Performance audit and sunset review, Arizona Department of Racing sunset review, Arizona Racing Commission a report to the Arizona Legislature

              Debra K. Davenport
Auditor General
Performance Audit and Sunset Review
Arizona Department
of Racing
Arizona Racing Commission
Performance Audit Division
MAY • 2007
REPORT NO. 07-02
Sunset Review
A REPORT
TO THE
ARIZONA LEGISLATURE
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Audit Staff
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
Melanie M. Chesney, Director and Contact Person
Monique Cordova, Team Leader
Karl Kulick
Barbara Maxwell
Senator Robert Blendu, Chair Representative John Nelson, Vice-Chair
Senator Carolyn Allen Representative Tom Boone
Senator Pamela Gorman Representative Jack Brown
Senator Richard Miranda Representative Peter Rios
Senator Rebecca Rios Representative Steve Yarbrough
Senator Tim Bee (ex-officio) Representative Jim Weiers (ex-officio)
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
May 30, 2007
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Mr. Geoffrey Gonsher, Director
Arizona Department of Racing
Mr. James N. Chilcoat, Sr., Chairman
Arizona Racing Commission
Transmitted herewith is a report of the Auditor General, a Performance Audit and Sunset
Review of the Arizona Department of Racing and Sunset Review of the Arizona Racing
Commission. This report is in response to a May 22, 2006, resolution of the Joint
Legislative Audit Committee. The performance audit was conducted as part of the sunset
review process prescribed in Arizona Revised Statutes §41-2951 et seq. I am also
transmitting with this report a copy of the Report Highlights for this audit to provide a quick
summary for your convenience.
As outlined in its response, the Arizona Department of Racing agrees with all of the
findings and plans to implement all of the recommendations.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on May 31, 2007.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
The Office of the Auditor General has conducted a performance audit and sunset
review of the Arizona Department of Racing and a sunset review of the Arizona
Racing Commission pursuant to a May 22, 2006, resolution of the Joint Legislative
Audit Committee. This audit was conducted as part of the sunset review process
prescribed in Arizona Revised Statutes (A.R.S.) §41-2951 et seq.
The Arizona Department of Racing (Department) regulates and supervises pari-mutuel
racing and wagering conducted in Arizona. The Department is responsible for
regulating all commercial and county fair horse-racing meetings, greyhound-racing
meetings, and pari-mutuel wagering.1 The Arizona Racing Commission
(Commission) focuses its efforts on supervising the department director and
approving or rejecting his policy recommendations, allocating racing dates (the
specific number of days allowed for a racing meeting), and approving permits to
conduct racing.
This audit focused on two aspects of the Department’s operations: overseeing pari-mutuel
wagering at horse and greyhound racing tracks, and testing horses and
greyhounds for drugs. The audit also includes information on the revenues
generated by the racing industry.
Department should improve pari-mutuel oversight
program (see pages 13 through 24)
The Department should take several steps to make its oversight of pari-mutuel
wagering more effective. To conduct wagering, racetracks contract with national
companies to administer computerized pari-mutuel systems, called totalisator or
“tote” systems. A 2002 scandal in New York focused nation-wide attention on
potential manipulation of these systems and led the racing industry to propose new
oversight practices. Relative to these recommended practices, the Department’s
procedures can be improved in several respects, both to make existing oversight
activities more efficient and to incorporate additional tests and reviews. Specifically:
1 Effective August 22, 2002, following the passage of Laws 2002, Chapter 328, §8, the Department of Racing assumed full
responsibility for boxing regulation. Prior to this time, the Department was responsible only for the financial administration
of the Arizona State Boxing Commission. This performance audit and sunset review focuses solely on the Department’s
regulation of Arizona’s racing industry. The Arizona State Boxing Commission has a separate sunset date of July 1, 2011.
Office of the Auditor General
SUMMARY
page i
􀁺􇩁 Adapting to new testing requirements—One of Arizona’s racetracks now
conducts simulcast operations with locations in Canada, allowing Canadians to
wager on Arizona races and thereby increase revenue for the tracks. However,
Canada’s laws require simulcasting racetracks to use a different form of pricing
than Arizona’s racetracks have historically used. As a result, the Department’s
auditors have to perform more tote testing calculations. To adapt to these
changes, department auditors need additional audit training, and the
Department needs to consider time-saving approaches used in other states.
􀁺􇩉 Improving information technology reviews of pari-mutuel wagering
systems—The Department’s practices fall short of information technology (IT)
auditing standards in such areas as monitoring changes to tote system software
and reviewing controls over access to the tote systems. Proposed racing
industry Model Rules for pari-mutuel wagering developed by the Association of
Racing Commissioners International (ARCI) recommend that states license tote
companies and require, among other things, independent assessments of tote
systems as a condition of licensure. However, although the Department licenses
tote companies, it lacks the statutory authority to do so and should therefore
work with the Legislature to obtain this authority. If it obtains this statutory
authority, the Department then should modify its rules to identify tote companies
as a license category and include licensing requirements recommended in the
proposed Model Rules. For example, the rules should require independent
testing of controls, known as SAS 70 reviews, to be performed on tote systems.
The Department’s pari-mutuel auditors should also become more familiar with
the information technology controls standards that ARCI has included in its
proposed additions to the Model Rules, and add some of these areas to its
regular auditing practices.
􀁺􇩍 Monitoring wagering anomalies—Although automated systems offer a more
systematic way to monitor and detect potential wagering anomalies, the
Department is not using automation to any great extent, either on a real-time or
post-race basis, to detect whether such anomalies have occurred. Some racing
jurisdictions are investing in independent monitoring systems that allow them to
monitor and detect potential anomalies. As of 2007, two organizations offer such
a service to state racing regulators—ESI Integrity, a Canadian-based company
that provides independent software for security and risk management, and RCI
Integrity Services, a nonprofit services organization, which is a subsidiary of the
ARCI. The Department should explore the feasibility of adopting automated
systems to improve detection of potential wagering anomalies.
In addition to improving its oversight of the totalisator systems, the Department
should explore expanding its financial analyses of the monies wagered in Arizona.
This would strengthen oversight of handle (the dollars wagered) distribution to parties
State of Arizona
page ii
that are entitled to a portion of the pari-mutuel revenues. For example, the
Department does not review purse distributions on a regular basis. However, in
September 2005, a department special audit found that one racing track had shorted
its distributions to owners of winning greyhounds by approximately 15 percent over
a 9-month period spanning August 2004 through April 2005. The Department reports
that it does not have the staff resources to conduct additional financial analyses on
a regular basis.
Department should continue aligning animal drug-testing
practices with national standards (see pages 25 through
36)
The Department’s animal drug-testing program is generally aligned with racing
regulation practices, and the Department should continue taking additional steps to
further strengthen its animal drug-testing practices. The Department employs the
standard testing practices used in the racing industry to both initially detect and
confirm the presence of drugs, and it is aligning its drug-testing practices with Model
Rules developed by ARCI. These Model Rules cover such matters as drug
classifications for horses and recommended penalties when violations are found, as
well as drug-testing practices for horses and greyhounds.
Although the Department has not formally adopted the Model Rules, the Department
is already in alignment with some of these rules and is making improvements to its
drug-testing program to better align with others. Racing industry stakeholders in
Arizona have expressed concerns about some of these Model Rules, and the
Department is working toward gaining consensus on these matters. However,
progress in the drug-testing program was set back by actions the Department took
in 2006 to deal with an internal budget shortfall precipitated by unexpected expenses
and mandates, such as state-wide, mandated, employee-pay increases. To deal with
these unexpected expenses, the Department implemented several cost-saving
measures, including reducing the number of winning horses tested for drugs. The
Department reported that it reduced drug testing as a last alternative to balance its
budget. This reduction went on for 2 months and did not violate any state laws, but
it resulted in the Department’s temporarily deviating from the Model Rules with regard
to the testing of every winning horse. Although the Model Rules do not recommend
the same practice for greyhounds, in response to its internal budget constraints, the
Department also cut back by about two-thirds the number of greyhounds tested.
Specifically, instead of sending eight to nine urine samples a day for testing, the
Department reduced this to three urine samples per day.
Office of the Auditor General
page iii
Other pertinent information (see pages 37 through 43)
Auditors also developed information about how Arizona’s racing industry was
historically funded and is currently funded, legislative actions to assist the racing
industry, and industry revenue sources used by some other states that are not used
in Arizona.
State of Arizona
page iv
Office of the Auditor General
TABLE OF CONTENTS
continued
page v
Introduction & Background 1
Finding 1: Department should improve pari-mutuel oversight
program 13
Arizona racing parks contract with national companies to administer pari-mutuel
wagering systems 13
Wagering scandal increased focus on overseeing tote systems 14
Department could improve wagering oversight practices 15
Department should explore expanding financial analysis
practices 22
Recommendations 23
Finding 2: Department should continue aligning animal drug-testing
practices with national standards 25
National efforts to standardize animal drug-testing practices resulted in
Model Rules development 25
Department’s animal drug-testing program generally aligned with racing
regulators’ practices 28
Conformity with Model Rules limited by internal budget pressure 33
Recommendations 36
Other Pertinent Information 37
Sunset Factors Arizona Department of Racing 45
Sunset Factors Arizona Racing Commission 53
State of Arizona
TABLE OF CONTENTS
concluded
page vi
Agency Response
Tables:
1 Pari-Mutuel Handle Reported by Commercial Tracks
Fiscal Years 2004 through 2006
(Unaudited) 3
2 Schedule of Revenues, Expenditures, and Changes in Fund Balance
Fiscal Years 2005 through 2007
(Unaudited) 6
3 Overview of Issues Raised in 1997 Audit Report and Status 9
4 Uniform Equine Drug Classifications, Examples, and Potential Effects
April 2005 27
5 Equine Drug-Testing Statistics
Fiscal Years 2004 through 2006 33
6 Greyhound Drug-Testing Statistics
Fiscal Years 2004 through 2006 34
7 Statutory Revenue Distribution and
Maximum Dollar Requirements for
Racing and Agricultural Funds
Specified in A.R.S. §5-113 39
Figures:
1 Arizona Racing Handle
Fiscal Years 1998 through 2006
(Unaudited) 2
2 Arizona Commercial Racing Handle
Generated by Live and Simulcast Race Wagering
Fiscal Years 1998 through 2006
(Unaudited) 4
3 Revenue Sources by Category
Fiscal Years 1998 through 2006
(Unaudited) 38
The Office of the Auditor General has conducted a performance audit and sunset
review of the Arizona Department of Racing and a sunset review of the Arizona Racing
Commission pursuant to a May 22, 2006, resolution of the Joint Legislative Audit
Committee. This audit was conducted as part of the sunset review process prescribed
in Arizona Revised Statutes (A.R.S.) §41-2951 et seq.
The Arizona State Legislature created the Arizona Department of Racing (Department)
in 1982 to regulate and supervise pari-mutuel racing and wagering conducted in
Arizona. The Department is responsible for regulating all commercial and county fair
horse-racing meetings, greyhound-racing meetings, and pari-mutuel wagering.1 The
Arizona Racing Commission (Commission) has existed since 1949, and before 1982,
it performed the regulatory activities the Department now performs. By establishing the
Department, the Legislature intended to strengthen racing industry regulation by
placing the Department and its director in charge of day-to-day oversight of racing
activities. In contrast, the Commission focuses its efforts on supervising the
Department’s director and approving or rejecting his policy recommendations,
allocating racing dates (the specific number of days allowed for a racing meeting), and
approving permits to conduct racing.
Status of Arizona’s racing industry
Arizona is one of only 11 states that operate both horse and greyhound racetracks.2
Horse and greyhound racing occurs at five tracks in the State: horse racing at Turf
Paradise in Phoenix, Yavapai Downs in Prescott Valley, and Rillito Park in Tucson;
and greyhound racing at Phoenix Greyhound Park and Tucson Greyhound Park.3 In
addition to commercial racing, all 15 Arizona counties conduct horse racing in
conjunction with their county fairs.4
1 Effective August 22, 2002, following the passage of Laws 2002, Chapter 328, §8, the Department of Racing assumed full
responsibility for boxing regulation. The Department was previously responsible only for the financial administration of the
Arizona State Boxing Commission. This audit and sunset review focuses solely on the Department’s regulation of
Arizona’s racing industry. The Arizona State Boxing Commission has a separate sunset review date of July 1, 2011.
2 Review of various state statutes indicates that 16 states legally allow both horse and greyhound racing: Alabama, Arizona,
Arkansas, Colorado, Connecticut, Florida, Iowa, Kansas, Massachusetts, New Hampshire, Oregon, Rhode Island, South
Dakota, Texas, West Virginia, and Wisconsin. However, Connecticut, Rhode Island, and Wisconsin have no operative
horse tracks, and Oregon and South Dakota have no operative dog tracks.
3 Fiscal year 2004 was the last year live racing was held at Apache Greyhound Park in Apache Junction, although patrons
at that location can still bet on races broadcast from Phoenix Greyhound Park as well as Turf Paradise and Yavapai Downs.
