Kentucky Historical Horse Racing May Need Legislative Intervention

HHR machines such of these have been deemed illegal by the Kentucky Supreme CourtHHR machines such of these have been deemed illegal by the Kentucky Supreme Court

AP Photo/Otto Kitsinger, File

Kentucky’s horse racing authority plans to fight the state’s Supreme Court on the issue of historical horse racing (HHR) machines. The court’s verdict was that at least some of the machines currently operating in the state are illegal.

The machines, whose gameplay bears a strong resemblance to slots, can be found at racetracks and off-track betting parlors in several states around the country. They first appeared in Kentucky in 2011 and have been controversial from the start. Some states have taken a firm stance one way or the other, but in Kentucky, they have until now occupied a legal gray area.

The deadline for the Kentucky Horse Racing Commission (KHRC) to request a rehearing is coming up next week. It has, however, petitioned the court for a two-week extension. In the meantime, Exacta Systems, which manufactures the affected machines, says it has a workaround to make them compliant and avert the need to shut them down entirely.

Gambling in general is a divisive issue in Kentucky. On the one hand, there’s significant pressure to keep up with neighboring states and a need for the additional revenue new legal gambling channels could bring. On the other, social conservatives hold a lot of power in the Bluegrass State, so anti-gambling voices are loud and numerous.

Early this year, it looked like a strong candidate to pass online sports beting and poker legislation. Unfortunately, that bill was already losing momentum when the COVID-19 pandemic hit. The subsequent shift in priorities and temporary shutdown of the legislature were a death knell for that legislative effort.

The battle over HHR may impact other gambling expansion efforts in unpredictable ways. In the short term they will probably delay such efforts, but in the grand scheme could either help or hurt.

Loopholes and gray areas about in US gambling

The US has one of the most bizarre and idiosyncratic gambling industries in the world. The amount of discretion accorded to judges combined with the puritanical legacy of existing laws means it’s often easier to find a loophole for a new form of gambling than it is to legalize it.

HHR is just one of many manifestations of this. It falls in the same general category as such things as:

  • “Riverboat” casinos that are permanently moored or sit in moats
  • Bingo-driven slot machines at Class II tribal casinos
  • Skill-based gaming machines and apps
  • The early days of daily fantasy sports

In the case of HHR, the loophole in question is extending the idea of simulcast wagering to include races that already happened. Players wager on real horse races from the past, stripped of the horse’s names and other potentially identifiable information. The outcome of the race then takes the place of a conventional random number generator in determining the outcome. Often, footage of the actual race appears alongside the spinning reels of the simulated slot machine.

These aren’t a niche product, either. In the absence of traditional casinos, Kentucky’s racetracks do booming business. HHR machines took $2.2 billion in wagers and created nearly $190 million in revenue in the last fiscal year.

Exacta Systems machines aren’t parimutuel, court finds

The specifics of the machines vary from manufacturer to manufacturer. It’s therefore possible for some to be a little over the line according to one court or set of laws, while others remain on the right side of it.

The Kentucky Supreme Court took exception to Exacta Systems’ machines on two fronts. Firstly, while players’ wagers do go into a common pool, they aren’t all necessarily betting on the same historical race. Secondly, that pool doesn’t begin empty, but rather starts with some seed money contributed by the house. In the court’s eyes, these two factors mean that the machines don’t qualify as parimutuel wagering, the only type of horse betting permitted under federal law.

It’s unclear exactly what tweaks Exacta plans to make to rectify these issues. However, the court’s opinion is that the KHRC can’t independently approve new products or expand the definition of parimutuel wagering without express approval from lawmakers. If the KHRC is successful in getting a rehearing, that will presumably be one of the issues discussed.

Naturally, opponents of HHR aren’t happy with the possibility that Exacta could simply bring its machines into technical compliance. The Family Foundation of Kentucky, which brought the original lawsuit, will likely continue to fight until HHR machines are entirely removed or legislators intervene to provide clarity.

Legislators largely in favor of HHR

The court’s decision is ironic, because many legislators and even the state’s Governor Andy Beshear are in favor of HHR machines.

“I believe that that decision, while not criticizing the legal aspects of it, not having analyzed it, is devastating for so many Kentucky jobs, for the horse industry, and for the state budget,” Beshear told the Courier-Journal. “… If it’s going to take a legislative change, we need to make a legislative change to keep our horse industry competitive and to keep our commonwealth competitive.”

Senate majority leader Damon Thayer and House Rep. Adam Koenig have also been vocal critics of the decision. Thayer is a former racetrack executive himself, while Koenig is the driving force behind gambling expansion efforts in the state.

Given such unity between the governor and the two halves of the legislature, it’s hard to imagine HHR disappearing from the state outright. If the outcome of the case is that most or all HHR machines have to be shut down, they will almost certainly be formally legalized in the next legislative session. In the meantime, however, it will create significant disruption. More importantly, it means a temporary loss of jobs at a time that the economy can little afford it.

An HHR bill could delay other gambling-related legislation

Aside from its impact on those whose jobs depend on it, the need to address HHR through legislation will push other things down the priority list. That could include Rep. Koenig’s efforts to legalize sports betting and online poker.

As it stands, the failure to pass Koenig’s bill this year already makes it likely the state will have to wait until 2022 to try again. In Kentucky, budget years are even-numbered, and passing a revenue-related bill in non-budget years requires a supermajority. Since the reason for expanding gambling, from a legislator’s perspective, is raising new revenue, this makes it much harder to pass such a bill in odd years. Having to deal with HHR instead makes it even likelier that sports betting and poker get passed over in 2021.

Further down the road, things become even harder to predict. The more forms of gambling are already legal, the less resistant the public typically is to adding new ones. On the other hand, having HHR as a cash cow will tend to make the horse racing industry resistant to competing products. Its lobbyists, combined with the state lottery (whose e-Instant products also resemble slots) will make any sort of casinos in the state a harder sell, whether online or brick-and-mortar.

One strategy Koenig or others could try is to tie HHR and sports betting together in a single bill. Sports betting is, after all, very close to having the necessary levels of support. Adding something even more popular like HHR could be the key to pushing it through. Unfortunately, online poker could end up falling to the wayside in that scenario, to avoid overcomplicating the bill.

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