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Letter to the Editor: First, Stop the Bleeding

T.D. Thornton's report on racetrack closures in California (TDN, 12/6/23) and Dan Ross's piece on Pat Cummings's research into Computer Assisted Wagering in California (TDN 2/13/24) are frightening for all tracks not supported by casinos/slots.

Santa Anita and Del Mar are high-profile tracks in trouble, but they are not alone. The problem? Host tracks are now receiving very little for their racing content.

Remember Napster, when a lot of people were stealing songs and nobody knew what to do about it?

I'm not Steve Jobs, who saved the music industry from Napster, but I'm going to tell you how to save Santa Anita and Del Mar and the rest of our tracks. When you understand how we came to this situation, you will see how easy it is to fix it.

I started working for the Thoroughbred Record in 1972. Then, the revenue from wagers was split 50/50 between the two “partners” in racing: half for the track and half for the racehorse owners' purse account. Each received about 8% of the on-track wager. It was a simple business isolated to the track location.

Off-track wagering across state lines was legalized with the Interstate Horseracing Act (IHA) in 1978. Although Congress has protected dairy farmers since 1946 with a “price floor” on milk, there was no price floor put into the IHA to protect the host tracks. A huge mistake!

After the IHA became law, Tommy Roberts, who pioneered simulcasting, negotiated a deal between Vegas sports books and some thirty tracks. Tommy told me Vegas said they could pay 10% of the wager to the host tracks. But, Vegas' actual offer was 2%. The tracks caved and accepted 2%, which meant the host track and purse account would only get 1% each and the bet takers in Vegas kept up to 15% of the wager. It was a very bad, upside-down deal.

The Vegas deal of 2% became the effective off-track distribution rate for every off-track bet taker, not just receiving tracks. As OTB's expanded off-track wagering locations, they cut into host track attendance, thus high-profit on-track wagering and concessions revenue dropped. Host track admissions and parking revenue vanished. Today off-track is more than 90% of all handle and host tracks and their purse accounts are suffering.

With the 2% rate in place, the major tracks were preyed upon by receiving tracks. NYRA, Keeneland and Hollywood Park all tried to increase the off-track rate for their races, but the hundred smaller tracks colluded to keep the rate as low as possible because they benefitted as bet takers on the major tracks' races. That was not the intent of the IHA.

The godsend of off-track wagering has now turned on racing and is devouring it. In the early days, most off-track bets were being made at receiving tracks and the money stayed in the sport. That ship sailed with computers and mobile phones. Today ADW's and robots are taking the most bets. What they pay the host tracks is so low they have enough margin to give up to 10% to whales. The money is bleeding out of host tracks and purses.

The first step for any business in trouble: Stop the bleeding.

Breeding, raising and racing Thoroughbreds is an agricultural business and sport. Over the years, Congress has responded with every possible advantage.

To stop the bleeding, Congress can establish a “price floor,” a minimum rate that off-track bet takers must pay host tracks. When Congress moved to save dairy farmers, lobbyists for the milk processors preying on them said the free market should set prices. But, the majority in Congress said “Sorry, we like milk and we are going to protect those who produce it.” There are many in Congress who like and care deeply about the Thoroughbred industry too.

Can we fix it? Yes, if Stuart Janney will commit to a “price floor” being put into the IHA, our tracks, purses and thousands of jobs in the industry will be saved. It is that simple.

Stuart Janney, chairman of The Jockey Club, personally committed to reduce the threat cheating has on the integrity of our sport. He worked with bi-partisan help from Andy Barr (R-KY) and Paul Tonko (D-NY) to pass the Horseracing Integrity and Safety Act (HISA). You need someone who has been successful with Congress to get back in harness and repeat the process.

Congress is the fastest way to save California tracks and all other racing states that do not have casino/slots support. As Mr. Janney related in working to pass HISA, you cannot do it state by state, or track by track. It has to be done at the federal level.

