Performance audit, Department of Racing, Racing Commission

              DOUGLAS R. NORTON. CPA

AUDITOR GENERAL

STATE OF ARIZONA

OFFICE OF THE

AUDITOR GENERAL

July 14, 1986

Members of the Arizona Legislature

The Honorable Bruce Babbitt, Governor

Timothy A. Barrow, Director

Department of Racing

Fred C. Struckmeyer, Jr., Chairman

Racing Commission

Transmitted herewith is a report of the Auditor General, A Performance

Audit of the Departriient of Racing and Racing Commission. This report i s

i n response to the July 26, 1385 resolution of the Joint Legislative

Oversight Committee.

The report addresses weaknesses in several areas. The Department needs to

strengthen i t s drug testing program by increasing the number of samples

taken from racing animals and ensuring that adequate analyses are

perfcrmed on the samples. We also found that the Department needs to

conduct electronic data processing audits of racetrack total isator systems

to help deter potential fraud. Finally, we found that the capital

improvements program has improved racetrack f a c i l i t i e s b u t has not led to

increased wagering as intended by statute.

My staff and I will be pleased to discuss or clarify items in the report.

Respectfully submitted,

~ o u ~ l kR.! Norton

Auditor General

Staff: William Thomson

Mark Fleming

Arthur E. Heikkila

Dennis B. Murphy

Marlc J. Syracuse

Patricia M. Krueger

2700 NORTH CENTRAL AVE. SUITE 700 PHOENIX, ARIZONA 85004 ( 602) 255- 4385

SUMMARY

The O f f i c e o f the Auditor General has conducted a performance a u d i t o f the

Arizona Department o f Racing and the Arizona Racing Commission. The a u d i t

was conducted i n response t o a J u l y 26, 1985, r e s o l u t i o n o f the J o i n t

L e g i s l a t i v e Oversight Committee. This performance a u d i t was conducted as

p a r t o f the Sunset Review set f o r t h i n Arizona Revised Statutes SS41- 2351

through 41 - 2379.

DEPARTMENT OF RACING

The Arizona Department o f Racing ( ADOR) was established by the Legislature

i n 1982 with the i n t e n t t o strengthen the regulation of the racing

industry i n Arizona. P r i o r t o the creation o f the Department i n 1982,

racing a c t i v i t i e s were regul ated by the Arizona Racing Commission. The

Department i s headed by a D i r e c t o r appointed by the Governor and i t s

responsibi 1 i t i e s i n c l ude 1 icensing i n d i v i d u a l s involved i n racing meets,

c o l l ecting pari- mutuel revenues, drug testing, conducting investigations

and background checks and conducting administrative hearings on p o t e n t i a l

racing v i o l a t i o n s .

This i s the t h i r d performance a u d i t o f r a c i n g r e g u l a t i o n i n Arizona i n the

past f i v e years. The Department has made substantial progress i n

implementing recommendations from previous Auditor General reports.

Procedures t o select the contract drug t e s t i n g laboratory have been

imp1 emented. The 1 icensi ng and background i n v e s t i g a t i o n process has been

0

improved. Several track operations probl ems i nvol ving scal es and weighing

jockeys have been corrected. I n a d d i t i o n , t h e Department has corrected

several accounting re1 ated probl ems.

ADOR Needs To Strengthen And Improve I t s

Drug Testing Program ( see pages 15 through 25)

ADOR should strengthen and improve i t s drug surveillance program to

prevent p o t e n t i a l abuses i n t h e r a c i n g industry. Our survey indicates

t h a t when compared with o t h e r r a c i n g states, ADOR does not conduct

s u f f i c i e n t sampl i ng o f horses and greyhounds t o adequately ensure t h a t

prohibited substances are not used to a1 t e r racing performance. Despite

i t s broad statutory authority to sample, the Department, on the average,

samples approximately one horse per race and one greyhound per race, while

other racing states contacted sample approximately two or more horses and

greyhounds per race.

ADOR has not acted to ensure adequate drug testing analyses. The contract

testing 1 aboratory conducts fewer screening tests on equine urine samples

than recommended by the National Associati on of State Racing Commissioners

( N. A. S. R. C. ) Research and Reference Centers. Fail ure to conduct the

N. A. S. R. C. Uniform Drug Testing procedures could result in some prohibi tea

drugs passing by the contract laboratory undetected. In addition, special

testing procedures establ ished by the Department to detect the potential

use of exotic drugs i n horses are not sufficiently random. Evidence from

other racing states indicates that special testing for exotic drugs should

be conducted more frequently or on a random basis. Finally, ADOR's

programs for eval uating the contract testing 1 aboratory ' s equine testing

performance are not r e a l i s t i c t e s t s of routine procedures because the

contract laboratory i s aware of when i t s performance i s being evaluated.

To strengthen i t s drug testing program ADOR should request increased

funding to provide for the additional sampling and testing procedures that

are needed.

Electronic Data Processino Audits Of

Racetrack Total i sator Systems Needed To

He1 P Deter Fraud ( see Daaes 2/ throuat. 1 34)

Electronic Data Processing ( EDP) audits of racing facility totalisator

computer systems are needed to help deter fraud. Presently, all

commercial race tracks i n Arizona use a computerized totalisator system

to: record the amount of money wagered, post the odds for animals racing

and provide information to the public on the odds board. A previous

Auditor General report as well as two studies prepared for the Department

identified several methods of computer fraud that could result from

total isator system control deficiencies. Such methods include:

Counterfeiting and cashing unclaimed winning tickets,

Adjusting t e l l e r balances to conceal overages or shortages,

Failing to enter betting transactions and keeping the money,

0 Skimming betting revenues, and

0 Underreporting the wagering pool to change the odds and the

State's portion of the revenue.

A1 though considerabl e hazards have been identi fied, the Department has

never conducted EDP audits of racetrack t o t a l i s a t o r systems. Past

attempts by the Department to implement EDP auditing have been ineffective

due to one t o t a l i s a t o r company's failure to comply w i t h the Department's

request for information. The Department has not used its full authority

to require compliance and protect the wagering public. In addition, the

Racing Commission was aware of the Department's problems i n inipl ementing

EDP audits, yet i t has not fully supported the attempts.

ARIZOIJA RACING COhl~ lISSION

The Arizona Racing Commission was created by the Legislature i n 1949. The

Commission is comprised of five members appointed by the Governor to

five- year staggered terms. The Commission is responsible for setting

overall Departmental pol icy, issuing racing dates, approving capital

improvement applications, and promulgating any rules and regulations

needed to protect the public safety. In 1982 the Legislature transferred

the regulation of racing meets and other duties to the newly created

Department of Raci rig.

The Capital Improvements Program Shou'l d

Be Terminated ( see paaes 59 throuch 671

The capital improvements program should be terminated prior to its

expi ration on June 30, 1987, for horse track permittees and June 30, 1992,

for dog track permittees. The statutory purpose of the program i s to

improve race tracks and increase the pari- mutuel hand1 e. A1 though capital

improvements have enhanced racing facil i t i e s , the an~ ount of rnoney wagered

a t two upgraded race tracks has decreased when measured in constant

do1 1 ars. The 1 imi ted effect of capital improvements indicates that other

external factors may have more impact on the amount of money wagered. The

purse structure, population changes, weather conditions, the number of

racing days and competition w i t h the 1 ottery could affect pari - mutuel

wagering.

The Racing Commission erroneously approved two capital improvement

projects. Statutes require the Commission to review and approve all

capital improvement projects submitted by race tracks. A1 though statutes

allow a broad range of projects to qua1 ify for capital improvement

wi thhol ding, certain restrictions apply. According to the Legislative

Council, these restrictions include a minimum project amount and a

requirement that components of a project be related i n purpose. The

Commission erroneously approved two projects that did not meet the minimum

expenditure requirement. As a resul t, the Racing Commission should

recover $ 236,685 of improperly withheld funds.

The Commission a1 so erroneously approved unrelated components i n three

other projects. However, because the project amounts s t i l l met the

minimum requirements after the unrelated components were subtracted, only

the $ 53,760 i n unrel ated components are inval id. The Racing Commission

shoul d a1 so recover this amount.

TABLE OF CONTENTS

ARIZONA DEPARTMENT OF RACING

- Page

INTRODUCTION AND BACKGROUND . . . . . . . . . . . . . . . . . . . . 1

SUNSETFACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

FINDING I: THE ARIZONA DEPARTMENT OF RACING NEEDS TO STRENGTHEN AND IMPROVE ITS DRUG TESTING PROGRAIUI. . . . . . .

Department Does Not Conduct Enough Sampling . . . . . . . . . .

Department Does Not Ensure Adequate Laboratory Analysis. . . . . . . . . . . . . . . . . .

Procedures For Eva1 uati ng Laboratory Performance Ineffective. . . . . . . . . . . . . . .

Recommendations . . . . . . . . . . . . . . . . . . . . . . . .

FINDING 11: ELECTRONIC DATA PROCESSING

AUDITS OF RACETRACK TOTALISATOR SYSTEMS ARE NEEDED TO HELP DETER FRAUD. . . . . . . . . . . . . . . . .

EDP Audits Needed To Help Protect Against Fraud . . . . . . . .

Racing Department Does Not Audit Electronic Totalisator Systems A t Racetracks . . . . . . . . . . . . . . .

Recommendations . . . . . . . . . . . . . . . . . . . . . . . .

OTHER PERTINENT INFORMATION . . . . . . . . . . . . . . . . . . . .

Costs Of County Fair Racing . . . . . . . . . . . . . . . . . .

Pari- Flutuel Racing Broadcasts And Information Dissemination . . . . . . . . . . . . . . . . .

Drug Testing Of Jockeys . . . . . . . . . . . . . . . . . . . .

AREAS FOR FURTHER AUDIT WORK. . . . . . . . . . . . . . . . . . . .

DEPARTMENT RESPONSE . . . . . . . . . . . . . . . . . . . . . . . .

ARIZONA RACING COMMISSION

Page

INTRODUCTION AND BACKGROUND . . . . . . . . . . . . . . . . . . . . 49

SUNSETFACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . .

FINDING I: THE CAPITAL IMPROVEMENTS PROGRAM

SHOULD BE ALLOWED TO EXPIRE . . . . . . . . . . . . . . . . . . 59

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Improved F a c i l i t i e s Have Not Increased State Revenues . . . . . 60

Some Improvements Erroneously Approved By The Racing Commission . . . . . . . . . . . . . . . . . . . . 63

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . 66

COMMISSION RESPONSE . . . . . . . . . . . . . . . . . . . . . . . . 69

LIST OF TABLES

ARIZONA DEPARTMENT OF RACING

Page

TABLE 1 - Department Activity, Fiscal Years 1982- 83

Through 1985- 86 . . . . . . . . . . . . . . . . . . . . . 2

TABLE 2 - State Revenues From Pari- Mutuel Wagering,

Fiscal Years 1981 - 82 Through 1984- 85. . . . . . . . . . . 4

TABLE 3 - Department Of Racing Expenditure And Budget

Detai 1 , Fiscal Year 1982- 83 Through

Fiscal Year 1985- 86 ( Unaudi ted) . . . . . . . . . . . . . 6

TABLE 4 - Routine TLC Screening Tests Conducted

On Equine Urine Samples . . . . . . . . . . . . . . . . . 19

TABLE 5 - County Fair Race Ibleets, Fiscal Year 1984- 85 . . . . . . . 3 6

TABLE 6 - State's Cost Of County Fair Racing, Fiscal

Year 1982- 83 Through Fiscal Year 1 984- 85. . . . . . . . . 3 7

ARIZONA RACING COMMISSION

TABLE 7 - Commission Activities, Fiscal Years

1982- 83 Through 1985- 86 . . . . . . . . . . . . . . . . . 5 0

TABLE 8 - Racing Commission Expenditures, Fiscal

Years 1984- 85 Through 1985- 86 ( Unaudited) . . . . . . . . 5 1

TABLE 9 - Capital Improvements Project

Wi thhol ding Through Apri 1 1986 And

Estimated Payoff Dates ( Unaudited) . . . . . . . . . . . . 60

LIST OF FIGURES

ARIZONA DEPARTMENT OF RACING

Page

FIGURE 1 - Pari- Mutuel Wagering Hand1 e,

Commercial Race Tracks, Fiscal

Years 1981 - 82 Through 1984- 85. . . . . . . . . . . . . . 3

FIGURE 2 - PCaormi- mMeurctuiael l RRaceev eTnurea cDksi, s tFriibsucatilo nY, e ar 1984- 85. . . . . . . 5

ARIZONA RACING COMMISSION

FIGURE 3 - Average Daily Handle A t Turf Paradise, Fiscal Years 1978 Through 1985 . . . . . . . . . . . . . 62

INTRODUCTION AND BACKGROUND

The Office of t h e A u d i t o r General has conducted a performance audit o f the

Department o f Racing. The a u d i t was conducted i n response t o a July 26,

1985, r e s o l u t i o n o f the J o i n t L e g i s l a t i v e Oversight Commi t t e e . This

performance a u d i t was conducted as p a r t o f the Sunset Review set f o r t h i n

Arizona Revised Statutes ( A. R. S.) SS41- 2351 through 41- 2379.

Statutorv Authori t v And Duties

The Legislature created the Arizona Department o f Racing i n 1982 ( HB247U

Chapter 310) " t o strengthen the regulation o f the r a c i n g i n d u s t r y i n

Arizona for the protection o f the public peace, safety and

welfare. . . ." The Department i s administered by a D i r e c t o r appointed by

the Governor. Before the Department was es tab1 i shed, racing a c t i v i t i e s

were regulated s o l e l y by the Arizona Racing Commission, through an

Executive Secretary. Creation o f the Department o f Racing eliminated the

Commission's responsibil i ty f o r s t a f f a c t i v i t i e s and the d a i l y operation

of the agency. The Department was created i n an e f f o r t t o have d a i l y

operations supervised by someone with s i g n i f i c a n t business and

a d m i n i s t r a t i v e experience. The Legisl ature a1 so intended t h a t the

Commission " concentrate t h e i r e f f o r t s on s e t t i n g overall department

pol icy, a'llocation o f racing dates and 1 icensirig of permittees," as set

f o r t h i n L e g i s l a t i v e Laws, 1982, Chapter 310, S1.

