"Can’t Buy Me Love"
Horse racing and fairs have been as natural a combination as chocolate and peanut-butter – as well suited a couple as Johnny and June. So, who would have ever guessed that the two would split-up? But, it has happened. In the orangey pre-dawn glow of a recent February morning, essentially, a "decree-nissi"was granted that brought an end to a relationship that spanned more than three-quarters of a century. It was not a nasty "divorce."Indeed, it was amicable and enacted out of practicality considering the declining revenues from tax on wagering, also know as "license fees", which was the source of funds for the fairs from the state.
Follow the Money
Proposition 3 of 1933 legalized parimutuel wagering on horse racing in California. The stated purpose of the new law was for the "encouragement of agriculture and breeding of horses."It included a, "[C]ommitment for the continuous funding of the fairs of California with an annual allotment of racing revenues to be used for health, safety and maintenance projects."Revenue from horse racing license fees was deposited into the Fair and Exhibition Fund (F&E Fund) to supplement the income of fairs throughout California. Racing, at that time, had a monopoly on gambling in California. There was no competition for the gambling dollar in this state (other than a few small card-clubs) and the industry had no trouble generating the money necessary to fund the fair. Fair funding was considered the cost for doing business by the racing industry in this state.
License fees generated from satellite wagering, when that practice became legal in 1984, were deposited into the Satellite Wagering Account (SWA) which is a separate account within the F&E Fund. The fairs are authorized to issue bonds backed by the SWA for certain purposes to benefit fairs. In addition to supporting the fairs, the F&E Fund pays for the California Horse Racing Board ( CHRB), the Department of Food and Agriculture’s administrative cost, and drug testing of race horses. The F&E Fund also supports the Kenneth L. Maddy Equine Analytical Chemistry Laboratory at UC Davis.
Until this year, the sole source of state funding for the Network of California Fairs was from horse racing license fees, which have declined to the lowest level ever. The decline in license fees over the past several years has resulted in a deficiency in revenues generated to the F&E Fund which is impacting fairs across the state. The license fee revenue schedule was based on such factors as the amount wagered, track location, type of horse racing, type of wager, and whether the wager is made on track or at a simulcast facility. The state’s share of horse racing revenue is either deposited to the General Fund, SWA, or F&E Fund.
In 1998, Senator Ken Maddy managed to secure the first round of license fee relief for the horse racing industry that, essentially, cut horse racing license fees in half. His measure, SB 27, allowed the struggling industry to retain an additional $40 million of its own money. As part of that license fee relief package, the racing industry agreed that it would provide a guaranteed minimum of $40 million annually to the F&E Fund for the support of California’s fairs and the CHRB.
License fee revenues have fallen below the $40 million guaranteed threshold annually since fiscal year 2004/2005 and have been inadequate to meet the F&E Fund revenue expectations to the extent allowed by law. The unprecedented revenue shortfalls in 2004/2005 and 2005/2006 were $2.8 million and $2.6 million, respectively. Calendar year 2005 and 2006 ended with a $560,765 and $967,422 revenue shortfall from the $40 million threshold, respectively, for a total loss of $1,528,187. Accordingly, the Division of Fairs & Expositions requested the California Horse Racing Board to pursue collection of the shortfall. Last year, revenue from license fees fell to only $33 million. Because the fairs have several outstanding bonds, in order to maintain their bond rating, a stable source of funding is necessary. Therefore, part of the budget bill package provided the stable source in the continuous appropriation of $32 million from the General Fund to the fairs.
An Amicable Split
In an attempt to further shore up the industry from total collapse, Senator Ashburn authored a budget trailer bill in February 2009, SB 16xx, to eliminate the license fee on horse racing. This bill eliminated the $40 million floor on the amount the horse racing industry is required to pay annually for support of the Network of California Fairs, the CHRB, and the Maddy Laboratory. It provided a distribution formula for the savings from license fee relief to the various segments of the horse racing industry. Funding for the CHRB and the Maddy Lab will, instead, be made by mutual agreement between the horse racing industry and the CHRB. Furthermore, it made various technical changes with regards to the funding caps on the F&E Fund and SWA. Finally, it provided for a $32 million annual appropriation from the General Fund for the support of the Fairs.
Since 1933, horse racing had a monopoly on gaming in California. Today, it is a minor player in the gambling world yet, in many ways, is still regulated as if it were still a monopoly. Racing was in desperate need of license fee relief in order to survive and the fairs were anxious to secure a more stable funding source. Already, one major track, Bay Meadows, has closed. Hollywood Park is next on the chopping block. Without license fee relief, the end for Hollywood Park is practically guaranteed. The closure of another track would mean even further decreases in the amounts paid to the F&E Fund. Such would have a serious impact on the fairs. Eliminating the horse racing industry’s responsibility to pay for the fairs means a necessary boost for the industry.
This change has no impact on racing events being conducted on fair grounds. That relationship remains alive and well. It simply removes the racing’s burden of funding fairs through the extra tax known as license fees. In fact, fair racing is pivotal to the future of horse racing in California. With recent and impending track closures, fairs are in prime positions to "pick up the slack"to help keep the sport of kings alive.
The Law of Unintended Consequences
As part of the budget package that the Governor signed into law, SB 16xx did not go through the normal legislative process. Usually, the committee process provides a forum for legislative ideas to be discussed, looked at, fixed and to work out possible unintended results before the measure is implemented. A change of this magnitude done so quickly can result in consequences that were not able to be considered. One such issue might be that SB 16xx puts the racing industry in the driver’s seat when it comes to paying for its regulatory board. By providing that the funds for the CHRB will be determined in accordance with a formula devised by the board, in consultation with the industry, the regulators are put in the position of seeking to stay in the good-graces of the regulated in order to maintain their funding levels.
In addition, no longer will fair funds be protected. Instead of being funded by a dedicated source (horse racing) in a special fund (F&E Fund), this bill provides funding directly from the General Fund, thus potentially making it subject to budget-cutters in the future. Despite this, statutory annual continuous appropriations are not subject to review and oversight by the Legislative Budget Committees. Therefore, under current law, the only legislative entity that now has the authority to review the spending plan for the F&E Fund is the Joint Committee on Fairs, Allocation and Classification. This little known statutory committee, which has not met in over two years, now becomes the focus of greater attention and importance.
For every thing there is a season
Horse racing in the aggregate is considered an agri-business producing a $3.4 billion direct and indirect impact on California’s agricultural industry. It is important that it stay viable in California. Eliminating horse racing license fees helps the industry to continue to function. License fees have been an added tax, designed to provide the state funding for the fairs. Switching the funding mechanism to the General Fund means that racing will now operate like any other business and continue to pay corporate taxes. It will no longer be subject to these additional fees taken as a percentage of each wager. From this separation, new relationships and processes can grow. Fairs can seek out new partnership while racing is relieved from the bridle of license fees.
For more information on this report or other Governmental Organization issues , contact Richard Paul, Senate Republican Office of Policy at 916/651-1501.