Today, the “partnership” between tracks and racehorse owners is far from simple and far from fair. Tracks have created subsidiaries outside the partnership with racehorse owners to take bets on other tracks' races and exploit the high profit margin. As a result, the percentage of off-track wagers going to purses drops every year. Purses fuel foal crops and ours have dropped from 50,000 to 17,000. Nobody wants track closures to return us to the days of Man o' War with a foal crop of 1,680.

The IHA puts people with feet of clay in position to approve multi-million dollar off-track bet taking deals. Dan Ross's piece told of death threats and extreme pressure on these individuals. To reduce the threats and the grip bet-takers have on the integrity of the wager, we need a “price floor” to protect the people giving IHA approval. The price floor will become the non-negotiable base rate for most approvals.

I don't expect tracks with wagering subsidiaries to support a price floor being put into the IHA any more than we expected all trainers and horsemen to support HISA. I don't expect those receiving rebates now to support a price floor anymore than those who got free music with Napster wanted to switch to iTunes. Most times, leaders have to step up and piss off some people to do what is right for the sport.

I believe a price floor on off-track wagers will allow host tracks to refocus on live racing that people want to see and they will be able to sell their product at a good price in the off-track market, something they cannot do today.

There's nothing magic about taking bets. Lotteries pay gas stations a 5% fee for punching in the customers' numbers and taking their wager. A price floor in the IHA is the first step for host tracks to change off-track wagering from a “buyers' market” to a “sellers' market,” where those producing the racing content drive down the costs of bet taking.

Is it more important for us to save Santa Anita, Del Mar and other tracks, or to let the money from their racing content go to Fan Duel and Draft Kings?

What is the fair rate for a price floor?

I believe it is 10%, meaning 5% of the off-track wager goes to the host track and 5% to the racehorse owners' purse account. Blended with on-track handle and imported handle, the host track and purses could exceed 15% of the total wagered on their races.

With a flat rate of 10%, mandated by federal law taking precedence, the states will not be able to pass laws to get a competitive advantage in the off-track market. We've had enough of that. (NJ passed a law prohibiting their receiving tracks from paying more than 3% to a host track.) Each host track would still have the freedom to negotiate a higher rate than the price floor for their racing content.

That's how you stop the bleeding and allow Thoroughbred racing to be turned around.

I doubt most of you give much thought to track business and off-track wagering revenue. But, in the changing world of Thoroughbred racing, that's make or break for our sport. Take the time to learn how who gets what from racing impacts the breeding shed.

And right now, for Santa Anita, Del Mar and the life you love, contact Stuart Janney at The Jockey Club and voice your support for a price floor of 10% to host tracks on all off-track wagers be put into the IHA. Quickly.

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Attorney Frank Becker on Texas, HISA Standoff

The simmering stand-off between the Texas Racing Commission and the powers behind the Horseracing Integrity and Safety Act (HISA) bubbled higher Monday, when the commission's executive director issued a letter warning Texas will prohibit the import and export of pari-mutuel simulcast signals at its racetracks if the Act goes into effect on July 1 with jurisdictional authority over the state's Thoroughbred racing operations.

In the letter, Amy Cook, the Texas Racing Commission's executive director, invokes various statutes in the Interstate Horseracing Act, the Texas Racing Act and the Texas Rules of Racing to substantiate this approach.

“Since the Texas Racing Commission regulates all aspects of Texas horse racing, including, in particular, pari-mutuel and simulcast wagering in Texas, the application of federal law pursuant to HISA in any aspect of horse racing regulation for a particular race or meet will necessarily preclude the Texas Racing Commission from full compliance with the Texas Racing Act and will, therefore, necessitate that no such affected race shall be allowed to conduct on-site pari-mutuel wagering or provide simulcast export signal,” Cook writes.

“Any such request will, of necessity, be denied by the Texas Racing Commission,” Cook adds.

In an article for horseracing.net, Cook is quoted as explaining how Texan tracks will, pending race-date approval by the commission, be permitted to run after July 1, but that imported and exported wagering signals will not cross the state line. In other words, “Texans supporting Texans,” Cook is quoted as saying.

