Testimony: Stephen Walters

I appreciate this opportunity to present the views of the horse industry on H.R. 3125, the "Internet Gambling Prohibition Act."

I am testifying today in my capacity as Chairman of the Oregon State Racing Commission, which regulates all matters pertaining to the conduct of horseracing and dog racing and pari-mutuel wagering on such activities that occur within the State of Oregon.

Pari-mutuel horse racing, including off-track and inter-track wagering is legal in 43 states and involves the racing of Thoroughbreds, Standardbreds, Quarter Horses, Arabians, Appaloosas and Paints. There are over 175 racetracks in the U.S. Racing and racehorse breeding is a widespread and diverse industry that includes gambling, sport, recreation and entertainment and is built upon an agricultural base that involves the breeding and training of the horses.

Economic Impact

According to the study of the Economic Impact of the Horse Industry in the United States done by Barents Group, LLC, the economic and fiscal consulting unit of KPMG Peat Marwick LLP, for the American Horse Council Foundation, racing and racehorse breeding have a total economic impact in the U.S. of $34 billion and generate 472,800 total full-time-equivalent jobs. There are 941,000 people and 725,000 horses involved in the racing industry.

Wagering on horse racing is permitted in 43 states and there is an active horse breeding and training business in all 50 states. In many, the economic contribution of the racing and breeding industry to state and local economies is substantial and the industry ranks among the state's most significant economic entities. For example, in Florida, it involves 37,000 horses, has a $2.1 billion economic impact and generates 27,300 full-time equivalent jobs; in California it involves 69,000 horses, has a $4.1 billion economic impact and generates 52,000 FTE jobs; in Illinois, it involves 52,000 horses, has a $2 billion economic impact and generates 30,700 FTE jobs; in Ohio, it involves 40,000 horses, has a $1.3 billion economic impact and generates 17,000 FTE jobs; and in Texas, it involves 74,000 horses, has a $1.8 billion economic impact and generates 27,900 jobs.

Pari-mutuel racing generates over $500 million annually in direct state and local revenue from pari-mutuel taxes, track licenses, occupational licenses, admission taxes and miscellaneous fees.

Racing as a Sport

Racing is an activity that attracts many fans who appreciate it and follow it as a sport and who enjoy the excitement of the race and the athletic ability of the horses. The Triple Crown races are considered among the most important sporting events conducted in the United States each year and are widely reported in the sports media. Over 130 additional hours of top Thoroughbred races are broadcast on national television each year, including the Breeders' Cup and the NTRA Champions on Fox Series. The national championships of Standardbred and Quarter Horse racing are also televised nationally and widely covered by the media. In addition, most major U.S. newspapers cover racing and print the results of the races at their local tracks on a daily basis, much like they print the box scores of other sports.

The Pari-Mutuel System

While horseracing is a sport on which one can gamble, it would be erroneous to assume that pari-mutuel wagering is the same as other forms of gambling. Unlike most other forms of gambling, horseracing uses the pari-mutuel system in which bettors wager against one another instead of against the "house." Of the total amount wagered on a particular race, approximately 80% is returned to winning bettors. The other 20%, called the "takeout," is shared between the state government, the racetrack and the horsemen who race at the track. Takeout rates, which vary from state to state, are published in track programs, which are available at race tracks and at simulcast wagering sites away from the track, so that fans know the rates and how they might affect their wagering.

Wagering computations are accomplished by a totalisator machine, a computer, which adds bets over and over again during the course of betting. Every 30 to 60 seconds the "tote" flashes new betting totals and odds for each horse. The machines contain a number of features designed to minimize the potential for pari-mutuel fraud or machine malfunction. These features include coded ticket paper and duplication of all critical functions by two computers working independently of one another.

I point this out because the pari-mutuel system and the published information available ensures that the public has easy access to data regarding their true chances of winning. There is little chance of manipulating the odds and therefore the payouts. The use of the tote machine allows bettors to determine their chances of winning every 30 to 60 seconds. In addition, the race upon which the wager is made, and paid, is a public event, watched by fans at the track or off-track facility, often viewed by others on television or cable, and always overseen by the stewards at the track itself and the state racing commission to ensure the integrity of the race.

