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HHR Passes Kentucky Senate 22-15

The “emergency” bill to legalize historical horse race (HHR) gaming by defining “pari-mutuel wagering” to include previously run races passed the Kentucky State Senate late Tuesday afternoon 22-15, with one senator not casting a vote.

Proponents of the bill are aiming to align HHR in a way that they believe will make the slots-like form of gaming constitutionally legal so the machines can keep generating $2.2. billion in annual handle. The Kentucky Thoroughbred Development Fund's purse-money cut from HHR is three-quarters of 1% of that handle.

Senators speaking Feb. 9 in favor of SB 120 focused their arguments primarily on the economic advantages of maintaining HHR, whose operation has fueled what they described as a Kentucky Thoroughbred “renaissance” over the past decade. According to the state's constitution, only pari-mutuel wagering, the Kentucky Lottery, and charity-related gambling are considered legal.

Proponents also framed part of the debate as “class warfare,” and said keeping Kentucky's 3,625 HHR machines operational would be the commonwealth's best bet to protect its signature Thoroughbred racing and breeding industry.

Another “pro” argument was that keeping HHR legal and limited only to racetrack-related licensees would avoid any infiltration of big casinos in a state known for conservative opposition to expanding gambling.

Senate Majority Leader Damon Thayer (R-Georgetown) even made the dire prediction that “three or four” Kentucky racetracks could close within the next fiscal year if senators didn't advance the HHR bill.

Opponents hit repeatedly on what they described as the non-constitutionality of HHR, the perceived moral ills of gambling, and how the state's racing industry knew 10 years ago it was engaging in a dicey business gamble by building an HHR industry atop a murky legal premise that has repeatedly been questioned in the courts.

HHR was put into peril Jan. 21, when the Supreme Court of Kentucky denied a petition for rehearing an earlier judgment that called into question the legality of HHR because it didn't amount to “pari-mutuel wagering.” The question over that legal definition, led by anti-gambling activists, has worked its way through the court system ever since HHR was first allowed by the state in 2012.

Senator John Schickel (R-Union), who introduced SB 120 on Feb. 2 and also chairs the Senate Licensing and Occupations Committee that reported it favorably Feb. 4, championed his measure on the grounds that “what this bill does, is simply clarify [the pari-mutuel definition] issue once and for all” so that Kentucky can remain “the horse capital of the world.”

But when the Senate opened up its floor to questions, Schickel surprisingly couldn't come up with even basic answers when Sen. Whitney Westerfield (R-Crofton) asked him how many HHR machines currently operate in Kentucky and how much money they generate.

At a later point in the nearly 90 minutes of debate, Schickel returned to the floor armed with what he said were his favorite racetrack indulgences–a sugary Kentucky-made confection known as a MoonPie and a “stinky cigar”–in a difficult-to-follow attempt to illustrate “the role of virtue and vice in our society.” Schickel then asked rhetorically, “Is it really our role to tell poor people that we need to protect them from themselves?”

Westerfield spoke first among the opposition, launching into detailed arguments centering on what he believed was the non-constitutionality of HHR. He then segued into a soliloquy based around his moral perceptions of gambling, during which he lamented how some “white trash” consumers disproportionally bear Kentucky's societal costs related to gambling.

Westerfield wrapped up his remarks by terming SB120 as a “bailout” to the racing industry, whose tracks over the past decade invested “hundreds of millions of dollars in HHR-related expansions” even as the very legality of the machines was being appealed all the way up to the Supreme Court.

Westerfield continued, “The surest bet [the tracks] ever made was that if they were ever called out on the legality or the illegality of these machines, that they'd be quickly able to claim the very real economic harm from suddenly having to close…. This legal defeat was not some out-of-the-blue ruling by a rogue judge. This wasn't an unexpected risk that couldn't be planned for and mitigated. The tracks knowingly built their houses on quicksand.”

Speaking next, Thayer lambasted the opposition's attempts to derail HHR as being laden with “all kinds of ruses and red herrings and smokescreens to try and divert our attention from the matter at hand.”

That matter, Thayer said, “is simply [that] the signature industry of Kentucky, the home of the [GI] Kentucky Derby, the home of the market-leading horse-breeding business that exports our stock around the world…is under threat.”

Thayer continued, “I respect people who are morally and religiously opposed to gambling. But I'm not going to stand idly by while pejoratives are made about people who participate in this sport,” alluding to Westerfield's remarks.

Even senators who expressed neutrality on embracing the new pari-mutuel definition of HHR had strong opinions related to the measure.