To discuss some of the legal implications of Texas' approach, TDN spoke with Frank Becker, a noted equine lawyer and former adjunct professor at the University of Kentucky College of Law.

The following is a mix of written answers and a recorded conversation, slightly edited for brevity and clarity.

TDN: As I understood, the federal HISA supersedes state law. Am I wrong in thinking that?

Becker: No.

TDN: And so, this includes Texas?

B: HISA goes so far as to state it preempts inconsistent state law. Texas obviously has its haunches up by the federal government's intrusion into what it considers state business.

TDN: Cook is reported as saying that when it comes to pari-mutuel betting, only in-state wagering will be allowed come July 1. She also states that under the Texas Racing Act, no pari-mutuel wagering on live or simulcast races is permitted on races the state commission does not supervise. What are your thoughts about the arguments and the approach? Are they legal?

B: The federal government's authority is limited by the United States Constitution. Typically, the federal government justifies its constitutional authority for pervasive regulation on the 'commerce clause' of the constitution. The 'commerce clause' provides that the federal government has jurisdiction over 'interstate commerce.'

HISA's purported jurisdictional authority is based on the commerce clause. Thus, it relies on 'interstate commerce' as its justification. HISA attempts to codify the authority in the definitions of 'covered horse,' 'covered persons' and 'covered horserace.'

Texas appears to be attempting to be excluded from the definition of 'covered horserace.' That definition is: “The term 'covered horserace' means any horserace involving covered horses that has a substantial relation to interstate commerce, including any Thoroughbred horserace that is the subject of interstate off-track or advance deposit wagers.”

Although Texas attempts to avoid its races being covered horseraces by eliminating 'interstate off-track or advance deposit wagers,' that may not fully solve the problem because a Texas track might be considered to be otherwise having a 'substantial relation to interstate commerce.'

The federal government often takes a very expansive view of what constitutes 'interstate commerce,' and might argue that many other aspects of horseracing involve 'interstate commerce' such as the presence of horses, participants, and even equipment from other states.

It will be up to a federal court to ultimately determine this issue, although some courts have recently taken a dim view of regulatory overreach attempted to be justified by an expansive view of 'interstate commerce.'

TDN: Let's take the hypothetical scenario that Texas takes this approach on July 1. What you're saying is, if trainers, owners and jockeys and such who are registered with HISA, and compete in states under the supervision of HISA, if they also try to compete in Texas, that potentially could yolk Texas to the Interstate Horseracing Act?

B: Even if Texas succeeds in avoiding HISA for horseracing conducted in Texas, are horses and participants nevertheless subject to HISA, even with regard to activities in Texas? We look to HISA's definition of 'covered horse' and 'covered person.'

A 'covered horse' is any Thoroughbred from the time it begins a workout at 'a racetrack that participates in covered horseraces or at a training facility' and ends 'when the horse has been retired.'

The federal government might take the position that any Thoroughbred horse that has ever done a workout at any track outside of Texas, or any training facility anywhere, remains subject to HISA even while in Texas.

And because the definition of 'covered persons' is very expansive and applies to those dealing with 'covered horses,' the federal government might take the position that all racing professionals and owners are subject to HISA, even while racing in Texas, if the horse involved ever worked out outside the state of Texas.

If the federal government takes this approach, it appears that the only way to avoid HISA is for horses and participants to conduct activities exclusively in Texas.

Thus, Texas' effort to avoid HISA may end up excluding horses, trainers, owners, and other participants from being involved in racing in Texas, unless they confine all of their activities to Texas.

TDN: I know you're not a self-professed expert in the economics of the industry, but just on a common sense reading of the threatened scenario, how impactful could this be to the industry there? Is Texas shooting itself in the foot?

B: It could have a dramatic negative impact on Texas horse racing. It's hard to imagine it wouldn't.

I don't think it takes an economics expert to say, 'gosh, eliminating simulcasting is one thing, but if Texas has to keep out participants from other states, that's going to have an extremely deleterious effect.'

