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Pennsylvania’s horse racing industry in jeopardy due to diversion of funds, declining revenue
Wednesday, June 18, 2014 - from the Pennsylvania Department of the Auditor General

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Harrisburg, PA --- Auditor General Eugene DePasquale said today the future of Pennsylvania’s billion dollar horse racing industry is in trouble and risks a catastrophic shutdown if measures are not taken to increase revenue and stop a diversion of racing funds to plug holes in the state’s budget.

In a report released today on the State Racing Fund (see note at end of story for fund description), the auditor general outlined how the Department of Agriculture overbilled the fund by $873,206 for three years to cover budget shortfalls and directly billed another $5.2 million over four years for personnel costs it could not appropriately document.

The effect of increasing expenses and declining revenue would have bankrupted the State Racing Fund this spring if the state legislature had not passed Act 30 of 2014, transferring $4.2 million from the slots-funded Race Horse Development Fund (see note at end of story for fund description) to the State Racing Fund.

“The horse racing industry is one of Pennsylvania’s largest agricultural industries, but it is in trouble because funds intended to provide necessary oversight and revitalize the industry are being diverted to plug budget holes,” DePasquale said.

“If the State Racing Fund goes bankrupt, the racing industry would shut down,” he said, noting that the fund pays for regulatory and oversight activities that include safety measures to protect jockeys and staffing the equine laboratories that conduct drug testing to protect horses and ensure the integrity of the races.

“To protect the jobs and reap economic benefits from the industry, we need to ensure the state and the Department of Agriculture are appropriately administering the funds,” DePasquale said. “The horse racing industry -- like every industry -- needs certainty and stability in regulation and oversight from the state.”

According to industry reports, there are nearly 550 horse breeders in Pennsylvania at horse farms across the state. The state’s race horse industry generates $1.6 billion in annual economic activity and supports 23,000 jobs in Pennsylvania. More than three million people attend race track events, wagering more than $1 billion each year.

The audit found the Department of Agriculture overbilled the State Racing Fund $716,535 between 2011-12 and 2012-13 for formula-based administrative shared services such as legal, human resources and communications. The department indicated it expects to exceed the shared services formula calculation by $156,671 in the current fiscal year.

“Balancing the Department of Agriculture’s overall budget with State Racing Fund monies is not an allowable use of the fund and represents an abuse of Agriculture’s authority,” DePasquale said.

In addition, Agriculture directly billed the State Racing Fund nearly $5.2 million over four years for additional personnel costs that it could not document were directly related to services provided to the two racing commissions. Agriculture officials say they use both formula-based funding for shared services and direct billing of staff time to charge the State Racing Fund for personnel expenses.

Auditors found that the Department of Agriculture is overcharging personnel costs to the State Racing Fund without being able to document the direct billing charges.

“Without the proper documentation, we have no assurances that the amount charged to the State Racing Fund is accurate or appropriate. That is unacceptable and must change,” DePasquale said.

For example, the Department of Agriculture charged more than $177,000 to the State Racing Fund for a “Special Agriculture Advisor to the Governor,” including a full year’s salary of $101,264 in 2012-13.

Agriculture officials contend the cost was justified because the advisor devoted all his time to the Horse and Harness Racing Commissions. However, auditors discovered the advisor worked on special projects unrelated to horse racing that were assigned by the governor and the Secretary of Agriculture. He also served as ambassador for the governor on issues facing rural communities and the agriculture community.

Agriculture officials later conceded the advisor did not work exclusively for the racing commissions.

“I am concerned when we receive conflicting explanations,” DePasquale said. “It erodes public confidence and the credibility of public officials. Taxpayers deserve straight answers from the start.”

In addition to problems with the State Racing Fund, auditors found that the future of Pennsylvania’s horse racing industry could be jeopardized because money in the Race Horse Development Fund, created in 2004 to help revitalize the industry, is being diverted to fund other state budget expenses.

Since 2010, more than $212 million was diverted from the Race Horse Development Fund, including more than $185 million to the state’s general fund budget, $5 million to the Farm Products Show Fund and $17.7 million to agriculture programs.

As money was redirected in the past four years, revenue continued to decline due to increased competition from casino gaming. Wagering tax revenue declined 24 percent over the four-year audit period while slot machine revenue -- which fuels the Race Horse Development Fund -- fell from $273 million in 2012 to $254 million in 2013.

Recommendations:

The audit recommends several changes to ensure the viability of the horse racing industry, including:

  • updating occupational licensing fees and other fees that were implemented in 1981. For example, the licensing fees, which are renewed every three years, are capped at $100
  • adding additional funding options developed by the Department of Agriculture and the racing commissions
  • prohibiting the Department of Agriculture from using the State Racing Fund to make up for budget reductions or charging the fund for personnel expenses for time spent on work not directly related to the horse racing industry.

“The race horse industry is important to our economy and we must ensure that it remains viable and prosperous,” DePasquale said.

Fund Descriptions

The State Racing Fund was created in 1981 and collects revenue from six revenue sources: wagering taxes, uncashed tickets, license fees, breakage, admission taxes and miscellaneous revenue. The State Racing Fund is used to pay for the personnel and operating costs of the Horse and Harness Racing Commissions, Equine Laboratories, the PA Fair and for some personnel and operating costs of the Department of Revenue for collecting the racing taxes.

The Race Horse Development Fund was created in 2004 to stimulate the viability and quality of racing in Pennsylvania by providing money for track purses, health and pension benefits for horsemen and breeder’s awards -- incentives to breed race horses in Pennsylvania. Licensed gaming facilities pay 12 percent of their gross terminal slot machine revenue into this fund. 


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