NATIONAL GAMBLING IMPACT STUDY COMMISSION

QUESTION AND ANSWER SESSION

CHAIRPERSON JAMES: At this point in time I'd like to open it up for questions from Commissioners, and also for dialogue among yourselves.

Commissioner McCarthy.

COMMISSIONER MCCARTHY: Mr. Meeker, since you've been deferred to a couple of times, you've achieved -- remaining modest -- a certain status here. How many tracks does your corporation own? You mentioned four at the --

MR. MEEKER: Four.

COMMISSIONER MCCARTHY: -- outset, but then you mention four different states. Is it one track in each of those state?

MR. MEEKER: No.

COMMISSIONER MCCARTHY: You mentioned Iowa, Delaware, Kentucky and Indiana.

MR. MEEKER: No. I'm sorry. I --

COMMISSIONER MCCARTHY: So your four tracks are in Kentucky and Indiana.

MR. MEEKER: Kentucky and Indiana.

COMMISSIONER MCCARTHY: And the other tracks that you refer to, was that just for our general information?

MR. MEEKER: Yes, sir. Yes, sir.

COMMISSIONER MCCARTHY: All right. Are the four tracks that you now manage, which of those four tracks does your corporation seek permission from their state legislatures, either Kentucky or Indiana, to allow casino-type gambling?

MR. MEEKER: Well, we don't --

COMMISSIONER MCCARTHY: Pardon me. Slot machines that emulate casino-type gambling.

MR. MEEKER: Right. We have pursued that slot machine legislation, for lack of a better term, in both Indiana and Kentucky. We've been supportive of both. I think depending upon what happens -- Indiana is unique because Indiana has a cross-subsidization right now between the river boat industry and the horse racing industry. There was a public policy determination made when they started both industries that the river boats would subsidize the pari-mutuel industry or the Thoroughbred industry through an admission tax cross-subsidization. If that goes away then I think for Thoroughbred and standard bred racing to proceed in Indiana they would need alternative gaming forms.

In the State of Kentucky, clearly Ellis Park, which is being threatened by two major casino boats down in that market and has suffered, could logically participate with VLT's and be successful. Churchill Downs, I'm still -- the issue's out on that, because we have not -- the largest boat in the world is due to arrive next summer -- excuse me, late winter next year, first quarter in our market. And I'll tell you more about that later on.

MR. MCCARTHY: Of the proposals that you're supporting in either legislature, what's the wording? How much of the profit would they devote to the purses?

MR. MEEKER: We don't have a firm bill, but we've been working with the horsemen's group. For instance, in Kentucky we share 54 percent of our net pari-mutuel revenue with the horsemen. We get less than 50 percent. And while I don't want to negotiate in public right now, I would suggest to you that the division of revenues would be something along the 50-50 line. We have always said, and we will continue to say, that there has to be a clear-cut division of revenue in any legislation and/or constitutional change that would protect racing. And we also suggest a couple of other things. That is a mandatory number of race days, and in some instances the number of races. So an operator of a "track" under one of these statutes would have to continue operating a given number of days and given number of races. So that what was described by some as just movement away from racing toward profitable venture, namely the VLT's, would not occur.

MR. MCCARTHY: So do you have the same set of investors in both Indiana and Kentucky; how different is the mid?

MR. MEEKER: Well, we have a 13 percent partner in Indiana, but our corporation owns everything at Church. We are a publicly traded company.

MR. MCCARTHY: So if you are successful in getting slot machines that emulate casino gambling onto your tracks, then your set of investors that own your corporations would make approximately 50 percent of the net from the slot machines?

MR. MEEKER: No.

MR. MCCARTHY: How would it work?

MR. MEEKER: You would still have costs. You would take on a gross level, you would divide it up 50-50, which is typical in our industry right now. And right now in a normal pari-mutuel configuration we -- the track gets about seven percent of the gross takeout, and the horsemen get 7.5. Out of that seven percent though we have to pay for capital costs. We have to pay for employees, et cetera.