TDN: So, what do you think is driving this?

B: Do you want me to answer this?

TDN: Sure.

B: It doesn't appear to be difficulty in complying with the regulations. It appears to be somewhat philosophical. Texas has, traditionally, been averse to federal regulatory overreach into what it considers state business.

TDN: What do you think about the other argument Texas is making, that they're doing this to slow down HISA's implementation so as to better manage some of the problems that have arisen, and are expected to still arise?

B: It seems to me that the slowing down may be their main goal here. It's hard to say. I mean, [if so], it's a pretty drastic action to get them to slow down.

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US Racing Website, Offshore Racebook Sued By Stronach Group Tracks

The operators of Santa Anita Park and Golden Gate Fields have filed a lawsuit against a horse racing website with alleged ties to an offshore racebook operation, charging the website with facilitating illegal online betting on California races and from California residents.

The Los Angeles Turf Club, licensed by the California Horse Racing Board to run race meetings at Santa Anita in Arcadia, and the Pacific Racing Association, which operates Golden Gate Fields in Albany, filed the suit against US Racing (www.usracing.com) and BUSR (www.busr.ag). One challenge, according to the complaint, is that both US Racing and BUSR are entities “of an unknown form…plaintiff does not know the true names” of the owners of the two websites.

Both LATC and PRA are part of the 1/ST Racing, owned by The Stronach Group.

The suit was filed Oct. 20 in the U.S. District Court for the Central District of California, Western Division.

The complaint claims that the two entities are in violation of the Interstate Horseracing Act and the Racketeer Influenced and Corrupt Organizations Act (RICO). It alleges that US Racing and BUSR “actively promote and market illegal online betting on horse races,” with US Racing directly referring individuals to the BUSR website through hyperlinks placed throughout the site. Neither entity is licensed through the California Horse Racing Board or authorized by the regulatory agency to accept wagers on California races or from California residents. Neither has statutory agreements with tracks or horsemen's groups to accept wagers on their races, and by operating offshore there are no host/signal fees or takeout mandated by California law. Wagers do not enter the pari-mutuel system.

“Defendants failure to pay the statutorily mandated takeout deductions as well as host fees and/or commissions increases Defendants net revenue thereby allowing them to offer rebates and other financial incentives to individuals…who place illegal bets through Defendants' websites in order to gain an unfair competitive advantage over Plaintiffs and over the licensed ADW providers operating in California,” the complaint states.

The Plaintiffs are seeking a permanent injunction barring defendants from accepting wagers on California races or from California residents, treble damages and attorneys fees.

A lawsuit only tells one side of the story. The Defendants in the suit will be afforded an opportunity to respond.

The post US Racing Website, Offshore Racebook Sued By Stronach Group Tracks appeared first on Horse Racing News | Paulick Report.

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Thoroughbred Idea Foundation: ‘Racing’s Wagering Business Needs To Evolve’ To Afford HISA

The creation of the Horseracing Integrity and Safety Authority (HISA) is the most significant development in American racing at the federal level since the passage of the Interstate Horseracing Act in 1978.

Questions now being rightly considered include how much HISA will cost and from where will its funding originate. Below, the Thoroughbred Idea Foundation offers some perspective on the costs. But as the greater industry determines from where the funding will come over time, racing should proactively adopt policies which seek to grow the wagering business.

The industry already has a plethora of obligations – aftercare, backstretch programs, integrity matters, jockey health and equine research, not to mention purses, the main driver for investment from owners. HISA adds to these. The best way for horse racing to afford all of its obligations is to grow the business.

Racing's wagering business needs to evolve – appropriate pricing of bets, improving access and reducing costs to accurate data, complementing pari-mutuel betting with fixed odds options, modernizing existing bet processing and infrastructure, all while increasing transparency to the public in many areas. Increasing costs to our already fragile wagering markets, or to a declining base of horse owners, without these needed improvements is a recipe for disaster.

Any step where costs to betting are increased to help pay for HISA programs will hurt the greater racing business.