Urging fellow lawmakers to “vote your conscience” on HHR, Sen. Stephen Meredith (R-Leitchfield) said what bothers him is Kentucky's trend of bills being presented to legislators under the premise that if they don't vote in favor, they'll be responsible “for killing so many jobs” in the commonwealth.

“I know this is their signature industry. I know it's important to us,” Meredith said. “But I feel like I'm almost being blackmailed, [as in] 'We need money in this state, and if we kill this industry we're going to lose all this money.' We spend a lot of time treating the symptoms of this state, but never curing the disease.”

Sen. Morgan McGarvey (D-Louisville) argued that judging “constitutionally” is not the job of senators. The judicial branch of government gets to decide that, he said, “and what the Supreme Court has said in this instance is that they are going to allow HHR if we make some legislative changes.”

McGarvey continued, “And when we talk about what's going to happen if we allow HHR, let's reframe this debate. We've had HHR for 10 years. We have not seen the problems that have been forecast here on the floor. We're not deciding whether we want HHR in Kentucky. It's here. We're deciding whether we want to keep HHR in Kentucky, and all of the jobs, and all of the help in the industry that goes along with it.”

That said, McGarvey added that even though he supports this particular bill, he “doesn't think the tax structure is fair” and will be seeking ways “to generate more revenue from it than is currently being generated.”

SB120 now advances to the Kentucky House of Representatives.

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HHR Bill Reported Favorably Out of Kentucky Senate Committee

The bill that attempts to legalize historical horse race (HHR) gaming in Kentucky by inserting a one-paragraph definition of “pari-mutuel wagering” into an existing state statute advanced with a favorable recommendation out of the Senate Licensing and Occupations Committee Feb. 4.

SB120 will now be scheduled for a hearing before the full Kentucky Senate.

Proponents testified that Kentucky's racing industry is in danger of economic devastation without the support of HHR to bolster purses, and that defining “pari-mutuel” for the first time within state laws is the appropriate way to make sure the $2.2-billion handle generated from that form of gaming is compliant with the state's constitution.

Opponents testified that the proposed legislative fix remains unconstitutional, that it is harmful to Kentucky culturally and economically, and would actually erode the state's Thoroughbred industry over time because HHR licensees might be inclined to phase out live horse racing in favor of cheaper-to-operate electronic gaming.

The two sides sparred in polite but sometimes barbed fashion for nearly an hour, and when the vote was finally called, Senator Tom Buford presaged the highly likely eventuality of a continued court fight over HHR: “I think we are in certainly a gray area, and I do believe we will see this resolved in the courtroom at some moment in time,” he said prior to casting an “aye” vote.

The setting for Thursday's HHR bill's hearing certainly seemed friendly to supporters: Senator John Schickel, who introduced SB 120 on Tuesday, also chairs the committee that had the authority to report it favorably. The measure also has the backing of Senate President Robert Stivers, and Senate Majority Leader Damon Thayer was in attendance to lend support to those who testified in favor of the bill. That team included Kentucky-based trainer Tom Drury and attorney William Lear, Jr., who is a Keeneland Association trustee and former state legislator.

In fact, representatives of the anti-gambling opposition group The Family Foundation (TFF) acknowledged right off the bat that they were fighting an uphill battle. Martin Cothran, senior policy analyst for TFF, began his testimony by thanking Schickel for being a “good sport” and allowing them to speak out against the measure even though TFF knew the bill had the chairman's obvious support.

But Cothran then launched into a concise deconstruction of why everyone was gathered for the hearing in the first place—because the Supreme Court of Kentucky had twice within the past five months affirmed that HHR gaming did not meet the required legal definition of pari-mutuel wagering, and how five of the state's six HHR licensees were “thumb[ing] their noses at the court” by continuing to operate HHR in spite of that ruling.

“That alone should have doomed their efforts here in Frankfort, where laws are made with the expectation that they are to be followed,” Cothran said.

Cothran also pointed out that it was not–as he said is often misrepresented–TFF that initially challenged the legality of HHR in Kentucky. He noted that back in 2010, it was the racing interests themselves who first petitioned Franklin Circuit Court asking for a declaration that HHR was legal. He said TFF only entered the fray when the group realized there was no other opposition to that initiative.

“[The HHR licensees] were the ones who asked the courts whether what they were doing was on the up-and-up. Well now we have an answer to that question, and they are ignoring it,” Cothran said, adding that the racetracks and the Kentucky Horse Racing Commission are now “pretending that these machines somehow constitute pari-mutuel horse wagering.”