The Department's r o l e i s t o license personnel irlvolved i n racing meets,

employ a hearing o f f i c e r t o hear testimony, and c o l l e c t fees from

permittees. In addition, the Department ensures the i n t e y r i t y o f

pari- mutuel wagering through t e s t i n g for ill egal substances i n race

animal s, i n v e s t i g a t i n g a1 leged crimes and conducting background

i n v e s t i g a t i o n s of 1 icense appl icants. ( Table 1 summarizes a c t i v i t i e s f o r

f i s c a l year 1982- 83 through 1585- 86. )

TABLE 1

DEPARTMENT ACTIVITY

FISCAL YEARS 1982 - 83 THROUGH 1985- 86

Actual Actual Actual Estimated

1982 - 83 1 983 - 84 1 984 - 85 1985 - 86

Race Days 796 82 2 91 2 1,029

Races 10,924 12,036 13,142 17,169

Sampl es Tested 11,855 11,616 13,656 17,150

Hearings 8 1 100 163 163

Licenses Issued 9,409 5,766 4,069 16,000

( 1 ) A1 1 previous mu1 ti- year 1 icenses will be renewed in 1985- 86.

Source: Compiled by Auditor General s t a f f from Department of Racing fiscal

year 1986- 87 Budget Request and 1984- 85 Annual Report.

Track Operations

Currently, the Department regul ates two commercial horse race facil i t i e s

and four greyhound parks. The two horse race f a c i l i t i e s are Turf Paradise

in Phoenix and Prescott Downs i n Prescott. Apache Greyhound Park i n

Apache Junction, Phoenix Greyhound, Tucson Greyhound and Yuma Greyhound

Parks are the four commercial greyhound tracks. In addition, 12 counties

hold horse races a few days each year.

W i t h i n the past few years the number of races held i n Arizona has

increased. The increase is due to growth i n the number of greyhound

races, which increased from 7,356 in fiscal year 1981- 82 to 11,050 in

1984- 85. Ttre number of horse races has decl ined from 2,536 in fiscal year

1981- 82 to 2,092 i n fiscal year 1984- 85. Wagering trends also reflect

this pattern. According to Department records, of the $ 230,738,814

wagered i n Arizona in fiscal year 1985, $ 81,11 G, 89b was bet on horses and

$ 149,627,918 on greyhounds. In fiscal year 1981- 82 money wagered on

horses comprised 41 percent of the total bet on pari- nrutuel wagering. In

fiscal year 1984- 85 that total was down to 35 percent, while greyhourid

racing received 65 percent of every wagering do1 lar. Figure 1 shows the

pari- mutuel wagering handle for horses and greyhounds for the l a s t four

fiscal years.

FIGURE 1

PARI- MUTUEL WAGERING HANDLE

COPIMERCIAL RACE TRACKS

FISCAL YEARS 1981 - 82 THROUGH 1984- 85

Source: Compiled by Auditor General s t a f f from Department of Racing Annual

Reports, fiscal years 1982- 83 through 1984- 85.

A

-- -- 140-

120 -

State Revenue From Racing

-

Greyhounds

Arizona receives a specified proportion of monies wagered on horse and

greyhound races. For greyhound tracks i n counties w i t h populations of

700,000 or more, the State receives 7.5 percent of the total money bet.

For dog races run i n counties w i t h fewer than 700,000 people, the State

receives 5.5 percent for the f i r s t $ 100,000 bet per day and 7.5 percent of

amounts over $ 100,000 per day. For horse races, the State's share also

fluctuates. Under current statutes in effect until August 13, 1986, the

State receives 3 percent of the f i r s t $ 100,000 wagered daily and 5 percent

of any amount over $ 100,000 for tracks with an average daily handle

exceeding $ 200,000. With the passage of HE2379 in 1986, from August 13,

1986, until July 1, 1987, for race f a c i l i t i e s that handle over $ 200,000 a

day, Arizona receives 3 percent of the f i r s t $ 1 million and 5 percent of

anything over $ 1 million. After July 1 , 1987, the State will receive 2

percent of the f i r s t $ 1 million wagered daily and 5 percent of wagers over

$ 1 million. For race meets that handle $ 200,000 or less daily, the State

receives 2 percent of the f i r s t $ 200,000 and 5 percent of anything over

$ 200,000.

In 1984- 85 Arizona received $ 8,803,373 i n State revenues from greyhound

race tracks and $ 2,704,308 from horse racing f a c i l i t i e s . The total amount

of revenue collected by the Department of Racing was $ 11,507,681 in

1984- 85 ( Table 2).

TABLE 2

STATE REVENUES FROM PARI- MUTUEL WAGERING

FISCAL YEARS 1981 - 82 THROUGH 1984- 85 ( 1

Fiscal Year ( 1) Greyhounds Horses Total

Includes revenues earned i n the current fiscal year and received in

the next fiscal year.

( 2 ) Excludes charity days for fiscal year 1981- 82.

Source: Prepared by Auditor General s t a f f from Department of Racing Annual

Reports, fiscal years 1982- 83 through 1584- 85.

State revenues from racing are distributed to a variety of funds

( Figure 2 ) . Two- thirds of the revenue goes to the General Fund. The

remaining revenues are a? l o c ~ t e dt o county f a i r racing, breeders' awards,

County Fair Livestock Funds arid other purposes.

FIGURE 2

DISTRIBUTION OF FISCAL YEAR 1984- 85

PARI- MUTUEL REVENUE FROM

COMMERCIAL RACE TRACKS

Revenue Distribution

County Fair/ Bmeder Awards ( 1 4.0s)

$ 1,150,768

$ 1,611,075

Collsaum/ Expo Fund ( 5. M;)

Co. Falr Admln. ( 0.5s)

$ 57,539 Co. Folr Raclng ( 3.0%)

Source: Prepared by Auditor General s t a f f from Arizona Department of

Racing Annual Report, fiscal year 1984- 85.

Staffinq and Budqet

The Racing Department is funded through General Fund and County Fair

Racing Fund appropriations. For fiscal year 1985- 86 the Department is

authorized 65 f u l l - time equivalent ( FTE) positions. The actual number of

FTEs in fiscal years 1983- 84 and 1984- 85 was 61.2. The s t a f f i s separated

into three sections: commercial racing, county f a i r racing and county f a i r

administration. For fiscal year 1985- 86 there are 58.1 FTEs in commercial

racing and 6.9 i n county f a i r racing. In addition, the Department has 2.0

nonappropriated positions for county f a i r administration. Staffing has

increased since f i s c a l year 1982- 83, due in part to the increased number

of racing dates. In fiscal year 1982- 83 there were 796 commercial race

dates. That has increased to an estimated 1,029 in 1985- 86. In fiscal

year 1984- 85, $ 327,626 was spent on outside s e r v i c e s , a s shown in Table

3. $ 288,200 of the outside services expenditures was for lab testing.

TABLE 3

FTE Positions

Personal Services

Empl oyee Re1 ated

Professional and

Outside Services

Travel

State

Out- of- State

Other Operating

Equipment

DEPARTMENT OF RACING

EXPENDITURE AND BUDGET DETAIL

FISCAL YEAR 1982- 83

THROUGH FISCAL YEAR 1985- 86

( UNAUDITED )

Actual

Fiscal Year

1 982 - 83

Actual

Fiscal Year

1 983 - 84

Actual

Fiscal Year

1984- 85

Estimated

Fiscal Year

1 985 - 86

TOTAL $ 1,513,414 $ 1,624,733 $ 1,790,608 $ 2.643,800

( 1 ) Includes two nonappropriated p o s i t i o n s f o r County F a i r Racing.

Source: Prepared by Auditor General s t a f f from Arizona Department o f

Racing Annual Report, f i s c a l year 1984- 85.

This i s the t h i r d performance a u d i t o f racing r e g u l a t i o n i n Arizona i n the

past f i v e years. Since i t s c r e a t i o n i n 1982 the Department o f Racing tias

impl emented many operational changes based on recommendations froti]

previous Auditor General reports ( Reports 81 - 5 and 82- 2). Proceciures t c

sel ect t h e c o n t r a c t drug t e s t i n g 1 aboratory have been impl emented. The

1 icensing and i n v e s t i g a t i o n process has been irriproved. Several track

operations probl ems i n v o l ving scal es and weighing jockeys have been

corrected. I n addition, the Departfilent has corrected several accourltir~ g

re1 ated probl ems.

Audit Scow and Pur~ ose

The a u d i t r e p o r t focuses on the Department's a b i l i t y t o perform i t s

functions e f f e c t i v e l y and e f f i c i e n t l y . The r e p o r t presents f i n d i n g s ana

recommendations i n two areas.

e The a b i l i t y of the Department to effectively identify prohibited

substances i n race animal s' systems,

e The need for EDP audits of racing f a c i l i t y t o t a l i s a t o r computer

systems.

We devel oped other pertinent i nformati on concerning the costs of county

f a i r racing, pari- mutuel racing broadcasts and information dissemination,

and testing jockeys for drug usage. Due to tine constraints we were

unable to address a l l potential issues identified during our audit. The

section Areas For Further Audit Work describes these potential issues.

The Auditor General and staff express their appreciation to the Director

and s t a f f of the Department of Racing for their cooperation and assistance

during the audit.

SUNSET FACTORS

In accordance with Arizona Revised Statutes ( A. R. S. ) $ 41 - 2354, the

Legislature should consider the fol 1 owing 12 factors i n determining

whether the Arizona Department of Racing ( ADOR) should be continued or

terminated.

1. The objective and purpose of establishing the Department

On September 30, 1982, the Legislature established the Department of

Racing w i t h the intent to " strengthen the regulation of the racing

industry i n Arizona for the protection of the public peace, safety and

welfare. . . ." On that date, all administrative matters before the

Arizona Racing Commission were transferred to the newly establ ished

Department. The transfer gave the Department the authority to enforce

the statutes and the rules and regulations that aadress racing and

pari- mutuel wagering. To t h i s end, the Department licenses, regulates

and supervises a l l racing meets held in the State. In addition, tile

Department col 1 ects the S t a t e ' s share of the pari- mutuel hand1 e frorn

racing f a c i l i t i e s and a1 locates the proceeds to various State funds.

2. The effectiveness w i t h which the Department has met i t s objective and

purpose and the efficiency w i t h wtrich i t has operated

The Department has general ly met its prescribed objective and purpose.

However, some problems remain that adversely impact both the

Departifient's effectiveness and efficiency.

Drug Testing - Current audit work has uncovered problems with the

testing procedures and the 1 aboratory Is qua1 i ty assurance

program. According to a Department spokesperson, urine samples

from all winning horses and approximately 80 percent of winning

greyhounds are tested for foreign substances. However:

e The Department does not conduct enough sampling of

nonwinning horses or greyhounds,

e The Department does not ensure adequate testing for the

presence of exotic drugs i n equine samples, and

The Department's evaluation of the contract testing

laboratory i s limited ( see Finding I, page 15).

Electronic Data Processing Audits - Changes are needed to allo\- J

the Department to adequately monitor the wagering activity a t the

various race track f a c i l i t i e s . The Department has been unable to

conduct Electronic Data Processing ( EDP) audits of the

computerized total isator systems a t racing facil i ties. EIjP

auditing is necessary: 1 ) to help ensure that the odds and

payoffs are correctly calculated, and 2 ) to verify that the

handle amounts reported by the permittees are accurate ( see

Finding I I , page 29).

3. The extent to which the De~ artment has o~ erated within the Public

interest

General ly, the Department has operated b~ tih in the pub1 ic interest by

upholding the integrity of racing and pari- mutuel wagering.

Regulatory a c t i v i t i e s provide owners, breeders and the betting public

w i t h f a i r and competitive racing conditions. However, the Department

could further protect the public and the racing industry by

strengthening i t s regulatory authority in the areas of animal drug

testing and EDP auditing.

4. The extent to which rules and regulations prorriul5ated by the

Department are consistent with the 1 egis1 a tive mandate

While the Department has statutory authority to promul sate rules and

regul ations, none have been i n i tiated. A1 1 rul es and regul ations

concerning racing and pari- mutuel wagering have been promul~ ateci ~ y

the Arizona Racing Commission ( see Arizona Racing Commission audit,

page 53).

5. The extent to which the Departn~ ent has encouraged i n p u t from the

p u b l i c before promulgating i t s r u l e s and r e g u l a t i o n s and t h e e x t e n t t o

which it has informed the p u b l i c as t o i t s actions and t h e i r expected

i m ~ atc on the ~ u bi cl

This f a c t o r i s not applicable since the Department has not promulgated

r u l e s and regul ations.

6. The extent t o which the Department has been able t o i n v e s t i g a t e and

resolve complaints t h a t are w i t h i n i t s j u r i s d i c t i o n

The Department i n v e s t i g a t e s and resolves v i o l a t i o n s o f the various

r u l e s and regul ations p e r t a i n i n g t o racing and pari- mutuel wagering.

According t o the Department's 1984- 85 Annual Report, the Department

resolved 93 percent o f the cases it opened f o r i n v e s t i g a t i o n i n t h a t

year. V i 01 ations ranged from fa1 s i f i e d appl i c a t i o n s t o possession o f

drugs and other c r i m i n a l a c t i v i t i e s . Moreover, the Boards o f Stewards

a t the v a r i o u s r a c e tracks issued 559 r u l i n g s f o r v i o l a t i o n s o f horse

or greyhound r u l es and regul a t i o n s . I n addition, the Department

employs a f u l l - t i m e Hearing Officer. During the 1984- 85 f i s c a l year,

the Hearing O f f i c e r h e l d 240 hearings. Any person adversely a f f e c t e d

by a decision of a steward o r any other Department employee may

request a hearing w i t h t h e Department's Hearing O f f i c e r .

Statutes a1 so provide the Department w i t h adequate a u t h o r i t y t o

i n v e s t i g a t e and resolve complaints brought f o r t h by the pub1 i c .

However, the Department does not keep a r e c o r d o f t h e n a t u r e or the

number o f complaints it receives from the public.

7. The extent t o which the Attorney General or any o t h e r a p p l i c a b l e

agency o f State government has the a u t h o r i t y t o prosecute actions

under enabl i ng 1 e g i s l a t i o n

To date, the Department has not experienced any u i f f i c u l t i e s w i t h

prosecuting actions under i t s enabl ing 1 e g i s l ation. However, the

Department Director and the ~ epartmen'ts Assistant Attorney General

r e p r e s e n t a t i v e s t a t e d t h a t some o f i t s enforcement statutes may need

c l a r i f i c a t i o n .

8. The extent t o which the Department has addressed d e f i c i e n c i e s i n the

enabling statutes which prevent it from f u l f i l l i n g i t s s t a t u t o r y

mandate

Since i t s inception i n 1982, the Department has proposed no

l e g i s l a t i o n . However, ADOR s t a f f stated t h a t t h e c u r r e n t s t a t u t e s are

n o t presented i n an o r d e r l y manner. To date, the Department has not

addressed t h i s issue.