MR. MCCARTHY: Now, you said -- I'm sorry. MR. MEEKER: So I'm suggesting that same division of revenues, gross revenues would be the same. In terms of bottom line return that would be substantially less.

MR. MCCARTHY: Okay. You mentioned that your enterprise is unlike some of the other testimony we've heard about other racetracks, that yours are pretty profitable?

MR. MEEKER: Yes, sir, they are.

MR. MCCARTHY: So the idea of adding slots that emulate casino conditions, that's just another profit center for you?

MR. MEEKER: Well, certainly it would be, but again, I'm not suggesting -- our point and the position of our company has been this: One, we are a racing company, and that is our business. And obviously Churchill Downs since 1875 has been in that business. We're going to continue being in that business in years to come.

MR. MCCARTHY: Sure, sure.

MR. MEEKER: And we are today, we think, the number one racing company in the country. We're not going to do anything that will adversely impact our position in the racing industry.

MR. MCCARTHY: What does that mean? I'm sorry, I don't understand.

MR. MEEKER: Well, we're not going to turn into a casino company. I mean, and we've stated that. If you look at our Board of Directors, you can understand why. I mean, we, you know, we're owned largely by people within the industry.

MR. MCCARTHY: Well, how do you define what would turn you into a casino -- your words, "a casino-type industry"? Would it be 25 percent of your total profit; what would it be?

MR. MEEKER: Well, having free- standing gaming operations, investing in gaming --

MR. MCCARTHY: Well, we'll stay with the slot machines that emulate casino-type gambling. Poker games, roulette.

MR. MEEKER: Right.

MR. MCCARTHY: So what would constitute transforming the character of your investment into something other than what it has been historically, which is one of the most notable horse racing entities in America? Would it be 25 percent of your profit, or 35 percent, or --

MR. MEEKER: I don't know.

MR. MCCARTHY: Well, you talked about this among the leadership of your corporation. Share with us what, how you think about this.

MR. MEEKER: Well, what we think about it is this: We view the introduction of VLT's as an opportunity to reach an entirely new demographic, a younger demographic as a growth component for the future. And right now you look at the racing industry, there are some problems in terms of determining what our growth component is going to be into the future. One of the critical things we have to do is reach this new younger demographic. Clearly, and any study that the casino industry has done, there is a demand sitting out there, particularly in the southeast, a huge demand for gaming. And that demand resides largely in a younger demographic. And what we propose to do is taking the VLT, which is attractive to a younger demographic, installing it on our facilities where we need it. And again, I will caution you. We haven't made the absolute end all, be all decision at Churchill Downs. But at some of our facilities which are being threatened by other competitive forces installing those operations there with the purpose of attracting new, a younger demographic to those facilities which in turn -- and I think there have been a couple of comments, and it may be by Mr. Horn who mentioned that we don't have the day to suggest when this will come about -- namely to take a VLT customer and introduce him or her to the best gaming form we believe around, namely the horse racing business and be able to draw them over. But at the outset, I don't want to eliminate that opportunity by some, you know, prohibition constitutionally or legislatively.

CHAIRPERSON JAMES: Thank you, Mr. Meeker.

Mr. Barrett, I was curious. I had to interrupt you necessarily so that we could hear from the rest of our panel, but I would like to come back and ask you to talk for just a little bit about your views on compulsive gambling, particularly as it relates to the racetrack.

MR. BARRETT: I'm sorry I didn't stop before. That's the New Yorker in me. But at any rate, our California Council With Problem Gambling has had little success in fund raising here in the state, and there is no legislation in regard to any kind of funding or anything like that, which we're very concerned about. The state lottery has not stepped forward in any fashion. The casinos -- we've solicited 40 of them, only five have given us a response. Two out of the three casinos here in San Diego have made pledges, but the largest one has not gotten back to us.

I would just like to, you know, issue a challenge to the gaming industry in general. The lottery, casino gambling, the racetracks, to provide just a small, very small portion of their profits to go towards problem gambling. I talked about a one percent solution with the President of the Council, Tom Tucker, last night, and I said well, you know, one percent of their profits that's probably a real lot of money, but may if we just asked for one-tenth, one-tenth of one percent of what the industry profit is to go towards problem gambling that would really help a great deal in solving some of the problems.