4 Seven of Arizona’s 15 counties conduct county fair racing at commercial tracks: La Paz, Maricopa, Navajo, Pinal (Turf
Paradise), Pima (Rillito Park), Yavapai, and Yuma (Yavapai Downs).
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
The racing industry measures its success through the amount of pari-mutuel
“handle,” which is the dollars wagered. The total amount of handle generated by
commercial horse and greyhound racing and county fair racing in fiscal year 2006
was $285.4 million. As Figure 1 shows, the handle for commercial horse racing has
increased since fiscal year 1998, while the handle for commercial greyhound
racing has decreased and the handle for county fair racing has remained relatively
constant. During fiscal year 2006, commercial horse racing accounted for $179.7
million in handle, which was more than double the $84.9 million in handle
generated from commercial greyhound racing that same year. County fair racing
handle totaled about $20.8 million.
As shown in Table 1, page 3, in fiscal year 2006, both commercial horse racing and
commercial greyhound racing showed increases in handle over previous years.
Approximately two-thirds of the total handle for commercial racing is generated at
off-track betting sites (OTBs) instead of the actual tracks. In Arizona, OTBs are
predominantly restaurants and bars that operate as satellites of the racetracks. To
open an OTB, a racetrack that already has a state permit to conduct horse racing
or dog racing must submit an application to operate an OTB facility to the
Department of Racing. It must also receive a permit to operate as an OTB from the
municipality where the site will be located and be approved by the Arizona Racing
Commission. According to the Department, 83 OTBs were authorized to
broadcast horse and greyhound racing in fiscal year 2006.
State of Arizona
page 2
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
1998 1999 2000 2001 2002 2003 2004 2005 2006
Millions
Fiscal Year
Commercial Horse Commercial Greyhound County Fair Horse
Figure 1: Arizona Racing Handle
Fiscal Years 1998 through 2006
(Unaudited)
Source: Auditor General staff analysis of information reported in the State of Arizona Department of Racing 53rd Annual Report 2001-2002,
State of Arizona Department of Racing Annual Report FY2003, and State of Arizona Department of Racing Annual Report FY2006.
The recent increases in commercial
horse-racing handle appear to be
driven primarily by an increase in
simulcast wagering—wagers that
Arizona bettors make on out-of-state
races as opposed to live race
wagering.1 As shown in Figure 2 (see
page 4), although total handle
generated at Arizona’s commercial
racetracks has generally fluctuated
between $245 million and $265
million since 1998, the actual
composition of the handle has
changed significantly, with simulcast
handle forming a larger proportion of
the total handle each year. During
fiscal year 2006, 69.2 percent of
handle generated was simulcast,
compared to 49.1 percent of handle
in 1998. However, these handle
trends only capture monies wagered
within the State of Arizona, and do not
include wagers made on Arizona-based
races that are broadcast out-of-
state.
Arizona racetracks can also earn
revenues in the form of commissions
from broadcasting their races to non-Arizona
jurisdictions. For example, during 2006, Turf Paradise
took the initiative to simulcast its race signal to California
racetracks that were unable to broadcast races from
Louisiana because of Hurricane Katrina. In addition, they
took the initiative to ensure that Canada would continue
to receive its race signal after Canada changed its laws
to require a different form of wagering called net pool
pricing (see Finding 1, page 16).2,3
Pari-mutuel handle distributions
Several entities receive a portion of the pari-mutuel
handle generated by commercial horse and greyhound
1 Simulcast handle should not be confused with handle that Arizona tracks earn from OTBs. If a patron bets on a live Arizona
race, it is considered “live handle,” and if it is an out-of-state race, it is considered “simulcast handle.”
2 The Turf Paradise racing season typically starts in early October and ends in May.
3 According to Turf Paradise officials, tracks that did not adopt net pool pricing would not be able to send their race signals
to Canada.
Office of the Auditor General
page 3
Table 1: Pari-Mutuel Handle Reported by Commercial Tracks
Fiscal Years 2004 through 2006
(Unaudited)
Track 2004 2005 2006
Commercial Horse
Turf Paradise $133,246,398 $131,067,082 $146,007,413
Yavapai Downs 26,387,747 29,818,131 32,883,699
Rillito Park 805,693 746,592 841,230
Subtotal 160,439,838 161,631,805 179,732,342
Commercial Greyhound
Phoenix Greyhound Park 58,262,630 57,674,840 60,277,043
Tucson Greyhound Park 21,514,079 20,725,277 20,551,582
Apache Greyhound Park1 5,281,988 3,485,747 4,101,136
Subtotal 85,058,697 81,885,864 84,929,761
Total $245,498,535 $243,517,669 $264,662,103
1 Apache Greyhound Park handle for fiscal year 2004 includes both live and simulcast
handle and was the last year that live races were held at that venue. Handle reported
for fiscal years 2005 and 2006 was generated solely from simulcast wagering from
races taking place in other jurisdictions that were broadcast to Apache Greyhound
Park.
Source: Auditor General staff analysis of commercial handle information reported in the
State of Arizona Department of Racing Annual Report FY2006.
Live Handle: Consists of dollars wagered on live
Arizona racing events, either on-site at the
racetrack or at an off-track betting site located in
Arizona. This type of handle can only be
generated from Arizona-based races.
Simulcast Handle: Consists of dollars wagered
within the State of Arizona on out-of-state races
that are broadcast to Arizona racetracks and off-track
betting sites. This type of handle is
generated only from out-of-state races.
Source: Auditor General staff interpretation of statutory definitions and
other information in A.R.S. §§5-101 and 5-111(B), and
information received from department officials in May 2007.
and county fair racing: the State (pari-mutuel taxes), the racetracks (track
operation revenues and out-of-state tracks), the wagering public (winnings),
and others. In fiscal year 2006, the Department reported that 76.8 percent of
the total $285.4 million handle was returned to the
wagering public as winnings. Owners of winning
horses and greyhounds also receive purse
monies that are derived primarily from racetrack
revenues.1 The Department reported a total of
$22.3 million distributed in purses in fiscal year
2006. (See textbox).
In recent years, the amount of revenues being
returned to the State in the form of pari-mutuel
taxes has declined significantly. For example, in
fiscal year 1998, the State collected more than
$2.9 million in pari-mutuel taxes compared to
nearly $528,000 in fiscal year 2006. Some of this
is due to the decline in live handle and the
corresponding growth in simulcast handle. Unlike
some other states, Arizona does not tax simulcast
handle.
1 Although purse monies are primarily derived from track revenues, other revenues, such as owners’ and trainers’
entry fees, also support purse distributions.
State of Arizona
page 4
$0
$50
$100
$150
$200
$250
$300
1998 1999 2000 2001 2002 2003 2004 2005 2006
Fiscal Year
Millions
Live Race Simulcast Race
Figure 2: Arizona Commercial Racing Handle
Generated by Live and Simulcast Race Wagering
Fiscal Years 1998 through 2006
(Unaudited)
Source: Auditor General staff analysis of information reported in the State of Arizona Department of Racing 53rd Annual Report 2001-2002,
State of Arizona Department of Racing Annual Report FY2003, and State of Arizona Department of Racing Annual Report FY2006.
Fiscal year 2006 pari-mutuel handle distributions
Total handle generated: $285.4 million
Distributions:
State pari-mutuel taxes: $527,860
Racetrack revenues: $61.1 million
Purse distributions: $22.3 million
Return to public—Arizona (winnings): $219.1 million
Return to public—other states: $4.4 million
County fair tax rebates: $124,298
Wagering pool adjustments1 $172,086
1 Consists of adjustments to wagering pools that are eventually
returned to Arizona’s wagering public or the out-of-state wagering
public.
Source: Auditor General staff analysis of fiscal year 2006 pari-mutuel handle distribution
information received from Department of Racing staff in February 2007.
Funding of department operations
The Department’s revenue, which used to come primarily from pari-mutuel taxes,
now comes primarily from State Unclaimed Property Fund monies. As shown in
Table 2, page 6, in fiscal year 2006, the department revenues totaled nearly $12.8
million, but its actual operating expenditures were much lower—slightly less than
$3 million. The Department transferred or remitted most of the remaining revenue
to other funds, leaving it with an end-of-year balance of about $817,000. See Other
Pertinent Information, pages 37 through 43, for a more detailed discussion of the
Department’s funding.
Commission and department staffing
The Arizona Racing Commission consists of five members that the Governor
appoints for 5-year terms. The Commission is primarily responsible for establishing
the racing regulation policy in Arizona, and it performs activities such as issuing
racing dates (the specific number of days allowed for a racing meeting ); preparing
and adopting rules to govern racing meetings as may be required to protect and
promote the safety and welfare of the animals participating in a racing meeting;
protecting and promoting the health, safety, and proper conduct of those involved
in racing and pari-mutuel wagering; conducting hearings on applications for racing
permits, and conducting hearings and other legal procedures on matters relating
to racing licensees and the racing industry.
Since fiscal year 2003, the Arizona Department of Racing has been authorized
46.5 full-time equivalent (FTE) positions to provide direct oversight of racing
activities in the State.1 The Department is organized into four divisions:2
􀁺􇩁 Administration (16.5 FTE, 2.0 vacant): The Department’s administration
division includes budgeting and strategic planning, personnel and
procurement, accounting and payroll, information technology, licensing,
and pari-mutuel auditing. The Department licenses all personnel involved
in racing, including horse and greyhound owners, trainers, jockeys,
grooms (individuals who care for horses), exercise riders, veterinarians,
track management and officials, concessionaires, and pari-mutuel
workers. As of March 2007, the Department reported a total of 12,269
licensees. The Department expanded the number of pari-mutuel auditors
from one to two full-time auditors in fiscal year 2004.1 These auditors are
responsible for ensuring the accuracy and integrity of commercial and
county fair pari-mutuel wagering. Their primary duties consist of testing
the computerized systems, known as totalisators or “tote” systems, prior
to the beginning of race meetings, and ensuring the integrity of wagering
Office of the Auditor General
page 5
1 In 2003, the Department lost six full-time positions and more than two seasonal (part-time) positions as part of the State’s
overall effort to cope with a budget shortfall.
2 Vacancies are as of April 2007.
State of Arizona
page 6
Table 2: Schedule of Revenues, Expenditures, and Other Changes in Fund Balance
Fiscal Years 2005 through 2007
(Unaudited)
2005 2006 2007
(Actual) (Actual) (Estimate)
Revenues:
Unclaimed property1 $ 8,706,424 $ 9,456,217 $ 9,500,000
State General Fund appropriations 2,506,297 2,606,784 2,750,700
Pari-mutuel taxes 460,960 527,901 530,000
Licenses, permits, and fees2 189,682 74,281 80,000
Fines, forfeits, and penalties 80,334 49,598 65,000
Boxing taxes 29,117 39,947 30,000
Other 23,828 26,745 25,000
Total revenues 11,996,642 12,781,473 12,980,700
Expenditures:3
Personal services and employee-related 2,104,646 2,240,296 2,341,000
Professional and outside services 330,942 239,034 245,000
Travel 173,514 161,819 190,000
Other operating 241,761 292,473 314,000
Equipment 94,922 16,421 5,000
Total operating expenditures 2,945,785 2,950,043 3,095,000
Aid to organizations 861,380 826,751 1,109,200
Awards4 831,730 847,529 1,260,000
Total expenditures 4,638,895 4,624,323 5,464,200
Excess of revenues over expenditures 7,357,747 8,157,150 7,516,500
Other financing uses:
Transfers to other funds5 1,709,861 1,706,331 2,506,100
Remittances to the State General Fund6 5,702,565 6,480,914 5,010,400
Total other financing uses 7,412,426 8,187,245 7,516,500
Excess of revenues over expenditures and other financing uses (54,679) (30,095)
Fund balance, beginning of year 901,884 847,205 817,110
Fund balance, end of year $ 847,205 $ 817,1107 $ 817,110
1 In accordance with A.R.S. §44-313, the Department receives 20 percent of monies from unclaimed properties in the State.
The monies are distributed, along with other specified revenues, to various department funds up to limits established by
A.R.S. §5-113.
2 License revenues fluctuate significantly because licenses are issued on a 3-year cycle. According to the Department, most
licensees renew at the beginning of the cycle.
3 Administrative adjustments are included in the fiscal year paid.
4 Amount primarily comprises awards given to breeders or their heirs for every winning horse or greyhound foaled or whelped
in Arizona in accordance with A.R.S. §5-113.F.
5 Amount primarily comprises monies transferred to the County Fairs Livestock and Agriculture Promotion Fund, Arizona
Exposition and State Fair Fund, and Agricultural Consulting and Training Fund in accordance with A.R.S. §5-113.
6 Amount primarily comprises unclaimed property monies that were in excess of monies allowed to be distributed under
A.R.S. §5-113 and required to be remitted to the State General Fund. Laws 2006, Chapter 363 increased the limits in 2007
allowing more unclaimed property monies to be spent and less to be returned to the State General Fund.
