Horse Racing Breakage Could Be On Its Way Out In Kentucky

Horse Racing Breakage Could Be On Its Way Out In Kentucky

There are a few reasons why breakage in horse racing will last into 2022, but the primary issue is ignorance. So although it might be clunky, any conversation surrounding breakage has to start with its definition.

Breakage is the pennies and nickels rounded down in parimutuel payouts. Always rounded down, never rounded up. Most racing states operate within the confines of dime breakage, per dollar. That means every payout, based on a dollar wager, is rounded down to the nearest 10 cents. If the payout is supposed to be $2.22 for a $2 wager (or $1.11 for a $1 wager), that payout is rounded down to $2.20.

Just a couple pennies, right? What’s the big deal? Well, those pennies can add up, and they’re not always just pennies. In the most extreme example, if a payout on a $2 wager is supposed to be $2.38, in most states that payout gets rounded down to $2.20. The actual payout per dollar should be $1.19, but because payouts are displayed off a $2 wager, it gets rounded twice down to the dime, so two $1.10 payouts equal $2.20. That means a winning $500 wager in that pool, with breakage, pays $550 instead of $595. That breakage cuts the profit on that wager down by 47%. It’s actually 47.3684%, but in the spirit of the conversation, we’ll round down.

Does 47% draw concern? If not, consider that breakage accounts for an estimated $40-$60 million in revenue for bet takers in the United States each year, according to industry sources. That may change, however, in the state at the center of the horse racing world: Kentucky. A legislator in the Bluegrass State will soon submit a bill that would essentially eliminate breakage for racing in the state.

But what will that mean to the rest of the racing world? That remains to be seen.

“This might feel like we’re talking about pennies, a small amount of pennies, but it’s really $50-60 million a year for no other reason than that’s why we did it in the 1930s,” said Pat Cummings of the Thoroughbred Idea Foundation, a racing think tank that published a white paper on the topic in 2018. “It takes a lot to change statutes, but given the momentum of other big gambling businesses like sports betting and casinos, it’s high time to take this on.”

Why does breakage exist?

A reasonable question to ask in the modern era of technology and account wagering is why breakage is part of any gambling operation. Like many anachronistic issues in horse racing, the reasoning is because that’s how it’s been done for as long as anyone can remember.

The logic goes that once upon a time, when racetracks were packed with patrons and lines at the betting windows were long, operators didn’t want tellers fumbling around with pennies and holding everything up. Fast forward to 2022, and the vast majority of horse racing handle now goes through online advance-deposit wagering (ADW) services, while day-to-day racing facilities — outside of blockbuster racing days and destination locations like Saratoga, Del Mar, Keeneland, and Oaklawn Park — have a tiny fraction of bettors on track.

Although rules can vary slightly from state to state, breakage almost always goes to the bet taker, which, in the modern age, tends to be an ADW.

“If you look at ADWs, once upon a time, we didn’t want to count pennies and nickels, but that argument is gone,” said a former racetrack executive who spoke on the condition of anonymity. “It would be best to go back to the gamblers, and it should go back to gamblers. I don’t think [the ADWs and racetracks are] living off of it. But it’s like a slush fund. Whatever they don’t rebate, they put back in their pocket.”

And the operators don’t particularly want to talk about it. The big three ADW companies in the United States — TwinSpires (Churchill Downs Inc.), TVG (FanDuel Group), and XpressBet (The Stronach Group) — all declined comment for this story.

The only previous major movement to cut breakage came in the 1990s, when Steven Crist led efforts through New York’s Advisory Commission on Racing in the 21st Century under Gov. Mario Cuomo. That led to New York’s current breakage formula, which is viewed as the best for horseplayers in the United States. New York has a progressive breakage schedule that is to the nickel, per dollar, on payouts less than $10 (so the hypothetical $2.38 winning payout above would break to $2.30 instead of $2.20), standard dime breakage from $10-$49.99, 50-cent breakage for $50-$499.99, and dollar breakage for payouts of $500 or more.

“We’ve had that system in New York for 30 years, but it was only the first step,” said Crist, a longtime turf writer and horseplayer advocate who went on to serve as the publisher of the Daily Racing Form and retired from journalism in 2016. “It’s better than everyone else, but it’s still not there. There is no reason, with the betting being done through accounts, that we can’t have penny breakage. Old justifications about poor mutuel clerks with pennies is ridiculous. It’s just stealing money. There is no rationale or justification.”

Crist also expressed disappointment that no one has yet built upon his efforts to limit breakage in New York and elsewhere, and pointed to the media that covers the game of racing as one of the reasons why progress has been stunted.

“In the past, you had more robust coverage of racing in the press and columnists who would pound on these issues, but there just aren’t any advocating for these things any more,” Crist said. “Who is advocating for bettors? Andy Beyer isn’t writing any more. The Form doesn’t have opinion columns any more.

“Even if we were lonely voices in the wilderness, we were heard on occasion.”

What is Kentucky’s plan?

One of the few breakage warriors, along with Crist and Cummings, is Kentucky state Rep. Adam Koenig, who is also a proponent of sports betting in the Bluegrass State but is relatively new to the breakage conversation.

Until Koenig had a discussion with two people involved with the TIF — Cummings and Craig Bernick — it wasn’t even on his radar. That is a familiar story. Advanced bettors and racing executives know all about breakage, because it has a direct impact on their livelihood, but the regular customer is often in the dark.

“Even as a player, I wouldn’t have known about it, if not for hearing Pat talk about it,” Koenig said. “And I’m a horse racing nerd. I wouldn’t be doing it otherwise.”