In 1998, over 30 million people attended the races and wagered over $14 billion, approximately 80% of which was returned to the winning players.

FEDERAL AND STATE POLICIES ON GAMBLING

Gambling, including that conducted on horseracing, has always been of concern to the federal and state governments. Throughout American history, the prohibition or legalization and regulation of gambling has primarily been a function of the states. The only time that the federal government has become involved has been when one or more states could not solve a problem without federal intervention. But even in these instances, for the reasons discussed above and others, pari-mutuel racing has often been either treated differently or specifically considered under federal gambling laws. The racing industry has developed to its current status under a regulatory framework of state law and regulation and the Interstate Horseracing Act of 1978 (discussed below). If racing and breeding hopes to continue to compete in today's economy, it must be able to continue to do so under these same statutes.

State Regulation - A Long History

Pari-mutuel racing has been conducted in the United States under state authority and regulation for over 75 years. In every state that has allowed legalized wagering on horseracing, strict state oversight and regulation has accompanied its introduction and growth. In each state the pari-mutuel industry is regulated by an agency most commonly known as the state racing commission. Among commission prerogatives are the licensing of track and horse owners, trainers, jockeys, drivers and all others involved in the pari-mutuel sport, and the promulgation and enforcement of the specific regulations under which the industry must operate. All matters pertaining to the operation of pari-mutuel racing, including wagering, are regulated by these agencies on behalf of the governors and state legislatures.

Over the years the states have consistently acted on the perceived need to closely regulate legal wagering and protect the public's interest in pari-mutuel sports. The actions of state legislatures and the racing commissions which carry out their policies have been predicated on the desire to: (1) maintain the integrity of the events on which the public is allowed to wager; (2) oversee the state's tax-related and economic interest in that wagering; (3) ensure that licensees meet specific standards of qualification; and (4) control any unsavory elements which may attempt to associate with the wagering aspects of the sport.

The Interstate Horseracing Act of 1978

In 1978, Congress enacted a federal statute that specifically deals with interstate gambling on horseracing. The Interstate Horseracing Act of 1978 ("IHA") made clear that a racetrack controlled wagering on its races in interstate and international commerce and provided for industry and regulatory approvals before betting was permitted between jurisdictions where the wagering was legal.

In the findings to the IHA, Congress said that states have the primary responsibility for determining what forms of gambling may take place within their borders, but that the Federal government should prevent interference by one state with the gambling policies of another. In the IHA Congress provided that with respect to the limited area of interstate off-track wagering on horse racing:

There is a need for Federal action to ensure that States will continue to cooperate with one another in the acceptance of legal interstate wagers.

Importantly, in passing the IHA, Congress specifically recognized that "pari-mutuel horseracing is a significant industry which provides substantial revenue to the States" and that "properly regulated and properly conducted interstate off-track betting may contribute substantial benefits to the States and the horseracing industry."

Consistent with these findings, Congress stated as a matter of congressional findings and policy that:

It is the policy of Congress in this chapter to regulate interstate commerce with respect to wagering on horseracing, in order to further the horse racing and legal off-track betting industries in the United States.

The combination of state statutes and regulations and the IHA have provided the racing industry with a workable regulatory framework for over two decades that has allowed the industry to develop its current activities within clear parameters and guidelines.

CURRENT ACTIVITIES OF RACING

The dissemination of information about racing, simulcasting, off-track and intertrack wagering, common pool wagering and account wagering have been initiated, operated and expanded under the IHA and state approval, licensing and regulation.

Information

Communication today is very complicated in the highly complex and ever-changing technological world. In this environment new industries have sprung up virtually overnight forcing existing industries to adapt and change practices in order to compete for the public's support. This is particularly true in the areas of wagering and entertainment.

Like others, the horseracing industry has had to adapt and change dramatically in the face of exploding competition and new technology. An example of that is that many racetracks, horsemen's associations and private businesses are now advertising and offering information on the sport through various media, both traditional and more technological state-of-the-art, including the Internet.