7 Amount is primarily unspent monies for the Arizona Breeders’ Award Fund, Arizona County Fairs Racing Betterment Fund,
Arizona Stallion Award Fund, and County Fair Racing Fund that are restricted for purposes defined in A.R.S. §5-113.
Source: Auditor General staff analysis of the Arizona Financial Information System (AFIS) Revenues and Expenditures by
Fund, Program, Organization, and Object and Trial Balance by Fund reports for fiscal years 2005 and 2006, and
department-prepared estimates for fiscal year 2007.
in Arizona. (See Finding 1, pages 13 through 24, for more information on
the Department’s pari-mutuel audit activities). In addition, the auditors
conduct quarterly compliance inspections of racetracks and limited
compliance inspections of OTBs.
􀁺􇩅 Enforcement and Compliance (8.0 FTE, 0 vacant): The enforcement and
compliance division consists of special investigators who are responsible
for investigating possible infractions committed by license applicants or
licensees. Investigators are responsible for conducting background
checks of license applicants and for investigating potential violations of
racing regulations. During fiscal year 2006, the Department reported
conducting 1,672 investigations. Nearly 60 percent involved (1)
investigating license applicants who reported false information about
criminal history on their license applications or (2) following up on
information reported on criminal records received on licensees as part of
conducting background checks. This division also has a full-time kennel
inspector who conducts inspections of greyhound kennels and breeding
farms throughout the State. In addition, the division has a half-time
inspector who reviews OTB permit applications and sites prior to making
recommendations to the Commission regarding their licensure and
conducts limited OTB compliance inspections of existing OTBs.
􀁺􇩒 Racing Services (20.5 FTE, 2.5 vacant): The racing services division
consists of race stewards and veterinary staff who supervise and regulate
live horse and greyhound racing events. Race stewards are responsible
for enforcing the Department’s rules and statutes on-site at the tracks.
State statute specifies that a track’s board of stewards must be composed
of two state stewards (Department of Racing employees) and one track
steward (a track employee). Racing department veterinarians also work
on-site at the racetracks and are responsible for activities such as animal
inspections to determine whether animals are safe and physically fit to
race, and collecting drug samples for animal and human drug testing.
(See Finding 2, pages 25 through 36, for more information on the
Department’s animal drug-testing activities). The division also includes
several seasonal employees who work at county fair races, such as a
mutuels supervisor who supervises at county fairs pari-mutel wagering.
􀁺􇩂 Boxing Regulation (1.5 FTE, 0 vacant): This division, which consists of an
administrative director and secretary, supports the Arizona State Boxing
Commission, a regulatory body separate from the Arizona Racing
Commission, in regulating traditional boxing, kickboxing, tough man
contests, and mixed martial arts.3
1 As noted in Table 3, the Department reports that the additional auditor position was approved in May 2004. A second
auditor started working for the Department in August 2004, although the employee resigned in January 2005. The position
remained vacant until August 2005.
2 This audit and sunset review focuses solely on the Department’s regulation of Arizona’s racing industry. The Arizona State
Boxing Commission has a separate sunset termination date of July 1, 2011.
3 This audit and sunset review focus solely on the Department’s regulation of Arizona’s racing industry. The Arizona State
Boxing Commission has a separate sunset termination date of July 1, 2011.
Office of the Auditor General
page 7
Update of previous Department of Racing and Racing
Commission audits
The Office of the Auditor General reviewed aspects of the Department’s and
Commission’s operations in a 1997 report (Auditor General Report No. 97-12).
During this current performance audit and sunset review assignment, auditors
followed up on several issues raised in that prior report (see Table 3, page 9).
Scope and methodology
This audit focused on the Arizona Department of Racing’s and the Arizona Racing
Commission’s oversight of pari-mutuel wagering activities and animal drug testing.
This report presents two findings and associated recommendations, as follows:
􀁺􇩔 The Department should improve its oversight of pari-mutuel wagering to be
more effective. The Department should improve its procedures in several ways,
both to make existing oversight activities more efficient and to incorporate
additional tests and reviews. The Department should also consider expanding
the scope of its financial analyses similar to activities conducted in other states
(see Finding 1, pages 13 through 24).
􀁺􇩔 The Department should continue its efforts to align its animal drug-testing
practices with national standards. Although the Department has made
improvements, a 2006 budget shortfall, due to unexpected expenses and
mandates, affected its progress. (See Finding 2, pages 25 through 36).
In addition, the report presents other pertinent information regarding how Arizona’s
racing industry was historically funded and is currently funded, legislative actions to
assist the racing industry, and industry revenue sources used by some other states
that are not used in Arizona (see pages 37 through 43). Finally, the report presents
information related to the 12 sunset factors defined in A.R.S. §41-2954 for both the
Arizona Department of Racing and the Arizona Racing Commission (see pages 45
through 56).
Several methods were used to study the issues addressed in the audit. Methods
used in all areas included interviews with agency management and staff and other
stakeholders, including representatives of the horse and greyhound racetracks
throughout the State. Auditors also reviewed Arizona Revised Statutes, the Arizona
Administrative Code, and the Department of Racing’s policies and procedures. In
addition, the following methods were used to review each specific area:
State of Arizona
page 8
Office of the Auditor General
page 9
Table 3: Overview of Issues Raised in 1997 Audit Report and Status
Subject Issues Status
Capital Improvement Program Auditors recommended that the Capital
Improvement Program established to
encourage improvements in facilities be
terminated because it was not meeting its
goals, and more than $500,000 in tax credits
had been improperly approved.
The program is still in place, but no new
projects can be approved. The tax
credits awarded improperly have not
been repaid.
Protection of wagering public’s
money
Auditors determined that the Department did
not regularly oversee pari-mutuel wagering
activities at commercial tracks, and identified
several steps the Department could take to
better monitor pari-mutuel wagering activities,
such as developing a plan to properly monitor
pari-mutuel wagering at all Arizona racetracks.
The Department added a second
auditor position in May 2004 and hired
someone for it in August 2004. After
this person resigned in January 2005,
the position stayed vacant until August
2005. These auditors oversee pari-mutuel
wagering activities at
commercial racetracks. The current
report discusses additional steps the
Department can take.
Oversight of greyhound tracks Auditors identified several steps the
Department could take to improve oversight
such as improving its scheduling of greyhound
stewards to monitor all greyhound racing
activities, and adding an additional part-time
position at each track to handle the additional
work.
According to the Department, its budget
request for fiscal years 2008 and 2009
includes two additional part-time
positions for all tracks. However,
neither the Joint Legislative Budget
Committee nor the Governor’s
Executive Budget Proposal included
additional steward positions.
Collecting pari-mutuel taxes at
county fairs
Under existing law, the Department should
have been collecting pari-mutuel taxes from
commercial tracks that conduct races at
county fairs.
The Legislature has since amended
state statute in 1998 to clarify its
statutory intent regarding the exemption
of county fairs from pari-mutuel taxes,
and note that they were exempt from
taxation regardless of who conducts the
race meetings.
Improper payroll practices Existing practices allowed employees at
greyhound tracks to record their time as
“performances” rather than actual hours
worked, a method that inflated the hours
worked by these employees. Since a
“performance” usually required only 6 to 7
hours of work rather than 8 hours a day,
greyhound track employees were receiving
pay for a 40-hour workweek even though they
may not have actually worked those hours.
According to the Department, it started
reporting actual hours worked for these
employees after the completion of the
1997 audit. The Department also
reports that an internal control audit
conducted by the Department of
Administration in fiscal year 2003 found
the Department’s payroll procedures
adequate.
Source: Auditor General staff analysis of findings in the 1997 Auditor General Report No. 97-12 and follow-up work with department staff to
determine the status of the 1997 audit findings.
􀁺􇩐 Pari-mutuel wagering oversight—To gain an understanding of the pari-mutuel
oversight practices, auditors observed the Department’s auditors performing
a pre-racing season totalisator system test at Turf Paradise, three on-site
audits during the racing season, including one at Phoenix Greyhound Park
and two at Turf Paradise, and a simulcast video audit conducted at a local off-track
betting site. In addition, auditors conducted follow-up interviews with the
Department’s auditors in their Tucson offices to learn additional information
about tote testing and other audit activities. Additionally, auditors interviewed
department staff, including its pari-mutuel audit manager, assistant director of
administration, and off-track betting site coordinator. Auditors also reviewed
the July 2006 draft version of the Association of Racing Commissioners
International (ARCI) Model Rules for Pari-Mutuel Wagering. Additionally,
Auditor General information technology (IT) auditors compared the ARCI July
2006 draft Model Rules to standards recommended by Arizona’s Government
Information Technology Agency as well as standards set forth by the
Information Systems Audit and Control Association, known as Control
Objectives for Information and Related Technology (COBIT), and the National
Institute of Standards and Technology (NIST).
To obtain perspective about the Department’s pari-mutuel oversight from
stakeholders in the State, auditors interviewed the general managers of
Tucson Greyhound Park, Phoenix Greyhound Park, Rillito Park, Yavapai
Downs, and Turf Paradise and the president of the Arizona Horsemen’s
Benevolent Protection Association.
To gather comparative information from other racing jurisdictions, auditors
interviewed officials and reviewed documentation from many other states’
departments of racing: California, Colorado, Florida, Illinois, Indiana, Iowa,
Massachusetts, Minnesota, New York, Texas, and West Virginia, and an official
from the Canadian Pari-Mutuel Agency.1 Additionally, auditors interviewed the
president of ESI Integrity Services, which is a leader in the development of
independent monitoring systems, and the president and CEO of ARCI.
􀁺􇩁 Animal drug-testing program—To determine racing industry standards and
best practices for animal drug-testing programs, auditors reviewed the ARCI
Model Rules; interviewed national and international experts, including the
executive director of the Racing Medication and Testing Consortium (RMTC);
and the president and CEO of the Association of Racing Commissioners
International (ARCI); and interviewed academics such as Dr. Scott Stanley,
associate professor and racing chemist at the University of California Davis,
and Steve Barham, the associate coordinator of the Race Track Program at
the University of Arizona.
To determine if department practices were in compliance with national and
international standards as well as best practice and the Department’s
administrative rules, auditors observed sample collecting procedures for
horses in the test barn at one track for one race; reviewed the Department’s
State of Arizona
page 10
1 The racing jurisdictions were chosen for various reasons, including recommendations from the Department’s pari-mutuel
audit manager for leaders in the industry, information from industry leaders, status as a major racing state, and funding
sources.
animal-drug testing invoice log for the months of March 2006 through
November 2006, and its October 2004 and October 2006 contracts with its
drug-testing laboratory; compared horse urine and blood sample collection
logs for those dates to the Certificate of Analysis the Department received
from its lab to confirm which samples noted in the collection logs had been
sent in for testing; compared collection logs to the Department’s copies of
steward racing programs to confirm whether the samples were drawn from
the winning horse; compared the Department’s rules to the Model Rules
established by the Association of Racing Commissioners International (ARCI)
and the ARCI Uniform Classification Guidelines for Foreign Substances and
Recommended Penalties; and evaluated drug test data for 20 randomly
selected race dates from March 1 through November 30, 2006, to assess the
Department’s compliance with ARCI Model Rules. Additionally, auditors
reviewed relevant literature related to horse drug testing.1
To understand how the Department pays for animal drug testing and the
reasons it reduced the amount of animal drug testing it performed during May
and June 2006, auditors reviewed the Department’s budget request
documentation for fiscal years 2008 and 2009, reviewed various commission
memoranda related to the drug-testing activities conducted during fiscal year
2006, and analyzed the Department’s invoice logs for animal drug testing
conducted in fiscal years 2004 through 2006.
􀁺􇩏 Other Pertinent Information—To gather information about the financial status
of Arizona’s racing industry and how regulation is supported in Arizona, as well
as other states, auditors reviewed information published in state annual
reports and relevant state statutes. Specifically, to assess the financial status
of Arizona’s industry, auditors reviewed information reported in the 1997
Auditor General report on the Arizona Department of Racing (Report No. 97-
12), and department annual reports for fiscal years 2000, 2001, 2003, and
2006. To understand the laws that affect state racing regulation, auditors
reviewed Arizona statutes, legislation proposed in the 2005 and 2006
legislative sessions, and information from the 2002 General Election regarding
Proposition 201(the Fair Gaming Act) and Proposition 202 (the Indian Gaming
Self-Preservation Act). To understand funding sources used to support racing
regulation in other states, auditors reviewed information reported in annual
reports published by the state agencies that regulate racing in California,
Colorado, Florida, Illinois, Kansas, New Mexico, New York, Texas, and West
Virginia. Auditors also reviewed a January 2007 informational report published
by the Wisconsin Legislative Fiscal Bureau.2
􀁺􇩉 Introduction and Background—Information used in the Introduction and
Background was collected from the Arizona Department of Racing’s annual
reports for fiscal years 2002, 2003, and 2006; the 1997 performance audit and
sunset review report (Auditor General Report No. 97-12); and analysis of the
1 National Thoroughbred Racing Association (NTRA) Racing Integrity and Drug Testing Task Force Report and Building a
World-Class Drug Detection System for the Racing Industry: A National Strategic Plan.
