In Memphis

In 1987, in one of the most hotly disputed legislative battles ever witnessed, the General Assembly voted to allow gambling on horse racing in Tennessee. Actually, the bill that passed did not automatically allow the construction of tracks and gambling outlets anywhere in the state. Instead, it stipulated that cities or counties could decide for themselves whether to allow horse racing in their communities.

The same year the Legislature passed the measure, the city of Memphis shot out of the gate and held a referendum. Horse racing passed, with over 60 percent of the vote. For its part, Davidson County also poked its head out of the gate, only to meet with an entirely different response. Amidst intense opposition from preachers and other anti-gambling activists, a 1987 vote to allow racing in Nashville failed by one-half of 1 percent. A subsequent vote in 1988 also failed, this time by 3 percent.

Despite the affirmative vote in Memphis, and the apparent desire for horse racing there, no track has ever been built. The Tennessee Racing Commission, which ultimately must approve any track or wagering facility in the state, has considered one proposal from Memphis. Developer Charles McVean suggested building a track for hackney ponies, which would be ridden by remote-controlled jockeys. Amidst a huge public outcry that the idea was nothing short of bizarre, the commission nixed the plan.

But things are changing. Two Saturdays ago, Memphis took a major step toward becoming the first city in Tennessee with gambling on horse races. The racing commission held a public hearing to discuss a proposal from Penn National Gaming, which owns two horse tracks in Pennsylvania and one in West Virginia. About 100 interested citizens showed up to hear the company’s pitch. In addition to proposing the construction of a harness racing track, Penn National is also seeking permission to build off-track wagering facilities, known as OTWs.

Penn National, a publicly traded company, also operates a North American network of 57 OTWs. In Memphis the company proposes to build a five-eighths-mile harness racing track and OTW on a 100-acre site in North Memphis. If Penn National meets with success in its Memphis venture, there are implications for the rest of Tennessee.

For companies in the business of modern horse racing, owning and operating a horse-racing track is really the price that must be paid to open the door to other, more lucrative ventures. Owning a horse track, for instance, allows access to the business of “simulcasting,” which permits fans at one track to bet on televised races that are taking place at another track. The OTWs, which are off-site betting operations for horse races, are also highly lucrative. Should Penn National get the green light to build the track and OTWs, there is also a slight chance it might also renew interest in amending Tennessee’s Constitution to allow other forms of betting, such as slot machines. Penn National has slots at its track in West Virginia. Legislation that would allow slots at its Pennsylvania tracks is “our single most important goal,” according to the company’s annual report.

Penn National has stated that, if it wins approval from the Racing Commission, it will seek permission from the panel to build OTWs without live racing in other parts of the state. Its Memphis harness racing track would only operate six weeks a year, weather permitting. But the OTWs would be open 365 days a year. The company hopes to open an OTW in eight months; the track itself would open in three years. Simulcasting, according to company documents, accounts for 56 percent of Penn National’s revenue.

The inside track

At the public hearing, Penn National, aided by friendly Racing Commission chairman Mike Whitaker, presented its plans as a boost to local employment and to area horsemen and farmers. “We’re talking about starting an industry,” said Penn National president William Bork.

In his introductory speech, Bork described an industry he said employs 35,000 people in Pennsylvania. But Penn National has “reached its limits” there. Memphis, he said, offers a central location and good, open spaces for development. He said the North Memphis facility would employ about 200 people, make at least $1 million in payments to local vendors annually, double as a place for horsemen’s events and 4-H clubs, and be a market for farmers to sell hay and feed and for breeders to race their horses.

Tunica, Miss., with nine casinos that do nearly $1 billion in business each year, is 20 miles south of Memphis. As for competition from Tunica, Bork said, “We all know what it is,” but he added, “We’re not concerned about casinos. We are bullish on racing.”

Whitaker, who is supposed to be a regulator, not an advocate, for Penn National, couldn’t resist putting in a plug for the company. He introduced a friend from Mason, Tenn., horse breeder Bobby Christmas. Then Whitaker led Christmas through a brief exchange, in the manner of a lawyer questioning a friendly witness.

