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 AB 432 (V. Manuel Perez) continued Page 2 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 AB 432 (V. Manuel Perez) continued Page 3 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., AB 432 (V. Manuel Perez) continued Page 4 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 AB 432 (V. Manuel Perez) continued Page 5 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 ********** AB 432 (V. Manuel Perez) continued Page 6