2 Informational paper 85, State Lottery, Pari-Mutuel Wagering and Racing, and Charitable Gaming, Wisconsin Legislative
Fiscal Bureau, January 2007.
Office of the Auditor General
page 11
Arizona Financial Information System (AFIS) Revenues and Expenditures by
Fund, Program, Organization, and Object and Trial Balance by Fund reports for
fiscal years 2005 through 2007. The follow-up information related to
recommendations made in the 1997 performance audit and sunset review
collected from the prior audit, and information from the Department regarding
the status of the Capital Improvement Program, greyhound racing and track
oversight, and payroll practices.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Department’s Director and
staff, and the racing commissioners, for their cooperation and assistance throughout
the audit.
State of Arizona
page 12
Department should improve pari-mutuel oversight
program
The Department can take several steps to make its oversight of pari-mutuel wagering
more comprehensive and effective. To conduct wagering, racetracks use
computerized systems, called totalisator or “tote” systems, operated by national
companies. A 2002 scandal in New York focused nation-wide attention on potential
manipulation of these systems and led the racing industry to propose new oversight
practices. Relative to these recommended practices, the Department’s procedures
can be improved in several respects, both to make existing oversight activities more
efficient and to incorporate additional tests and reviews. Finally, the Department
should consider expanding the scope of its financial analyses similarly to activities
conducted in other states.
Arizona racing parks contract with national
companies to administer pari-mutuel
wagering systems
For several decades, racetracks have used computerized
totalisator systems that record the amounts of money wagered
for each race, compute the odds and estimated payoff
associated with each race, and calculate the payouts to the wagering public, the
racetrack, and the State. Totalisator systems are essentially computers that track
all the monies wagered, which is known as handle. Arizona’s racetracks contract
with one of three nation-wide firms: Scientific Games (Turf Paradise, Yavapai
Downs, and Arizona Counties Racing Association), United Tote (Rillito Park and
Phoenix Greyhound Park), and American Tote (Tucson Greyhound Park).
Although it was once the norm for each track to have a stand-alone tote system at
its facility, according to tote company officials, tote companies have used hub
Three major tote
companies exist nation-wide.
Office of the Auditor General
FINDING 1
page 13
-M Pari-mutuel
wagering consists of bettors
placing wagers that go into a wagering
pool. After races are completed, the total
monies wagered are distributed among the
winning patrons, the tracks, purses for
owners of winning animals, and the State.
Source: Auditor General staff analysis of Arizona Revised
Statutes and other states’ annual racing reports.
systems to process wagering data since the mid 1990s. Within the last few years,
at least one tote company has developed “mega-hubs,” which serve entire
sections of the country. For example, Scientific Games contracts with seven tracks
to process their wagering pool data in its Western mega-hub in Sacramento,
California. In Arizona, all tracks except Rillito Park use a hub system.
Wagering scandal increased focus on overseeing tote
systems
A nationally known wagering scandal that occurred in 2002 contributed to an
increased emphasis on ensuring tote system integrity. The scandal occurred
during the 2002 Breeders’ Cup race and has come to be known as the “Pick 6”
scandal. The fraudulent scheme involved a programmer for the tote company and
two collaborators. Using the accounts of his two collaborators, the programmer
used a touch-tone betting system to place bets through one of New York’s public
OTB Corporations, and then altered the tickets within the computer system to
make them winners. A delay in the transfer of Pick 6 wagering data to the host track
allowed the programmer to create a winning ticket that specifically identified the
first four winners, including two horses with extremely high odds against winning.
In addition, the programmer printed fake tickets with the serial numbers of
uncashed tickets that he found in the computer system and gave the fake tickets
to his collaborators to cash at automated machines. The programmer and his
collaborators carried out similar schemes earlier that month before it came to light
at the 2002 Breeders’ Cup race.
The racing industry subsequently took steps to strengthen oversight of the pari-mutuel
wagering system. In July 2006, the Association of Racing Commissioners
International (ARCI) published proposed additions to its chapter of Model Rules for
Pari-Mutuel Wagering for consideration and potential adoption by the entire racing
industry.1 The proposed additions address wagering security and put a
great emphasis on information technology security controls, such as
the need for racing regulators to monitor controls over tote system
access and system programming changes, and are aligned with well-established
information technology (IT) security standards.2 Some
states have already taken the initiative to update their pari-mutuel
wagering standards to improve IT security and tote system controls. For
example, Colorado and Texas updated previously established pari-mutuel
system or tote standards, while other states, such as New York,
are in the process of adopting entirely new rules that set forth new
requirements.
A betting scandal in
New York led to newly
proposed oversight
standards.
1 The entire set of ARCI Model Rules contains 25 chapters. Chapter 4 addresses pari-mutuel wagering, and the proposed
additions would be added to this chapter. The latest version, 3.4, was last updated on March 29, 2006. According to
ARCI’s current president and CEO, ARCI anticipates formally adopting the proposed additions at its April 2007 annual
meeting.
2 Auditor General IT auditors compared the ARCI’s proposed rules to standards recommended by Arizona’s Government
Information Technology Agency, as well as standards set forth by the IT Governance Institute, known as Control
Objectives for Information and Related Technology (COBIT), and the National Institute of Standards and Technology
(NIST).
State of Arizona
page 14
ARCI is a nonprofit corporation that is a
resource for racing regulators. Its
membership includes representatives
from 38 racing jurisdictions in the United
States.
Source: Auditor General staff analysis of information from
ARCI’s Web site.
Department could improve wagering oversight practices
The Department can improve its performance in key oversight activities. Effective
oversight requires effective practices in three key areas: testing the systems to
ensure the accuracy of results, ensuring compliance with standard information
system security controls, and identifying unusual fluctuations in odds or wagering
pools. Compared to a decade ago, the Department has expanded the scope of
its audit activities. For example, a 1997 Auditor General report found that the
Department’s pari-mutuel auditor did not oversee commercial racetracks. Now, the
Department’s auditors oversee wagering at both commercial tracks and county
fairs.1 Nonetheless, review of the audit unit’s actual practices found that
performance in all three areas can be improved.
Pari-mutuel wagering oversight requires three key practices—Through
research of ARCI’s proposed addition to the pari-mutuel wagering Model Rules
and other racing jurisdictions’ practices, auditors found that oversight of pari-mutuel
wagering systems generally consists of three activities: tote testing,
ensuring tote system security, and monitoring wagering activities for anomalies:
􀁺􇩃 Conducting tote testing: Involves testing automated pari-mutuel
totalisator systems to ensure accuracy of wagering
outcomes. These tests either use predetermined wagering
scenarios and outcomes or use data from live races using
actual outcomes. Both types of tests are performed to ensure
that the system calculates potential wagers according to the
Department’s administrative rules. Some states, including
Arizona, choose to use in-house auditors to conduct tote
testing, while others contract with third parties, such as CPA
firms. According to department rules, tote testing is required
prior to the start of all race meet seasons to ensure that the
systems are performing wagering calculations correctly.
􀁺􇩅 Ensuring tote system security: Involves ensuring compliance with standard
information system security controls, such as those set forth to restrict access
to computer systems (access controls), programming change controls, and
limiting access to rooms where computer systems are located. In the racing
industry, ensuring tote security involves monitoring and verifying who has
access to totalisator systems (both on-site at a racetrack as well as at a hub),
and tote room surveillance to ensure restricted access.
􀁺􇩍 Monitoring to identify potential wagering anomalies: Involves identifying any
unusual fluctuations in odds or wagering pools to protect the integrity of the
wagering pools. For example, a large wager could be made to significantly
change the odds and then be intentionally canceled right before the close of
betting to create a false favorite and decrease the odds and the resulting
Office of the Auditor General
page 15
A
wagering scenario is the potential
outcome of a race’s or races’ order of
finishes. For example, the Pick 3 is
the selection of the first-place finisher
in each of three specified races.
Source: Auditor General staff analysis of the Arizona
Administrative Code and information obtained
from the American Heritage and Merriam-
Webster dictionaries.
1 Two full-time auditors supervise commercial race wagering, and a seasonal part-time employee supervises county fair
wagering.
payout. These anomalies can be detected either by astute observations of
odds that fluctuate on the race display board, or through automated systems
that analyze the actual race results. Automated systems can perform analysis
either on a real-time basis or after races have been completed.
Practices for testing tote system accuracy need to be more
efficient—Although the Department was able to conduct its statutorily required
tote-testing activities at each racetrack during fiscal years 2004 through 2006, new
challenges make becoming more efficient important. Until September 2006, the
Department’s auditors performed tote testing using only a format called standard
pool pricing (see textbox). However, in 2006, two tracks requested the Department
to test under a different form of pricing, called net pool pricing, so that the tracks
could send their simulcast signals to the Canadian market and thereby potentially
increase their handle.1 The Department's auditors conducted this testing for one of
the tracks in 2006. According to the pari-mutuel audit manager, the auditors
conducted testing for the other track in April and May 2007 before its summer race
meet, and that it took them nearly twice as long to complete testing under net pool
pricing than standard pricing for the 2007 testing (51.5 hours as compared to 25
hours). To meet the needs for this type of testing more efficiently, the Department
should take action in the following areas:
Simulcasting Arizona
races to Canada
requires testing under
net pool pricing.
1 Canadian law requires simulcasting tracks to use net pool pricing.
State of Arizona
page 16
-M In pari-mutuel wagering, the total monies
that racing patrons bet on a specific race are called a “common wagering pool.” All racetracks that
bet into this common wagering pool are entitled to receive a commission from the total amount
wagered, which is based on a specific commission rate. A commission rate is the amount taken out
of the wagering pools by the tracks to help pay for operating expenses such as utilities, employee
salaries, taxes, and purses. The amount that remains in this wagering pool after the tracks are paid is
then distributed to winning racing patrons after calculating a specific rate per winning dollar
wagered. Two pricing methods can determine payouts to tracks and winning racing patrons:
Standard Pool Pricing—In standard pool pricing, track commission rates and payouts to
winning patrons are uniform. For example, all tracks that participate in the wagering pool
have a 20 percent commission rate. Similarly, winning patrons at all tracks are paid the same
amount for each winning dollar that they wagered. For example, if the winning payout is $4,
all winners will receive $4 for each winning dollar wagered.
Net Pool Pricing—In net pool pricing, track commission rates are variable. For example,
Track A might have a 15 percent commission rate, and Track B might have a 20 percent
commission rate. The use of variable commission rates results in different winning payouts
for winners at each track. Payouts to the public are higher for tracks with lower commission
rates because they have more to distribute to the winning patrons.
Source: Auditor General staff analysis of the Arizona Administrative Code and industry literature.
􀁺􇩐 Providing more general audit training and specific training in net pool pricing:
Although department management reported that the Department supports
continuing education for its auditors, its auditors lack formal audit training. For
example, although the Department's audit manager reports having taken
accounting courses and both auditors have a background in pari-mutuel
wagering, neither auditor has formal training in standard auditing techniques,
such as risk-based sampling or reviewing internal controls. Without formal
knowledge regarding audit techniques, the auditors’ efficiency and
effectiveness may be undermined. Improving their auditing knowledge would
help the auditors to audit more efficiently and effectively. In addition, while the
Department’s auditors have no formal training in performing net pool pricing
tests, there are several potential training opportunities. For example,
according to an ARCI official, ARCI is developing information on how to audit
systems that use net pool pricing. This official identified the ARCI annual
meeting or the National Thoroughbred Racing Association Simulcast
conference as additional resources.
In May 2007, department management reported that they will be sending both
pari-mutuel auditors to an ARCI-sponsored continuing education conference
for pari-mutuel auditors and investigators scheduled for June 2007. A
preliminary agenda indicates that the conference will discuss the adequacy of
tote system testing currently used by jurisdictions.
􀁺􇩒 Reducing reliance on manual calculations: To conduct their tests, pari-mutuel
auditors rely on labor-intensive manual calculations. The number of
calculations expands significantly under net pool pricing. The Department
should examine ways to reduce reliance on manual calculations and
implement them as appropriate. Two practices it should consider are:
􀁺􇩔 Testing booklets: Texas and Colorado both use pre-printed testing
booklets to enhance their tote testing’s efficiency. These booklets contain
the input and expected output for each test race. This can improve
efficiency because the booklets provide the correct outcome for a
potential wagering scenario. Therefore, the auditors merely need to make
a visual comparison between the actual tote output and the booklet.
􀁺􇩓 Spreadsheets: Although the Department’s auditors have developed
spreadsheets that could facilitate more efficient tote testing for some
wagering scenarios, they do not use them during the course of their
testing practices. According to the pari-mutuel audit manager, the
spreadsheets were developed to reduce the auditors’ reliance on manual
calculations for some wagering scenarios. However, they report that they
are not using these spreadsheets because they are not applicable to all
wagering scenario testing that the auditors perform.
