BILL ANALYSIS Bill No: SB 662 SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION Senator Roderick D. Wright, Chair 2009-2010 Regular Session Staff Analysis SB 662 Author: Yee As Amended: April 13, 2009 Hearing Date: April 28, 2009 Consultant: Chris Lindstrom SUBJECT Horse racing: board powers: advance deposit wagering. DESCRIPTION SB 662 authorizes the California Horse Racing Board (CHRB) to provide real time monitoring of all parimutuel wagering transactions on California horse races. Specifically, the bill: 1)Expands the responsibilities of CHRB to include: a) Providing real time transactional monitoring of all parimutuel wagering on California horse races. b) Maintaining independent technology services to provide for capturing, saving, transmitting, receiving, and otherwise disseminating technology resources. CHRB may contract with the Department of Technology Services or seek suitable accommodations with vendors of CHRB's choosing for the purpose of furthering the CHRB's chosen business objectives. 2)Requires any association or fair that conducts a racing meeting to pay a license fee to the state to fund real time transactional monitoring of all parimutuel wagering on California horse races. EXISTING LAW SB 662 (Yee) continued Page 2 Article IV, Section 19(b) of the Constitution of the State of California provides that the Legislature may provide for the regulation of horse races and horse race meetings and wagering on the results. Existing law provides CHRB shall have all powers necessary and proper to enable it to carry out the purposes of the Horse Racing Law and specifies certain responsibilities of CHRB including, but not limited to, all of the following: 1) Adopting rules and regulations for the protection of the public and the control of horse racing and parimutuel wagering. 2) Administration and enforcement of all laws, rules, and regulations affecting horse racing and parimutuel wagering. 3) Adjudication of controversies arising from the enforcement of those laws and regulations dealing with horse racing and parimutuel wagering. 4) Licensing of each racing association and all persons, other than the public at large, who participate in a horse racing meeting with parimutuel wagering. 5) Allocation of racing dates to qualified associations in accordance with law. Existing law provides that, as of July 1, 2009, any association or fair that conducts a racing meeting shall only pay a license fee to the state to fund CHRB and the Kenneth L. Maddy Equine Research Laboratory at UC Davis as follows: 1) All racing associations and fairs including all breeds of racing shall participate in the funding of CHRB in accordance with a formula devised by CHRB in consultation with the horse racing industry. 2) The baseline funding for CHRB and equine drug testing in the first fiscal year after the enactment of this section shall be the amount approved in the 2008-2009 state budget. SB 662 (Yee) continued Page 3 3) Adjustments to the funding in subsequent budget years may only be made by an act of the Legislature. Existing law provides that, after payments to fund CHRB and the equine drug testing program, the remaining amount of license fees shall be distributed to the association that conducts the meet and the horsemen participating in the meet as follows, 50 percent to the association as commissions, and 50 percent to the horsemen as purses. Existing law authorizes CHRB to permit licensed racing associations and fairs to operate satellite wagering facilities. Existing law authorizes and defines "advance deposit wagering (ADW)" as a form of parimutuel wagering in which a person "establishes an account with a CHRB-approved betting system or wagering hub where the account owner provides 'wagering instructions' authorizing the entity holding the account to place wagers on the owner's behalf." Existing law allows CHRB to authorize 15 mini-satellite wagering sites in each of the northern, central and southern racing zones. Existing law establishes the Maddy Lab to take advantage of the expertise of the veterinary specialists at UC Davis' School of Veterinary Medicine. The laboratory is a part of the California Animal Health and Food Safety Laboratory. Existing law authorizes the allocation of $11 million from the Satellite Wagering Account to pay for the costs and expenses of CHRB and the Maddy Lab. BACKGROUND Purpose of the bill. According to the author's office, "The appearance of evil is sometimes worse than the evil itself. This quote is from the former chairman of the California Horse Racing Board, Nathaniel Colley. What's even worse, is not knowing and not caring. "SB 662 requires the California Horse Racing Board to provide for real time transactional monitoring of all parimutuel wagering on California races. The Board sorely SB 662 (Yee) continued Page 4 needs to have the independence and ability to monitor all parimutuel wagers on California horse races. "This need was brought to the forefront during the 2008 Kentucky Derby. A California bettor placed a "Quick Pick" wager of $1,500 on the Kentucky Derby. This wager was intended to randomly select horses from numbers 1 through 20 to fill the wager. The winner of the Derby was the number 20 horse. "Two days after the running