Thomas Lambert, an applied economist at the University of Louisville's College of Business, wasn't quite sure if he could trust the dollar amounts that were routinely cited regarding the impact of the GI Kentucky Derby on the region's economy. So he took on the task of finding out for himself, and has just published the results in a study titled, “Horse Sense or Horse Hype? Estimating the True Economic Impact of Churchill Downs and the Kentucky Derby on the Louisville Metro Area.”
Lambert started by noting that the results of quick internet searches (which bring up the type of oft-repeated data that economists everywhere regard with healthy skepticism) generally yielded two familiar figures: Churchill Downs's own Kentucky Derby Museum pegged the race's economic impact at $217 million without citing a source. A significantly higher figure of $400 million was often “mentioned in various press accounts and by local city leaders,” but its source, too, wasn't immediately clear.
A little digging by Lambert revealed that the Derby Museum's $217-million number came from a 2001 study by a marketing firm and was now two decades outdated. And he found the $400-million figure came from the civic marketing organization Louisville Tourism, which used a modeling system to make projections.
But, Lambert noted, “if one multiplies the 2001 study result by an inflation factor of 1.72 to account for inflation from 2001 to 2023, the result is approximately $375 million. This is close, but not quite the same as $400 million, and it also does not take into consideration declines in Derby attendance since 2015.”
Lambert then researched and fed a wide range of publicly available data on Derby-related spending, revenue, taxation, employment, hotel stays, restaurant visits, and on-track betting and attendance into a complex economic input-output modeling system known as IMPLAN to come up with the estimated financial impact of what happens at Churchill Downs on and around the first Saturday in May.
He ended up finding out that the oft-cited $400-million estimate for the regional economic impact of the Derby is about as on-the-money a projection as one can make.
“The findings corroborate estimates that put the economic impact of a normal Derby week at $400 million,” Lambert wrote. “The economic impact of the [GI Kentucky] Oaks, Derby, and other races that week appear to have a substantive effect on the region's economy.”
Lambert continued: “For businesses, this is good news. During the pandemic and for state government, there is not much of a gain regarding tax revenues, and for local governments there are tax losses.
“However, during usual [non-pandemic] years, there are significant gains,” Lambert wrote. “It also can be argued that Derby week also serves as a promotional tool to bring in new residents, investment, and businesses to the area, and the value of this is much greater than any possible tax losses or sacrifices. In other words, the events of Derby week can help keep the name of the city circulating throughout the nation just as professional sports teams help to keep the names of their host cities in the media.”
There are caveats, however.
Lambert wrote that “the employment conjecture of almost 2,000 employed at the facility is very high and needs to be qualified by noting that during the Oaks and Derby more than 10,000 temporary workers are hired to help with large attendance numbers.
“Hence, the track employment numbers are probably 10 times that of what would usually appear for a typical horse racing track and much higher than what resources usually report is the normal, year-round, average employment at the track of between 200 and 500 employees. This range is due to the seasonal nature of horse racing and the fact that during much of the year, facilities sit idle.
“Nonetheless,” Lambert wrote, “the number of nearly 2,000 is legitimate given that IMPLAN has averaged the employment numbers and considers all jobs created by an employer, regardless of whether part or full-time, or permanent or temporary within a given time period.”
Lambert also cautioned that horse racing itself is not the prime economic driver it once was.
“Overall racing attendance and gambling has been in decline in the U.S. during the current century, and it is the growth of historical horse racing machines and its gaming centers that has been Churchill's main star in its product portfolio over the last 10 years or so,” Lambert wrote.
As a result, Lambert wrote, when adjusted for inflation based on U.S. Bureau of Labor Statistics, “the 2022 wagering for the Derby and all Derby day races falls short of 2019 revenues.”
That adjusted-for-inflation finding stands out in contrast against Churchill's reporting last year of record 2022 Derby handle figures across numerous betting categories.
The difference? Racetracks don't report handle figures that include tweaks for inflation, while economists–especially during this current period of high inflation–view such adjustments as vital to seeing the overall picture more accurately.
Taxation strategies that are favorable to Churchill Downs also come into play, Lambert wrote.
“Churchill Downs has received tax breaks over the years by its inclusion in a tax increment financing district and by signing over many parcels of land on its [track] premises to Louisville city government, [which] helps Churchill to avoid and/or underpay local and state taxes,” Lambert wrote.
Other civic perks don't hurt Churchill's bottom line, either, Lambert postulated.
“Additionally, the Oaks and Derby days receive the benefits of hundreds of local police and Kentucky National Guard troops being deployed to help manage crowds at no cost to the track, and of the state pari-mutuel tax imposed on wagering at the track, only a small portion goes to the state's general budget,” Lambert wrote. “Most if it goes for paying for equine industry and equine health related programs, which provides an indirect benefit to Churchill and other tracks as well as horse farms in the state.
“Even music to play 'My Old Kentucky Home' by the University of Louisville Marching Band is provided without charge,” Lambert wrote–although perhaps somewhat tongue-in-cheek considering his connection to the school. (He did concede that amount is “fairly small when compared to the general economic activity of Derby week.”)
Still, Lambert rationalized some of the economic subsidies that Churchill gets by writing that they aren't much different from those received by sports teams all across America.
“Of course, many professional sports teams in the NFL, NBA, or MLB have relied upon subsidies and other concessions granted by local governments. Municipal officials have to weigh the benefits and costs of any tax or subsidy decisions. If there are losses, perhaps there are gains in other, non-tangible areas that can offset them. On the other hand, the money sacrificed and taken away from basic public services such as schools, police, fire, and sanitation should only be justified if it serves a bigger public purpose.”
In summation, Lambert wrote that, “In general, the economic benefits of Churchill and Derby week activities appear to create more benefit than loss to the Louisville area, and so any governmental assistance given to Churchill for Derby week probably can be justified easily by policymakers.”
The post The Week in Review: It’s Official, Derby Generates $400M Economic Impact appeared first on TDN | Thoroughbred Daily News | Horse Racing News, Results and Video | Thoroughbred Breeding and Auctions.