Office of the Auditor General
page 17
􀁺􇩄 Developing better guidance: The Department has not completed the
development of pari-mutuel auditing policies and procedures or manuals that
describe how to perform tote testing or any other aspects of the auditors’ job
duties. Although the Department has started to draft a policies and
procedures manual, it was still in draft form as of February 2007. Department
management and the pari-mutuel audit supervisor stated that the auditors
follow it as a guide to perform their duties. According to the Department, the
manual has not been completed because it does not have sufficient
resources to finalize it.
The Department should complete the development of this policies and
procedures manual and implement it, and ensure that it contains specific
guidance for tote testing under both standard and net pool pricing. Other
states, such as Florida and Texas, have developed and implemented policies
and procedures manuals to guide tote testing and other oversight and
compliance activities.
Reviews of system security need greater use of standard information
technology controls—Auditor General auditors compared the system
security procedures used by department auditors to ARCI’s proposed additions to
the Model Rules and information technology (IT) auditing standards. This
comparison identified several shortfalls in the Department’s current procedures.
􀁺􇩌 Licensing tote companies and requiring independent reviews of systems:
ARCI’s proposed Model Rules amendments recommend that the totalisator
company be licensed by the Racing Commission in order to provide greater
assurance that the tote systems are secure. According to the proposed Model
Rules amendments, racing departments should include in the licensing
application and renewal a requirement that they allow the Department to have
testing performed on the system hardware and software. During the course of
the audit, the Department reported that it will use its authority under A.R.S.
§104.01 and A.A.C. R-19-2-104 and R-19-2-304 to require computer system
security audits as part of the commercial tracks’ annual financial audit. This will
provide an analysis of the track’s tote system security beginning with the 2007
reporting period.
The Department reported that it licenses totalisator companies under a
"business-vendor" category. However, review of the Department's statutes
indicates that it does not have statutory authority to issue business-vendor
licenses, which means it does not have the legal authority to issue licenses for
tote companies under this licensing category. In order to license tote
companies, the Department needs to work with the Legislature to seek the
necessary statutory authority.
In addition, the proposed Model Rules amendments also recommend that a
Type II SAS 70 report be required of the totalisator company. Other states have
State of Arizona
page 18
tote company licensing requirements
or plan to strengthen their
requirements. For example, Illinois
requires that the tote company be
licensed and also requires a SAS 70
review. According to an Illinois racing
official, the SAS 70 review was
mandated by Illinois’ Racing Board
effective July 2004. Also, New York’s
Racing and Wagering Board plans to
require tote company licensure and a
Type II SAS 70 or similar review as part
of its efforts to revise its pari-mutuel
wagering rules standards. In July
2006, the New York Racing and
Wagering Board submitted proposed
rule amendments that included
requirements to license tote
companies and request Type II SAS
70 reviews.
If the Department obtains statutory
authority to license tote companies, it then should take action to modify its
administrative rules to explicitly identify tote companies as a license category.
In addition, the administrative rules should include specific requirements for
tote company licensure, as recommended in ARCI’s proposed additions to its
pari-mutuel wagering Model Rules. For example, the administrative rules
should require a Type II SAS 70 or similar review.
􀁺􇩐 Programming change controls: Consistent with well-established IT audit
standards, ARCI’s proposed Model Rules amendments also recommend that
regulators monitor computer programming changes to ensure the
appropriateness of software programming changes. Specifically, the
proposed amendments contain several software requirements, including
those related to totalisator system software changes. For example, the
proposed amendments recommend that the tote company notify the
Commission of changes to system software at least 30 days before any major
revisions. Although the proposed Model Rules amendments recommend a
formal communication process between the tote company and regulatory
authority, the Department and Commission have not established a formal
process to monitor and test major changes in tote system software. For
example, according to the Department's pari-mutuel audit manager, the
auditors review programming changes that the tote companies make only
when they are made aware of such changes. Without a more formal process,
the Department and Commission have no assurance that the tote company is
communicating all major changes to state regulators.
Office of the Auditor General
page 19
A SAS 70 is a report on a service organization’s internal controls
and safeguards when they host or process data belonging to their
customers.
Type I SAS 70—A Type I report includes the service organization’s
description of its controls and objectives, and an auditor’s opinion
on the suitable design of the controls in meeting the specified
objectives. The report reflects an opinion at a specified point in
time.
Type II SAS 70—A Type II report, in addition to the Type I
components, includes a test and evaluation of the effectiveness of
the internal controls. This test attests, with reasonable assurance,
to the effectiveness of the controls in meeting specified objectives
over a period of time.
Source: Tyrell, Eugene T. SAS 70 Frequently Asked Questions. Providence, RI: Orbidex Inc./Polar
Cove, 2005.
􀁺􇩒 Reviewing access controls: Although in February
2006 the Department’s auditors started to determine
who has access to track tote systems and tote
rooms, they do not routinely check access controls
or access rights. IT control standards recommend
that system access be limited to persons who need
access to that system to perform their jobs, and that
the access rights they have be limited only to the
information they need to carry out their job.
Consistent with established IT audit standards,
ARCI’s proposed Model Rules amendments
recommend that the totalisator system program
should be able to restrict access rights to the tote
systems, have the capability to generate access
logs, and restrict access to software that could be
used by unauthorized users to create duplicate
tickets.
Although access control standards emphasize restricting access both to the
tote room and the actual computer systems, ensuring restricted access to the
systems should be a higher priority. According to the Department’s auditors,
their oversight of tote system security is informal, and they do not have any
standard security aspects that they review.
To improve how it monitors tote system security, in addition to obtaining statutory
authority to license tote companies and strengthening requirements associated
with the licensure of tote companies, the Department should work toward
incorporating other aspects of the proposed additions to the ARCI Model Rules,
including those related to monitoring programming changes and reviewing access
controls into its administrative rules.
Finally, the Department’s auditors should review ARCI’s Model Rules related to
programming changes, access controls, system security, and other IT control
areas, and generally become more familiar with standard IT audit practices. Once
they have become more familiar with these standards, the auditors should work
with department management to incorporate these recommended practices into
their pari-mutuel auditing work.
Automated auditing tools could improve monitoring of potential
wagering anomalies—Auditors’ review of the Department’s efforts to monitor
for wagering anomalies also identified potential areas for improvement. Wagering
anomalies can be detected by visually observing fluctuating odds on visual display
boards or by using automated systems to analyze actual race results. However, in
Arizona, the chief horse, greyhound, and county fair racing stewards report that
they mainly rely on people bringing such issues to their attention because they
State of Arizona
page 20
Access Controls—The process that limits and controls access
to a computer system, or a logical or physical control designed
to protect against unauthorized entry or use. A logical control
can include policies, procedures, organizational structure, and
electronic access controls that restrict access to computer
software and files. Physical controls can include a system of
controlled entry to the room or other related rooms through the
use of locking devices on all doors or entry points.
Access Rights—Access rights are the rights granted to users
by the administrator or supervisor. Access rights determine the
actions users can perform (e.g., read, write, execute, create,
and delete) on computer files.
Source: Definitions obtained from the Information Systems Audit and Control Association
(ISACA) Glossary and ARCI July 2006 Draft Model Rules for Pari-Mutuel Wagering.
need to focus on monitoring activities associated with live racing, such as deciding
and posting the race outcomes. For example, according to one department
steward, they mainly rely on track employees who oversee the pari-mutuel
wagering to report unusual wagering activities.
To improve detection of potential wagering anomalies, the Department should
explore the feasibility of adopting automated systems. The Department is not
using automation to any great extent, either on a real-time or post-race basis.
Areas for possible improvement include the following:
􀁺􇩁 Adopting independent monitoring systems: Some racing jurisdictions are
investing in independent monitoring systems that allow them to monitor
potential wagering anomalies at the same time that the races are occurring. The
independent monitoring systems receive and evaluate the same data going
through an actual tote system. Two types of independent monitoring system
services are available—one offered through ESI Integrity, and the other through
RCI Integrity Services.1 The two differ in services and price. Specifically:
􀁺􇩅 ESI Integrity: The Canadian Pari-Mutuel Agency and the Florida Division
of Pari-Mutuel Wagering report using ESI Integrity’s independent
monitoring systems. The system monitors and verifies every race so that
if a potential anomaly occurs, alerts are generated and messages are
sent to the auditors for investigation. Florida officials reported spending
$400,000 to start up the system, and annual maintenance costs are
approximately $75,000. According to ESI, the benefits of implementing
this type of system include investigative capabilities to detect anomalies,
validation checks to ensure valid wagers are processed according to
state regulations, independent monitoring of all wagering activities as
they happen, and immediate auditing of all payouts and commissions
(breakage monies left over from rounding on wagers).
􀁺􇩒 RCI Integrity Services: The RCI Integrity Services system is based on the
system that ESI Integrity developed. The RCI system also monitors
wagering data in real time to ensure that the data complies with the
jurisdiction’s regulations and any corrective actions can be taken within
moments of the incident. In contrast to ESI, RCI offers Monitor Plus, which
is an additional component that allows regulators to analyze betting
patterns. According to an RCI Integrity Services official, the initial start-up
cost would be approximately $64,000, and a nominal maintenance cost
would be applied thereafter. This service only became available in
January 2007.2
The Department should explore the feasibility of implementing one of these
independent monitoring systems in Arizona.
Office of the Auditor General
page 21
1 ESI Integrity is a Canadian-based company that provides independent software for security and risk management. RCI
Integrity Services, a nonprofit services organization, is a subsidiary of Racing Commissioners International and also
provides independent security testing for pari-mutuel wagering systems.
2 Citing confidentiality, an official with RCI Integrity Services was unwilling to disclose whether any states have started using
this system.
Department should explore expanding financial analysis
practices
The Department should explore expanding its financial analyses of the monies
wagered in Arizona. This would strengthen oversight of handle distribution to
parties that are entitled to a portion of the handle. The Department’s financial
analysis practices are limited to an administrative review of the tracks’ annual
financial statements, compiling and verifying handle and other wagering
information in its pari-mutuel database for its annual report, and, according to
department management, reviewing monies distributed to the eight statutory
funds.
In general, financial-related auditing duties involve tracking the monies that are
distributed from the wagering pools to purses for the racing participants, special
funds such as breeders’ organizations and animal organizations, or special taxes.
Many of these audits are done in other states as part of a regular audit schedule
and are performed on a daily, monthly, annual, or cycle basis. Some other states’
pari-mutuel auditors reported that they focus mainly on financial analyses. For
example, some states conduct:
􀁺􇩂 Breakage Audits: Breakage audits determine that breakage is distributed
appropriately.
􀁺􇩐 Purse Audits: Purse audits determine that the monies distributed by the track
to the horsemen or dogmen are correct.
According to Racing Department management, other than a review of special
funds distributions and reviews of the tracks’ annual financial statements that are
performed by the Department’s administrative staff, the department staff does not
perform any of the other types of audits on a regular basis. According to
department management, it does not currently have the staff resources necessary
to carry out other forms of financial analysis on a regular basis. To rectify this lack
of resources, the Department requested four additional pari-mutuel auditors as
part of its Fiscal Year 2008 Executive Budget request. According to a department
official, it wanted additional auditors in order to conduct more frequent on-site
audits. However, the final executive budget included resources for only one
additional auditor, and the legislative budget proposal included none.
Although additional auditors may not be available, results from a one-time special
purse audit completed in 2006 suggests that financial-related audits should be
done on a more regular basis. Specifically, in September 2005, based on a
complaint from the Arizona Greyhound Association, the Department assigned its
audit supervisor to complete a special audit of purse distributions at a major
racetrack. This audit found that the track had shorted purses distributed to
greyhound owners by $21,432, or approximately 15 percent, from August 1, 2004
through April 10, 2005.
A 2006 purse audit
identified problems with
a track shorting purses
by approximately 15
percent.
State of Arizona
page 22
Recommendations:
1. To improve tote testing, the Department should:
a. Train its pari-mutuel auditors on general audit practices and how to conduct
tote system testing under net pool pricing.
b. Identify and implement ways to reduce the reliance on manual calculations,
such as using testing booklets or spreadsheets.
c. Complete the development of the pari-mutuel auditing policies and
procedures manual and implement it. The Department should ensure that
it contains specific guidance for tote testing under both standard and net
pool pricing.
2. The Department should work with the Legislature to obtain statutory authority to
license tote companies.
3. If the Department obtains statutory authority to license tote companies, it then
should:
a. Modify its administrative rules to identify tote companies as a license
category.
b. Include in its administrative rules specific requirements associated with the
tote company licensure as recommended in ARCI’s proposed additions to
its pari-mutuel wagering Model Rules.
c. Include in its administrative rules for tote company licensure a requirement
for a Type II SAS 70 or similar review.
