A decision last month by the Pennsylvania Supreme Court determined that thousands of so-called games of skill operating throughout the state under what had been a gray area of the law are, in fact, illegal.
That decision, which will begin to be enforced Oct. 15 after a 120-day safe harbor period ends, figures to provide a lift for state casinos, including those that operate at Thoroughbred tracks. Casinos at Hollywood Casino at Penn National Race Course, Parx Racing, and Presque Isle Downs benefit Thoroughbred racing.
In the fiscal year completed in June, the casinos at those three tracks generated about $51.9 million for the Pennsylvania Race Horse Development Fund, with 80% of that money going to purses, 16% to breeding funds, and 4% to benefits and pensions for backstretch workers.
During a July 30 conference call with analysts and investors, Churchill Downs Inc. CEO Bill Carstanjen said experts have estimated some 70,000-100,000 gray games operating throughout Pennsylvania at locations such as taverns, restaurants, social clubs, gas stations, and pizza shops. Based on the removal of "gray games" in Kentucky, where lawmakers passed legislation in 2023 to remove the devices, and Virginia, where they also are illegal, Carstanjen believes racinos in Pennsylvania will see added interest. CDI operates legal historical horse racing outlets in Kentucky and Virginia.
"What you have there is a market that gray game illegal operators came in and cannibalized very quickly," Carstanjen said of Pennsylvania. "Now it's been made clear that these machines are illegal, and as a legal gaming operator in jurisdictions like Kentucky, Pennsylvania, and Virginia, that's good for our business."
In the Pennsylvania Supreme Court's 4-2 ruling against the gray machines, it concluded that "games of skill" are slot machines and should be regulated as such. In its decision, it did not buy arguments that the "games of skill" were different from slot machines.
"Nonetheless, one might, as the commonwealth court did, insist that the device is not a 'slot machine' because there is some 'skill' component of the gameplay (or at least there can be, hypothetically). But this is merely to invoke the predominant factor test," the court concluded. "The new definitions of 'skill slot machine' and 'hybrid slot machine' plainly eliminate the predominant factor test for any device that otherwise constitutes a 'slot machine.' No amount of skill, chance, or any combination thereof will remove a device from the ambit of a 'slot machine' after Act 42 of 2017."
Carstanjen said that it's important for states to protect licensed gaming outlets to ensure they receive the benefits tied to that gaming.
"We play by the rules. We're licensed. We pay taxes. We contribute to other avenues as the government requires us, whether it be horse racing or otherwise," Carstanjen said. "It's not fair if it's not regulated. It's not right when folks just come in and open up illegal gaming operations.
"So this is going to be good for Presque Isle. This will improve whatever happens from this point."
Carstanjen said the positive outcome for racinos in the state will follow whether gray games are removed in October or if state legislators decide to write new laws to tax and regulate them.
"If there's a movement afoot to tax, regulate, and legalize some form of distributed gaming, then they'll be playing by the rules like we play by the rules. So that will be good for us as well," Carstanjen said. "All in all, it's a good thing for gaming operators when you have events like we just saw in Pennsylvania with their Supreme Court, and like we've seen in Virginia, and like we've seen previously in Kentucky. It gives confidence to those of us that operate under regulated gaming jurisdictions and play by the rules and pay our taxes. It gives us confidence that while there can be bumps in the road and uncertainty for a while, eventually the states get it right and allow our business model to function as intended and achieve the public policy objectives that the state intended when they legalized gaming.
"So I think it's good news ahead for Presque Isle in Pennsylvania."
That future for Presque Isle could soon include a new owner. Presque Isle is one of nine casino properties that CDI is looking to sell as it focuses efforts on HHR, the Kentucky Derby (G1), and its advance-deposit wagering platform TwinSpires.
READ: CDI Plans to Sell Nine Casinos Including Presque Isle
"We encourage whatever makes sense for potential buyers, but for us, we've announced the sale of these assets, and that's what the team's been tasked with working on," Carstanjen said of the nine casino properties. "There aren't any nuances around it, like just selling the real estate. We're not interested in doing that."
In building on its Kentucky Derby property, on Monday CDI and the New York Racing Association announced plans for a six-race series for top 3-year-olds at Churchill Downs, Belmont Park, and Saratoga Race Course—including a new series championship race in September at Churchill.