Cothran continued: “Depending on your perspective, that was either very ingenious or preposterous that someone could invent a machine that showed live racing with dead horses. Count us as skeptics on this. And count us as skeptics too that you can assert in an equally preposterous way that you can simply declare, as this bill does, that what is not pari-mutuel wagering by any other definition you can find is, in fact, pari-mutuel wagering.

“Rather than the horse tracks and their allies on the horse racing commission changing their actions to bring them into alignment with the law, we are being asked in this bill to bring the law into alignment with the actions of the tracks—and in doing so making a mockery of the constitution,” Cothran said.

Cothran added that the proper way to make HHR legal is to amend the state's constitution, which currently stipulates that the only permissible forms of gaming are pari-mutuel horse racing, the Kentucky Lottery, and charitable gaming.

But Lear pointed out that a 1931 Kentucky Court of Appeals ruling (Commonwealth v. Kentucky Jockey Club) already exempted the pari-mutuel system of betting on horse races from anti-gambling laws.

Lear then explained that in 2020, when the Supreme Court ruled HHR was not considered legally pari-mutuel, “it extended what you might call an engraved invitation to the Kentucky General Assembly to deal with it,” which he said was exactly what SB 120 would accomplish by including “previously run” races within the newly proposed definition of “pari-mutuel.”

Lear said constitutionally speaking, the bill “applies because it's the first time there's been a statutory definition of pari-mutuel wagering. It has to cover both everything we're doing in live racing today, as well as HHR, and that's what it does. It deals with the issue raised by the Supreme Court of different people betting on different races. It deals with the issue of seed pools, which are really just a pre-funded minus pool.

“There is no way a constitutional amendment would be required to do this kind of gaming,” Lear summed up.

Stan Cave, an attorney who has led TFF's efforts against HHR, disagreed.

“As you look at the bill you're about to vote on, compare the language of that bill to what the Supreme Court said pari-mutuel wagering was,” Cave said. “And then ask yourself the question 'Does the language in the bill satisfy, or is it consistent with the definition of pari-mutuel wagering explained by the Kentucky Supreme Court?' If it's not, it's unconstitutional. It's no giant leap of logic. A six-year-old could do the exercise. The language in the bill does not compare, at all, remotely, in the slightest, with the language that the Supreme Court said constituted pari-mutuel wagering. Thus, this bill is unconstitutional.”

Thayer took umbrage with the way Cothran and Cave framed their arguments.

“I was sworn in [to the Senate] 18 years ago today,” Thayer said. “And I've never seen testimony that insulted an entire industry more than what I've heard here today. This testimony was overtly specious. By that I mean superficially plausible but actually wrong.”

At this point Thayer asked Lear to be granted the floor for a rebuttal. Lear reiterated his points about the 1931 court precedent and then went off on a tangent about how HHR is not a game of chance like a lottery, because HHR incorporates elements of handicapping skill on the part of players.

Schickel politely cut the attorney short when Lear began to list off the various handicapping skill features of HHR before giving Cave a last word prior to the vote.

“I'd just like you to remember: Who's won in the Court of Appeals? Who's won unanimously in the Supreme Court–twice? Who's won unanimously in petitions for rehearing?” Cave asked rhetorically. “TFF. I have no incentive to misrepresent to you what The Jockey Club case says or what the law concerning pari-mutuel wagering is. This bill is unconstitutional. It violates Section 226 of the constitution.”

Lear then interjected: “Mr. Chairman, may I just say, you just heard from the only person in the world that believes TFF won the first decision at the Kentucky Supreme Court.”

Passage appeared to be unanimous among committee members whose votes were audible, although several Senators whose names were called appeared not to respond or did not make audible responses during the roll call.

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Legislative Fix For HHR In Kentucky Is Coming; Supporters Hope It Will Leave Committee This Week

A legislative fix for the legal question of historic horse racing (HHR) in Kentucky is on the way, according to legislators speaking at a rally held at Keeneland Feb. 1. Sen. John Schickel (R-District 11) told observers at the track and watching online that he plans to introduce a bill before a legislative committee this week that would make the HHR machines at Keeneland and the Red Mile part of the state's definition of parimutuel wagering.

The rally was organized by the Kentucky Equine Education Project (KEEP).

