The Indiana Inspector General is recommending that the lucrative $58 million subsidy paid annually to the state’s horse racing industry be cut by more than half—a move that could strike a huge blow to a business aiming to raise its profile.

The agency, which investigates state fraud and abuse claims, made the suggestion in a report last week that exonerates the Indiana Horse Racing Commission of any criminal or ethical wrongdoing.

The Inspector General launched the 16-month probe amid numerous allegations of potential violations, including inappropriate wagering involving jockeys and horse owners betting on their own races.

A review of Indiana law found that the wagering is legal. But if the state Legislature wants to stop the activity, the Inspector General wrote, it would back a statutory prohibition.

A bigger issue, though, is the agency's proposal to slice the racing industry’s annual subsidy from $58 million to $28 million—the amount it received prior to the opening of the two racinos near horse tracks Hoosier Park in Anderson and Indiana Downs in Shelbyville.

Indiana's horse racing industry began receiving state subsidies in 1993, initially from taxes on riverboat gambling. In 2007, the state Legislature expanded the funding to include a portion of revenue from the racinos' slot machines.

The racinos, which opened in 2009, set aside 15 percent of their slot-machine revenue, with 60 percent of the set-aside going toward purse money at the tracks and the remaining 40 percent going to promote horse breeding in the state. Since 1993, the Indiana horse racing industry has received a total of $427 million in subsidies.

The idea is that more prize money and better horses will attract more people, and money, to the sport. The additional funding seems to have had an impact. The sport's direct economic impact has grown from $181 million in 2005 to $733 million in 2010, according to a Purdue University study.

What started as a subsidy to jumpstart an industry might need to be re-evaluated, Inspector General David O. Thomas said in a written statement.

“Assuming that a continued subsidy to the horse racing community is deemed proper by the Indiana Legislature, we respectfully recommend that the Legislature consider evaluating the amount of the subsidy and consider a monetary cap at pre-racino figures,” he said.

Any efforts to cut the $58 million subsidy would be devastating to the industry, said Herb Likens, chairman of the Indiana Thoroughbred Owners and Breeders Association.

"The quality of racing in the state of Indiana would go down rapidly," he said. "I know there's a lot of competition for dollars, but people don't realize how important horse racing is to Indiana, especially where I'm at in Anderson."

Likens owns nine horses that race at Hoosier Park and said there "wouldn't be anything left" in Anderson if Hoosier Park were to close.

The state Horse Racing Commission, in a written response to the Inspector General's recommendation, declined to comment on the proposed cut.

“We have never inserted ourselves in this particular public policy issue in the past, and will not do so now,” said Sarah McNaught, chairwoman of the Horse Racing Commission.
 
McNaught also said she’s not surprised the commission was fully exonerated of charges of wrongdoing.

“This is not the first time that fabricated charges have been levied against the commission, its staff or other industry participants,” she said. “Since my tenure as chair began in 2005, I have sadly learned that spreading misinformation is an all-too-common way for a small number of industry participants to pursue their personal and/or political agendas.”

Joe Gorajec, the Horse Racing Commission’s executive director, is appointed by the commission, unlike leaders of the Indiana Gaming Commission and Indiana Lottery Commission, who are selected by the governor.

The Inspector General said the Horse Racing Commission’s executive director also should be appointed by the governor, “to maintain similar accountability, and due to the oversight of over $140 million in annually wagered funds.”

The report also questioned the commission’s spending of more than $300,000 annually in outside legal fees, and said it should employ an in-house attorney, similar to other state commissions. A staff attorney would enable the Horse Racing Commission to save money and to employ a lawyer more familiar with state government.

The Inspector General said it launched its investigation into the horse racing industry at the request of several state legislators, Gov. Mitch Daniels and people in the horse racing community. Legislative action would be required to make any of the Inspector General's recommended changes.

More than 100 witnesses were interviewed for the report, the Inspector General said.