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