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




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           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.




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               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  




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          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  




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          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  




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          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.  




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          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  




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          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.




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           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.



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