BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 1072
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          Date of Hearing:   August 30, 2010

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS
                                Felipe Fuentes, Chair

                  SB 1072 (Calderon) - As Amended:  August 20, 2010 

          Policy Committee:                              Governmental  
          Organization Vote:                            N/A

          Urgency:     No                   State Mandated Local Program:  
          Yes    Reimbursable:              No

           SUMMARY  

          This bill,  as proposed to be amended  , authorizes the California  
          Horse Racing Board (CHRB) to allow exchange wagering as a new  
          method of wagering on horse races, if the CHRB, the California  
          horsemen (owners of race horses), and the tracks approve. 

           FISCAL EFFECT  

          1)Exchange Wagering:

             a)   A 2003 study on the early effects of exchange wagering  
               in Australia and follow up information from the Australian  
               Racing Board, found that exchange wagering resulted in a  
               loss of support for the racing industry in Australia as  
               bettors shifted from traditional forms of betting, which  
               support such things as the tracks, trainers, health and  
               safety of the horses and riders, government oversight of  
               the industry, to exchange wagering which initially provided  
               no support for government oversight and for the industry. 

               Should California have the same experience as Australia,  
               the authorization of exchange wagering could result in a  
               reduction in the traditional takeout which is used to  
               support the CHRB and maintain the horseracing industry.   
               While this legislation allows the CHRB to recoup their  
               costs for regulating this new form of wagering, it does not  
               require that a portion of the money wagered on these types  
               of bets be included in the traditional takeout which is  
               used to fund track maintenance and safety, workers  
               compensation, retirement, and health insurance for jockeys  
               and backstretch workers, equine research through the  








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               Kenneth L. Maddy Equine Analytical Chemistry Laboratory at  
               the University of California, Davis, or the statewide  
               promotion of horseracing. 

             b)   Unknown, potentially significant costs, potentially in  
               the low hundreds of thousands of dollars, for the CHRB to  
               oversee and regulate exchange wagering in California.   
               However, under this legislation, the board is authorized to  
               recover all costs associated with exchange wagering from  
               the exchange wagering licensee.

          2)Increasing the takeout:

             a)   Increasing the amount of the takeout would reduce the  
               amount of money provided to winning bettors, and thus the  
               amount of taxable income reported as gambling winnings by  
               those bettors.  Currently, over $4 billion is wagered each  
               year in the state on horse races and almost $800 million is  
               withheld as the takeout to fund such things as horsemen's  
               purses, racetrack operations, state oversight of the  
               industry. If an increase in the handle for exotic wagers  
               results in a two percent increase in the takeout it would  
               result in approximately $70 million in horseracing revenue  
               being redirected toward the industry, rather than provided  
               to bettors as winnings.

             b)   This bill would not alter the percentage of wagers paid  
               to the CHRB for licensing fees.  To the extent, however, an  
               increase in the takeout decreases the amount of money  
               wagered at tracks or satellite wagering facilities or the  
               number of bettors at those sites, the amount paid to the  
               CHRB for its operating budget would decrease.  Conversely,  
               should the increase in purses increase betting activity,  
               the amount of revenue received by the board could increase.  


          3)California Marketing Committee:

             a)   Funding for the California Marketing Committee (CMC)  
               comes from the instate off-track wagering handle.  0.4% of  
               the amount wagered is provided to the CMC for marketing  
               horse racing in the state. In 2009, the CMC received  
               approximately $5 million for marketing. Extending the  
               sunset would result in continuing the annual redirection of  
               the handle.








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             b)   Minor and absorbable costs for CMC to produce a  
               semi-annual report on receipts and expenditures and for  
               CHRB to audit and review the reports. 

           SUMMARY (CONTINUED)
           
          Specifically, this bill,  as proposed to be amended  : 

          1)Adds a new Article (Article 9.1) to the Horse Racing Law  
            authorizing "exchange wagering" and declares that the  
            Legislature has determined that the CHRB is best suited to  
            oversee, license, and regulate exchange wagering in  
            California.  Declares legislative intent to promote the  
            economic future of the horse racing industry in California and  
            to foster the potential for increased commerce, employment and  
            recreational opportunities by authorizing exchange wagering. 

          2)Stipulates that exchange wagering shall only be conducted by  
            an exchange wagering licensee pursuant to a valid exchange  
            wagering license issued by the CHRB.

          3)Requires the CHRB to promulgate rules and regulations  
            governing the conditions under which exchange wagering may be  
            conducted, including requiring an annual audit of an exchange  
            wagering licensee. Also, would allow exchange wagers to be  
            submitted and accepted by licensed exchange wagering systems  
            in the same manner as is currently provided for Advanced  
            Deposit Wagers (e.g., in person, telephone, or Internet). 