9. The extent t o which changes are necessary i n the laws o f the

Department t o adequately comply w i t h the factors l i s t e d i n the sunset

- 1a w

Based on our a u d i t work, we recommend t h a t the Legislature consider

the f o l l o w i n g change t o the Department o f Racing's statutes.

0 C l a r i f y A. R. S. § 5- 107.03. A to ensure t h a t the Department has

f u l l access t o information needed t o conduct EDP audits.

10. The extent t o which termination o f the Department would s i g n i f i c a n t l y

harm the p u b l i c heal t h y safety and we1 fare

Terminating the Department o f Kacing would have a deleterious e f f e c t

on ttle pub1 i c heal t h y safety and we1 fare. A racing regulatory body i s

needed t o uphold the i n t e g r i t y o f racing meets and pari- mutuel

wagering. Unregulated racing and pari- mutuel wagering could increase

the p o s s i b i l i t y of:

0 physical harm t o r a c i n g p a r t i c i p a n t s ,

0 r a c e - f i x i n g ,

i n c o r r e c t payoffs t o b e t t o r s , and

0 l o s s o f State revenues due t o a decrease i n wagering or the

amount o f the pari- mutuel nand1 e remitted t o the State.

11. The extent to which the l e v e l o f regulation exercised by the

Department i s appropriate and whether more or l e s s s t r i n g e n t l e v e l s o f

regul a t i o n woul d be appropriate

The current l e v e l o f regulation exercised by the Department should be

increased. The Department should strengthen i t s regul atory presence

i n the areas of animal drug t e s t i n g and EGP auditing. Moreover,

reducing the regulatory scope o f the Department could r e s u l t i n harm

t o the public and p a r t i c i p a n t s i n racing events. A l l racing and

wagering a c t i v i t i e s must be supervised t o ensure t h a t they are

condacted properly and b e n e f i t t h e p u b l i c , racing p a r t i c i p a n t s and the

State i n general.

12. The extent t o which the Department has used p r i v a t e contractors i n the

performance o f i t s duties and how e f f e c t i v e use o f p r i v a t e contractors

coul d be accompl i shed

According t o the Department, p r i v a t e contractors are used t o the

extent t h a t such use i s p r a c t i c a l and cost e f f e c t i v e . P r i v a t e

contractors are used i n 1 aboratory t e s t i n g services f o r the detection

o f foreign substances i n racing animals. I n a d d i t i o n , t h e Department

uses the services o f a p r i v a t e f i r m t h a t provides a data base o f a l l

racing r e l a t e d r u l i n g s from various j u r i s d i c t i o n s as a p a r t o f the

i n v e s t i g a t i o n function. Me d i d not i d e n t i f y any other areas where the

Department should be using p r i v a t e contractors i n the performance o f

i t s duties.

FINDING I

THE ARIZONA DEPARTMENT OF RACING NEEDS TO STRENGTHEN AND IMPROVE ITS DRUG

TESTING PROGRAK

The Arizona Department of Racing ( ADOR) should strengthen and improve i t s

drug surveillance program t o prevent p o t e n t i a l abuses i n the racing

industry. The l e v e l o f sampl ing conducted by the Department appears too

low t o provide e f f e c t i v e deterrence. I n addition, the Department has

f a i l e d t o ensure adequate analyses by the contract t e s t i n g laboratory.

Moreover, ADOR's program o f eval u a t i n g t h e c o n t r a c t l a b o r a t o r y ' s t e s t i n g

performance i s weak.

Arizona Revised Statutes ( A. R. S. ) $ 5- 1 05 authorizes the Cepartnent t o

employ q u a l i f i e d personnel or contract w i t h p r i v a t e chemical l a b o r a t o r i e s

f o r analyses o f saliva, urine and blood samples o f horses and dogs, t o

ensure t h a t p r o h i b i t e d substances have not been used t o a1 t e r an animal ' s

performance. Presently, the Department contracts w i t h one laboratory f o r

most of i t s sample analyses. The Department r e l i e s on t h e e x p e r t i s e and

a n a l y t i c a l accuracy o f the c o n t r a c t l a b o r a t o r y t o detect the presence of

drugs i n racing animals i n Arizona. I n f i s c a l year 1986, it i s estimated

by the Department t h a t more than $ 332,000 w i l l be expended f o r the

analyses o f more than 17,150 samples from racing animals, most of which

are urine samples. During f i s c a l year 1985, approximately $ 288,200 \/ as

expended f o r analyses o f more than 13,550 horse and greyhound samples.

Department Does Not

Conduct Enough Sampling

ADOR does not conduct s u f f i c i e n t sampling of horses and greyhounds to

adequately ensure t h a t p r o h i b i t e d substances are n o t used to a l t e r racing

performance. The Department needs to increase the number of sanples

c u r r e n t l y taken t o provide a greater deterrence t o drug usage. However,

a d d i t i o n a l funding w i l l be necessary i f more extensive sampling i s

conducted.

Department needs to take more samples to better deter drug usage - The

Department needs to increase the numbers of samples taken to provide a

greater deterrence to drug usage. The number of horse and greyhound

samples currently taken by the Department is extremely low. Despite its

broad statutory authority to sample horses and dogs, the Department

samples an average of approximately one horse per race and one dog per

race. In comparison, the majority of racing states contacted during our

review conduct more extensive sampling. Of the major horse racing states

contacted,* seven sampl e, a t a minimum: winners, winners of exotic

wagers,** beaten favorites and any horse the judges feel should be

tested. Nine of the ten states t e s t a~ proximately two or more horses per

race. For example, California requires judges t o s e l e c t seven horses a t

random every racing day for testing, in addition to the winners. Four

greyhound racing states surveyed*** routinely sample a minimum of two dogs

per race, with a special focus on winners of exotic wagering races.

Connecticut, for example, generally samples and tests all eight dogs

participating i n a race.

Increased sampling provides a greater deterrence to drug usage. Testing

more entries raced than j u s t the winning horse or greyhound broadens the

scope of drug surveillance and provides a check on winners in exotic

wagers. A majori ty of states contacted concl uded that increased sarrrpl ing

i s cost- effective and has provided greater deterrence to drug usage. For

example, three states reported that the increased sampling has actually

resul ted i n proportionately fewer samples containing i l legal drugs. In

addition, a study conducted by the Kentucky Equine Drug Research and

Testing Program and pub1 ished in November 153.5 revier~ ed resul t s from

* The ten states are: Cal i fornia, Florida, Kentucky, I1 1 inois,

Louisiana, Maryland, New Jersey, New Mexico, New York and Ohio.

** Winners of exotic wagers should be tested for two reasons. First,

exotic wagering payoffs often represent large sums of money. Second,

a horse or dog need not finish f i r s t to be an important factor in an

exotic wager. For example, to win a quinella pool, wagerers are

required to select the f i r s t two finishers. Payoffs remain the same

regardless of which animal wins and which places second.

*** These states are: Connecticut, Fl ori day Massachusetts and Nerd

Hampshire.

several countries and found t h a t increased salnpl ing i n i t i a l l y resul ted i n

a greater percentage o f p o s i t i v e samples but a f t e r a period o f weeks the

incidents o f prohibited substances were sharply reduced.

Additional funding necessary - Current funding 1 evel s are i n s u f f i c i e n t t o

a1 1 ow the t e s t i n g o f a d d i t i o n a l sampl es. ADOR wi 11 requi r e a d d i t i o n a l

funding i f more extensive sampl ing i s t o be conducted.

The Department requested funding f o r 1.15 equine samples and 1.05

greyhound samples per race i n i t s f i s c a l year 1986- 87 budget request.

This l e v e l o f funding appears t o be less than i s necessary t o adequately

sample racing animals based on the sampl ing done i n o t h e r r a c i n g s t a t e s

contacted.

Additional fundi ng wi 11 be necessary to conduct more extensive sampl i ng.

Based on our survey o f other racing states, the Department should, a t a

minimum, sample an average o f two horses and two greyhounds per race.

However, the Department could decide to conduct additional sampl ing per

race i f f u r t h e r analysis indicated t h a t increased sampling would be

b e n e f i c i a l . Based on budget p r o j e c t i o n s for f i s c a l year 1987, t e s t i n g two

equine and two greyhound samples per race would increase the prcjected

t e s t i n g budget from approximately $ 350,100* t o $ 657,500, an increase o f

approximately $ 300,000 per f i s c a l year.

An increased sampl ing 1 evel would require s u f f i c i e n t funding t o sanipl e

more than j u s t one animal per race. Increased sampl ing would enhance ' the

enforcement c a p a b i l i t i e s cf the Department by providing a greater

deterrence t o drug usage. Additional funding would also give tile

Department s u f f i c i e n t f l e x i b i l i t y to t e s t the various con~ binations o f

animals i n each race t h a t would most e f f e c t i v e l y discourage i l l e g a l drug

use.

* This f i g u r e represents costs o f sampl irig based on current t e s t i n g

procedures f o r horse and dog tracks c u r r e n t l y under operation.

17

Department Does Not Ensure

Adequate Laboratory Analysis

ADOR has not acted t o ensure adequate drug t e s t i n g analyses. The contract

1 aboratory should conduct additional t e s t i n g procedures f o r equine

sanpl es, as recommended by N. A. S. R. C. Research and Reference Centers. The

Department has n o t c l e a r l y specified minimum t e s t i n g procedures i n i t s

Chemical Analysis Contract with the t e s t i n g 1 aboratory. I n addition, the

Department's program t o detect exotic drugs i n horses i s l i m i t e d .

Additional funding may be required to perform adequate drug t e s t i n g

analyses.

Laboratory shoul d perform additional equine t e s t i n g procedures - The

t e s t i n g laboratory should conduct a s u f f i c i e n t number o f t e s t i n g

procedures f o r horses. The contract 1 aboratory conducts fewer screening

t e s t s on equine urine samples than recommended by N. A. S. R. C. Research and

Reference Centers. I n a d d i t i o n , the 1 aboratory 1 acks adequate

documentation o f procedures performed. Not conducting recommended

procedures could r e s u l t i n the f a i l u r e t o detect some prohibited drugs.

The contract laboratory performs fewer i n i t i a l screening procedures f o r

equine sampl es than recommended by the National Association o f State

Racing Commissioners ( N. A. S. R. C.) Research and Reference ( RER) Centers.

According t o the con t r a c t 1 aboratory ' s manager, only four Ttli n- Layer

Chromatography ( TLC )* t e s t s are r o u t i n e l y conducted on equine samples as

i n i t i a l screening tests. However, the N. A. S. R. C. Uniform Drug Testing

procedures recommend additional TLC tests. The N. A. S. R. C. Research and

Reference Center** a t Ohio State University ( 0%) reccr; imenas a nii~ iri~ unoif

* Thin- Layer Chromatography i s so named because the experinent i s

performed on a t h i n l a y e r o f s i l i c a gel or other adsorbent coated on a

glass or metal plate.

** These Centers serve, i n part, as equine t e s t i n g research i n s t i t u t i o n s

t h a t develop and evaluate a n a l y t i c a l drug t e s t i n g procedures. As a

r e s u l t , the Ohio State and Cornell Research and Reference Centers

establish the N. A. S. R. C. Uniform Drug Testing procedures.

s i x TLC tests, while the Cornel 1 University Research and Reference Center*

recommends a minimum o f nine TLC tests. The types o f t e s t s conducted by

the contract laboratory and the N. A. S. R. C. Research and Reference Centers

are shown i n Table 4.

TABLE 4

ROUTINE TLC SCREENING TESTS CONDUCTED ON EQUINE URINE SAMPLES

CONTRACT LABCRATGRY OHIO STATE CORNELL

1) Base Urine 1) Base Urine 1 ) Base Urine

2) Base Hydrolysis- 2) Base Hydrolysis- 2) Base Hydrolysis

Acid Extraction Acid Extraction 3) Enzyme Hydrolysis

3) Enzyme Hydrolysis 3) Enzyme Hydrolysis 4) Neutral Urine

4) Neutral Urine 4) Neutral Urine 5) Ion Pair

5) Ion P a i r 6) Acid Hydrolysis

6) Acid Urine 7) Clenbuterol Bore

8) D i u r e t i c Urine

9) Steroid Urine

Source: Compi 1 ed by Auditor General s t a f f from contract 1 aboratory

procedures manual , Ohio State University equine t e s t i rlg procedures

and Cornell University equine t e s t i n g procedures.

According t o the c o n t r a c t l a b o r a t o r y ' s manager, the four TLG t e s t s

r o u t i n e l y conducted by t h e l a b o r a t o r y were recommended by the d i r e c t o r o f

the OSU R& R Center as the minimum required t e s t i n g procedures. However,

the d i r e c t o r o f the OSU R& R Center stated i n w r i t i n g t o Auditor General

s t a f f the OSU recommends a minimum o f s i x TLC tests.

Because the c o n t r a c t l a b o r a t o r y ' s documentation o f d a i l y t e s t i n g a c t i v i t y

i s incrjrnplete, it i s d i f f i c u l t t o determine ~ h e t h e r a l l four TLC t e s t s f o r

equine samples are completed daily. The 1 aboratory ' s method of recordi ny

d a i l y t e s t i n g makes it d i f f i c u l t f o r a layperson t o determine what t e s t s

* The Equine Drug Testing and Research Progranl a t Cornell University has

been a l e a d i n g i n s t i t u t i o n i n the f i e l d of equine drug research for

many years and has pub1 i shed numerous a r t i c l e s addressing equine drug

appl ications. In a d d i t i o n , t h e M. A. S. R. C. Uniform Drug Testing and

Qua1 i t y Assurance Program was patterned a f t e r a program developed a t

Cornel 1 University.

are actually conducted. However, statements by laboratory personnel

suggest that i n the past, only three TLC t e s t s were conducted on days when

a large quantity of samples were present for testing.

Fai 1 ure to conduct testing procedures recommended by the Research and

Reference Centers for equine sampl es reduces the potential effectiveness

of the drug surveillance program. Directors of both Research and

Reference Centers indicated that fewer t e s t s could result i n some

prohibited drugs passing undetected. The director of the Cornel 1 Research

and Reference Center also indicated that Arizona's omission of one

particular TLC t e s t makes it impossible for the laboratory to detect the

presence of a certain type of illegal substance i n equine samples.*

Department has not clearly defined minimum testing procedures - The

Department has not clearly s t i pul ated minimum testing requirements for

equine and greyhound samples to ensure adequate and uniform testing. The

existing contract clause defining minimum analysis procedures for horses

i s vague and does not ensure that the laboratory conducts the minimum

number of t e s t s recommended by the Department's Research and Reference

Laboratory. In addition, ADOR has not stipulated minimunt testing

procedures for greyhounds i n the chemical analysis contract, a1 though

greyhounds account for approxin~ ately 83 percent of the total samples

tested by the contract 1 aboratory.