The process of betting on horse racing and selecting the winner is called "handicapping." It is a cerebral process for serious bettors who spend a great deal of time at the track, and elsewhere, pouring over information that will help them select the winners of races. For students of the sport this is not a random selection. The "handicapping" information used in this process has been available in written forms since racing began and is similar to the statistical information available for other sports.

The racing industry is presently offering a great deal of this type of "handicapping" information in publications, on-the-wire, over toll-free numbers and over the Internet in the form of advertisements for state-licensed and regulated race tracks, information and "how-to" sites, "tout" sheets, past performance information, betting lines and similar information, that will market the racing product to new fans and allows existing patrons to participate more successfully.

This continued flow of this information is critical to the racing business and we submit should not be affected by any changes to current law.

Prior to 1970, legal pari-mutuel wagering on racing was limited to those at the track where the race was run. In 1970, the New York legislature approved off-track wagering. As an aside, at that time the computerized system operated by New York OTB (Off-Track-Betting) was one of the first real-time, on-line computer systems in the U.S. Since then, many states, and the federal government under the Interstate Horseracing Act, have authorized racetracks to simulcast or transmit signals of their races off-track into other states and jurisdictions under applicable law.

With the continued development of technology, by the early 1980s racing was able to make its product better for its patrons again. Additional technological changes allowed the linking of pari-mutuel wagering pools among tracks in separate jurisdictions, called "commingled pools," so that payouts could better reflect the size and wagering behavior of the entire betting public.

The racing industry's continuing utilization of state-of-the-art technology has resulted in the ability of the industry to survive and offer its patrons a better product. In fact, today over eighty percent of the money wagered on racing is bet at facilities or locations other than where the race itself is run. Again, all with the approval and regulation of the states involved.

Account Wagering

Another process for pari-mutuel wagering on racing that has expanded over the two last decades is account wagering, primarily telephone betting. Currently, eight States, including Connecticut, Kentucky, Maryland, Nevada, Ohio, Oregon, Pennsylvania and New York, have enacted legislation specifically authorizing the acceptance of account wagers by licensed facilities within those States and a number of others are considering similar legislation. For example, California is currently considering legislation that would allocate the proceeds from account wagering by California residents among the California pari-mutuel industry.

Account wagering is not a new activity in the United States. Telephone account betting has been offered in New York for over 25 years by New York City Off Track Betting and upstate New York Off Track Betting entities-- all state agencies. These entities have accepted wagers from residents of New York and other states who had established accounts in New York.

In order to keep pace with modern technological advances, the horseracing industry needs to be able to continue these activities, provided that such activities are conducted in accordance the IHA and applicable state laws or regulations.

In summary, the IHA and individual state statutes and regulations, under the supervision of state racing commissions, combine to form a very capable regulatory system for pari-mutuel racing.

The Internet Gambling Prohibition Act of 1999, H.R. 3125, is a natural response to the current changes in technology. The regulated and licensed pari-mutuel horse racing industry agrees with the intent of this legislation, as characterized by Congressman Bob Goodlatte when he introduced a previous version of H.R. 3125 in 1997:

…this legislation does not preempt any state laws, does not cover online news reporting about gambling, and does not apply to transactions that are legal in both the State in which they originate and the state in which they are received.

The regulation of gambling is essential to protect state policies and revenues, the racing industry's ability to control its own product and the integrity of racing. Our industry is opposed to any unregulated or unauthorized gambling, particularly on racing.

Nonetheless, this legislation involves very complicated legal and technical issues. We believe the exemptions in the current legislation that allow horseracing to continue to conduct its existing activities are fair and consistent with existing law and practice under which horseracing has operated for decades. We are concerned, however, about any changes to the current legislation that may adversely impact what racing is doing now under state regulation and the IHA with respect to the dissemination of information, common pooling and account wagering.

The worst possible result for all concerned would be to enact legislation that would restrict licensed and regulated entities from conducting their current business using modern technology with the result being that many of those who wish to wager on horseracing will be forced to deal with unlicensed and unregulated vendors, either off-shore or operating illegally within the United States. This would open the door to consumer fraud and result in significant decreases in revenues for the licensed operators, purses (which are directly derived from licensed wagering revenues) and tax revenues for the Federal and State governments.