“Would you be excited about competing in Memphis?” Whitaker asked.

“It would be a dream come true,” Christmas replied.

Also attending the hearing were lobbyist Robin Merritt and state representatives Rufus Jones and Ulysses Jones. In 1996 the two legislators cosponsored a bill that allowed operators of horse tracks to simulcast races every day of the year. Previously, track operators could only hold one simulcasting day for every two days of live racing. For her part, Merritt represents both the city of Memphis and Penn National, but she says that situation creates no conflict of interest. “I checked with the mayor and [chief administrative officer] Rick Masson,” she said. “The city is very much for this.” Memphis Mayor Willie Herenton also serves on the board of another gambling company, Sungold Gaming.

The real focus of Penn National’s plans for Memphis may well be its OTW operation. The OTW would open next year before the track is up and running, and would operate 13 hours a day, every day of the year. It would show simulcast races from 57 other tracks around North America. The only racing would be on a bank of television screens. Gamblers could also bet by telephone by opening a “Telebet” or “Dial-A-Bet” account with Penn National, which handled $8.4 million in such wagers in 1996. Penn National employs 1,183 people at its tracks and OTWs in Pennsylvania, but 794 of them are part-timers. Half the jobs in Memphis would be part-time.

None of this was mentioned at the hearing.

But in corporate announcements, Penn National clearly explains the economics of simulcasting and says it is taking a “low-risk approach to entering the untapped Tennessee market.”

Jump started

Across the country, live horse racing has been in serious decline for several years due to competition from casinos and other forms of gambling. “Over the past several years, attendance at live racing has generally declined,” says a form that Penn National recently submitted to the Securities and Exchange Commission. Wagering at Penn National’s Pocono Downs harness track declined from $21 million in 1992 to $12 million in 1996, and the company’s stock is in a slump, trading recently at a 52-week low of about $11. But simulcasting keeps horse racing in business.

“An increase in simulcast, inter-track, off-track and telephone wagering from approximately $7 billion to approximately $10.1 billion has offset declining wagering at tracks on live races,” says Penn National’s report to the SEC, while the company derives more than half of its revenue from simulcasting, 30 percent comes from live racing. In 1992 live racing accounted for 76 percent of revenue; simulcasting accounted for just 14 percent.

The report goes on to discuss growth opportunities.

“Given that many parimutuel companies face the necessary precondition of conducting live racing operations as their entree into the industry, the company believes that its opportunities for success can be maximized through OTW operations, import simulcasting and export simulcasting and the operation of gaming machines to the extent permitted.”

Slot machines did not get much attention at the public hearing, although one Memphis resident, Tim Phillips, asked if they were a possibility. Whitaker chimed in again, saying, “It is impossible in Tennessee to have slot machines because of our Constitution.” But Tennessee, he argued, already has legal gambling on the Internet at offshore casinos.

Pressed by Phillips, Bork conceded that Penn National has slot machines at its West Virginia facility. He said “horsemen groups” are pushing for legalization of slots at racetracks in Pennsylvania, but “we are not part of it.”

That’s not what Penn National’s annual report says. In his letter to shareholders, CEO Peter Carlino says slots at the company’s Pennsylvania racetracks would allow them to “remain competitive with surrounding states” and adds, “We are very focused on this new legislation and it remains our single, most important goal.”

In a later interview, Bork said other tracks are proposing slots, but “we’re just sitting back. Delaware Park, right south of Philadelphia, is pushing for it. In Pittsburgh, a harness track called the Meadow is getting hurt by slots in West Virginia.”

Art Giles, spokesman for the Racing Commission, said the number of OTWs is not limited by statute as the number of race tracks is. The commission would determine an adequate number and do the licensing.

The seven-member commission currently has four members and three vacancies. Giles said the four members could vote on Penn National after the Tennessee Bureau of Investigation does a background investigation. He declined to predict when that would be.

Asked if the Racing Commission is supposed to be promoting or regulating the industry, Giles said, “We see our job as to license and regulate.” He said he would not characterize the appearance of Bobby Christmas at Whitaker’s invitation as promotional.

“Mr. Christmas was there on behalf of the track,” he said.