4. To improve how it monitors tote system security, the Department should:
a. Work toward incorporating other aspects of the proposed additions to the
ARCI Model Rules, including those related to reviewing programming
changes and access controls, into its administrative rules.
b. Review ARCI’s recommendations related to programming changes,
access controls, system security, and other IT control areas, and generally
become more familiar with standard IT audit practices.
c. Incorporate these recommended practices into its pari-mutuel auditing
work.
Office of the Auditor General
page 23
5. To improve monitoring of wagering systems for potential anomalies, the
Department should explore the feasibility of adopting automated systems.
Specifically, the Department should explore the feasibility of implementing the
ESI Integrity or RCI Integrity system in Arizona.
6. The Department should explore expanding its scope of financial analyses of the
monies wagered in Arizona to strengthen oversight of the distribution of handle
to parties that are entitled to a portion of it.
State of Arizona
page 24
Department should continue aligning animal drug-testing
practices with national standards
The Department’s animal drug-testing practices are generally aligned with racing
regulation practices, and the Department should ensure that it continues its efforts to
align these practices with national standards. Racing regulators across the country
have adopted a set of Model Rules intended to standardize animal drug-testing
practices nationally. Although the Department has not formally adopted the Model
Rules, most elements of the Department’s animal drug-testing program are aligned
with these Model Rules. However, in 2006, the Department faced significant budget
constraints precipitated by unexpected expenses and mandates that resulted in the
Department’s temporarily reducing drug testing as a last-resort, cost-saving measure.
Although the short-term reduction in testing affected the Department’s ability to
adhere to practices recommended in the Model Rules, it did not violate any state laws,
and the Department immediately resumed its regular testing in fiscal year 2007.
National efforts to standardize animal drug-testing
practices resulted in Model Rules development
For approximately the past 15 years, racing industry regulators
have been in the process of standardizing animal drug-testing
requirements nation-wide in order to move toward a consistent
regulatory environment. Developing of Model Rules through the
Association of Racing Commissioners International (ARCI) is
one way in which industry regulators are attempting to
standardize these requirements. ARCI has drafted and
approved the Model Rules.1 In addition, the Racing Medication
and Testing Consortium (RMTC) has been a contributor to the
Model Rules, specifically those relating to medicating and
testing racing horses.2
1 Version 3.4, the most recent version of ARCI pari-mutuel Model Rules, was approved by ARCI on March 29, 2006.
2 The RMTC model medication policy document was converted into Model Rules language and submitted for development
into Model Rules in 2004.
Office of the Auditor General
FINDING 2
page 25
Governed by a board
that consists of 23 racing industry
stakeholder groups. One purpose of this
organization is to develop policies to
promote the health and welfare of race-horses
and to ensure the integrity of
racing.
Source: Racing Medication and Testing Consortium Web site.
ARCI intends for the rules to be adopted and used by the entire pari-mutuel racing
industry.1 In order to stay current with industry developments, the Model Rules are
continually updated. Specifically, new rules have been added by various industry
stakeholders, including the RMTC, through a proposal process outlined by ARCI.
ARCI guidelines pertaining to animal drug testing focus extensively on equine drug
testing, but also address collecting canine samples. Specifically:
􀁺􇩅 Equine Veterinary Practices, Health and Medication, and Classification Model
Rules—Racing regulators have established Model Rules for equine veterinary
practices, health, and medication, and guidelines for the uniform classification
of drugs used on horses. Drug Testing—Chapter 11 of the ARCI Model Rules
for Equine Veterinary Practices, Health and Medication sets procedural
guidelines for drug-testing racehorses. The rules provide guidelines for
procedures such as sample collection, sample storage, and allowable
threshold levels for Non-Steroidal Anti-Inflammatory Drugs (NSAIDs).2
According to these guidelines, racing jurisdictions should conduct a drug test
on every winning racehorse. Chapter 11 also includes recommended
penalties for drug and medication violations. According to ARCI, the penalties
listed in this document supersede those listed in the Uniform Classification
Guidelines for Foreign Substances and Recommended Penalties and Model
Rule.
􀁺􇩃 Classification of Drugs—The Uniform Classification Guidelines for Foreign
Substances and Recommended Penalties and Model Rule is a set of
guidelines developed by ARCI that pertain only to racehorses. It groups drugs
into five classes as illustrated in Table 4, page 27. Class 1 drugs have
potentially more of an effect on an animal’s performance than Class 5 drugs.
In general, drugs that are clearly intended for therapeutic use in horses are
placed in the lower classes, such as 4 and 5. In contrast, drugs that are not
clearly intended for use in horses are placed in higher classes, such as 1 and
2, particularly if they could affect the outcome of a race. Drugs that are
recognized as legitimately useful in equine therapeutics but could affect the
outcome of a race are placed in the middle or lower classes. For example, as
illustrated in Table 4, page 27, Ketoprofen is a Class 4, nonsteroidal anti-inflammatory
drug used on horses for pain relief, but could be used to mask
a minor injury that may have prevented a horse from racing or racing in its best
form. According to ARCI, the penalties listed in this document have been
superseded by those in Chapter 11 of the ARCI Model Rules for Equine
Veterinary Practices, Health and Medication Model Rules.
Model Rules are
intended for adoption
and used by the entire
pari-mutuel racing
industry.
1 According to RMTC, as of 2006, 28 states have adopted or are in the process of adopting medication policies consistent
with part of the Association of Racing Commissioners International (ARCI) Model Pari-Mutuel Rules. ARCI approved the
latest version, 3.4, which contains 25 chapters, on March 29, 2006.
2 Nonsteroidal anti-inflammatory drugs are used on horses for pain relief. However, the Department and Model Rules do
not allow these medications to be administered on race day because they may mask a minor injury that could prevent a
horse from racing or racing in its best form.
State of Arizona
page 26
Model Rules require
drug tests on every
winning horse.
􀁺􇩃 Canine Drug-Testing Rules—ARCI Model Rules for canine drug testing set
forth guidelines for testing greyhounds.1 In contrast to the equine rules, these
guidelines do not require every winning greyhound to be tested for drugs.
Further, the Model Rules do not stipulate uniform drug classification guidelines
or penalty recommendations for greyhounds as they do for racehorses.
However, the rules provide guidelines on the procedural aspects of
medication and drug testing on greyhounds. For example, the Model Rules
stipulate who should have the authority to collect pre-race drug-testing
samples.
The Model Rules do not
require racing
jurisdictions to conduct
drug tests on every
winning greyhound.
1 The chapters in ARCI Model Rules that contain guidelines for greyhound drug testing and medication are Chapter 16—
“Greyhound Prohibited Acts,” and Chapter 18—”Greyhound Welfare, Health, and Medication.”
Office of the Auditor General
page 27
Table 4: Uniform Equine Drug Classifications, Examples, and Potential Effects
April 2005
Classification Name Examples, Description, and Potential Effects1
Class 1—Highest potential to
affect a horse’s race performance
Morphine Opiate—Commonly used as a painkiller, or alternatively, when
administered in small dosages, to stimulate a horse and
escape detection due to the minute amount administered.
Class 2—High potential to affect a
horse’s race performance
Phentermine Amphetamine—Normally used as an appetite suppressant in
humans, but can be used to stimulate a horse.
Class 3—Less potential to affect
a horse’s race performance than
Class 2 drugs
Acepromazine Tranquilizer—Usually administered to calm a horse during
transport or training, but can be administered to take the edge
off an excitable horse that would normally be disqualified from
a race before it ran due to its behavior in the saddling area.
Class 4—Less potential to affect
a horse’s race performance than
Class 3 drugs
Ketoprofen Nonsteroidal anti-inflammatory drug—Used on horses for pain
relief and could be used to mask a minor injury, which may
have prevented a horse from racing or racing in its best form.
Class 5—Less potential to affect
a horse’s race performance than
Class 4 drugs
Cimetidine Anti-ulcer medication—Used to treat horses with stomach
ulcers, a common ailment afflicting racehorses. This is a
therapeutic medication and is not used as a performance
enhancer.
1 The specific drug examples shown are provided for illustrative purposes only as there are hundreds of drugs that fall into the five
classifications.
Source: Auditor General staff analysis of substances in the Uniform Classification Guidelines for Foreign Substances and
Recommended Penalties and Model Rules established by the Association of Racing Commissioners International, Inc. as
of April 2005, and the potential effects reported by the Racing Medication Testing Consortium.
Department’s animal drug-testing program is generally
aligned with racing regulators’ practices
Most elements of the Department’s animal drug-testing program are generally
aligned with practices used by racing regulators. Specifically, the Department uses
standard testing practices used by racing regulators, classifies drugs according to
the classification in the Model Rules for horses, and has made some improvements
to its drug-testing program for horses. However, the Department deviates in two of
the four threshold levels for therapeutic drugs set forth in the Model Rules. Finally, the
Arizona racing industry has expressed concern about some of the requirements
under the Model Rules, and the Department is working with them to develop
consensus on the requirements.
Department uses standard drug-testing practices—The primary animal
drug tests the Department uses for both horses and dogs for initial detection and
confirmation of positive results are considered standard practice by experts and
used by many other racing jurisdictions. Specifically:
􀁺􇩉 Initial detection—The first phase of the Department’s regular animal drug-testing
program is the detection phase. This includes testing urine
samples on horses and greyhounds and additional blood samples for
horses. This testing phase uses two screening methods to detect a
variety of drugs: Thin Layer Chromatography (TLC) and Enzyme-Linked
Immunosorbant Assay (ELISA) tests. Both TLC and ELISA screening
methods are commonly used among other racing jurisdictions and an
industry expert also states that these screening methods are considered
best practice. TLC tests can detect more drugs than ELISA tests, but are
not sensitive enough to detect drugs in the minute amounts that ELISA
tests can. In contrast, ELISA tests are very sensitive and thus can detect
small amounts of drugs, but focus on one drug or a family of drugs, such
as an opiate group.
Although each individual urine sample undergoes a TLC screening test,
ELISA tests, in contrast, are conducted on pooled urine samples. Pooling
refers to the co-mingling of a portion of a number of samples, and it is a
cost-saving measure for racing jurisdictions because it can reduce the
number of samples that are tested. If a positive result is identified in a
pooled sample, each individual sample contained in the original pool is
then tested and the positive individual sample is sent for confirmation
testing. According to an expert in animal drug testing, no more than four
samples should be combined in a pooled sample.1 The Department is in
line with this since it combines no more than three samples when testing
horses and four samples when testing greyhounds.
The Department uses
two screening methods,
TLC and ELISA tests, on
samples in its initial
drug testing.
1 Dr. Scott Stanley, Associate Professor, California Animal Health & Food Safety Laboratory (CAHFS) at the UC Davis
School of Veterinary Medicine.
State of Arizona
page 28
The Department currently uses 25 assorted ELISA tests on each horse
urine sample, which translates into potentially detecting more than 75
different types of drugs. The Department also uses 5 ELISA tests on each
greyhound urine sample, which translates to screening for 10 to 15
different types of drugs. This is because, generally, each ELISA test kit
can detect two to three drugs. Therefore, the Department uses a
combination of the TLC testing method with a number of different ELISA
tests to enhance the depth and breadth of detection
coverage. Although this method allows the Department to
test for a wide variety of drugs, it does not cover all the
drugs that could potentially be used on horses or
greyhounds. According to an industry expert, the median
is between 20 and 25 ELISA kits when testing horse
samples for drugs.
As part of its regular testing program, the Department also
tests horse blood samples to measure the level of
Phenylbutazone and Oxyphenylbutazone to ensure that
horses do not exceed the threshold levels established in
state rule. These tests use high-performance
liquid chromatography (HPLC) instrumentation.
Results that return levels above the state-established
threshold are reported as violations.
􀁺􇩃 Confirmation of positive results—The Department
confirms the drug detections identified in its initial
regular testing using mass spectrometry
instrumentation. The Department limits the use of
mass spectrometry instrumentation tests for
confirmation and special testing.
􀁺􇩓 Special testing—Besides the initial detection and
confirmation testing, the Department has the ability to
conduct special tests, which target specific drugs
such as Erythropoietin (EPO), or practices such as
“milkshake” tests.
Department classifies drugs according to Model Rules and has
made some program improvements—The Department’s drug-testing
program classifies drugs according to the Model Rules. In addition, consistent with
its strategic goal to enhance animal drug-testing, the Department has increased
the number of tests that it performs on samples, and in 2006 it strengthened its
contract with the lab that conducts animal drug testing to allow for more types of
testing. Specifically:
􀁺􇩄 Drug categories are aligned with Model Rules: The Department’s
classification of drugs relating to horse racing is consistent with the ARCI’s
Uniform Classification Guidelines. Specifically, the Department has
Office of the Auditor General
page 29
Phenylbutazone: Also known as
“bute.” A nonsteroidal anti-inflammatory
drug—commonly used
for pain relief for the treatment of
lameness.
Oxyphenylbutazone: A metabolite of
Phenylbutazone.
Source: Auditor General staff analysis of information on
the Ontario Ministry of Agriculture, Food and
Rural Affairs Web site and in ARCI Model Rules.