          4)Includes language (similar to Advance Deposit Wagering law)  
            relative to supporting the contracting rights of pari-mutuel  
            clerks that have been displaced due to the increased  
            automation of the wagering process, in addition to a specific  
            distribution to the existing jockey health and benefit welfare  
            fund.

          5)Provides that every thoroughbred racing association or fair  
            that conducts a live race meet shall deduct an additional 2%  
            of the total amount handled on exotic wagers requiring the  
            selection of two wagering interests (e.g., exactas, quinellas)  
            and 3% of the total amount handled on exotic wagers requiring  
            the selection of three or more wagering interests (e.g.,  
            trifectas, superfectas).  (The additional takeout is intended  
            to augment purses.)








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          6)Provides that monies that would have been otherwise  
            distributed to a purse account from the increased takeout on  
            Breeders' Cup day(s) shall be available for the purpose of  
            promoting and sponsoring the Breeders' Cup.

          7)Extends the sunset date from January 1, 2011, to January 1,  
            2014, in existing law relating to a private statewide  
            marketing organization (CMC) to market and promote  
            thoroughbred and fair horse racing in California, including,  
            but not limited to:

             a)   Establishment and maintenance of a website featuring  
               California thoroughbred and fair racing; and,
             b)   Establishment and administration of a players incentive  
               programs for those who wager on thoroughbred association  
               and fair races, and promotional activities at satellite  
               wagering facilities to increase their attendance and  
               handle, as defined. 

          8)Provides that the marketing organization shall provide  
            specific reports to CHRB, as defined.
           
          COMMENTS  

           1)Intent  . The purpose of this legislation is to help stabilize  
            the horse racing industry by increasing the amount of money  
            available for purses, attracting the Breeder's Cup to  
            California as its permanent home, and authorizing a new type  
            of wagering, exchange wagering, in an attempt to attract new,  
            younger bettors.

           2)Deteriorating Status of the Horse Racing Industry in  
            California  . The California horse racing industry's long-term  
            health is threatened by a combination of factors, including  
            competition from racing in other states, other forms of gaming  
            within California, racetrack bankruptcies and the potential  
            for higher return from development than operating revenues.   
            As resources shrink, the industry is experiencing deficits in  
            virtually every one of its revenue sources.  Traditional take  
            out, allocation and distribution formulas are no longer able  
            to sustain ongoing operations.  As the value of racing  
            operations declines, track ownership is struggling to maximize  
            shareholders' return on the investment and tempted by  
            alternative uses of the property that yield higher returns.   








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            Consequently, the racing industry is suffering unprecedented  
            instability and capital flight.  Industry jobs are in  
            jeopardy, along with breeding farms and open space in urban  
            centers throughout California.  Also at risk is a substantial  
            amount of local and state revenue generated both directly and  
            indirectly by the industry.

           3)Exchange Wagering  .  This measure would authorize the CHRB to  
            license entities to operate exchange wagering systems that  
            accept "exchange wagers" from individuals residing either  
            within or outside of this state on horse races run in  
            California or in other states, so long as the process is  
            conducted in compliance with the federal Interstate  
            Horseracing Act.  Exchange wagering is defined as a means of  
            pari-mutuel wagering in which two or more persons place  
            identically opposing wagers on a horse race.  This bill would  
            require exchange wagering agreements to be entered into by the  
            exchange wagering licensee, the applicable racing association  
            or fair conducting live racing in the state, and the  
            horsemen's organization representing the particular breed  
            currently racing at the meet, and that provides for the  
            contractual terms and conditions specifying the use of the  
            racing signal and the compensation returned to the respective  
            parties to the agreement, audit terms and conditions, and  
            contractual remedies.  

            Exchange wagering on horse racing is currently permitted in  
            Great Britain and Australia.  Similar legislation has been  
            introduced and is moving through the New Jersey State  
            Legislature as well.    

            Under exchange wagering (which involves bettors betting  
            against each other, with no other entity having an interest or  
            stake in the outcome of the race), each bettor selects a  
            horse, an outcome, and the amount the bettor desires to wager.  
             Another bettor can match that wager, choosing to wager the  
            opposite of the original wager.  For example, if bettor "A"  
            thinks a horse will win a race and would like to wager $2 to  
            win on that horse at 1-1 odds, bettor "B" can match the wager  
            for $2 at 1-1 odds if bettor B has the opinion that the horse  
            will not win the race.  When wagers are matched, they are  
            pooled together and the pari-mutuel exchange wagering operator  
            is responsible for paying the winning bettors out of the pool  
            (just as is the case in all other forms of pari-mutuel  
            wagering on horse races in California.)  Pari-mutuel exchange  








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            wagering is limited to win, place and show wagering.  