The Kentucky Supreme Court ruled in September that the HHR machines made by Exacta Systems do not qualify as parimutuel wagering because wagers are pooled from multiple races to determine the payout for a wager placed from a given machine. The ruling was in response to a suit brought in civil court by The Family Foundation to have the games halted. The court decided last week not to rehear the case. On Jan. 24, Keeneland and Red Mile, which both have Exacta Systems terminals installed, closed their HHR operations.

“Tonight, I'm going to appeal to your worst fears,” said Sen. Damon Thayer (R-District 17). “Our worst fear is if HHR goes away — and we've already seen it, hopefully temporarily, suspended down at the Red Mile — the result will be cataclysmic. Catastrophic. We are on the cusp of greatness in Kentucky. Now this unfortunate Supreme Court decision last fall has put a temporary straw in our pathway, and we're going to do everything we can to sweep this straw aside.”

Thayer also pointed out that there have been questions about how much of the revenue on HHR goes to the state's general tax fund, with some critics claiming the state is getting short-changed. Thayer said it's important to note that the tax rate of 1.5 percent of gross income on HHR wagering is the same rate paid by living racing and simulcasting. Thayer claimed the rates have been twisted by HHR's critics, who fail to recognize that the 1.5 percent is against the gross income before the tracks pay out to the customer and to purse accounts, and the rate actually works out to roughly 33 percent of net profits.

“You're going to see all kinds of specious arguments and wailing and gnashing of teeth as we try to get this bill passed,” said Thayer. “The opponents of this will make all sorts of wild claims. One of them will be that 1.5 percent of gross is a sweetheart deal; it's not … there's no reason for the racing industry to be ashamed of that. It's worked very well since 2014.”

Schickel took a somewhat different tack, saying that as Kentucky's signature industry, racing should get special consideration.

Both legislators said they had been asked why they weren't advocating for legalizing sports betting along with the new HHR definition, and said that it's important to consider the issues one at a time.

“There are some people who support historical horse racing who do not support sports wagering and casinos,” he said. “One of the reasons I'm so committed to historical horse racing is that the focus is on racing. My buddies at happy hour razz me all the time and say, 'John why are you giving the tracks this sweetheart deal?' And I plead guilty as charged. The reason they are is that Thoroughbred racing is our signature industry, and that's where our focus should be this session.”

KEEP executive vice president Elisabeth Jensen urged attendees to think beyond the Central Kentucky area when pushing their representatives to support HHR. Jensen pointed out that many of the people at the rally were from the same eight or ten counties surrounding Lexington, but successful lobbying will require those who are passionate about the issue to reach out to friends and colleagues in more far-flung areas.

KEEP offers an easy tool for Kentucky residents to contact their legislator about the issue and a petition for those who live outside the state to voice their opinion.

So far, Jensen said people have used the system to send 4,500 unique messages to Kentucky legislators requesting their support for HHR.

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Keeneland To Host Horsemen For Historical Horse Racing Legislative Informational Session On Feb. 1

Horsemen and state leaders will convene in support of Historical Horse Racing at the Keeneland Entertainment Center on Feb. 1 at 6:00 p.m., according to the Kentucky Equine Education Project. The meeting is also being hosted by the Kentucky Chamber of Commerce and Kentucky Thoroughbred Farm Managers Club, and is presented by Breeders' Cup and Jackson Kelly PLLC.

“As you know, HHR is under threat following the Kentucky Supreme Court's ruling that called into question the legality of HHR,” KEEP said in a release calling for industry support of the Feb. 1 event. “Now it is up to the state legislature to take action to preserve HHR and its unparalleled impact on Kentucky's horse industry.”

According to the Blood-Horse, the Feb. 1 panel will be led by Kentucky State Rep. Matt Koch (Republican, Paris), and will include Agriculture Commissioner Ryan Quarles, Senate Majority Floor Leader Damon Thayer (Republican, Georgetown), Rep. Adam Koenig (Republican, Erlanger), and Sen. John Schickel (Republican, Union), as well as Kentucky Chamber of Commerce president and CEO Ashli Watts.

COVID-19 protocols will be enforced at the event, which is currently filled to capacity. To sign up to watch the live stream, follow this link.

The Kentucky Supreme Court issued a brief statement last Thursday in which it declined to reconsider its unanimous decision on historical horse racing machines issued on Sept. 24, 2020. In response, both Keeneland and Red Mile temporarily shut down historical racing operations over the weekend.

Legislation to legalize Historical Horse Racing in Kentucky has not yet been introduced, but KEEP said it expects that legislation sooner rather than later. The session resumes on Feb. 2.

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