BILL ANALYSIS                                                                                                                                                                                                    Ó






                                                       Bill No:  AB  
          432
          
                 SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
                       Senator Roderick D. Wright, Chair
                           2013-2014 Regular Session
                                 Staff Analysis



          AB 432  Author:  V. Manuel Perez
          As Introduced:  February 15, 2013
          Hearing Date:  June 11, 2013
          Consultant:  Art Terzakis


                                     SUBJECT  
                        Horse Racing: exchange wagering

                                   DESCRIPTION
           
          AB 432 requires any racing association or racing fair  
          receiving distributions from any exchange provider's  
          exchange revenues to distribute a portion of that revenue  
          to the official registering agency in a manner, as  
          specified in existing law (Business & Professions Code  
          Section 19617.2).

                                   EXISTING LAW

           Article IV, Section 19(b) of the Constitution of the State  
          of California stipulates that the Legislature may provide  
          for the regulation of horse races and horse race meetings  
          and wagering on the results.

          Existing Horse Racing Law stipulates that the California  
          Horse Racing Board (CHRB) shall regulate the various forms  
          of horse racing authorized in this state and directs 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.  The law authorizes the CHRB to recover any costs  
          associated with the licensing or regulation of exchange  
          wagering by imposing an assessment on the exchange wagering  
          licensee in an amount that does not exceed the reasonable  
          costs associated with the licensing or regulation of  




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          exchange wagering.

          Existing law allows exchange wagers to be submitted and  
          accepted by licensed exchange wagering systems in the same  
          manner as is currently provided for under Advanced Deposit  
          Wagering (e.g., in person, telephone, or Internet) Law.   
          The law provides that no exchange wagering licensee may  
          accept wagers prior to May 1, 2012.  The law defines  
          "exchange wagering" as form of parimutuel wagering in which  
          two or more persons place identically opposing wagers in a  
          given market.  

          Additionally, existing law defines "exchange wagering  
          agreement" to mean a written agreement by and among the  
          applicable exchange wagering licensee, the applicable  
          racing association or racing fair conducting live racing in  
          this state and the horsemen's organization responsible for  
          negotiating purse agreements for the breed on which  
          exchange wagers are accepted, provided that the terms and  
          conditions for the permitted use of the signal by the  
          exchange wagering licensee, and the compensation to the  
          applicable racing association or racing fair and the  
          horsemen's organization include certain specified  
          provisions.

          Existing law includes provisions similar to Advanced  
          Deposit Wagering (ADW) 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.

          Existing California Horse Racing Law (B&P Code Section  
          19617.2) provides that  
          any association conducting a race meeting that includes  
          thoroughbred racing shall deposit, at specified intervals,  
          with the official registering agency 0.54 % of the total  
          handled on-track in daily conventional and exotic  
          parimutuel pools resulting from thoroughbred wagers made in  
          the state.  After deducting a sum equal to 5% of the  
          aforementioned and total deposits made from out of state  
          wagers, the amount to compensate the official registering  
          agency for its administrative costs and for expenses it  
          incurs for educational, promotional, and research programs,  
          the official registering agency is required to distribute  
          annually the balance of the deposits as follows: (a) 10% to  




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          the California-bred race fund to help promote  
          California-bred races; (b) of the remaining balance a  
          deduction for the purpose of owner premiums; and, (c) a 15%  
          deduction for the California-bred bonus program to be used  
          for the payment of bonuses to California-bred horses in  
          maiden allowance races in the state.  Funds remaining after  
          the above distributions must be distributed as follows: (a)  
          75% to the breeder fund from which breeder awards are to be  
          paid and (b) 25% to the stallion fund from which stallion  
          awards are to be paid. 

                                    BACKGROUND
           
           Purpose of AB 432:   The author's office states that when  
          exchange wagering was authorized by the Legislature in 2010  
          (SB 1072 - Calderon, Chapter 283 of 2010), the enabling  
          legislation lacked clarity pertaining to the allotment of  
          exchange wagering revenues for California's Thoroughbred  
          breeders.  The author's office states, that this bill  
          simply clarifies that should exchange wagering be  
          implemented in California under Business & Professions Code  
          Section 19617.2, California Thoroughbred breeders will not  
          see a reduction in breeder, owner and stallion owner  
          incentives.  The intent of the bill is to ensure that each  
          official registering agency for a specific breed of horse  
          receives the same type of proportion distribution as  
          retained for other types of wagers in current law  
          (on-track, simulcasting, and ADW).