CHAIRPERSON JAMES: Commissioner Loescher.

COMMISSIONER LOESCHER: Yes. Thank you, Madam Chairman.

I'd like to ask Mr. Meeker if -- you know, I'm interested in your comments about youth. Youth being people hopefully above 18 years of age, maybe to 30 years of age. Hopefully not younger. You know, I'm a Native American and in --you know, we're interested in culture as well, and the horse racing industry has culture and traditions. The aspect of intellectual reasoning in gaming, I think is an interesting approach. Difference in one industry versus the other. But I'm concerned about this business of interactive gaming on computers and TV sets in the homes of America, account gaming or Off-track Betting, the same concepts. But, you know, when you look at the sea of gaming, all the things cumulatively in gaming, all the different types of gaming, I'm wondering about the issue of gaming on the affects on youth and the culture of America as a whole. This computer business takes people away from the horse track, the environment, the experience, the so-called intellectual experience. And I'm wondering if it's just becoming about the money. The way your industry is going you're more interested in increasing your revenues and in getting more consumers involved, and it becomes more just gambling rather than the horse racing culture and environment and industry. And is there -- I'm concerned about your position on the Kyl Bill. I'm not quite sure where you are on that, but that is the focus at the moment. There may be many, many more bills in Congress before it's over about this interactive gaming on the computers and television. But how is your company and your industry going to contribute to setting the parameters and the guidelines for this interactive gaming on computers and the television in our homes?

MR. MEEKER: Well, that's a pretty broad question. I don't know where to start. First of all, the target market is not the underage minor market. It is the mobile, the people -- the mobile market, the people that are spending money for entertainment options.

In terms of using commerce, electronic commerce to broaden our distribution system, when we first looked at the opportunities available in the electronic area, specifically the Internet or cable, DBS, anything that will allow you to get into the home, the question first we asked ourselves was the business question. Does that make sense? And as you know, and I'm speaking specifically for Churchill now, we have a huge capital, imbedded capital base, in OTB operations in racetracks that over the course of time we've moved our guests and customers around. We've moved them from outside watching the races inside of our tracks with television watching the televisions. Then we moved them for convenience sake into an OTB environment, and now the suggestion being we'll move them one more step into the home. And that transition into the home causes problems on a business standpoint because that is not the place that we want the wagering activities to take place.

So when ODS approached us, as I put in my outline there, is ODS approached us we informed them we would not be a party to this introduction of a new signal into the home if the sole purpose was to take -- make the final move, if you would, of our guests into the home. What we wanted to do is to reach new people in the home and use the entry into the home as a marketing tool to market what we've got on the racetrack. And that's the entire intent from Churchill's perspective. And if you see the programming that we have designed for the in-home programming, talk about and educate people about the horse. There is a gaming component, no question about it, because that's part of our business. But the primary interest that we have is developing new customers, younger customers, who will ultimately find their way onto our racetracks and enjoy the benefit of racing, and more importantly invest in our business as owners of race horses. So that's the way we've approached that from the business point of view.

Now, the next issue was the social issue. And the social issue is the more problematic issue, and that is consistent with our baseline philosophy of making sure that we do the right thing. The question of entering into the home brings up the minor issue, and it brings up the compulsive gaming issue. And I think within the outline that I've given to you, you've seen some of the things that we have planned in conjunction with ODS. Cooling off periods where you can't open up an account and wager on it immediately. You get one banking day before that can occur. The minor issue, the investigation, use of PIN numbers, and as technology continues as dynamic as it is, as it continues to go there'll be other mechanisms that the Bill Gates of the world will figure out in terms of protecting the home from, you know, any abuses that anybody in commerce, be that individuals involved in gaming or other forms of commerce might play in the home.

CHAIRPERSON JAMES: Thank you, Mr. Meeker. Commissioner Wilhelm.