PROJECTING COSTS

There is every reason to expect that a new level of federal bureaucracy functioning on top of individual state commissions will be expensive.

As it relates to testing, these expenses are fairly clear. For example, if the per-race spending on testing alone from the more than 5,000 races across all breeds overseen by the California Horse Racing Board were extrapolated across the entirety of U.S. Thoroughbred racing, nationwide testing alone would run approximately $20 million annually at current standards.

This is a cost already borne by individual commissions.

Factoring improvements and upgraded requirements it should be understood that the $20 million – just for testing – merely represents a starting point.

Administratively, what it will cost to start a federal authority from scratch is more challenging to envision. The HISA creates a layer of federal bureaucracy where one never previously existed. This isn't necessarily good or bad, it is a reality in development with little insight on costs to this point.

HISA requires the registration of all “covered persons” – an umbrella term which, according to the language of the bill, includes “all trainers, owners, breeders, jockeys, racetracks, veterinarians, persons (legal and natural) licensed by a State racing commission and the agents, assigns, and employees of such persons and other horse support personnel who are engaged in the care, training, or racing of covered horses [basically, all active Thoroughbreds].”

Most are already licensed by existing commissions, but some are not. Will that information be shared or require completely new registrations? The exact administrative requirements are (understandably) unknown to this point, but all of this will come with costs.

The United States Anti-Doping Agency (USADA), which will assist in the development of HISA, serves as a potential reference point to understand the possible administrative expenses.

According to its annual report, USADA conducted more than 14,000 tests in 2019 across various groups which include America's Olympic and Paralympic athletes, services to the UFC or contracted services for other events, such as the Boston and New York City Marathons. Off a base of just 30,000 Thoroughbred races, down from 36,000 run in 2019, it is reasonable to expect the number of annual tests in U.S. Thoroughbred racing would be no less than five times larger than those conducted by USADA, and very likely more.

USADA's testing costs in 2019 ran more than $13.5 million, but non-testing expenses, which includes results management, science, research and development and drug reference, education and awareness, as well as general and administrative expenses totaled an additional $9.3 million.

It would be reasonable to estimate that HISA's costs would be similar, if not more given a substantially increased number of tests, across a far larger base of competitors and events (races) requiring tests.

Whatever the exact costs, it will be more than pre-HISA times.

GROW THE BUSINESS

The best chance racing has of covering HISA costs is if racing finds a way to actually grow the business, turning around two decades of decline.

Grow the business. Grow the business. Grow the business.

State commissions are, for the most part, funded through fees assessed to, or withheld from, the sport's participants. Receiving a portion of the hold from wagering takeout is one source of funding, licensing fees and starter fees are another. Some receive funding through a share of alternative gaming revenue too.

If wagering on racing continues to decline, recalling that it has dropped roughly 50% adjusted for inflation over nearly the last two decades, the ability to pay for HISA and plenty of other programs required of the industry – aftercare initiatives, jockey health, equine research, among others – would grow increasingly difficult. Takeout hikes would be a completely counterproductive measure to pay for HISA as betting churn would decline.

The path to a brighter future, where the industry's liabilities can be covered, is wagering growth.

More wagering on racing yields a more sustainable business for all stakeholders. But yet, many of the decisions made by racing operators over the last two decades have been in opposition to growing wagering on racing. This has to change.

Whether it is the continuation of churn-killing jackpot bets, high takeout rates, an aversion from many to exploring fixed-odds options, or continuing to operate antiquated pari-mutuel bet-processing systems without modernization – these and other actions have greatly limited racing's growth all as the sport's liabilities increase and its social license to operate becomes tougher to retain.

As racing and humanity emerge from a troubling calendar year, make no mistake that 2020 was a year of tremendous growth in legal sports betting. Those states doing the best with sports betting are those which have embraced online betting and competitive markets. While the overall environment for betting has never been stronger, racing's wagering product remains stagnant.

If racing wants to succeed, and cover its growing liabilities which now includes HISA, it must undertake measures to radically improve – and grow – the wagering business.

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