           Staff Comments:   "Exchange wagering" is a form of gambling  
          in which two or more persons place directly opposing wagers  
          on the outcome of horse races and "sporting events."  
          Typically, exchange wagering allows a better to "back" or  
          wager on a selected horse to win, with another bettor  
          "laying" or wagering on that same horse  not to win.   A back  
          and a lay become matched when a bettor lays at the same  
          price at which another bettor backs that same outcome, with  
          the amount subject to the lay being proportionately  
          commensurate to the amount subject to the back.  Exchange  
          wagering allows the bettor to name his/her own odds in the  
          hopes of luring a match.  While the potential for positive  
          industry effects is present with exchange wagering, so too  
          is the prospect for disaster.  Some within the industry  
          believe that exchange wagering may cannibalize traditional  
          parimutuel wagering and actually leave less money in the  
          system for those responsible for putting on the show (e.g.,  




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          owners, breeders and racetracks), thus placing the future  
          of horse racing in jeopardy. 

          As noted above, existing law requires the CHRB to  
          promulgate administrative rules and regulations to  
          effectuate exchange wagering.  At its November 2012 regular  
          meeting the CHRB adopted the proposed addition of Article  
          27 (Exchange Wagering), which comprises 25 regulations  
          governing the conduct of exchange wagering in California.   
          The exchange wagering rulemaking file was submitted to the  
          Office of Administrative Law (OAL) on January 31, 2013.   
          Two months later (March 31, 2013) OAL disapproved the file.  
           Of the 25 regulations submitted, the OAL cited necessity,  
          clarity or consistency issues with eight regulations, as  
          well as certain procedures of the Administrative Procedures  
          Act (APA).  The CHRB has 120 days from the date of the  
          disapproval to correct and resubmit the rulemaking file. 

                            PRIOR/RELATED LEGISLATION
           
           AB 1423 (Committee on Governmental Organization) 2013-14  
          Session.   Would remove the January 1, 2021 sunset date for  
          the distribution of the revenue collected through exchange  
          wagering and instead sunset the provisions after the 10th  
          annual distribution of those funds.  (Pending in Senate  
          Rules Committee)
          
           SB 1072 (Calderon), Chapter 283, Statutes of 2010.   Made  
          the following substantive changes and additions to  
          California's Horse Racing Law: (1) required thoroughbred  
          racing associations and fairs to deduct an additional  
          amount of the total handle on exotic wagering for purse  
          augmentation; (2) authorized the CHRB to license entities  
          to operate "exchange wagering" systems; (3) required each  
          exchange wagering licensee to annually distribute a  
          specified amount of exchange wagering revenue to the  
          existing jockey health and benefit welfare fund; (4)  
          authorized the thoroughbred racing industry to use monies  
          from horse racing wagering pools to promote the Breeders'  
          Cup;  (5) extended the sunset, from January 1, 2011 to  
          January 1, 2014, on provisions that authorize racing  
          associations and fairs that conduct thoroughbred racing to  
          pay to the owners' organization a certain portion of the  
          purses for a statewide marketing program, as specified, to  
          increase interest in horse racing; and (6) provided that an  
          amount not to exceed 0.05% of the total amount handled by  




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          each satellite wagering facility shall be distributed to  
          the nonprofit organization designated by the CHRB for the  
          purpose of maintaining a database of horse racing  
          information, as defined.

           AB 2414 (Perez), Chapter 299, Statutes of 2010.   Sunset the  
          exchange wagering provisions of SB 1072 (Calderon) on May  
          1, 2016.

           AB 765 (Evans), Chapter 613, Statutes of 2007.    Among  
          other things, reauthorized horse racing's Advance Deposit  
          Wagering Law, which was due to "sunset" on January 1, 2008.  
           In addition, provided that a fair, combination of fairs,  
          or an association conducting racing at a fair, may, with  
          CHRB approval, deduct an additional 1% from its handle, to  
          be used for maintenance and improvements at a fair's  
          racetrack enclosure, as specified.
           
          AB 471 (Hertzberg), Chapter 198, Statutes of 2001.   Allowed  
          customers to deposit funds into an account in order to  
          wager online and over the telephone (ADW).  ADW wagers are  
          commingled into pools at the host track where the races are  
          run, and within the pari-mutuel wagering system regulated  
          by CHRB.  The bill established a process for the  
          distribution of the revenue received from ADW to mirror  
          existing distributions for track commissions, owner purses,  
          and breeder incentive awards. 

           AB 471 (Hertzberg), Chapter 198, Statutes of 2001.    
          Authorized the CHRB to permit any racing association,  
          racing fair, betting system or multijurisdictional wagering  
          hub to conduct advanced deposit wagering whereby a  
          California resident could deposit funds into an account in  
          order to wager via the Internet, phone or other media.

           SUPPORT:   As of June 7, 2013:

          California Thoroughbred Breeders Association (sponsor)

           OPPOSE:   None on file as of June 7, 2013.

           FISCAL COMMITTEE:   Senate Appropriations Committee

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