Over the weekend, the Breeders’ Cup races happened. Twenty years ago, this was one of my favorite sporting events on the annual calendar, but my interest has waned significantly. This years’ races were held at DelMar just outside of San Diego for the first time. [Aside: If you want to go and spend a day at the races anywhere, DelMar and Saratoga are my two favorite racetracks in the US.] The total betting handle for all the races was $166M; the handle at DelMar from the crowd in attendance was $25.2M. Obviously, the Breeders’ Cup is economically sound.
Notwithstanding the success and the glamor surrounding the races last weekend, horseracing in the US continues its decline. In 1989, the number of races run in the US hit a peak; that year there were 74,701 thoroughbred races run. In 2016, that number dropped to 41,277 races; that is a 44% decrease in races over a 27-year period. That data are anything but encouraging for those interested in the business end of horseracing. But wait, it gets worse…
For much of the second half of the 20th century, the average number of horses per race in the US remained relatively constant; when horses were called to the post in the US, the average race had 9 runners. Last year, that number dropped to 7.4 runners per race and that figure has a double whammy for the economics of the industry:
- With significantly fewer races AND significantly fewer horses running per race, the only conclusion one can draw is that the “inventory” of horses in training – the only things capable of generating income for owners – has decreased.
- Races with smaller fields tend to draw much less interest from the betting public simply because payoffs tend to be smaller in races with fewer runners. When the handle goes down, racetracks have few options other than to reduce purses for the races they run.
There is another angle to consider here. In times past, the top horses in training raced frequently; Seabiscuit had a 6-year racing career and he made 89 starts; as a 2-year old, he went to the gate 35 times. Man O War had a 2-year racing career; in those 2 years, he raced 21 times. Forego raced until he was 8 years old. John Henry raced until he was 10 years old and started 83 times. You get the idea here…
- Those horses generated a following; people cared about what happened in races involving these horses and people went to the tract to see them run. Today’s best horses might run 5 or 6 times in a year; some horses will enter Breeders’ Cup races in November with as few as one prep race in that calendar year. It is far more difficult for the public to “get excited” about individual horses today than it used to be.
The economic pinch in the industry has not hurt “the big guys” all that much yet. There are still enthusiastic crowds betting plenty of money at places like DelMar and Saratoga and Churchill Downs. However, there is a blemish that has appeared among “the big guys” in the industry; Santa Anita used to race 5 days a week; currently, they race 4 days a week and track owners are reportedly considering the possibility of racing only 3 days a week. Frankly, that makes loads of economic sense – if all you look at are “the numbers”.
- Historically, the biggest days for racing cards are Friday, Saturday and Sunday. Those days would definitely be days to open up and present racing to the public.
- If a track raced a 4th day – let’s say Monday – that would almost certainly be the “slow day” for business but it would still put a drain on the inventory of runners at the track. Rather than racing 7 horses in a middling claiming race on “Monday”, why not stage that same middling claiming race on “Friday” with a field of 12 – the ones that would have entered the race on “Friday in any event plus the ones who would be needed to fill the field on “Monday”?
Those numbers make sense; but those numbers do not account for the attention span of the customers. Fifty years ago, legal venues for gambling were uncommon – except for racetracks. Of course, people gambled in illegal ways, but the racetracks had close to a monopoly on places where gambling was acceptable. That is far from the case today; there are casinos and lotteries available just about anywhere that a racetrack is available. Cutting the number of racing days could present a problem for tracks if people forget they are there and take up other gambling activities instead.
In the racing industry, these are interesting times…
Since the theme for today has been economic trends related to sports, let me continue with a comment on the tax reform legislation that has been proposed in the Congress recently. So that you know where I come from on that issue:
- I believe that tax code needs reform. It is hugely complicated, and it obviously does not raise sufficient revenue to fund all the things that the Congress votes to spend money on.
- If the 535 Congressthings on Capitol Hill would focus on those aspects of any new legislation instead of sound bites intended only to polarize the debate, we might actually make some progress here.
There are two proposals in the tax reform bill as it stands now that I find very positive.
- There is a “special tax rule” that has been around for a while that I knew nothing about. This rule allows provides college sports fans with a tax deduction for a portion of their season ticket costs to athletic events. The way this happens is that for some schools, one must make a donation to the school’s booster club in order to allowed to buy a season ticket to the football games – or basketball games. That portion of the cost of the ticket becomes a charitable deduction to the school. The proposed tax reform would do away that that nonsense.
- The second proposal is one I have suggested for at least 2 decades. If enacted, cities and states would not be allowed to issue tax free municipal bonds to fund athletic stadiums/arenas. Any such borrowing would have to be with taxable bonds meaning that the interest rates paid by cities and states would have to be higher than they would be for tax free bonds. This would increase Federal revenue and it would decrease the leverage that sports owners have over cities to fund new venues for them at taxpayer cost.
Lest you think the change from tax free bonds to taxable bonds is a trivial matter, here is some data from a Brookings Institution study:
- Since 2000, there have been 45 stadiums/arenas built or significantly renovated in the US for professional sports teams in the “Big 4” of pro sports. Of those 45 constructions/renovations, 36 were paid for using tax-free municipal bond offerings.
- Using one example here, when NYC raised the funds needed to build the new Yankee Stadium, they did so with $1.7B of tax free bonds meaning that investors who bought those bonds did not pay any Federal tax on that interest. Assume that the bonds paid 2.5% tax free interest; that means the Federal coffers did not receive any tax on income received by investors totaling about $425M.
It is not often that I have a lot to say about the US Congress that is positive. I recognize that all of the above is merely a proposal and that none of it may make it into any new legislation – assuming that there will be new legislation passed by the Congress. Nonetheless, I think both of those provisions in the tax-reform bill are good ideas that I support.
Finally, sticking with today’s theme of money and economics and the like, consider this comment from Greg Cote in the Miami Herald:
“Aston Martin is selling a Tom Brady-edition automobile for $360,000. It is preprogrammed to drive straight to the Super Bowl.”
But don’t get me wrong, I love sports………