they can ultimately shut down simulcasting which effectively puts the racetrack and its life-blood-giving OTBs out of business. Problem is that also puts the horsemen and the Breeders Fund out of business too. So, in the end, both parties have good reasons to resolve their differences and move forward.

The major sticking point this go ‘round in the contract negotiations centers around the purses for the Colonial Turf Cup and the Virginia Derby. Simply put, the horsemen say those purses for two big races that payoff out-of-town connections are over paid at the expense of overnight purses. Conversely, the racetrack says the purses are needed to market the track via these key events to the fan base as agreed upon by all the parties some years back.
On certain levels both are right. With wagering declining and purses declining it only seems logical that everybody get a haircut. The track notes that the purses for these two marquis races have been dropped every year for the past three years and it is time for such cuts to stop or the races will lose their impact.

The VHBPA counters with the simple fact that, due to these two big races, the percentage of overall purses paid to the stake schedule (which is quite limited beyond these two races, the Virginia-bred stakes, the Virginia Oaks and the All Along) is higher than at any racetrack in the country. The horsemen further contend that the same horses will show up for the Turf Cup if the purse is cut from $600,000 to $500,000 and those same three-year-olds looking for big turf pay days will be in the gate for the $600,000 Virginia Derby, down from $750,000 last year.

Since the VRC offered a racing day compromise, we will offer a stakes purse compromise and maybe we can all move forward. Yes, Colonial Downs needs the marquis events to market a small window race meet to a still underdeveloped fan base. At the same time, the stakes purses need to be reduced so the average daily purses increase to the benefit of the day-in-and-day-out horsemen that make the whole meet function. So what is the answer?

Easy. Drop the Derby’s purse to $600,000 with a side agreement to increase it back to $750,000 if certain financial marks are met. Drop the Virginia Turf Cup entirely. Yep, you heard me, jettison this race. Replace it with a $400,000 Virginia Turf Cup for older horses on the turf. Yes, it will lose its grading for a couple of years, but if you increase funding over the years and bring it back to the $500,000 and $600,000 level, this race will ultimately be a bigger draw then the current Turf Cup because the winners of the Virginia Derby will have an opportunity to return to Virginia.

If you were in the marketing business which race would you rather be tasked with drawing a big crowd? A three-year-old race with a big purse and a field of horses that nobody has really heard of save one or two that may have run poorly in a Triple Crown race, or a similar race for older horses that might include the Virginia Derby winner and graded stakes caliber older horses with which both casual fans and serious bettors are familiar? The answer seems pretty obvious.

I hate to be the bearer of bad news, but nobody cares about the Grand Slam of Grass. It was an interesting and innovative concept that attracted some attention to Colonial Downs. But, in the end, it’s too hard to win (if Kitten’s Joy or English Channel couldn’t pull it off, who can?), and trainers simply don’t send their horses down that sort of path with the end result and ultimate reward depending on a three-year-old beating the best older horses in the world at the Breeders Cup some five months later.

The Grand Slam isn’t what drives trainers to bring their three-year-olds to Colonial Downs in June for the Turf Cup. What drives them is big money – an early opportunity to pick up a big pay check on the grass against a bunch of somewhat inexperienced three-year-olds. They come back if they want to and if the schedule suits their horse (English Channel) and they don’t if it doesn’t (Showing Up). No amount of money or hype will change this.

Sorry, Jeff, but his baby just isn’t gonna fly no matter how much of your money you sink into CBS television broadcasts. It’s fun, and it helps drive simulcast wagering and fans to Colonial Downs, but it isn’t going to catch on enough to materially change the future of your racetrack. So save yourself the $300,000 in CBS money and however much it cost to insure the final bonus for the Grand Slam of Grass and create a new race for older horses designed to lure past Derby winners back to New Kent.

Considering the recent demise of Derby winner Go Between, how about the $500,000 Go Between Colonial Turf Cup? Three things would happen for sure: 1) you could resolve your horsemen’s contract issue and, in all likelihood the 2009 race days question 2) you’d guarantee that Billy Mott and Peter Vegso would show up with van load for your new race, and 3) you would be back to Grade 2 status in four years max. No harm, no foul.

In the meantime, we sit and wait wondering if it’s Colonial Downs long-range plan to shutter the New Kent track like the harness track in Michigan or to simply position themselves to minimize the live racing days for the sole purpose of maximizing profits? Somewhere in the middle of all that lingers a potential strategy that has been tried before – eventually telling the government that live racing can’t exist without an alternative form of gambling.

We can’t say which one it is for sure. Maybe it’s none of the above, and maybe some combination of all three. Only time will tell. — Glenn Petty