Koenig intends to submit a bill during Kentucky’s legislative session (Jan. 4-April 14) that will reduce breakage to a penny on the state’s races. That means if you’re supposed to get paid $2.38 on a $2 wager, that’s what you will get, instead of $2.20. The breakage provision will be a part of a larger tax bill which will also move varying taxes related to horse racing in line to 1.5%.

Currently, the tax on parimutuel wagering activity in Kentucky is 0.5% for ADWs, 1.5% for on-track wagers, 3% for off-track simulcast locations, and 1.5% for historical horse racing (HHR) machines. There was talk, at some point, about potentially increasing tax rate for HHR, a parimutuel game that has the look and feel of a slot machine, but Koenig said that will not be part of the bill.

Koenig’s stance is simple: Bettors should get paid what they are owed.

“We’ve taken care of the breeders, the tracks, and the owners. When are we going to take care of the bettors?” said Koenig, a horseplayer himself. “The show doesn’t run without them.”

But the presence of HHR, a boon to Bluegrass operators and state coffers, leaves Kentucky uniquely positioned to eliminate breakage. Operators are more likely to swallow the loss of breakage if they continue to get expanded revenue from more HHR machines. That’s not the case in other racing states.

Cummings spoke at a November meeting of the Pari-Mutuel Wagering Taxation Task Force, which is co-chaired by Koenig and Kentucky state Sen. Damon Thayer. Thayer said he supports Koenig’s efforts to reduce breakage and will “make the case” if the bill can get to the Senate. He also said the rationale for the current breakage system “is hard to argue.”

“Kentucky is unique in that they formed a legislative task force to study taxation across the parimutuel wagering spectrum, which includes their very successful historical horse racing machines,” Cummings said a month after his presentation to the task force. “Much to their credit, the task force considered the role of breakage in the mix of the entire landscape.

“A shift to penny breakage would be a win for anyone betting Kentucky racing, but it is clear how much time and effort goes into these matters. While every state is different, I doubt we see a cascade of breakage policy changes in the short term, but I am hopeful that if penny breakage becomes a reality on races in Kentucky, others will see the benefit over time and realize it is a worthwhile effort to make racing wagering more competitive.”

Competitive pricing to compete against sports betting

There are differing opinions about just how price sensitive the average horseplayer or sports bettor is, but if Kentucky essentially eliminates breakage, it would be a good test case. Breakage losses for bettors come on top takeout rates from parimutuel pools, which vary by wager type and track, but average out to about 20% nationwide. That is significantly higher than the traditional vigorish on a sports wager at a sportsbook.

The New York Racing Association (NYRA), which has the best breakage situation in the nation and operates its own ADW, NYRA Bets, declined requests for an interview with CEO David O’Rourke, but issued a statement.

“NYRA considers it an obligation to look after the best interests of horseplayers,” the statement from spokesman Patrick McKenna said. “NYRA, along with a number of industry stakeholders, are in agreement that there are legacy aspects of the parimutuel system that should be revisited. This is especially important with the rapid expansion of the sports betting marketplace. Breakage regulations differ by jurisdiction, and NYRA would welcome a broader conversation around the uniform modernization of pari-mutuel wagering regulations.”

O’Rourke expounded upon those thoughts at the University of Arizona’s Global Symposium on Racing in December.

“I do think it needs to be reexamined, and I’d love to do it industrywide, so it was consistent — create a model for it,” O’Rourke said during a panel discussion when asked about the pricing aspects of breakage and takeout. “As the product evolves and we merge into what I believe is our opportunity in sports betting, our product is going to change. It will evolve. And the things you are pointing out are sore-spot aspects that we need to really, really reexamine.”

If those aspects have been reexamined, however, they have not been acted upon widely. Takeout rates have largely remained the same across the industry, including what some describe as predatory jackpot-style bets that feature effective takeouts in the neighborhood of 40-50%, although NYRA did ditch its jackpot Pick 6 in 2021 in favor of a traditional Pick 6.

But Koenig and Thayer are optimistic about how penny breakage could make Kentucky horse racing a more attractive betting product.

“For someone like me, who likes to spend his free time on his computer betting at home, usually at a Kentucky track, that breakage will add up,” Koenig said. “If you’re getting back $2.35 instead of $2.20 or $2.75 instead of $2.60, after a while, why would you bet anywhere else?”

“People vote with their feet and people also bet with their feet,” Thayer added. “If we can get the breakage situation taken care of, it will change the narrative and other jurisdictions will have to respond.”

Other states have different circumstances

For a state like California, which does not have any gaming subsidies for racing and lacks the cash cow that is HHR to print money for the industry, it’s hard to imagine much change. California operators took in more than $7.5 million in breakage in fiscal year 2020-21, according to the California Horse Racing Board (CHRB). Kentucky brought in $9.3 million in breakage for its most recent fiscal year, according to the TIF.

“We are watching with interest regarding what Kentucky is doing,” CHRB executive director Scott Chaney said in a statement. “We agree that California should continually look for ways to reward the wagering public and encourage betting on races, especially in our state.”

But many involved in horse racing have heard these platitudes, on varying topics, for decades. And although it is speculative, some contend breakage returned to bettors would just end up back into parimutuel pools, which would lead to greater churn and benefit the industry.

So proponents of eliminating breakage have a simple question: Is there a rational case to be made as to why operators should retain breakage instead of it being returned to bettors? If there is, nobody has made that case. So why has it remained?

“It’s been 30 years [since New York changed its breakage model]. I’m waiting for somebody else to do something,” Crist said. “I’m not going to count those chickens. The world has changed and the accounting has changed. There’s no reason not to pay to the penny. I’d love to hear someone stand up and give a reason for why we should still have 20-cent breakage [off a $2 base wager], because there isn’t one.”

Photo: Tommy Gilligan/USA TODAY