COMMISSIONER WILHELM: I have a question for Mr. Horn. You made the assertion that true advocates of horse racing should be opponents of slot machines. And as we heard this morning -- slot machines at tracks. As we heard this morning, there are a number of prominent people in the pari-mutuel industry who agree with you, and others who apparently do not. You also made the observation in your testimony that collections of slot machines by themselves don't produce very many jobs compared to either full-blown casinos or racetracks or other forms of gambling. I would certainly agree with that. The video truckstops in Louisiana, those types of collections of gaming machines with nothing else do produce very few jobs, and they tend to be in theory inferior jobs as well.

There are over 400 members of the Hotel and Restaurant Employees Union from Southern California here this morning, and they're here because they are concerned about the impact of this Commission's recommendations on jobs in the pari-mutuel industry and in the card club industry. The pari-mutuel industry in California and in many other parts of the country is heavily unionized, and the jobs tend to be decent jobs that provide a decent wage and benefits. The new generation and larger card club industry in the state of California, whose growth was referred to earlier, is increasingly unionized. And to the extent that it is, it also tends to provide liveable jobs with decent benefits, which is why all of these folks are here.

You're certainly right with respect to the newer installation of machines at racetracks such as in Delaware. Not enough time's passed and the effort hasn't been made to assess what the impact of those has been. Your chart on page 2 of your testimony points out that in West Virginia and in Rhode Island there are much older experiments. Well, they're not experiments anymore. They're much older situations where the machines have been installed at pari-mutuel operations. In your written testimony on page 6 you talked about Lincoln Park in Rhode Island. I remember negotiating labor contracts at Lincoln Park in Rhode Island in the 1970's, and it was very shaky then. And your written testimony says "similarly at the Lincoln Park Dog Track in Rhode Island the machines generated $96.9 million in gross revenues. For comparison, gross revenues from pari-mutuel handle totalled just $13.1 million in 1997". That I'm sure is factual, but it doesn't address the question that you raise, which is whether or not using Lincoln as an example -- and I only picked it out because I happen to be personally familiar with it -- whether anybody has studied in those older situations. The question of whether or not those slot machines, which as I said I agree with you, by themselves don't produce very many useful jobs, whether they have served to preserve jobs in the pari-mutuel industry or not.

MR. HORN: I don't think that there have been any studies. They are situations which lend themselves to the general discussion of cannibalization of business. That is the money that's spent at Lincoln Park is money that's not spent somewhere else. The person putting money in the slot machine is not putting that money in the local retail store or restaurant. So, you know, I think an economist would tell you that somebody's losing a job somewhere in that market because the money is spent at the slot machine and not at the restaurant. But, you know, how much is a difficult thing to study, and it has not been studied because the state -- it hasn't been in their interest to do so.

MR. WILHELM: Well, I don't want to be argumentative, Mr. Horn, but I wasn't really asking you about the substitution theory. That's a whole other question. The theory that if somebody spends a dollar in gaming entertainment, you know, they would have spent it somewhere else, if you apply that logic to every form of economic endeavor nobody would ever add anything anywhere because it wouldn't make any difference anyway. So I wasn't trying to ask that question. I was trying to address the specific assertion. I don't necessarily disagree with you in your testimony whether or not the addition of slots to pari-mutuel facilities tends to preserve the jobs and the other positive attributes of those pari-mutuel facilities. And I really was trying to find out whether in those older situations anybody had really studied it. I agree with you, though, states aren't going to study it. I wondered if either your group or somebody else had.

MR. HORN: Not yet.

MR. WILHELM: Thank you.

MR. HORN: Thank you.

CHAIRPERSON JAMES: And on that note I am going to have to thank our panelists and encourage you, as I have other panelists, to please continue to stay in touch with this Commission as we go about our work.

A few notes as we go into a break right now. I want to say to Commissioners that we've been told by the hotel that they will charge us a half-day rate if we don't check out of our rooms by 12:00. So you may want to use the break to do just that. And I would say to our audience thank you for being here this morning and I encourage you to come back, but ask as you leave the room during the break if you have any personal belongings to please take them with you, and we'll see you back here at 11:15.