BILL ANALYSIS
SB 1072
Page 1
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
SB 1072
Page 2
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.
SB 1072
Page 3
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.)
SB 1072
Page 4
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.
SB 1072
Page 5
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
SB 1072
Page 6
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
SB 1072
Page 7
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
SB 1072
Page 8
bill, is currently pending in the Senate Rules Committee.
Analysis Prepared by : Julie Salley-Gray / APPR. / (916)
319-2081