Furthermore, the N. A. S. R. C. Uniform Drug Testing procedures f ~ liror ses are

not rye1 1 defined. As mentioned previously, N. A. S. R. C. Research and

Reference Centers disagree on the r e q ~ i r e d nunher of c~ inimuc~ testiny

procedures. Because no actual consensus exists within N. A. S. R. C. as to

what the Uniform Drug Testing procedures are, the Department needs to

develop contract language to ensure that the laboratory conducts the

m i n i m u m number of t e s t s recommended by the ~ epartment's N. A. S. 1i. C.

Research and Reference Laboratory.

* During the course of the audit we informed the Department of the type

of substances involved and the t e s t needed to detect them.

Limited t e s t i n g f o r e x o t i c drugs - Special t e s t i n g procedures establ ished

by the Department t o detect the p o t e n t i a l use o f exotic drugs* i n horses

are l i m i t e d . Testing o f samples to detect exotic drugs i s not

s u f f i c i e n t l y frequent or random when compared w i t h other racing states.

The Department's e x i s t i n g procedures f o r low dose drugs do not appear t o

be s u f f i c i e n t l y frequent or random, and therefore, may not adequately

i d e n t i f y o r minimize the usage o f such drugs. It was not u n t i l December

1985 t h a t t h e D i r e c t o r o f ADOR exercised a provision o f the chemical

analysis contract and i n s t r u c t e d the contract t e s t i n g laboratory to begin

special t e s t i n g under the d i r e c t i o n o f the Department Veterinarian. A

t e s t i n g schedule was not formally developed and was l e f t t o the d i s c r e t i o n

o f the Department Veterinarian and the manager o f the t e s t i n g laboratory.

According t o t h e l a b o r a t o r y manager, the decision had been reached t o

conduct the special t e s t s on horse racing days when a large stakes race i s

run and on the same day each week when the laboratory does not receive

many horse and greyhound samples f o r testing.

Other r a c i n g s t a t e s conduct special t e s t i n g on e i t h e r a more frequent or

more random basis. For example, C a l i f o r n i a , New Jersey and Kentucky

conduct the special t e s t i n g o f a l l samples as a p a r t o f t h e i r d a i l y

i n i t i a l screening procedures. Evidence from other racing states appears

t o i n d i c a t e t h a t , a t minimum, random special t e s t i n g f o r exotic drugs

should be conducted. However, because o f the technique necessary t o

conduct the special t e s t i n g and the associated costs, the t e s t s are Lest

performed on a l l the horses for a racing day. Therefore, the randomness

involves which days would be tested and how often the t e s t i n g krould be

conducted.

* According t o experts i n the drug t e s t i n g f i e l d , some performance

a l t e r i n g drugs used i n the horse r a c i n g i n d u s t r y r e q u i r e such a low

dose t o achieve desired e f f e c t s t h a t e x i s t i n g i n i t i a l screeniny

procedures cannot detect them. These low dose drugs are commonly

referred t o as exotic drugs, and include such drugs as etorphine or

elephant j u i c e , and fetanyl .

Additional funding may be needed - Additional funding may be needed t o

perform adequate t e s t i n g analyses. Currently, the Department pays $ 1 8.50

f o r t h e f o u r minimum screening t e s t s per sanipl e. Increased screening

t e s t s per sample could r a i s e the price. For example, Ohio State charges

$ 20 per sample using s i x t e s t s t o process each sample. I n addition,

Cornell charges $ 20 per sample u s i n g n i n e t e s t s t o process each sample.

Additional funding may be required f o r increased t e s t i n g f o r exotic

drugs. Currently, the t e s t i n g laboratory charges $ 18.50 plus $ 15 t o $ 25

per sample f o r special t e s t s f o r exotic drugs. The Department needs t o

determine the frequency o f special t e s t s and then c a l c u l a t e the amount o f

a d d i t i o n a l funding needed. New York S t a t e ' s laboratory a t Cornel 1, for

example, performs special t e s t s f o r e x o t i c drugs on 15 t o 20 percent o f

a l l samples tested.

Procedures For Evaluating

Laboratory Performance I n e f f e c t i v e

ADOR ' s procedures f o r eval u a t i ng the contract t e s t i n g 1 aboratory ' s

performance are not e f f e c t i v e . The Department's c u r r e n t methods o f using

unknown and spl it sampl es t o eval uate the contract l a b o r a t o r y ' s equine

t e s t i n g perforinance are not real i s t i c t e s t s o f r o u t i n e procedures. I11

addition, ADOR's e f f o r t s t o review the procedures o f the contract

laboratory are not adequate.

The Department p r i n ~ a r i l ye valuates the c o n t r a c t 1a boratory through unknor~ n

and s p l i t samples. However, the Department does not use outside reviewers

t o evaluate the adequacy o f laboratory t e s t i n g procedures.

Unknown and s p l i t sample procedures not effective - The Department's

method o f e v a l u a t i n g t h e l a b o r a t o r y ' s performance through unknown and

spl it samples does not accurately sinlul a t e r o u t i n e t e s t i n g requirements.

Procedures f o r hand1 ing these samples a1 1 ow the contract 1 aboratory t o

know when i t s work i s being tested. Changes i n t h e a d m i n i s t r a t i o n o f

unknown and s p l i t samples c o u l d r e s o l v e t h e weaknesses i n these programs.

The contract laboratory i s aware when i t s performance i s being evaluated

through the N. A. S. R. C. QA program. This occurs because unknown samples

from the N. A. S. R. C. QA program* are sent d i r e c t l y t o tne contract

laboratory. In addition t o being aware t h a t an evaluation i s taking

place, the contract laboratory i s given a l i s t o f possible drugs, one of

which w i l l be the unknown i n the QA sample. For example, f o r the QA

unknown administered i n September 1985, the Ohio R8tR Center provided the

Arizona c o n t r a c t l a b o r a t o r y a l i s t o f e i g h t possible drugs, one o f which

was present i n the unknown QA sample.

The c o n t r a c t l a b o r a t o r y a l s o knows when the Department s p l i t s samples to

evaluate i t s performance. When routine samples from Arizona t r a c k s a r e

s p l i t between the contract laboratory and OSU, it i s the contract

laboratory t h a t arranges f o r t h e shipment o f the s p l i t samples.** This

occurs because the laboratory, not the State, contracts with OSU. In

a d d i t i o n , t h e contract laboratory rather than the Department i s n o t i f i e d

by OSU o f the t e s t i n g r e s u l t s on the s p l i t samples. Thus, the contract

laboratory could devote greater a n a l y t i c a l e f f o r t t o the t e s t samples than

it does f o r r o u t i n e samples.

* The N. A. S. R. C. QA program was established i n 1582 rvitti the prii:~ ary

purpose o f ensuring the competency o f the p a r t i c i p a t i n g l a b o r a t o r ~ e s .

The program functions through two Research and Reference Centers, one

located a t Ohio State University and one a t Cornell University. ? vlost

s t a t e racing regulatory bodies contract w i t h one o f tne kesearcrl and

Reference Centers, which i n t u r n administers the QA program t o the

s t a t e ' s equine t e s t i n g laboratory. According t o an OSU KclR Center

o f f i c i a l , the N. A. S. R. C. QA program works as follows. Each Resedrcn

and Reference Center maintains a quantity o f race horses. Selected

drugs are administered t o these horses and then blood and u r i n e

samples are drawn from the horses. These samples are then a r i d i j i 2 d it,

the R& R Center and the r e s u l t s documented. QA samples are then sent

t o the p a r t i c i p a t i n g l a b o r a t o r i e s as e i t h e r a know or unkfiorin

sample. Approximately once every two weeks known QA samples are sent

t o the p a r t i c i p a t i n g l a b o r a t o r i e s along with the RBR Center's

documentation o f the sample analysis. Once every 16 weeks an unknob~ n

sample and three blank sanlpl es ( u r i n e samples w i t h o u t f o r e i g n

substances) are sent t o p a r t i c i p a t i n g labs. The 1 aboratories dre

evaluated on t h e i r procedures t o t e s t the known QA samples and t h e i r

a b i l i t y t o i d e n t i f y the drug present i n the unknown QA samples. ** ADOR has establ i sned a practice o f spl i t t i n g equine samples from 1 drge

stakes races. According t o the Gepdrtment Veterinarian, a major

reason f o r spl i t t i n g the samples i s t o evaluate the performance o f the

contract laboratory. In calendar year 1985, 36 samples were s p l i t .

The s p l i t s are sent t o Ohio State University f o r testing.

Changes i n the a d i n i n i s t r a t i o n o f the unknown and s p l i t samples could

resolve t h e i r weaknesses as evaluation methods. Through the chemical

analysis c o n t r a c t , t h e Department could require the QA unknowns t o be

administered as b l i n d samples t o the c o n t r a c t laboratory.* By using a

procedure s i m i l a r t o one developed by the Michigan Racing Commission, the

Department could d i r e c t the c o n t r a c t laboratory t o have the N. A. S. R. C. R& R

Center send unknown samples d i r e c t l y t o the Department Veterinarian. The

Department Veterinarian would then submit the unknown samples t o the

t e s t i n g 1 aboratory as r o u t i n e sampl es, thereby removing the con t r a c t

l a b o r a t o r y ' s p r i o r know1 edge o f an evaluation.

By c o n t r a c t i n g w i t h e i t h e r o f the N. A. S. R. C. Research and Reference

Centers o r any other q u a l i f i e d r a c i n g l a b o r a t o r y f o r s p l i t sample

analysis, the Department coul d ship samples d i r e c t l y t o the 1 aboratory.

This would resolve the problem o f the c o n t r a c t laboratory knowing which

samples are s p l i t . Furthermore, the Department could require as p a r t o f

the c o n t r a c t t h a t the evaluating laboratory n o t i f y ADOR o f the sample

a n a l y s i s r e s u l ts.

Procedures not reviewed - The Department does not review laboratory

t e s t i n g procedures. Independent review i s an important means o f ensuring

t h a t the laboratory i s complying w i t h t e s t i n g and procedural

requi remen ts. For example, Cal i f o r n i a empl oys a prog ram of periodic

evaluations o f the contract t e s t i n g laboratory by a qua1 i f i e d i n d i v i d u a l .

According t o the executive d i r e c t o r o f the C a l i f o r n i a Racing Board, the

Racing Board has been successful i n using a pharmacologist to evaluate the

contract 1 aboratory conducting equine drug t e s t i n g i n Cal i f o r n i a. The

executl've d i r e c t o r said t h a t the i n d i v i d u a l conducting the eval uations has

a doctorate i n pharmacology and i s a member of the Racing Board's

Medication Committee. The i n d i v i d u a l a r r i v e s unannounced a t the contract

* As p a r t of the chemical a n a l y s i s c o n t r a c t , t h e Department requires the

c o n t r a c t laboratory t o p a r t i c i p a t e i n the N. A. S. R. C. QA Progranl and to

i n c u r t h e c o s t o f the program.

laboratory approximately once every three months and ensures t h a t required

t e s t i n g procedures are f o l l owed and adequate documentati on o f the t e s t i n g

i s maintained. C a l i f o r n i a receives t h i s service f o r a minimal charge of

$ 250 plus expenses f o r each evaluation.

The need f o r periodic eval u a t i ons i s especial ly important because the

Department has f a i l e d t o establish an evaluation program f o r the c o n t r a c t

1 aboratory ' s t e s t i n g o f greyhound samples. ADOR o f f i c i a l s contend t h a t

the lack o f a national greyhound t e s t i n g organization has been the cause

of t h e i r f a i l u r e t o establ i sh an ongoing performance evaluation program.

However, a program of periodic evaluations o f the c o n t r a c t l a b o r a t o r y by

qua1 i f i e d i n d i v i d u a l s could a s s i s t i n resolving t h i s problem. I n

addition, such a program could a s s i s t i n t h e e v a l u a t i o n o f the

1 aboratory ' s equine t e s t i n g performance.

CONCLUSION

The Arizona Department o f Racing should strengthen and improve i t s drug

t e s t i n g program. ADOR's l e v e l o f sampling appears too low t o deter the

use o f prohibited substances. In a d d i t i o n , t h e Department has not ensured

adequate analyses by the contract t e s t i n g laboratory nor properly

evaluated the l a b o r a t o r y ' s t e s t i n g performance. F i n a l l y , the Departnent

needs t o revise i t s t e s t i n g laboratory c o n t r a c t and request a d d i t i o n a l

funding t o imp1 ement the recommended changes.

RECOMMENDATIONS

The Arizona Department o f Racing should:

1. Sample an average o f two horses and two greyhounds per race, a t a

minimum.

2. Revise the chemical analysis contract w i t h the t e s t i n g laboratory to

require t h e a d m i n i s t r a t i o n o f QA unknown sampl es as b l i n d samples.

3. Contract directly w i t h either of the N. A. S. R. C. Research and

Reference Centers or any other qualified racing laboratory for the

analysis of spl i t equine and greyhound sampl es. This procedure

should ensure that the transportation of all s p l i t samples is

arranged by the Department.

4. Develop a program i n which the overall testing procedures of the

contract laboratory are evaluated a t least quarterly by an

individual qua1 ified in the area of drug testing or a related field.

5. Develop contract language which will ensure that the contract

laboratory conducts the minimum number of tests recommended by the

Department's N . A. S. R. C. Research and Reference Laboratory. The

contract shoul d a1 so a1 1 ow for modi fications to address new testing

developments and new drugs. In addition, the frequency of testing

for exotic drugs needs to be determined.

6. Request sufficient funding to:

Sample, a t a minimum, an average of two horses ana ttro

greyhounds per race;

Perform defined testing procedures;

Conduct sufficient special testing for exotic drugs; and

e Provide for quarterly eval uations of the con tract l aboratory .

FINDING I1

ELECTRONIC DATA PROCESSING AUDITS OF RACETRACK TOTAL I SATOR SY STEPiiS ARE

NEEDED TO HELP DETER FRAUD

The Arizona Department of Racing ( ADOR) needs to conduct electronic data

processing ( EDP) audits of racing f a c i l i t y t o t a l i s a t o r computer systems.

EDP audits are needed to help protect against fraudulent activity. The

Department has not implemented EDP auditing and the Racing Commission has

not ful ly supported Departmental efforts to imp1 ement EDP audits.