of the Derby, the California bettor came into the Stewards Office at Golden Gate Fields and told the official, "It's really strange that out of all these tickets the number 20 horse did not show up anywhere." The steward asked the mutuel manager (an employee of the race track) what he thought about this coincidence and the employee said something to the effect that it was "bad luck." The steward (a contract employee of CHRB) then reported the coincidence, or bad luck, to the Executive Director (ED) of CHRB. The ED then contacted the mutuel manager who stated: "there may be a problem with the tote machines." "The tote machines are property of a contractor, who contracts with the racing associations. The ED then contacted the tote company's Regional Manager who stated that he had heard of a similar problem nine months earlier in Indiana. Based on this information, the ED ordered an audit of the tote system in California. "At that point in time, about two weeks after the Derby, the possible failure in the tote system became public knowledge. Senator Leland Yee called the ED to ask the question: "Don't you have any way of monitoring the system to know if something is going wrong?" The ED responded that the Board is conducting an audit of the tote company to find out if there was or is a problem, and, that the Board is dependent on the numbers furnished by the tote company through a system called the Consolidated Horse Racing Information Management System (CHRIMS). Senator Yee stated, "Well that's only going to tell you what they want you to hear." "The audit of the tote company revealed an "anomaly" on some machines and only on the "Quick Pick" wager. The Quick Pick wager was withdrawn from the betting format, and SB 662 (Yee) continued Page 5 the tote company was ordered to pay restitution for not bringing this to the attention of the CHRB in a more timely fashion. "In addition, on April 23, 2009, ThoroughbredTimes.com reported that a wagering system foul-up on April 22 (less than a week ago) impacted wagering pools in five states and affected bettors across the country. $2 bets placed at New York City Off-Track Betting and processed through AmTote were deposited into wagering pools as $200 bets. Thoroughbred facilities affected were Aqueduct, Golden Gate Fields, Gulfstream Park, Indiana Downs, Keeneland Race Course, and Tampa Bay Downs. "These known incidents make it clear that California consumers need independent, real time oversight of all parimutuel wagering on California horse races." Background. For more than a decade, horse racing has been a declining industry. Some argue that the decline stems from increased competition from expanded gaming in California to the inability of the industry to attract new fans. Regardless of the reasons, the closure and threatened closure of racetracks, a decline in the handle, purses and the size of racing fields are indicators that the sport of kings is in a precarious position. Over the years, in an effort to secure the business footing of horse racing, the industry has endeavored to modify its business model to attract more fans and to make wagering more convenient. In 1984, legislation was enacted to authorize satellite wagering via off-track facilities. In 2001, legislation was enacted to authorize advance deposit wagering (ADW) which allows a fan or customers to deposit funds into an account in order to wager online and over the telephone. In 2007, legislation authorized the establishment of 45 mini-satellite wagering facilities throughout the state - 15 in each racing zone. Without getting into the debate regarding the impact of satellite wagering and ADW on the business of horse racing, as a whole, one thing is clear - electronic wagering systems are critical components of horse racing's future. Illustrating this is the fact that ADW is the only segment SB 662 (Yee) continued Page 6 of the horse racing industry that is growing. Consolidated Horse Racing Information Management System (CHRIMS). CHRIMS is a database system developed in 1989 that keeps track of wagers and the flow of money in horse racing. CHRIMS provides end-users access to information by selected data ranges and a variety of data-sorting options. Using CHRIMS, end-users can see what has actually taken place on the prior day, in terms of handle, takeout, total amount payable to the public, distributions, etc., and can be further sorted by location groups (California on-track, off-track, and out-of-state wagers) or by various date ranges, breeds and a variety of other options. CHRIMS can also run "what-if" scenarios to project the effects of proposed changes to law that would change distribution percentages. CHRIMS does not provide real time information. Utilizing software tools, CHRIMS staff loads and balances California parimutuel data on a daily basis. Each night following the close of wagering, CHRIMS computers download complete wagering files from the three totalizator hubs. The following morning, CHRIMS personnel supervise the compilation of tote data into usable formats (pool by pool, site by site, handle, takeout, breakage, and payout), which is then processed, per statutory and contractual takeout distribution formulas and made available for review. Further, CHRIMS