EPO—A hormone that stimulates the bone
marrow to produce red blood cells, thereby
increasing oxygen-carrying capacity within the
circulation. Increased oxygen in the blood may
enhance a horse’s performance.
Milkshake Tests—A milkshake is a drug
combination that usually contains agents, such
as baking soda, sugar, and other substances. It
is believed to help fend off a horse’s fatigue.
Milkshake tests specifically identify heightened
carbon dioxide levels in horses.
Source: Auditor General staff analysis of information from the Racing
Medication and Testing Consortium and the Racing New South
Wales Web sites.
promulgated rules for horse racing that classify foreign substances in
generally the same manner as is set forth in the ARCI Uniform Classification
Guidelines. For example, the Department’s Chief Veterinarian determines
threshold levels for Class 3, 4, and 5 drugs that correspond with the
classifications listed in the ARCI Uniform Classification Guidelines.
􀁺􇩎 Number of tests performed on pooled samples has increased: The
Department has increased the number of ELISA tests performed on each
pooled horse drug test sample, and has provisions in place to add additional
tests. Specifically, the Department increased the number of ELISA tests for
horses from 15 to 25 in fiscal year 2005. By increasing the number of ELISA
tests performed, the Department can increase the number of drugs detected
in an animal.
The Department’s new testing laboratory contract was finalized in October
2006, and it allows the Department to request even more additional ELISA
tests. Specifically, this new contract allows the Department to request up to 45
ELISA tests on each horse sample. This means that a horse could be tested
for 90 to 135 different drugs in initial testing. The new contract also allows the
Department to request up to ten ELISA tests on each greyhound sample,
which is an increase from its previous testing protocol of ELISA tests for each
greyhound sample.
􀁺􇩎 New contract allows for additional test types: As noted above, the
Department’s new lab contract allows it to request that milkshake tests be
performed. In addition, in contrast to its prior contract, the Department’s new
contract allows it to request Furosemide (Lasix) testing.1 Moreover, the new
contract allows the Department to select specific samples or batches of
samples that can be unpooled if needed.
Two of Department’s threshold levels for therapeutic drugs
deviate from Model Rules recommendations—Of the three
threshold levels for therapeutic drugs recommended in Model Rules, the
Department’s threshold levels match recommendations in one case and deviate
in the other two. Threshold levels refer to amounts of medications that are
allowable at certain levels in an animal’s system. Threshold levels have been
established in equine Model Rules for only three drugs and metabolites:
Phenylbutazone, Ketoprofen, and Flunixin.2 According to an RMTC official, the
thresholds that are listed in the Model Rules were added as a result of scientific
research, and additional thresholds levels will be established for other
therapeutic medications once a consensus is reached.
The Department’s threshold levels for Phenylbutazone (Bute) match those set
forth in the Model Rules, while its thresholds for Ketoprofen and Flunixin are five
times greater. The Department’s Chief Veterinarian, who has the authority to set
The Department’s new
drug-testing contract allows
for more testing options
and a greater number of
tests to be conducted.
1 Furosemide (Lasix) specific gravity testing measures how diluted the urine is. Samples with a specific gravity under the
set amount are subject to further testing.
2 Flunixin is a nonsteroidal anti-inflammatory drug that controls pain and inflammation in horses.
State of Arizona
page 30
Furosemide—A drug that is
also known as Lasix and is
used to prevent exercise-induced
pulmonary
hemorrhage. This describes
the condition in which tiny
blood vessels in a horse’s
lungs rupture due to stress
sustained during physical
exertion. According to an
industry expert, Furosemide
is the only substance allowed
to be administered to a horse
on race day in most racing
jurisdictions. Therefore, it is
treated differently than other
drugs and does not have a
classification in the Uniform
Classification Guidelines for
Foreign Substances and
Recommended Penalties.
Source: Auditor General staff analysis of expert
interview and information provided
from the American Association of
Equine Practitioners Web site and a
January 2007 interview with an ARCI
representative.
thresholds for therapeutic medications (Class 3, 4, and 5 drugs) for horses, set
these thresholds. According to the Chief Veterinarian, these thresholds were set
at a higher level than those in the Model Rules in response to the higher levels
allowed in other racing jurisdictions. An appendix in the January 2003 edition of
the Journal of Equine Veterinary Science, the article the Chief Veterinarian used
to set Arizona’s levels, supports that some states had allowed higher threshold
levels for the Ketoprofen and Flunixin than those recommended in the Model
Rules.1 For example, two states allowed higher levels for Ketoprofen, and four of
five states allowed higher levels for Flunixin. The Department’s threshold levels
for Ketoprofen are the same as one state and its Flunixin threshold levels are the
same as two of the five states. The Chief Veterinarian reported that when the
Department adopts the Model Rules and other racing jurisdictions also comply
with the threshold levels in the Model Rules, he will adjust the threshold levels
for these substances accordingly.
ARCI Model Rules do not address threshold levels for drugs in greyhounds.
However, the Department’s administrative rules specify thresholds for
barbiturates and Procaine.2
Department working toward aligning its policy with Model Rules—
Although the Department has taken steps to improve its animal drug-testing
practices, not all practices, such as therapeutic medication thresholds, are yet
aligned with the Model Rules. Therefore, the Department should continue to
move forward to more fully align its drug-testing practices with the Model Rules,
and seek consensus with the industry in areas where there are concerns. The
Department has received input from stakeholders regarding equine Model
Rules. The Department has developed a draft report listing stakeholder
recommendations regarding the Department’s proposed changes to policy to
align with the Model Rules. Arizona industry stakeholders recommend that the
Department adopt different requirements in five areas recommended in the
ARCI Model Rules. Specifically, industry stakeholders recommend that the
Department change:
􀁺􇩆 Foreign substance—Stakeholders suggest changing the verbiage in the
Model Rules referring to a “foreign substance” to “pharmacologically active
substance.” According to the Department, this would dramatically weaken its
ability to take enforcement actions against drug and medication violations
because extensive and expensive tests would be required to prove that a
substance is “pharmacologically active.”
􀁺􇩆 Furosemide dosage—Stakeholders believe the minimum dosage required in
the Model Rules is too high and recommend a smaller minimum dosage
requirement. In addition, stakeholders suggest that how Furosemide is
administered be left to the discretion of the practicing veterinarian instead of
limiting the administration route to only intravenous injections, as required in
Industry stakeholders
recommend that the
Department adopt
different requirements in
five areas recommended
in the ARCI Model Rules.
1 Journal of Equine Veterinary Science. Appendix 7:International Threshold Regulatory Limits. November 2002. Journal of
Equine Veterinary Science 23, no. 1 (January 2003): 37-38.
2 Barbiturates are central nervous system depressants that can produce a wide spectrum of effects, from mild sedation to
anesthesia. Procaine is a local anesthetic.
Office of the Auditor General
page 31
The Department’s
thresholds for Ketoprofen
and Flunixin are five times
higher than those in the
Model Rules.
the Model Rules. A lower minimum dosage and giving
veterinarians the ability to choose the administration method
allows veterinarians more latitude to dispense Furosemide
according to weather conditions and how the horse reacts to the
substance. Arizona has extreme temperatures and when the
temperatures rise, a horse needs less Furosemide.
Administering a higher dose than needed can cause metabolic
problems. The horse can become dehydrated, which disturbs
the horse’s electrolyte balance and can cause cramping. In
addition, thin horses need less Furosemide and administering a
higher dose than needed can have the same detrimental effect.
􀁺􇩂 Bleeder lists—Stakeholders recommend that the amount of
time horses are ineligible to run after being placed on the
bleeder list be reduced for the first occurrence from 14 to 10
days and for the third occurrence from 180 to 60 days.
Industry stakeholders agree with ineligibility requirements
listed in the Model Rules for second and fourth occurrences.
􀁺􇩎 Nonsteroidal anti-inflammatory drugs—Industry stakeholders suggest
prohibiting NSAIDs from being administered before post time on race
day instead of within 24 hours before post time for the race in which the
horse is entered, as recommended in the Model Rules.
􀁺􇩖 Veterinarians’ reports—Industry stakeholders recommend submitting
records regarding the treatment of a racehorse only when a positive drug
test has been conducted. In contrast, the Model Rules require every
veterinarian licensed by the Department to provide to the Chief
Veterinarian a written record of every treatment they administer on a
racehorse.
The Department submitted its new proposed policy on equine drug testing and
recommended penalties that encompass industry recommendations to the
Commission for their endorsement at the April 2007 commission meeting. The
Department recommended the adoption of the new policy to go into effect starting
in September 2007. According to department staff, the Commission requested the
Department to take the proposal and review it with representatives of the
Horsemen’s Benevolent and Protection Association, Inc. and to submit it to the
Commission again for their endorsement at the May 2007 meeting.1
The department director reported that the Department has decided to first issue a
substantive policy statement, and then move forward with adopting that policy into
rule.2 According to the Director, the Department’s practice has been to issue a
substantive policy statement prior to completion of the formal rule-making process
in situations that require immediate action to protect the health and safety of the
The Department plans
to implement a new
drug-testing policy that
closely mirrors the
Model Rules.
State of Arizona
page 32
A list kept by the official
veterinarian of each horse that has demonstrated
external evidence of exercise-induced pulmonary
hemorrhaging during or after a race or workout as
observed by the official veterinarian. Horses put on
a bleeder list are ineligible to race for a period of
time determined by the number of prior bleeding
incidents a horse has had. This allows the horse
time to heal damaged tissue and get the medical
attention needed. For example, RCI Model Rules
recommend that a horse be ineligible to race 14
days after its first instance of bleeding.
Source: Auditor General staff analysis of ARCI Model Rules Chapter 11,
revision 3.3, and an Arizona Racing Commissioner.
1 Both the Commission and the Department have statutory authority to adopt administrative rules and make policy.
However, according to A.R.S. §5-104(B), the Commission may approve or reject decisions of the Department’s director
in accordance with rules that it has established.
2 A substantive policy statement is a written expression that informs the general public of an agency's current practice,
procedure, or method of action based on its opinion of state or federal requirements. A substantive policy statement is
advisory only and does not impose additional requirements or penalties on regulated parties.
industry. However, there is a fine line between a substantive policy statement and
a rule. Because this proposed policy prescribes new drug policies that must be
adhered to by all licensees and may result in penalties for failure to comply, the
policy, if adopted as proposed, would be a rule that has not gone through the rule-making
procedures. Consequently, the provisions in the proposed substantive
policy statement cannot be enforced until they are adopted into administrative rule.
Therefore, the Department should put this proposed policy into administrative rule
instead of solely in department policy.
Conformity with Model Rules limited by internal budget
pressure
Although the Department was making progress in strengthening its drug-testing
program, the need to address unexpected expenses, such as state-wide, mandated,
employee-pay increases, resulted in having to divert $31,000 to meet other
department needs in late fiscal year 2006. Although the Department did not violate
any state laws, this short-term reduction affected its ability to adhere to some
practices recommended in the Model Rules.
Program improvements stalled in 2006—Although the Department made
progress toward improving horse drug testing between 2004 and 2005, it reduced
its level of testing for both horse and greyhound drug testing in fiscal year 2006 in
response to unexpected expenses and mandates as a last-resort, cost-saving
measure. Specifically:
􀁺􇩈 Horse drug testing—As noted in Table 5, the Department had increased drug
testing in fiscal year 2005. During fiscal years 2004 and 2005, the Department
reports that it tested every winning horse in addition to some extra horses
selected by the stewards for testing. Based on the number of live horse races
conducted in fiscal year 2006, the Department should have tested at least
2,394 horses and as Table 5 shows, it tested 3,149 horses, which included
Office of the Auditor General
page 33
Table 5: Equine Drug-Testing Statistics
Fiscal Years 2004 through 2006
2004 2005 2006
Horses
Tested
Live
Races Ratio1
Horses
Tested
Live
Races Ratio1
Horses
Tested
Live
Races Ratio1
2,455 2,379 1.03:1 3,399 2,406 1.41:1 3,149 2,394 1.32:1
Positive Tests
Number 44 37 48
Percentage 1.79% 1.09% 1.52%
1 Ratio represents the average number of horses tested for each live race conducted. For example, a 1:1 ratio means one
horse was tested for every live race conducted.
Source: Auditor General staff analysis of the Department of Racing’s analysis of invoices received from the private drug-testing
laboratory for fiscal years 2004 through 2006 and the State of Arizona Department of Racing Annual Report FY 2006.
regular tests on winning horses and special tests on extra horses. However,
for a 60-day period in fiscal year 2006, from May 1 through June 30, to help
avoid a potential budget shortfall, the Department reduced horse drug testing,
and as a result temporarily stopped testing every winning horse during this
time. Auditors reviewed the Department’s horse sample logs on 10 randomly
selected race dates during this period, and found that only 69 out of 91 races
had samples submitted for testing on the winning horse. This is an
approximate 24 percent decrease in testing of winning horses for this sample
period. As a result, although it did not violate any state laws, the Department
deviated from the Model Rules that require every winning horse to be tested.