All commercial race tracks i n Arizona use a computerized t o t a l i s a t o r

system to: record the amount of money wagered, post the odds for animals

racing and provide information to the pub1 ic on the odds board.*

Previously, race f a c i l i t i e s did not use computers to determine the odds

and calculate the payoffs. Information was derived through manual

calculation and verified using the same method. Tracks contract for

t o t a l i s a t o r services from companies that provide both computer equipment

and programs. In addition, the t o t a l i s a t o r companies provide staff

on- site to operate the system.

EDP Audits Needed To

Help Protect Against Fraud

The Department needs to conduct EDP audits to help deter total isator

system fraud. A previous Auditor General report noted total isator systein

control deficiencies a t race tracks. Subsequent studies conductea for the

Department have al so identified control deficiencies. Final l y , other

states conduct EDP audits of t o t a l i s a t o r systems to verify aata generated

by the computer.

Computerized fraud can be very significant. In one state, substantial

fraudulent activity occurred re1 ating to computer total isator systems. In

1977 the Flagler Cog Track i n tliami, Florida, had several employees

embezzle pari- mutuel wagering monies. I t was estimated that $ 1 mil 1 ion

* Some components of the system a t Prescott Downs are not computerized.

was stolen from the b e t t i n g public before the crime was i d e n t i f i e d . At

l e a s t e i g h t employees were able t o move bets around t o winning t r i f e c t a

combinations. The mutuel manager along w i t h data entry, t i c k e t window and

several other employees were involved. Data entry employees entered

t i c k e t s i n t o the computer system, then a f t e r the race assigned the t i c k e t s

t o the winning greyhounds. The manipulation reduced payoffs t o l e g i t i m a t e

wagerers. The data manipulation went undetected u n t i l uncovered by an

i n v e s t i g a t o r f o r the Dade County, Florida, State A t t o r n e y ' s O f f i c e .

Previous a u d i t r e p o r t noted d e f i c i e n c i e s - I n a previous Auditor General

r e p o r t ( Report 82- 2) on the Racing Commission, p o t e n t i a l problems due t o

1 ack o f computer system control were i d e n t i fied. Audi t o r General EDP

s t a f f examined track t o t a l i s a t o r systems and controls. The analysis was

done i n 1980 and 1982, and i d e n t i f i e d a number o f system weaknesses,

i n c l u d i ng:

lack of control over software changes due to poor

documentation,

a b i l i t y t o l o g onto computers w i t h o u t e n t e r i n g a password,

0 1 ack o f software back- up, and

0 improper storage o f uncashed winning t i c k e t reports.

The r e p o r t indicated the means by which the i d e n t i f i e d control weaknesses

could increase the p o t e n t i a l f o r fraud.

Control weaknesses o r f a i l ure t o use e x i s t i n g c o n t r o l s creates

the p o t e n t i a l f o r misuse o f the t o t a l i s a t o r system. For example,

inadequate c c n t r ~ s l i d e n t i f i e d a t one track could a1 1o w

c o u n t e r f e i t i n g arid cashing o f unclaimed winning t i c k e t s . A t

another track, access t o the system which allows adjustments t o

t e l l e r balances does not r e q u i r e a password or code f o r

authorization. This could a1 1 ow concealment o f overages and

shortages by t e l l ers.

More recent reports i n d i c a t e serious weaknesses - Two reports prepared f o r

the Department subsequent t o the Auditor General ' s r e p o r t indicated t h a t

serious control weaknesses continue t o be present i n t o t a l i sator computer

systems.* A systems analysis conducted i n 1983 i a e n t i f i e d control

probl ems with t o t a l i sator computer systems. A r e p o r t compl eted i n 1984

concluded t h a t the p o t e n t i a l f o r fraudulent a c t i v i t y a t Arizona's race

t r a c k s e x i s t s .

A 1983 r e p o r t prepared f o r the Department indicated t h a t improper data

mani pul a t i o n coul d occur wi t h computerized t o t a l i sator systems. Two

Arizona race f a c i l i t i e s were examined t o determine the impact increased

computerization had on regulation o f racing f a c i l i t i e s . The r e p o r t found

t h a t the computer system a t one track could be susceptible to software

manipulation v i a telephone l i n e s . The r e p o r t recommended t h a t computer

software used by t o t a l i s a t o r companies should be examined by the State.

This examination would he1 p t o ensure the i n t e g r i t y o f the system and he1 p

t o prevent manipulation.

Another r e p o r t conducted f o r the Department i n 1984 determined t h a t there

i s a 1 i k e l ihood f o r computer fraud or data manipulation. This r e p o r t was

conducted by an ECP security consultant and i d e n t i f i e d several metnods

t h a t could be used t o defraud race f a c i l i t i e s . The most 1 i k e l y computer

fraud to occur i s i n p u t manipulation. Input manipulation occurs i f the

data i s not entered properly due t o human e r r o r or i n t e n t i o n a l

manipulation. Therefore, t h e p o t e n t i a l e x i s t s t o change or nani pul ate tnc

information being entered i n t o the computer system. For instance,

t e l etrack** wagering information i s sent t o the computerized t o t a l i s a t o r

system v i a regular telephone l i n e s . The 1984 study determined t h a t

w i t h o u t p r o t e c t i o n o f computer and phone 1 ines, i n p u t manipulation could

take place.

Other p o t e n t i a l methods t o defraud were i d e n t i f i e d , and i n c l udeu cdkiny

money without entering b e t t i n g transactions i n t o the computer and

programming t h a t woul d a1 t e r b e t t i n g transactions a f t e r they have been

* The 1983 Report analysis was perforriled by P l r . Hans Krusscian. ;! r.

Krussman was with the Department o f Public Safety for 17 years and

headed the Special Com~~ unicatioSne ction r ~ hcih included the el ectronic

surveillance system. The 1984 Report analyses was performed by bis.

Jane Humbl e, EGP Securi ty Consul ti ng.

** See Other Pertinent Information, page 39, for description o f

t e l etracking.

accepted. The consul t a n t rated Arizona's protection against mani pul a t i o n

due t o human e r r o r , computer system f a i l u r e s , abuse and catastrophe, and

gave a poor overall r a t i n g t o Arizona Commercial Tracks. The consultant

recommended t h a t EDP audits be conducted and only v e r i f i a b l e computer

programs be used.

Other states conduct EDP audits - To address these p o t e n t i a l problems,

other states conduct EDP audits o f track t o t a l i s a t o r systems t o provide

a d d i t i o n a l c o n t r o l s i n an e f f o r t t o deter fraud. F l o r i d a conducts EDP

audits o f the four t o t a l i s a t o r companies operating a t race tracks i n

F l o r i d a i n an e f f o r t t o prevent fraudulent a c t i v i t y . F l o r i d a examines

systems by o b t a i n i n g i n f o r m a t i o n on q u a l i t y control used by the

t o t a l i sator company t o ensure t h a t data i s not improperly nani pul ated.

The state then v e r i f i e s t h a t the data generated by the computer i s

correct. I1 1 i n o i s v e r i f i e s a1 1 c a l c u l a t i o n s done by ttie t o t a l i sator

system by s i m u l a t i n g a race day and feeding bets and information i n t o the

system. Cal i f o r n i a a1 so has access t o computer information f o r auui ti ng

purposes. The C a l i f o r n i a Horse Racing Board conducts EDP audits o f the

one t o t a l i s a t o r company on a random basis. C a l i f o r n i a requires race

tracks t o h i r e c e r t i f i e d pub1 i c accountants t o examine and check reports

and t h e i n f o r m a t i o n a t the track. The state then v e r i f i e s the information

by placing t e s t information i n t o the system t h a t v e r i f i e s the i n t e g r i t y o f

the software.

Racing Department Does Not A u d i t E l e c t r o n i c

T o t a l i s a t o r Svstems At Racetracks

In contrast t o other states, the Arizona Department o f Racing has never

conducted EDP audits o f racetrack t o t a l i s a t o r systems. The Gepartment

does not morii t o r the t o t a l i s a t o r system a t tracks. Previous Lepartmental

attempts to i n s t i t u t e EDP audits have been unsuccessful and lacked Racing

commission support. The current e f f o r t t o i n s t i t u t e EGP auditing ill

need f u l l Department and Commission support t o be successful.

Department does not monitor t o t a l i s a t o r system - Currently, the Departr,~ ent

does not oversee track t o t a l i s a t o r operations. ~ l t h o u g h the Department

has s t a f f t o conduct EGP audits, none have been tione a t conniercial

tracks. Arizona has traditional ly supported control s on total isator

systems. The Department previously used a pari- mutuel supervisor to

verify data generated i n the pari- mutuel room. With the onset of

computerization, the pari- mutuel supervisor positions became obsolete and

were eliminated i n 1982.

Previous efforts unsuccessful and lacked Commission support - Past

attempts by the Department to implement EDP auditing have been ineffective

and lacked Racing Commission support. The Department unsuccessfully

attempted to implement EDP auditing i n 1984. The Commission was aware of

the Department's problems in impl ementing EDP audits, b u t has not ful ly

supported i t s attempts. As a result, the Department has not used i t s full

authority to requi re compl iance.

The Department has attempted to i n s t i t u t e EDP audits i n the past, b u t was

unsuccessful. The Department initiated i t s attempt to impl ement EDP

auditing i n December 1983 by requesting that permittees and total isator

companies turn over computer generated reports and provide access to the

software. A t that time two t o t a l i s a t o r companies provided computer

services in Arizona. No response was received from either company as a

result of the December 1983 request, so the Department sent subsequent

requests and met w i t h race track and t o t a l i s a t o r company officials through

September 1984. One company subsequently agreed to comply with the

request, but the other company would not comply.

The one company that d i d not submit the needed information claimed the

information was proprietary. In a l e t t e r dated May 9, 1984, responding to

a Departmental request for computer software and other information, the

company pointed out:

We have had similar requests from other states i n the past and

have managed to persuade them that the current practice of

mai ntai

proprie

of the

ning s t r i c t confidentiality e ., not disclosing any

t a r y information to anyone) is ultimately in the b e s t i n t e r e s t s

s t a t e , the racetrack and the public.*

During this time the Commission did not fully support Departmental e f f o r t s

to imp1 ement EDP auditing. The Commission discussed the Department's EDP

efforts during i t s May and September 1984 meetings. However, no official

action was taken to support the Department's efforts. During the

September 1984 meeting, the Commission discussed a Department di recti ve

requesting EDP audit information from the permittees. Some Commissioners

questioned whether the permittees could comply w i t h one aspect of the

directive and di scussed whether a1 1 future di rectives shoul d be reviewed

by the Commission. The Director subsequently modified the directive to

delete the requirement i n question.

The Department has the statutory authority to obtain pari- mutuel

information but did not take action to require the t o t a l i s a t o r company to

comply. Arizona Revised Statutes ( A. R. S. ) $ 5- 1 07.03. A requi res the tracks

to provide accurate information to the State.**

. . . financial books, statements and records shall be ~ e p tan d

maintained i n accordance with general ly accepted accounting

principles so as t o r e f l e c t accurately the operations conducted

by each permittee and concessionaire who has a proprietary

interest i n a permit. . . . Such financial books, statements and

records shall be open for examination by the director or his

designated representative.

* According to an April 1986 interview w i t h the total isator company

president by Auditor General s t a f f , i f Arizona requires EDP auditing a

possible solution rdould be to place a copy of the software i n escrord

( with a neutral party). This would allow access to i t by appropriate

Department s t a f f and prevent access by others to the proprietary

information. However, t h i s possible solution was not offered during

the Department's i n i t i a l EDP auditing attempt in 1984.

* According to the Department's Attorney General Representative, A. R. S.

$ 5- 107.03. A should be clarified to ensure Department access to needed

EDP auditing information.

I n addition, the Department has statutory authority t o take action against

any permittee who does not comply with Departmental regulations. If

requested documentation i s not submitted, A. R. S. S5- 107.03. C provides the

f o l l owing penal ty.

Any v i o l a t i o n of tt. lis section by any permittee i s a ground f o r

refusal to renew or f o r the revocation of a permit. . . .

A1 though the Department has the authority to penalize any lack o f

compliance, no action was taken primarily due t o two reasons.

According t o the Department, it did not penal ize noncompl iance due t o the

potential impact on revenues. If the t o t a l i s a t o r company l o s t i t s 1 icense

to operate i n Arizona, it could no longer provide computer services to a

number of Arizona race tracks. These tracks would have to c o n t r a c t w i t h

another company, which coul d take some time. The tracks may have to remain

closed while t h i s was taking place, r e s u l t i n g i n l o s t business f o r the

tracks and l o s t State revenues.

The second reason c i t e d by the Department f o r not taking any action against

the t o t a l i s a t o r company was the Departmental perception t h a t the Commission

d i d n o t f u l l y support the concept of EDP audits. Some Cori~ missioners

questioned the Department's need for EDP information and the D i r e c t o r ' s

request f o r permittees t o r e t a i n information. Since the Cofimi ssi on may

review and modify any Departmental action, any e f f o r t t o i n s t i t u t e EDP

auditing could be rescinded by the Commission.

Current attempt requires f u l l support - To be successful, the Departr, lentls

current attempt to implement EDP auditing w i l l need the f u l l support o t

both the Department and the Commission. Recently, the Department again

t r i e d to obtain the information necessary for EDP auditing from the

t o t a l i s a t o r companies. The Department sent a l e t t e r on March 17, 1986, to

the t o t a l i s a t o r companies requesting a description of security features and

access to software programs. In addition, the Department stated t h a t it

would be i n s t i t u t i n g a formal procedure for approval and implementation o f

a l l program changes. If the t o t a l i s a t o r companies do not conlply the

Department neeas to use i t s s t a t u t o r y a u t h o r i t y to ensure compliance or

penalize any lack o f cooperation. I n addition, the Commission needs to

f u l l y support EDP a u d i t i n g f o r the Department t o succeed. F u l l support i s

needed because any action taken by the Department to ensure t h a t the

t o t a l i s a t o r companies comply could eventually be reviewed by the

Commission. Recently, the Commission has moved toward supporting the

Department's EDP a u d i t i n g e f f o r t s . During the January 1986 meeting the

Commission agreed t o allow the Department to require permittees t o keep

uncashed winning t i c k e t s f o r examination. F o l l owing t h i s meeting, the

Department prepared an EDP a u d i t program t h a t i d e n t i f i e s what i s needed f o r

imp1 ementi ng EDP audits.