           4)Pari-Mutuel Wagering  . In traditional pari-mutuel wagering,  
            each bettor selects the horse or horses they choose to wager  
            on an outcome (how those individual horses will finish in a  
            race - Win, Place, and Show wagering) or the order of finish  
            for multiple numbers of horses (exotic wagers such as exacta,  
            trifecta, superfecta), and the amount which they desire to  
            wager. The odds on any particular horse are determined by the  
            total amount bet on the race by the individual bettors. The  
            bets made are pooled together and the pari-mutuel operator is  
            responsible for paying the winning bets from that pool. 

            The racing industry derives revenue from traditional  
            pari-mutuel wagering from a "takeout" or "commission" that is  
            charged on every wager placed in the pool, and from  
            pari-mutuel exchange wagering from a "commission" that is  
            charged only on a bettor's net winnings on a particular race.   
            In either case, those revenues are shared among the horse  
            owners (purses), the race tracks and the provider of the  
            pari-mutuel wagering service.  However, under this  
            legislation, the exchange wagering handle would be outside of  
            the pari-mutuel pool and would not be shared in the  
            traditional manner. 

           5)The Takeout  . The horse racing takeout amount is a percentage  
            deducted from all of the wagers before the winnings are paid  
            out to bettors.  These takeout rates vary among states.   
            California's current rate is 15.43% for conventional wagers  
            (win, place, and show wagers) and 20.68% for exotic wagers  
            (Exacta, Trifecta, and Pick-6), resulting in a total takeout  
            of 19.9%. The money from the takeouts is used for such things  
            as owner purses, racing association commissions, and breeding  
            incentive programs. In addition, various funds receive money  
            from the takeout to meet specific needs of the industry.  For  
            example, funds have been set up for offsite stabling and  
            transporting horses on race day, to offset the costs of  
            workers compensation, to establish pension plans and provide a  
            welfare fund for backstretch personnel, and to fund the  
            California Marketing Committee.

            Within the horseracing industry, there has been a movement  
            over the last several years to allow flexibility to increase  
            or reduce takeout rates.  For example, Balmoral Park in  
            Illinois recently announced that on each Wednesday of the meet  








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            the takeout on Pick 3 and Pick 5 wagers would be reduced from  
            the current 25% to 15%, thus increasing the payout to the  
            winning bettors by 10%. They are using this type of takeout  
            adjustment as a marketing tool to increase attendance at the  
            races and boost wagering. 

           6)Breeders' Cup  .  The Breeders' Cup World Championship is an  
            annual series of Grade 1 thoroughbred horse races.  The event  
            is a year-end championship for North American thoroughbred  
            racing, which attracts top horses from other parts of the  
            world, especially Europe. The Breeders' Cup is considered to  
            be the richest two days in the United States for total purses  
            paid to horse owners.  The attendance at the Breeders' Cup  
            ranks fifth in North America and usually surpasses the  
            attendance of all other stakes races. The daily attendance of  
            the Breeders' Cup typically trails only the Kentucky Derby,  
            the Preakness Stakes and the Kentucky Oaks.

           7)Statewide Marketing Organization  . SB 27 (Maddy; Chapter 335,  
            Statutes of 1998) created a private statewide marketing  
            organization for thoroughbred and fair racing funded by 0.4%  
            of the instate off-track (satellite wagering) handle.  The  
            funds generated from this portion of the takeout are used for  
            marketing California horse racing throughout the state. 

            The California Marketing Committee (CMC) is generally  
            responsible for promoting horse racing in the state by  
            developing and implementing a marketing plan that will  
            increase on-track and off-track attendance throughout the  
            state.  An underlying assumption of the CMC's Marketing Plan  
            is that it is easier to capture a new fan through an on-track  
            experience than through an off-track visitation to a satellite  
            wagering facility.  

            In 2003, the CMC received approximately $6.1 million to  
            support its marketing efforts but due to reduced handle  
            revenue, it was reduced to approximately $5 million in 2009.   
            Current law provides that the CMC must annually submit to the  
            CHRB a statewide marketing and promotion plan for thoroughbred  
            and fair horse racing that encompasses all geographical zones  
            in the state, including the manner in which funds were  
            expended in the implementation of the plan for the previous  
            calendar year.  

           8)Related legislation  : AB 2414 (Perez), a substantially similar  








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            bill, is currently pending in the Senate Rules Committee. 


           Analysis Prepared by  :    Julie Salley-Gray / APPR. / (916)  
          319-2081