However, as of July 1, 2006, auditors determined that the Department had
resumed testing every winning horse.
􀁺􇩇 Greyhound drug testing—Although there were fewer races held in 2005 as
compared with 2004 because live racing ended at Apache Greyhound Park,
the ratio of samples tested as compared to live races was consistent—a ratio
of 0.52 to 1 in 2004 and 0.54 to 1 in 2005. In 2006, while the number of live
races returned to its 2004 level, the number of tests declined (0.47 to 1 ratio).
Similar to horse testing, the Department reduced the level of greyhound drug
tests conducted in 2006. According to the Department’s Chief Greyhound
Veterinarian, the Department’s standard practice is to allow each track to
submit no more than eight to nine greyhound urine samples for testing each
race day. However, due to budget constraints during the last 2 months of fiscal
year 2006, each track was limited to submitting no more than three samples
each race day. According to the Department, it resumed its standard testing
levels of eight to nine samples a day at the beginning of fiscal year 2007.
Although equine Model Rules do require every winning horse to be tested,
greyhound Model Rules do not have this same requirement. According to the
Department’s Chief Greyhound Veterinarian, the current state standard testing
protocol does not include testing every winning greyhound.
State of Arizona
page 34
Table 6: Greyhound Drug-Testing Statistics
Fiscal Years 2004 through 2006
2004 2005 2006
Greyhounds
Tested
Live
Races Ratio1
Greyhounds
Tested
Live
Races Ratio1
Greyhounds
Tested
Live
Races Ratio1
5,508 10,492 0.52:1 5,105 9,372 0.54:1 4,878 10,457 0.47:1
Positive Tests
Number 1 5 0
Percentage 0.02% 0.10% 0.00%
1 Ratio represents the average number of greyhounds tested for each live race conducted. For example, a 1:1 ratio means one
greyhound was tested for every live race conducted.
Source: Auditor General staff analysis of the Department of Racing’s analysis of invoices received from the private drug-testing
laboratory for fiscal years 2004 through 2006 and the State of Arizona Department of Racing Annual Report FY 2006.
The Department
stopped testing every
winning horse for a 60-
day period in 2006.
Department reduced drug testing in 2006 to avoid budget shortfall—
According to department officials, it reduced both horse and greyhound drug
testing in late fiscal year 2006 as a last-resort, cost-saving measure to avoid a
potential agency budget shortfall caused by unexpected expenses and mandates.
The Department had originally allocated $300,000 for animal drug testing in fiscal
year 2006. However, the Department reported that, due to the need to meet other
unexpected operational expenses late in the fiscal year, it allocated approximately
$31,000 to other purposes.
The Department reported that it faced an initial potential budget shortfall of
$156,585 for fiscal year 2006. This shortfall was the result of unexpected expenses
and mandates, including:
􀁺􇩈 Higher travel expenses: The Department reported that the State increased
mileage reimbursement rates and hotels increased the lodging rates they
charged the Department, but no additional funds were provided for this
purpose. Therefore, the Department reported that an additional $16,220 was
needed to reimburse racing employees for travel expenses. The Department
is responsible for regulating county fair race meets that are located throughout
the State. This requires department employees, such as racing stewards, to
travel to remote areas of the State as part of their regulatory duties.
􀁺􇩕 Unexpected computer programming and equipment needs: The Department
experienced unexpected computer programming and equipment needs,
such as the expense of stabilizing the Department’s database, for which funds
were not available. The Department reported that it acquired replacement
equipment and programming services at a cost of $16,260.
􀁺􇩐 Pay parity for county fair-funded employees: Although legislation passed to
increase state employee salaries during fiscal year 2006, the appropriations
were made from the State General Fund, and thus did not provide additional
resources to increase the salaries of the Department’s employees who are
funded through county fair monies.1 However, the Department was required
to provide these increases to all of its employees. According to the
Department, the increases for these employees cost $20,205.
􀁺􇩃 County fair personnel and operating expenses exceed the appropriation caps
established by statutes: Rather than reduce or cancel scheduled county fair
racing because the Department did not have the monies to pay the wages of
its employees assigned to work at the fairs and for the operating expenses
associated with the fairs, the Department reported that it used $103,600 from
its General Fund appropriation.
The Department reported that it reduced its potential shortfall by maintaining staff
vacancies, promoting Web site usage, which reduced labor expenses, and other
1 The County Fairs Racing Fund, which was established to pay for Department of Racing staff to oversee county fair racing,
had a $300,000 cap, and the County Fairs Racing Betterment and Breeders’ Awards Administration Fund had a $45,000
cap in fiscal year 2006 on the amount from revenues and transferred funds that could be distributed to those funds.
Therefore, any expenses above those caps would need to be funded from other monies.
Office of the Auditor General
page 35
Late-year unexpected
expenses caused the
Department to move
approximately $31,000
from animal drug testing
to other operations in
fiscal year 2006.
cost-saving measures. The Department resolved the remaining budget shortfall of
approximately $31,000 by reducing the number of animals tested by
approximately two winning horses and five greyhounds for each race day from
May 1, 2006 through June 30, 2006. The Department reports that it implemented
the cost reductions in drug testing as a last alternative to balance its budget.
Starting in fiscal year 2007, the Department included increasing animal drug
testing as one of its strategic goals and retained this goal in its fiscal year 2008
strategic plan. Since the Department has adopted increasing animal drug testing
as a strategic goal, it needs to ensure that monies are available to support this
goal.
Starting in fiscal year 2008, the Department should have more monies available for
drug testing for county fair and commercial racing. According to the Department,
it has been subsidizing county fair racing drug testing and other activities with
General Fund monies. These General Fund monies are normally reserved for
commercial racing because the county fair racing costs were higher than
appropriations received from the County Fair Racing Fund and the Administration
Fund. However, because the Legislature approved higher caps for two county fair
racing funds during the second 2006 regular session, the Department’s county fair
racing appropriations could potentially increase by $172,000 starting in fiscal year
2008, pending approval of the State’s budget. This should pay for county fair
animal drug testing with county fair monies, freeing up more General Fund monies
for commercial animal drug testing.1
Recommendations:
1. The Department should continue to move forward to align its drug-testing
practices with the Model Rules, and seek consensus with the industry in areas
where there are concerns.
2. Once finalized, the Department should put its new equine drug testing policy
and penalties into administrative rule instead of solely in department policy.
1 Pending legislative approval, starting in fiscal year 2008, the Department’s total county fair racing appropriations will
increase from $345,000 to $517,000 as a result of the Legislature increasing the statutory cap for the County Fairs Racing
Fund and the Administration Fund.
State of Arizona
page 36
Office of the Auditor General
OTHER PERTINENT
INFORMATION
page 37
During the audit, other pertinent information was collected regarding how Arizona’s
racing industry was historically funded and is currently funded, legislative actions to
assist the racing industry, and revenue sources used by some other states that are
not used in Arizona.
Historically, racing regulation was self-funded from pari-mutuel
taxes
In the past, revenues derived from the racing industry generated sufficient
resources to fully fund all costs associated with racing regulation and eight
statutorily established funds that the racing industry has historically supported.
However, fiscal year 1995 was the last year that pari-mutuel taxes derived from the
racing industry provided sufficient revenues to fully fund the eight statutorily
established racing and agricultural funds, and remit revenues to the State General
Fund, which more than covered the Department of Racing’s operational
expenditures. Specifically, in fiscal year 1995, the State collected more than $8.5
million in pari-mutuel taxes, and contributions to the State General Fund exceeded
$5 million. The following year pari-mutuel tax collections dropped to $2.8 million
when legislatively approved tax relief went into effect, and racing revenues remitted
to the State General Fund decreased to $165,878.1
Since tax relief legislation went into effect in 1996, pari-mutuel tax collections have
continued to decline.2 As shown in Figure 3 (see page 38), collections from pari-mutuel
handle taxes have declined from $2.9 million in 1998 to $527,000 in 2006.
During this same time, the cost to regulate the industry in the form of the
Department’s operational expenditures has increased somewhat, from $2.65
million in fiscal year 1998 to $2.95 million in fiscal year 2006.
The exemption of simulcast wagering from taxation appears to be a primary factor
in the pari-mutuel tax collection decline since total commercial handle generated
1 The Auditor General’s 1997 audit report presents information on the immediate effect of tax relief legislation in the
Introduction and Background and Other Pertinent Information sections of that report. (See Report No. 97-12)
2 State collection of pari-mutuel tax is based on a complicated formula set forth in state statute, and only live handle is
subject to taxation in Arizona.
Pari-mutuel taxes have
continued to decline
since tax relief
legislation became
effective in 1996.
State of Arizona
page 38
has generally remained stable over the last decade. As discussed previously (see
Figure 2 in the Introduction and Background, page 4), total commercial handle
generated has generally remained stable since 1998, fluctuating between $245
million and $265 million.1 However, during this time, live handle has declined
compared to simulcast handle, from about 51 percent of the total in 1998
compared to only 31 percent of the total in 2006. Since Arizona taxes only live
handle, the generation of fewer live handle dollars translates to less pari-mutuel
taxes collected.2
1 Examination of commercial handle trends before 1998 also supports that total handle generated now is nearly the same
as a decade ago. For example, the racing industry generated an average $249.5 million in commercial handle during
fiscal years 1994 through 1996, which is slightly less than the $251.2 million in average commercial handle for fiscal years
2004 through 2006.
2 The overall trend of increased simulcast wagering appears to be taking place only in Arizona’s horse-racing industry. In
fiscal year 2006, only 42.3 percent of total handle earned by the greyhound-racing industry consisted of simulcast handle,
compared to 81.9 percent for commercial horse racing. Thus, the greyhound-racing industry still derives more revenue
from live races than simulcast races.
$2.9 $2.9
$2.5
$1.8
$4.2
$4.3
$7.2
$6.5
$7.5
$8.7
$9.5
$0.8 $0.6 $0.6 $0.5 $0.5
$2.7 $2.5
$0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
1998 1999 2000 2001 2002 2003 2004 2005 2006
Millions
Fiscal Year
Fees, Fines, and Other Revenues Pari-Mutuel Tax State Unclaimed Property
Figure 3: Revenue Sources by Category
Fiscal Years 1998 through 2006
(Unaudited)
Source: Auditor General staff analysis of information reported in the State of Arizona Department of Racing
Annual Report FY2000, State of Arizona Department of Racing Annual Report FY2003, and State of
Arizona Department of Racing Annual Report FY2006.
Most department revenues distributed to eight special
funds
The Department receives revenue from a variety of sources. The Department
directly collects pari-mutuel taxes, license fees, and fines from licensees. Fines
from licensees are deposited into the State General Fund, while other revenue
sources are deposited into eight separate racing and agricultural funds identified
in A.R.S. §5-113 and shown in Table 7. Five of these funds are administered by the
Department and benefit the racing industry directly, while the other three funds
benefit the Arizona State Fair, county fair, and agricultural programs. Statute entitles
all of these funds to receive a certain percentage of racing-related revenues (pari-mutuel
taxes and license application fees), up to a specific allowable maximum.
Since 1998, these funds have also been supported by monies from the State
Unclaimed Property Fund. Unclaimed property consists of abandoned property
such as bank accounts, and the Arizona Department of Revenue handles its
disposition. The Legislature took this action to address revenue shortfalls for the
eight statutorily established funds that occurred as a side effect of the tax relief
legislation. In fiscal year 1996, as a result of that legislation, pari-mutuel taxes no
longer provided sufficient resources to fully fund seven of the eight funds, which
together required a total funding level of $3.6 million. In 1996, the Legislature
Office of the Auditor General
page 39
Table 7: Statutory Revenue Distribution and
Maximum Dollar Requirements for
Racing and Agricultural Funds
Specified in A.R.S. §5-113
Fund Maximums2
Fund
Percentage
Distributions1
Before
December 31, 2006
Starting
January 1, 2007
Racing Funds
County Fairs Racing Betterment Fund 22% $800,000 $1,200,000
Arizona Breeders’ Award Fund 22 800,000 1,200,000
County Fairs Racing Fund 9 300,000 450,000
County Fairs Racing Betterment and Breeders’ Awards
Administration Fund 1 45,000 67,000
Arizona Stallion Award Fund 1 40,000 60,000
Agricultural Funds3
County Fairs Livestock and Agriculture Promotion Fund 33 1,200,000 1,800,000
Agriculture Consulting and Training Fund 1 No maximum No maximum
Arizona Exposition and State Fair Fund 11 400,000 400,000
1 Distribution percentages represent the portion of total pari-mutuel tax receipts, license fees, and unclaimed property fund monies that can
be distributed to each fund annually.
2 The Arizona Legislature amended A.R.S. §5-113 in 2006 to increase the maximums for six of the eight funds.
3 These funds identified are administered by other state agencies; specifically, the Governor’s Office, the Arizona Department of
Agriculture, and the Arizona Exposition and State Fair Board.
Sourc