CONCLUSION

The Department has not conducted EDP audits o f racing f a c i l i t y t o t a l i s a t o r

systems, which are needed t o deter fraud. N e i t h e r t h e Department n o r t h e

Commission have exerted f u l l a u t h o r i t y t o i n s t i t u t e EDP auai ts.

RECOMMENDATIONS

1. The Racing Department should conduct EDP audits. The Department and

Commission should work together t o develop and implement an EDP

a u d i t i n g pl an.

2. The Department should exercise authority, as necessary, to obtain

access t o information needed t o conduct EDP audits. The Departnerlt

should request the Legislature to consider c l a r i f y i n g A. R. S.

$ 5- 107.03. A to ensure t h a t the Department has f u l l access t o EDP

a u d i t i n g information.

OTHER PERTINENT INFCRWATION

During the audit, other pertinent information was developed regarding the

costs of county f a i r racing, broadcasts of horse and greyhound races, and

jockey drug testing.

Costs Of County Fair Racins

The Arizona Department of Racing ( ADOR) i s directed by statute to regulate

and administer State funding for county f a i r racing. T h i s regulation and

subsidization of county f a i r racing costs the State of Arizona nearly

$ 1 mill ion a year. According to Department o f f i c i a l s , county f a i r racing

is currently the major arena for quarter horse racing in the State, and

provides a racing opportunity for thoroughbred horses that might not

otherwise run a t commercial tracks.

Arizona Revised Statutes 55- 110. G. authorizes ADOR to regulate racing and

pari- mutuel wagering a c t i v i t i e s a t county f a i r race meets. To t h i s end,

the Department proviaes a county f a i r supervisor, three stewards, a State

veterinarian, a clerk of scales, a sample collector, a camera operator, a

money room supervisor, a horse identifier, a paddock judge and a

pari- mutuel supervisor, as well as licensing and investigative person~ el

to each of the county f a i r races. Table 5 summarizes county f a i r racing

activity for fiscal year 1985.

The costs of county f a i r racing are shared by the State and the various

county f a i r associations. In fiscal year 1985, more than $ 1.8 mill ion was

expended by the State and 12* county f a i r associations to conduct these

races.

* A1 though I"! iaricopa County conducted county f a i r races a t Turf Paradise

during fiscal year 1985, a financial report has not as yet beer]

submitted to ADOR.

TABLE 5

COUNTY FAIR RACE MEETS

FISCAL YEAR 1984- 85

County Days of Racing Number of Races Mutuel Hand1 e

Apache

Cochise

Coconi no

Gila

Graham

Green1 ee

Mohave

Navajo

Santa Cruz

Yuma

~ a rcoi p a ( 1 )

Yavapai ( 1 )

TOTAL

) Denotes meets held a t commercial tracks. According to Department

o f f i c i a l s , pari- mutuel revenue a t these races i s divided between the

county f a i r organization and the conimercial track.

Source: Compiled by Auditor General staff from ADOR annual report for

f i scal year 1 984- 1 985.

The State of Arizona provides nearly ha1 f of the funding for county f a i r

racing. As i l l u s t r a t e d in Table 6, i n the l a s t three fiscal years the

State expended an average of approximately $ 900,000 per year for the

regulation and promotion of county f a i r racing. All of these funas are

generated from the S t a t e ' s share of pari- mutuel wagering revenues from

commercial horse and dog tracks. In addition, the State relinquishes i t s

share of the pari- mntl; el wasering revenues t o the county f a i r association

where the races are conducted. This amounted to an average of

approximately $ 161,500 for each of the l a s t three fiscal years.

TABLE 6

STATE'S COST OF COUNTY FAIR RACING

FISCAL YEAR 1982- 83 THROUGH FISCAL YEAR 1984- 85

( UNAUDITED)

Fiscal Year Fiscal Year Fiscal Year

1 912- 83 1 983 - 84 1984- 85

County Fair Rac'n Fund/

Genera? Fund 119 $ 1 43,986 $ 1 64,393 $ 175,157

Administration of the

County Fair Racing an

Breeders ' Award Fund f2 1 34,393 42,094 40,640

County Fair Racing and

Breeders' Award Fund ( 3) 759,593 61 3,058 71 7,453

TOTAL

The County Fair Racing Fund was created i n fiscal year 1985. I t

represents 3 percent of the revenues collected by tile Department

from commercial horse and dog track operations, and i s used by the

Department to regulate county f a i r racing. Prior to fiscal year

1985, county f a i r racing was funded w i t h General Fund ana County

Fair Racing and Breeders' Award Fund monies.

( 2 ) The Administration of the County Fair Racing and Breeders' Award

Fund represents one- half of 1 percent of the revenues collected by

the Department from commercial horse and dog track operations, and

i s a nonappropriated fund used by the Department to cover costs

associated with aciministering the County Fair Racing anu hreeaers'

Award Fund.

( 3) The Arizona County Fair Racing and Breeders' Award Fund represents

14 percent of the revenues collected by the Department frorii

commercial horse and dog track operations. After a11 breeciers'

awards have been paid, remaining monies may be distributed by tfre

Department to county f a i r racing associations through purse

subsidies, promotion and betterment grants, and capital inprovemen ts

grants. Tne figures presented here represent only tiiose r,; onies

distributed to county f a i r racing associations. Legislation enacted

i n the 1% Legislative Session affected the methods revenues \ rill

be distributed to t h i s fund ( see Introduction and Background,

Page 1 ) .

Source: Compiled by Auditor General staff from ADOR Annual Report for

fiscal year 1985 and State of Arizona Appropriations Leport for

fiscal year 1985.

The county f a i r associations provide the remaining funding for county f a i r

racing. According to financial reports submitted by 11 of 12 county f a i r

associations, in total approxinlately $ 945,000 ivas expended by these

organizations t o conduct county f a i r races i n f i s c a l year 1985. The

m a j o r i t y o f t h i s money, more than $ 780,000, was generated from the races

( i . e., pari- mutuel wagering revenues). The remaining expenditures consist

o f estimated costs o f services donated by l o c a l governments, county f a i r

associations and community organizations.

Pari- Mutuel Racing Broadcasts And Information Dissemination

A. R. S. $ 5- 1 11 a1 1 ows t e l etrack broadcasts of horse and greyhound races.

I n addition, A. R. S. 95- 112 a l l o w s r e c e p t i o n o f horse race broadcasts from

outside Arizona. Broadcasting horse and greyhound races from a racing

f a c i l i t y i n Arizona t o another l o c a t i o n i n the State i s known as

t e l e t r a c k i n g . Transmission o r reception o f race signals t o o r from

out- of- State l o c a t i o n s i s simulcasting. Wagering takes place a t b o t h t h e

h o s t t r a c k where the races are a c t u a l l y run and the f a c i l i t y r e c e i v i n g the

transmission. Currently, several Arizona t r a c k s t r a n s m i t or receive race

broadcasts. Phoenix Greyhound Park t e l e c a s t s races t o Apache Greyhound

Park i n Apache Junction. Tucson Greyhound Park transmits simul casts o f

greyhound races t o Las Vegas, Nevada. Turf Paradise receives simul cas t

broadcasts from various horse racing f a c i l i t i e s throughout t h e r a c i n g

season.

Teletracking and simulcasting can create p o s s i b i l i t i e s f o r unauthorized

a c t i v i t y through e i t h e r delayed or intercepted signal s. The t r a n s a i s s i o n

signal can be del ayed before broadcasting, a1 1 owing il legal wagering.

Delay o f s i g n a l s c o u l d lead t o i l l e g a l wagers being made a t a l o c a t i o n

r e c e i v i n g a broadcast a f t e r a race has run b u t uefore tile r e s u l t s dre

o f f i c i s l l y announced.

The signal and other information can be intercepteci and used f o r i l l e g a l

wagering. Signal p r o t e c t i o n attempts t o minimize or prevent the i 11 esal

use of s i g n a l s . Signals can be protected by encoding ( a1 so kncrvrr as

encryption) o r scrambling the signal from p o i n t o f transmission t o

reception. Encodi ng appl i e s a mathematical formul a t o ttle si gnal t i i a t

must be properly decoded t o receive the signal. The encoding formula can

be changed frequently t o increase the d i f f i c u l ty o f interception.

Scrambling i s done using a very high or very low frequency t o d i s t o r t the

signal. Equipment t o scramble a t r a c k ' s signal would cost between $ 20,000

and $ 50,000. Encoding a signal r e q u i r e s a minimum investment o f $ 10,000

t o $ 25,000.

Arizona does not c u r r e n t l y r e q u i r e r a c i n g permittees to protect t h e i r

signals. According t o the Department's Director, no problems e x i s t i n

Arizona t e l etracking t h a t warrant imposing c o s t l y requirements on

permittees. The lack o f i l l e g a l bookmaking appears t o support the

Department's decision. None of the law enforcement o f f i c i a l s we

interviewed were aware o f any i l l e g a l a c t i v i t y i n v o l v i n g stolen race

signal s. A recent il legal bookmaking operation uncovered i n Arizona

involved other sporting a c t i v i t i e s but not horse or greyhound racing.

Some o f f i c i a l s believe the r e l a t i v e l y small amount o f money involvea i n

pari- mutuel wagering i n Arizona i s not large enough t o provide the

incentive t o purchase the equipment needed t o i n t e r c e p t a signal f o r

i l l e g a l bookmaking. If problems with t e l etracking a r i s e i n t h e f u t u r e ,

the Department's mandate t o p r o t e c t the i n t e g r i t y o f racing and the public

allows it t o promulgate rules and regulations t o p r o t e c t signals and

racing information.

Drug Testing O f Jockeys

Other racing states have recently developed drug t e s t i n g prograrns f o r

jockeys. ADOR has the a u t h o r i t y t o conduct drug t e s t i n g o f jockeys ana

has used t h i s a u t h o r i t y i n the past.

The use o f i l l i c i t drugs by jockeys can present a hazara to those invoived

i n the race and p o t e n t i a l l y a f f e c t the outcone o f the race. For exaiiiple,

a r e c e n t a r t i c l e on cocaine and i t s use by jockeys indicated t h a t a r i a e r

under the influence of cocaine would be a d e f i n i t e danger t o other jockeys

and horses on the track.* According t o the a r t i c l e , i f cocaine i s used

immediately before a race, the euphoria and exaggerated sense of

sel f- confidence proauced by the dru5 could lead t o clouding of judgrnent

and excessive r i s k taking. Beyond the physical hazards associated with the

* -

liiornas F. Burks, " Cocaine and the Jockey,'' The Jockey Iderds, Clay 1985.

use o f cocaine, i t s use and the use o f other i l l i c i t drugs can b r i n g

jockeys i n t o contact w i t h undesirable figures who frequently attempt t o

maneuver drug users i n t o compromising s i t u a t i o n s and unethical acts.

Other racing states, i n c l u d i n g I1 1 i n o i s , New York, Maryland, New Jersey

and Ohio have r e c e n t l y developed some form o f drug t e s t i n g program f o r

jockeys. These programs vary from d a i l y t e s t i n g o f jockeys a t random

( Maryland) t o the subnii ssi on o f samples during annual physical

examinations ( 11 1 i n o i s). I1 1 i n o i s recently completed a pi1 o t program f o r

drug t e s t i n g o f thoroughbred jockeys and harness d r i v e r s . During 1985, a

t o t a l o f 819 urine samples were tested on a population o f 730

i n d i v i d u a l s: 568 harness d r i v e r s and 162 thoroughbred jockeys. O f those

tested, 122 ( 70 d r i v e r s and 52 jockeys) tested p o s i t i v e f o r cocaine, THC

( marijuana metabolite) o r both substances. This r e s u l t e d i n a t o t a l

p o s i t i v e r a t e of 17 percent. According t o an I l l i n o i s racing o f f i c i a l ,

p r e l i m i n a r y plans are t o continue the t e s t i n g program.

A l l the states surveyed have indicated t h a t a primary purpose o f drug

t e s t i n g i s t o ensure safety on t h e r a c i n g tracks. I n ~ o s t o f these

states, those jockeys t e s t i n g p o s i t i v e are ordered i n t o a drug

rehabil i t a t i o n proyrani. Subsequent p o s i t i v e t e s t s can resul t i n 1 icense

revocation.

The Department has the a u t h o r i t y t o conduct drug t e s t i n g of jockeys.

Arizona Racing Commission r u l e R4- 27- 109 states, i n part: " The stewards

o r t h e i r designee may r e q t i i r e t h a t any jockey provide blooa or uririe

samples f o r analysis upon request." I n 1985 ADOR requested advice an tae

subject of jockey drug t e s t i n g from the Attorney General's Office. The

Department's Attorney General representative a t t h a t time advised the

Department t h a t because random sarnpl i n g techniques f o r possi b l e t e s t i n g

were not planned, the stewards should only order urine analysis t e s t i n g

when there i s a reasonable suspicion t h a t the jockey i s using drugs or

a1 coho1 .

The Department has used i t s a u t h o r i t y t o conduct drug t e s t i n g of jockeys

once i n the l a s t four years. I n 1982, as the r e s u l t of a telephone t i p , a

Turf Paradise steward ordered the testing of six jockeys. One jockey

tested positive for cocaine and received a 30 day suspension. According

to Department o f f i c i a l s , since that time no further testing of jockeys has

occurred.

AREAS FOR FURTHER AUDIT WORK

During the course o f the a u d i t we i d e n t i f i e d several p o t e n t i a l issues t h a t

we were unable t o pursue because they were beyond the scope o f our a u d i t

o r we lacked s u f f i c i e n t time.

Does the Arizona Department o f Racing ( ADOR) conduct the type o f

i n v e s t i g a t i o n s necessary t o i d e n t i f y i l l e g a l a c t i v i t i e s and

criminal elements i n the Arizona Racing Industry?

The Department maintains an investigations s t a f f s t a t u t o r i l y charged with

the responsi b i l i ty f o r i n v e s t i gative matters re1 a t i n g t o tne proper

conduct o f racing and pari- mutuel wagering. These responsibil i t i e s

include: b a r r i n g undesirables from racing, conducting undercover

investigations, f i n g e r p r i n t i n g persons 1 icensed by the Racing Commission

and reviewing license applications. However, our review o f Investigations

Section's records indicated t h a t a v a s t m a j o r i t y o f cases worked since

1982 involved the i n v e s t i g a t i o n o f i n d i v i d u a l s subnii t t i n g fa1 se

information on 1 icensing appl ications. Beyond two i n v e s t i g a t i o n s o f

organizations applying f o r permits t o operate tracks, most i n v e s t i gatioris

during t h i s period have been l i m i t e d t o assault and drug r e l a t e d cases.

