Kentucky's Breeders' Incentive Fund, touted as a way to help preserve the state's horse breeding industry, is likely to have much less money in the next few years to encourage mares and stallions to stay here.
The fund, which is financed by the sales tax paid on stud fees, could be cut by more than 25 percent next year. Without a new source of revenue, it most likely will be down the next year as well.
Fund director Jamie Eads said a 25 percent drop was projected last fall "but probably now, we think it will be higher than that."
Compare that to Pennsylvania's Breeding Fund Program, which had $20.8 million for Thoroughbreds this year, and probably will have a similar amount next year for a much smaller pool of horses, according to Mark McDermott, executive director of the Pennsylvania Horse Breeders Association.
Kentucky's fund is being hit two ways by the economic downturn: by a drop in stud fees and by a drop in breeding.
The 2008 North American foal crop was down 2.3 percent from 2007, according to the Jockey Club. And fewer Thoroughbred mares were bred last year, in Kentucky and elsewhere, leading the Jockey Club to predict the 2009 foal crop to be down an additional 3.1 percent.
The drop in stud fees could have a big impact on the amount of sales tax collected. Take four of the top-priced stallions last year: Storm Cat, Distorted Humor, A.P. Indy and Unbridled's Song. Collectively, on paper, they could have generated as much as $6,188,000 in tax revenue last year, based on the number of foals sired and their individual stud fees at the time. (In reality, many foals are bred on a "foal-sharing" basis in which no stud fee changes hands, so no tax is generated.)
But Storm Cat has retired, and stud fees for the other three stallions have dropped by hundreds of thousands of dollars. Even if Distorted Humor, A.P. Indy and Unbridled's Song sire the same number of foals, at their new stud fees they could be worth almost 40 percent less tax revenue.
But many stallions have not attracted the same number of mares to breed to. Smaller book sizes will compound lower stud fees, increasing the drop in sales tax receipts.
Eads said that, based on falling stud fees and the anticipated drop in breeding, "I'm assuming payments are going to go down."
By contrast, Pennsylvania's fund is fueled by slots and a pari-mutuel tax. Even though gambling in general has suffered, McDermott said, the state's situation is "rosy."
"We're going pretty good right now, attracting a lot of attention, and it's attracting a lot of breeders," he said. Last year, while breeding was down nationally and in Kentucky, the number of mares bred in Pennsylvania was up by almost a third (about 300 mares, still a small number compared with Kentucky's overall market dominance).
As states compete for a shrinking pool of breeders, the possibility of winning incentive money could make the difference.
"Our business is growing. The only thing holding us back is the economy," McDermott said. "Money talks. As long as we have money, we'll be successful."
For fiscal year 2008, Kentucky's breeders' incentive fund had receipts of $15.5 million from Thoroughbred stud fees, $2.5 million from Standardbred stud fees, and $1.3 million from all other breeds. That money was then paid to horse breeders based on various incentive programs tailored to each breed.
Tax receipts from Thoroughbred stud fees, the largest proportion of revenue generated, so far for fiscal year 2009 (which would be July through December 2008) were $6.6 million, down significantly from the same period in the first two years of the fund. (Last year's numbers were skewed by a shift in payments from November to February, so that even though the payments had been down through December the overall fiscal year numbers ended up being virtually the same.)
Payments this year for rewards earned in 2008 should be unaffected because that money was paid in fiscal 2008 as well. But payments will drop in 2010 and probably in 2011, Eads said.
Thoroughbred racing gets the largest share of the money, with smaller percentages doled out to non-race breeds based on the number of horses each has in Kentucky.
For Standardbreds, the incentive money is pooled into the annual "sire stakes," special races only for Kentucky-breds. Eads said that in anticipation of the drop in receipts, purse money for the preliminary legs of those races has been cut 25 percent, although the purse money for the finals will be maintained at $300,000. She said the reductions could be maintained through 2013, although they will be adjusted if the drop is less significant than expected.