is not completely independent. CHRIMS is the property of the state. The members of the CHRIMS board are also its clients -- racing association operators. The members of the CHRIMS board also, as part of their duties as racetrack operators, contract with the tote company for services. Moreover, CHRIMS contracts with other states and the tote company contracts back with CHRIMS. Best approach. With more and more wagering occurring on the Internet and electronically, it could be argued that the opportunities for fraud have grown. At this time, CHRB, who is responsible for protecting the betting public, depends significantly on CHRIMS in its oversight role. CHRB does not have an independent monitoring system that in "real time" can pick up, not only anomalies in the tote system, but also detect money laundering schemes and trends in wagering that may put the betting public at a disadvantage. SB 662 (Yee) continued Page 7 By all accounts, all stakeholders want to ensure the integrity of horse racing to protect the betting public, the track operators, and everyone involved in horse racing, and consider that real time wagering monitoring system would be beneficial. However, what approach is the best approach? Should the real time monitoring system be developed and implemented on a state-by-state basis or should it be done via a national monitoring system? Do any such systems exist or are any in service today? Who should pay for the system, each state in which the system is located and operated, or all states that benefit? Currently, New York State Racing and Wagering Board passed legislation requiring independent real time monitoring of all parimutuel wagering. New York aimed to have the system in place by January 1, 2009, but missed that target date. New York is working closely with the industry and system providers to develop the parameters of and implement the system. The state of Indiana and Minnesota are looking at adding oversight software for its horse racing parimutuel wagering pools. The author, through SB 662, is committed to working with the industry to establish a real time system to protect California's wagering public as soon as possible. The author indicates that if and when a national system is developed, then California could participate in the national program. Totalizator. A totalizator is the name of the system which runs parimutuel wagering, calculating payoff odds as wagers are made and payouts once a race is complete. Electronic terminals are used by parimutuel clerks to key in wagers into the system and by customers who place bets into the system directly or through a wagering hub. Independent Monitoring System (IMS). IMS is a computerized system that has been designed, built and/or operated or supported by a company or companies other than the totalizator provider or related entity and is not related to the totalizator provider or authorized parimutuel wagering entity in any way. The system must, among other things, monitor all transactions received and processed by the totalizator, produce alerts corresponding to potential SB 662 (Yee) continued Page 8 wagering rule violations or other situations that could compromise the integrity of the wagering process. Real Time Transactional Monitoring System. A real time transactional monitoring system is an operating system that can respond to input immediately (ranging from a few seconds to minutes depending on the function). The system must be able to react to a steady flow of new information without interruption and perform its tasks within the same time constraints of the totalizator system it monitors. PRIOR/RELATED LEGISLATION SB 16xx (Ashburn), Chapter 12, Statutes of 2009-10 Second Extraordinary Session . Among other things, establishes the baseline funding for CHRB and equine drug testing at the amount approved in the 2008-09 Budget Act. Provides that subsequent funding for CHRB and equine drug testing shall be pursuant to a formula devised by CHRB in consultation with the horse racing industry. AB 765 (Evans), Chapter 613, Statute of 2007 . Reauthorizes, expands and revises state authorization for Advance Deposit Wagering. AB 471 (Hertzberg), Chapter 198, Statutes of 2001 . Authorized Advance Deposit Wagering. SB 428 (Maddy), Chapter 825, Statutes of 1995 . Authorized the construction of an Equine Drug Testing Laboratory at UC Davis. Created the Equine Research Laboratory Account in the Fair and Exposition Fund for the deposit of funds distributed from the wagering on horse racing for purposes of the laboratory. SB 14 (Maddy), Chapter 1273, Statutes of 1987 . Expanded satellite wagering statewide. License fees from satellite wagering are deposited into the Satellite Wagering Account. SB 1499 (Maddy), Chapter 1698, Statutes of 1984 . Implemented satellite wagering in the central and southern part of the state, and made conforming and technical changes in the northern part of the state. Proposition 3 of 1933 . Legalized parimutuel wagering on horse racing in California. SB 662 (Yee) continued Page 9 SUPPORT: As of April 24, 2009: Center for Public Interest Law, University of San Diego School of Law OPPOSE: None on file as of April 24, 2009. FISCAL COMMITTEE: Senate Appropriations Committee. **********