However, DPS and FBI o f f i c i a l s stated t h a t they have not been asked t o

p a r t i c i p a t e i n a major Arizona racing i n v e s t i g a t i o n i n more than f i v e

years, a1 though they i n d i c a t e t h a t serious v i o l a t i o n s may be occurring i n

the Arizona racing industry. In addition, an Attorney General

i n v e s t i g a t o r expressed concern over the Department's a b i l i t y to conduct

f i n a n c i a l background i n v e s t i g a t i o n s o f i n d i v i d u a l s and corporations

applying f o r permits t o operate Arizona horse and greyhouna tracks.

Further audit work i s needed t o determine whether adequate i n v e s t i yations

are being conducted by the Department.

0 Should the Department of Racing address financial col1 ection

cases through i t s admini s t r a t i ve hearing process?

Currently, t h e t r a c k stewards and the Department's Hearing O f f i c e r devote

a considerable amount o f time to hearing financial c o l l e c t i o n cases.

These cases involve a creditor, often a feed dealer seeking payment from a

debtor, and generally an owner or trainer who is licensed by the

Department and has incurred a financial obl i gation in connection with

racing i n Arizona. Creditors use the Department's administrative hearing

process i n hopes of having the debtor's license suspended until the debt

is paid. According to the Department's Hearing Officer, i n many of these

cases the creditor has not received a court judyment against the debtor.

In 1984 the Department Director acted to r e s t r i c t the ~ epartment's

invo'lvement i n financial coll ection cases by requiring that creditors have

court judgments before bringing a case before track stewards. However,

the Racing Commission overruled the Director's decision and instructed

stewards and the Hearing Officer to hear all financial collection cases.

Further audit work is needed to determine what involvement, i f any, the

Department should have i n financial col 1 ection cases.

Does the Eepartnent adequately ensure the integrity of the

Breeders' Award Program for greyhounds?

Breeders ' awards, establ ished by A. R. S. $ 5- 1 14, were created to pror, rote

and improve the breeding of horses and greyhounds within the Stdte. The

award i s equal to 40 percent of every f i r s t place purse won uy a horse or

dog bred i n Arizona. The award i s paid to the owner of the dam of the

animal a t the tine the animal was foaled or whelped. Thirty percent ~ f

the funding for breeders' awards i s derived from a percentage o f the

S t a t e ' s share of pari- mutuel wagering revenue a t horse and do5 trdcks, and

10 percent i s paid by the track permittee." In fiscal year 1985, $ 854,879

was distributed by the Cepartrnent in breeders' awards: $ 317,173 to horse

breeders and $ 537,706 to greyhound breeders. Approximately $ 285,000 was

distributed in breeders ' awards by track permittees during this tirile

period.

* Legislation enacted in the 1986 Legislative Session empowers the

Racing Commission to establ ish, by administrative rules, the amount of

award to be distributed by the State.

ADOR i s responsible f o r administering the Breeders' Award Program.

However, according t o a Department o f f i c i a l , because o f the d i f f i c u l t y i n

v e r i f y i n g and documenting a greyhound's place o f b i r t h , there i s some

question as t o whether some greyhound breeders receiving awards a c t u a l l y

bred the animals i n Arizona. Further a u d i t work i s needed t o determine

whether the Department has adequate controls t o v e r i f y the el i g i b i l i ty o f

those receiving breeders' awards.

Are the permissible l e v e l s established f o r the foreign stibstances

procaine and b a r b i t u r a t e s i n greyhound urine excessive?

According to the Department Veterinarian, permissi b l e 1 evel s o f procaine

and b a r b i t u r a t e s were established because these compounds are often found

i n the feed given t o greyhounds and can then appear as foreign substances

i n the screening o f greyhound urine. The trace l e v e l s were established by

the Racing Commission several years ago as the r e s u l t o f a study conducted

by the Department Veterinarian.

Recently, however, o f f i c i a l s i n Connecticut whose permissible 1 evel s of

procaine and b a r b i t u r a t e s are s i m i l a r t o l e v e l s used i n Arizona, have

begun a study o f these levels. In addition, the Manager o f the ADOR

contract t e s t i n g laboratory has indicated t h a t e x i s t i n g trace l e v e l s f o r

these substances may be too high. Further audit work i s needea to

determine whether the e x i s t i n g l e v e l s are excessive.

AFirZONA DEPARTMENT OF RACING

July 2, 1986

Douglas R. Norton

Auditor General

2700 North Central Ave., Suite 700

Phoenix, Arizona 85004

Dear Mr. Norton:

I would first like to express my appreciation to your staff for

the manner in which they conducted the audit. The inquiry was

thoughtful and complete and the staff conducted themselves in a

professional manner at all times.

The resulting audit report is evidence of the validity of the

sunset process. The identification of deficiencies, not

observed by the Department, by the Auditor General's staff and

the subsequent implementation of the recommendations by the

Department will improve our effectiveness, a primary goal of

the sunset legislation.

FINDING I: THE ARIZONA DEPARTMENT OF RACING NEEDS TO STRENGTHEN

AND IMPROVE ITS DRUG TESTING PROGRAM

The Department agrees that improvements are needed in sampling

and quality control procedures. However, we disagree with one

of the recommendations and propose alternative corrective action.

The administration of QA unknowns as blind samples is a change

which will be made. However, this can be accomplished adminis-tratively

rather than through a contract modification. The

contract requires the laboratory to participate in the NASRC

quality assurance program; the manner in which samples are ob-tained

is not specified. Hence, the Department can and will

direct the laboratory to have the unknowns sent to the Department

veterinarian, who will then submit them as routine samples from

the tracks.

Subsequent to discussions with the audit staff, the Department has

taken steps to clarify the procedures requirements of the contract

and will implement the recommendations regarding split samples and

reviews by an independent contractor. Specifically, the contract

has been revised to state that the laboratory must use both the

number of tests and procedures for each test required by NASRC.

800 W. Washington

Room 400

Phoenix, Arizona 85007

( 602) 255- 5151

" EQUAL EMPLOYMENT OPPORTUNITY/ AFFIRMATIVE ACTION EMPLOYER"

The Department will incorporate written verifications of proce-dures

from the NASRC quality assurance certification committee

into the contract and periodic reviews by a contractor employed

by the Department will serve to determine compliance with this

provision. The Department will further investigate your finding

that the laboratory has not performed all necessary tests to

determine if further action is needed.

The Department concurs with all other findings and recornrnenda-tions

in the drug testing area. As noted in the report, the

Department lacks sufficient funding to implement all recommen-dations

during fiscal year 1986- 87. Corrective action not

requiring additional funding will be taken immediately. The

other recommendations will be prioritized, funding will be re-quested

and action will be taken as funds become available.

FINDING 11: ELECTRONIC DATA PROCESSING AUDITS OF RACETRACK

TOTALISATOR SYSTEMS ARE NEEDED TO HELP DETER FRAUD

The Department agrees that EDP auditing is vital to ensuring

the integrity of totalisator systems and is moving forward in 0

developing a viable audit function. Statutory changes to ensure

that all needed data is available to the Department will be

sought in the next session. We share the Auditor General's con-cern

over the lack of control over teletrack wagering systems and

hope to incorporate reviews of wagering data transmissions into

the auditing program. a

In addition to implementing the recommendations, the Department

will request that the Joint Legislative Oversight Committee direct

the Auditor General's office to conduct reviews of the Department,

especially the drug testing program, at three year intervals. As

this audit has demonstrated, review by an objective third party can a

reveal problems which management may not be able to identify due to

time and staffing constraints and the tendency to become too close

to day- to- day operations. We recognize that a full audit may not

be possible due to the Auditor General's workload. However, a mini-review

to identify problem areas which the Department could investi-gate

fully and resolve with its own staff would ensure that a

deficiencies such as those reported here do not occur again.

Again, I would like to thank you and your staff for their conscien-tious

and courteous efforts during the audit.

TAB : va

TIMO& Y A. BARROW

Director

INTRODUCTION AND BACKGROUND

The Office of the Auditor General has conducted a performance audit of the

Arizona Racing Commission. The audit was conducted in response to a July

26, 1985, resolution of the Joint Legislative Oversight Committee. This

performance audit was conducted as part of the Sunset Review set forth in

Arizona Revised Statutes ( A. R. S. ) SS41- 2351 through 41 - 2379.

Statutory Authority And Duties

The Arizona Racing Commission was created by the Legislature in 1549. The

Commission i s comprised of five members appointed by the Governor to

five- year staggered terms. State law 1 imits the horse racing industry and

the dog racing industry to one representative each. Until 1982 an

Executive Secretary hi red by the Commission administered the daily

operation of the Commission. In 1982 the Department of Racing was created

with a Director appointed by the Governor. Since that time the Conirilission

has had no direct responsibility for the daily operations of the agency.

The Racing Commission's role as stated i n A. R. S. $ 5- 1b4. A. i s to:

. . . issue racing dates and prepare and promulgate

such complete rules and regulations to govern the

racing meetings as may be required to protect and

promote the safety and welfare of the anin~ als

participating i n such racing meetings, to protect and

promote public health, safety and the proper conduct of

racing and pari- mutuel wagering. . . .

In addition to setting racing dates and promulgating rules, the Comrfiission

i s responsible for accepting and evaluating applications for capital

improvement projects. Race tracks make requests to the Commission for

permission to withhold a portion of the State's share of pari- nutuel

wagers for capi ta1 inlprovement projects. The Commission nay a1 so amend,

approve or deny any decision made by the Director of the Gepartment of

Racing. Commission a c t i v i t i e s from fiscal year 1982- 83 through 19135- 86

( estimated) are shown in Table 7.

TABLE 7

COMMISSION ACTIVITIES

FISCAL YEARS 1 982- 83 THROUGH 1 985 - 86

Actual Actual Actual Estimated

1982- 83 1 983- 84 1 984- 85 1 985 - 86

Meetings he1 d 16 18 18 2 0

Cases heard/

rulings Issued 28 0 * * 2 10

Rules adopted 6 12

Permits granted 8 7 2 8

Approved capital

improvement appl ications 4 1 0 1

* All rules revised to reflect changes resulting from creation of

Department of Racing

Source: Compiled by Auditor General staff from Arizona Department of

Racing 1984- 85 Annual Report and capital improvements 1 edger.

Staffing And Budget

The Racing Commission does not have s t a f f . Upon creation of the

Department of Racing in 1982, a l l s t a f f members were placed under the

authority of the Department Director. The Commission ' s major expenai tures

are for travel and outside services, as shown i n Table 8. In- State travel

funds pay the costs of the Commissioners attending Commission meetings.

Out- of- State travel funds are used to attend National Association of State

Racing Commissioner conferences and other professional conferences. Tile

outside services monies are for court reporting services to record meeting

ninutes.

TABLE 8

RACING COMMISSION EXPENDITURES

FISCAL YEARS 1984- 85 THROUGH 1985- 86 )

( UNAUDITED)

Actual Estimated

Fi scal 1984 - 85 Fiscal 1985 - 86

Professional and outside

services $ 3,418

Travel

In- State 1,798

Out- of- State 2,172

Other operating 4,500

TOTAL $ 1 1 ,888 $ 1 7.200

) Expenditures prior to fiscal year 1984- 85 were included in the

Racing Department's expenditures.

Source: Compiled by Auditor General staff from Department of Racing Annual

Report, fiscal year 1984- 85.

Audit Scope And Purpose

The audit report focuses on the Conlmission's ability to perform i t s

functions effectively and efficiently. The report presents one finding

and recommendations regarding the capital improvements program.

The Auditor General and s t a f f express their appreciation to the members of

the Racing Commission for their cooperation and assistance auring the

audi t.

SUNSET FACTORS

I n accordance w i t h Arizona Revised Statutes ( A. R. S.) $ 41- 2354, the

Legislature should consider t h e f o l l o w i n g 12 sunset factors i n determining

whether the Arizona Racing Commission should be continued or terminated.

1. The objective and purpose o f e s t a b l i s h i n g t h e Commission

The enabling statutes f o r the Arizona Racing Commission state t h a t the

purpose o f the Commission i s to:

. . . issue racing dates and prepare and promulgate such

complete rules and regulations t o govern the racing meetings

as may be required to p r o t e c t and promote the safety and

welfare of the animals p a r t i c i p a t i n g i n such racing

meetings, t o p r o t e c t and promote p u b l i c health, safety and

the proper conduct o f racing and pari- mutuel wagering and

any other matter pertaining t o the proper conduct o f racing

w i t h i n t h i s state.

S t a t u t e s a u t h o r i z e t h e Commission to conduct hearings on appl i c a t i o n s

f o r racing permits, t o issue racing permits, t o conduct rehearings on

l i c e n s i n g and regulatory decisions made by the Director o f the

Department o f Racing, and t o review a p p l i c a t i o n s t o construct c a p i t a l

improvements a t race tracks.

2. The effectiveness w i t h which the Connission has met i t s objective and

purpose and the e f f i c i e n c y w i t h which it has operated

The Commission has generally met i t s objective ana purpose. The

Commission has issued racing permits and set racing dates. I n

addi tion, the Commission has approved several capi t a l improveriient

projects and promulgated rules and regulations. However, the

Cornmi ssion has not compl e t e l y supported the Racing Departrnen t ' s

attempts to i n s t i t u t e an Electronic Data Processing ( EDP) a u d i t i n g

program ( see Gepartrrient o f Racing audit, Finding 11, page 29). ' EDF)

a u d i t i n g i s necessary t o help ensure t h a t the odds and payoffs on

pari- mutuel wagers are correct. In addi ti on, the Corcmi ssion has

erroneously approved projects or components o f several c a p i t a l

improvement p r o j e c t s ( see Racing Commission Audit, Finding I, page 63).

Moreover, the Commission has n e i t h e r adopted formal procedures nor set

pol i c y f o r t h e a d m i n i s t r a t i o n o f the c a p i t a l improvements program.

Since the Commission has no s t a f f and meets an average o f once a

month, it r e l i e s on Racing Department personnel f o r assistance i n

administering the c a p i t a l improvements program.

3. The extent t o which the Comniission has operated w i t h i n the p u b l i c

i n t e r e s t

Generally, the Commission has operated w i t h i n the publ i c i n t e r e s t .

However, the Commission should endorse an EDP a u d i t i n g program t o help

ensure the i n t e g r i t y of racing and pari- mutuel wagering.