It is critical to the future of the racing industry, the agri-business it supports, the state revenue and employment it generates, the sporting and the entertainment benefits it provides to countless fans, that all distribution mechanisms of racing information and its product be available, so long as they continue to meet regulatory criteria established by state governments and comply with the IHA. It is also critical that the racing industry have the opportunity to take advantage of any and all technological advancements in the future distribution of its information and products in order to successfully compete against other forms of gambling, sport and entertainment.

Because of the unique status of pari-mutuel racing and the present regulatory structure applicable to it, we believe that the purposes of this legislation and the particular needs of racing can both be accommodated without infringing on federal or state public policies, abrogating strict regulation or lessening the current protections of the public. We look forward to working with the Chairman of the Subcommittee, the sponsors of the bill, the members of the committee and the staff to accomplish this.

In the context of the above remarks, we would also like to address the comments submitted by the Justice Department to the Senate Judiciary Committee last summer during its consideration of the Senate version of the Interstate Gambling Prohibition Act and similar comments recently submitted to the New York State Racing and Wagering Board.

These comments can be summarized as questioning the legality under the Wire Act (18 U.S.C. 1084) of the current practices of interstate simulcasting, commingling of pools and account wagering and opposing exemptions to the Internet Gambling Prohibition Act that would allow racing to continue to conduct these activities using modern technology. We believe this is an extreme and incorrect interpretation of the Wire Act that disregards the specific purpose behind the Wire Act of combating organized crime, the passage by Congress of the Interstate Horseracing Act of 1978, and the reality that State sanctioned and licensed businesses have been conducting these activities in compliance with existing State and federal laws for over twenty years.

The Wire Act is undeniably directed at illegal gambling and bookmaking conducted by organized crime. It was enacted 1961 as part of a package of bills directed against organized crime and racketeering. See The Attorney General's Program to Curb Organized Crime and Racketeering, Hearings before Committee on the Judiciary, U.S. Senate, 87^th Cong., 1^st Sess. (1961).

In its report accompanying the Wire Act, the House Committee on the Judiciary wrote that:

"The purpose of the bill is to assist the various States and the District of Columbia in the enforcement of their laws pertaining to gambling, bookmaking and like offenses and to aid in the suppression of organized gambling activities. . . ."

Any fair reading of the Wire Act and the Congressional record accompanying the Act makes clear that the Wire Act is not directed at nor intended to make illegal licensed state regulated activities.

The Wire Act was enacted in 1961. Seventeen years later, Congress enacted the Interstate Horseracing Act of 1978 for the express purposes of ensuring proper regulation of "interstate off-track betting" and "furthering the horseracing and legal off-track betting industries in the United States." The interpretation of the Wire Act currently propounded by the Justice Department would appear to disregard Congress' enactment of the IHA and the supporting Congressional record.

Lastly, although the Wire Act was enacted almost 40 years ago and interstate simulcasting and account wagering have been conducted in this country since the early 1970s, neither the Justice Department nor any federal prosecutors have ever used the Wire Act to prosecute any state licensed and regulated entities for conducting interstate simulcasting, commingling of pools or account wagering. The reasons for this should be clear. The legislative history of the Wire Act, coupled with the passage of the IHA and the existing framework of extensive state regulation leads to the inescapable conclusion that the Wire Act simply does not apply to the licensed regulated sport of horseracing.

Stated another way, the logical conclusion of the Justice Department's current position would render criminally illegal interstate wagering on legal, state-regulated horseracing that currently provides hundreds of millions of dollars in annual tax revenues, supports hundreds of thousands of jobs, and has been an ongoing state-sanctioned activity for decades.

In conclusion, the current form of H.R. 3125 has been carefully crafted to allow the sport of horseracing to continue to conduct its business in the same way it has been operating for the last two decades. The bill does not in any way expand wagering, but instead preserves the status quo. We appreciate the opportunity to present these comments on this important legislation and would be happy to respond to any question.