4. The extent t o which r u l e s and r e g u l a t i o n s promulgated by the

Commission are consistent w i t h the 1 eui sl a t i v e mandate

The Commission has promulgated r u l e s and regulations t h a t are

general ly consistent w i t h i t s l e g i s l a t i v e mandate. Since the 1982

performance audi t, tthe Commission has r e r ~ rtit e n and reorgani zea dl 1

the r u l e s and r e g u l a t i o n s p e r t a i n i n g t o racing. I n addition, the

Commission adopted o r amended a number of r u l es regarciing pari - n, utuel

wagering.

5. The extent t o which the C~ mrnission has encouraqed i n p b t i'rc!?; xnc

-- V ----

p u b l i c before pronlulgatirig i t s r u l e s and r e g u l a t i o n s and ttre ex'cent t o

which it nas informed the p u b l i c as t o i t s actions and t h e i r expected

impact on the publ i c

The Commi ssi on has atiequatel y encouraged i n p u t from the pub1 i c before

promulgating i t s r u l e s and regulations. Any proposed r u l e i s placed

on a regular Commission rjleeti ng agenda f o r consideration. After the

proposed r u l e i s p r i n t e d i n the " Administrative ~ i g e s t , " a p u b l i c

hearing i s tie1 d. F i n a l l y , the r l r l e i s placed on a regular Conirnission

meeting agenda f o r f i n a l adoption.

6. The extent t o which the Commission has been able t o i n v e s t i g a t e and

resolve complaints t h a t are w i t h i n i t s j u r i s d i c t i o n

Betkieen J u l y 1982 and A p r i l 1983, the Commission heard 28 cases.

However, since the Department o f Racing was created i n f i s c a l year

1982- 83, the number o f cases heard by the Commission has decreased.

This i s because t h e D i r e c t o r o f the Department o f Racing and the

Hearing Officer began resolving cases and complaints. The Commission

c u r r e n t l y hears only appeals b u t a proposed r u l e , which i s pending

c e r t i f i c a t i o n , w i l l allow the Commission t o review any l i c e n s i n g or

regulatory decision made by the D i r e c t o r o f the Department o f Racing.

7. The extent t o which the Attornev General o r anv otner a ~ o l i c a b l e

agency o f State government has the a u t t i o r i t y t o prosecute actions

under enabl i n g l e g i s l a t i o n

According t o the Chairman o f the Racing Commission, statutes provide

the Attorney General w i t h adequate a u t h o r i t y t o prosecute actions

under the Commission's enabl irrg 1 e g i s l a t i o n .

8. The extent t o which the Commission has addressed d e f i c i e n c i e s i n the

erlabl i n g statutes which prevent it from f u l f i l l i n g i t s s t a t u t o r y

mandate

The Commission has not proposed any l e g i s l a t i o n since 1582. However,

one Commissioner stated t h a t he be1 ieves the Commission's 1 aws should

be revised t o allow three members o f the Commission t o be selected

from the racing industry. He believes t h i s w i l l provide the

Commission w i t h a b e t t e r working knowledge of racing issues.

9. The extent t o which chanqes are necessarv i n the laws o f the

Commission t o adequately comply with the factors l i s t e d i n the sunset

- 1a w

Based on our a u d i t work, we recommend t h a t the Legislature consider

the f o l l o w i n g change t o the Racing Commission's statutes.

o Repeal A. R. S. S5- 111.02 and A. R. S. $ 5- 111.03, thereby

terminating the c a p i t a l improvements program.

10. The extent t o which the termination o f the Commission would

s i g n i f i c a n t l y harm the public health, safety or welfare

Terminating the Arizona Racing Commission would not have an

immediately i d e n t i f i a b l e e f f e c t on the pub1 i c health, safety or

welfare. Since the Commission has no s t a f f and meets an average o f

once a month, the Department o f Racing, i n f a c t , r e g u l a t e s t h e racing

industry on a day- to- day basis. However, Racing Commi ssioners contend

t h a t a Racing Commission i s needed i n Arizona. Racing Commissioners

stated t h a t because racing involves gambl ing t h i s increases the need

f o r an independent Commission t h a t represents the general public.

They believe the absence of a Commission may vest too much autt; crrity

i n a s i n g l e i n d i v i d u a l . In addition, one Commissioner stated t h a t tile

Commission i s necessary for the onyoing supervi sion o f the Department

o f Racing.

If the Cornmi ssion i s terminated, the f o l l owing a c t i v i t i e s '+ mild have

t o be t r a n s f e r r e d t o the Department:

e issuance o f racing permits,

0 issuance o f racing dates, and

approval o f c a p i t a l iriiprovement projects ( termi n a t i ng the

program w i l l eliminate t h i s function).

11. The extent t o which the l e v e l o f r e g u l a t i o n exercised by the

Commission i s appropriate and whether less o r more s t r i n g e n t l e v e l s o f

r e g u l a t i o n would be appropriate

The c u r r e n t l e v e l o f r e g u l a t i o n exercised by the Commission should be

increased. The Commission shoul d strengthen i t s regul atory presence

by adopting r u l e s and r e g u l a t i o n s t h a t provide the Department t r i t l i

c l e a r a u t h o r i t y t o conduct E l e c t r o n i c Data Processing a u d i t s o f the

various permittees ( see Department o f Racing a u d i t , F i n d i n g 11,

page 29).

12. The extent t o which the Commission has used p r i v a t e contractors i n the

performance o f i t s duties and how e f f e c t i v e use o f p r i v a t e contractors

coul d be accorn~ il s hed

According t o the Chairman, the Racing Commission has not used p r i v a t e

contractors i n the performance o f i t s duties because the nature o f i t s

a c t i v i t i e s precl uae the use o f p r i v a t e sector contractors. The

services f o r regul a t i ng racing and pari- mutuel wagering are not

avai 1 abl e i n the p r i vate sector. However, the Cornmi ssion does enipl oy

a c o u r t r e p o r t i n g service t o t r a n s c r i b e t h e minutes o f i t s p u b l i c

meetings and proceedings. We d i d not i d e n t i f y any other areas binere

the Commission should be using p r i v a t e contractors i n the performance

o f i t s duties.

THE CAPITAL IClPROVEMENTS PROGRAM SHOULD BE TERMINATED

The capital improvements program should be terminated. Although the

capital improvements program has improved racing facil i t i e s , State

revenues have not increased as a result of the program. In addition, the

Racing Commission has erroneously approved two capital improvement

projects and components of three projects.

Background

To encourage the improvement of race track f a c i l i t i e s , Arizona Revised

Statutes ( A. R. S. ) 555- 1 11.02 and 5- 1 11.03 were enacted. The statutes

establish two purposes for the capital improvements prosram. Those

purposes are: 1) to improve racing f a c i l i t i e s for the benefit of the

pub1 icy breeders and horse or dog owners, and 2 ) to increase the revenue

to the State through an increase in pari- mutuel wagering resulting from

such improvements.

The program grants perrni ttees a 1 percent reduction in tile amount of the

hand1 e* paid to the State for undertaking capital improvement projects.

Permittees continue withholding 1 percent of the hanale until the total

cost of the project is recouped.** As of April 1986 all conunercial

perrni ttees Nere wi thhol ding capital improvement monies. Eased Gn

historical growth of racing handles, withholding for currently approved

projects will continue until a t l e a s t 1593 - beyond the prot; rar,~' s

schcdul ed expiration.*** Moreover, permittees have until the expi ration

* tiandle i s defined as the total amount of money wagered a t a race track.

** Prior to October 1, 1982, only horse track permittees could apply for

the capital improvement reduction. Also, each project was subject to

a ten- year withholding 1 imitation. However, A. R. S. 51 11.02 was

amended and the 10 year 1 imi t was el iminated.

*** The capital improvements program i s scheduled to expire on June 30,

1987, for horse track permitees. With the passage of H52379 in 15136,

the program for dog track permittees is now scheduled to expi re on

June 30, 1992.

have u n t i l the expiration date to seek approval for additional capital

improvement projects. While i t i s not possible to estimate the amount of

future requests, American Greyhound Racing, Inc. submitted prel imi nary

plans to the Commission for a project estimated a t approximately $ 8.4

mill ion. Thus, the estimated payoff for capital improvement projects

approved before June 30, 1987, could extend beyond March 1993.

TABLE 9

CAPITAL IMPROVEMENTS PROJECT WITHHOLDING

THROUGH APRIL 1986

AND ESTIMATED PAYOFF DATES

( UNAUDITED )

Amount Amount Remaining Estimated

Permittee Approved Withheld Balance Payoff Date )

Turf Paradi se $ 14,327,695 $ 5,746,156 $ 8,581,499 3/ 93

Prescott Downs 206,963 179,904 27,059 7/ 86

Ri 11 i to Downs 242,427 182,987 59,440 11/ 88 ( 2 )

Aneri can

Greyhound ( 3 3,232,847 3,069,533 63,314 6/ 86

Gill e t t

Greyhound ( 4) 3,669,288 1,301,723 2,367,565 12/ 9U

TOTALS

Estimated payoff dates based on historical withholding patterns.

( 2) Facility ceased operations in 1582. According to the Department, i t

i s unknown when the f a c i l i t y will reopen. Since the project was

approved under the previous capital i~ provement s t a t u t e s , payoff

must be completed within ten years of the project approval date.

( 3 ) Operates Apache, Phoenix and Y uma Greyhound Parks.

( 4 ) Operates Tucson Greyhound Park.

Source: Compiled by Auditor General s t a f f from Department of 2acing

capital improvements 1 edger.

Improved Facil i t i e s Have Not

Increased State Revenues

I t is d i f f i c u l t to determine whether the State has directly benefited from

capital improvements a t racing facil i t i e s . A1 though capital improvements

meet the statutory i n t e n t of enhancing race tracks, the pari- mutuel nandle

when measured in constant dollars has decreased a t Turf Paradise and

Tucson Greyhound Park. I n addition, while s t a t u t e s i n d i c a t e t h a t c a p i t a l

improvements should increase the S t a t e ' s revenue v i a an increase i n

pari- mutuel wagering, it i s d i f f i c u l t t o accurately assess t h i s

re1 a t i onship.

Capital improvements have enhanced race track f a c i 1 i t i e s - Capital

improvements financed through the 1 percent withholding have improved

racing f a c i l i t i e s , as mandated by A. R. S. SS5- 111.02 and 5- 111.03. I n

a d d i t i o n , t h e projects have met the s t a t u t o r y requirement t o " promote the

safety, convenience o r comfort o f the people and be i n the best i n t e r e s t

o f horse o r dog racing and t h i s s t a t e generally." The f o l l o w i n g p r o j e c t s

are examples o f c a p i t a l improvements t h a t have increased the comfort o f

the p u b l i c and are i n the best i n t e r e s t o f racing.

a Grandstand a1 t e r a t i o n s and additions a t T u r f Paradise - This

p r o j e c t enabled Turf Paradise t o accommodate more fans by the

a d d i t i o n o f bleachers and the c o n s t r u c t i o n o f adai t i o n a l ~ nutuel

windows.

a I n s t a l l a t i o n o f a t u r f track a t T u r f Paradise - According t o a

track o f f i c i a l , pari- mutuel wagering on races run on the t u r f

exceeds the amount bet on races run on the d i r t by approximately

25 percent.

a Grandstand renovation a t Phoenix Greyhound Park - This p r o j e c t

was undertaken t o provide a more comfortable environment f o r

summer racing performances.

a Grandstand enclosure and remodeling a t Tucson Greyiiouna Park -

This p r o j e c t was done t o replace a temporary t e n t f a c i l i t y t h a t

had been destroyed by a s t o r r ~ ~ .

Handles a t Turf Paradise and Tucson Greyhound Park have decredsea -

Although race track f a c i l i t i e s have improved as a r e s u l t o f capi ta1

improvements, the handles a t T u r f Paradise and Tucson Greyhound Park have

not increased.* When measured i n constant do1 1 ars, the average dai 1 y

handle a t Turf Paradise has decreased $ 146,000 since f i s c a l year 1979- ij0.

bloreover, the increase i n the pari- mutuel handle a t Tucson Greyhound Park

has n o t k e p t pace w i t h i n f l a t i o n .

* The e f f e c t of c a p i t a l iciprovements on the handle a t Phoenix Greyhouna

Park was not analyzed because i t s f i r s t p r o j e c t was not s u b s t a n t i a l l y

completed u n t i l l a t e 1384.

In constant dollars, the average daily handle a t Turf Paradise has

decreased $ 146,000, more than 34 percent, during the past five years, as

shown in Figure 3. Since 1979, however, more than $ 14 mil 1 ion of capi ta1

improvement projects were completed a t Turf Paradise.

FIGURE 3

AVERAGE DAILY HANDLE AT TURF PARADISE )

FISCAL YEARS 1 978 THROUGH 1 585

Fiscal Year

CURRENT DOLLARS + CONSTANT DOLLARS

j l ) Includes Turf Paradise and Arizona Downs racing meets.

( * ) Base year i s fiscal 1978.

Source: Average daily handle figures were obtained from Arizona Racing

Commission and Arizona Department of Racing Annual Reports, 1979

through 1985. CPI data was provided by the Bureau of Business and

Economic Research, Arizona State University.

In addition, the increase in the pari- mutuel handle a t Tucson Greyhound

Park has not kept pace w i t h inflation. As of April 6, 1986, the average

daily handle was $ 178,953, up from $ 166,625 for the 1982- 83 racing

season. This corresponds t o an average annual increase o f approximately

2.7 percent. However the i n f l a t i o n r a t e f o r Arizona increased about 5.2

percent per year from f i s c a l year 1983 t o 1985. As a r e s u l t , it i s

questionable i f c a p i t a l improvements had any p o s i t i v e impact on Tucson's

average d a i l y hand1 e. *

D i f f i c u l t t o confirm the re1 ationship between c a p i t a l iniprove~ rents alld

handle - The l i m i t e d impact o f c a p i t a l improvements on the pari- mutuel

handle suggests t h a t factors other than a t r a c k ' s f a c i l i t i e s a f f e c t the

pari- mutuel hand1 e. External factors such as popul a t i on changes, weather

conditions and the number o f racing days can a f f e c t a t r a c k ' s t o t a l

handle. Further, the l o t t e r y has increased competition f o r the gambling

do1 l a r and t h i s might negatively impact the e f f e c t o f c a p i t a l improvements

on a t r a c k ' s handle.

Variables other than track f a c i l i t i e s and external factors nay a1 so have a

more d i r e c t e f f e c t on pari- mutuel wagering. Racing o f f i c i a l s, track

o f f i c i a l s and breeders indicate t h a t purse structures a f f e c t wagering.

Larger purses a t t r a c t b e t t e r horses and b e t t e r horses lead t o increased

wayeri ng. **

Some Improvements Erroneously Approved

By The Racing Commission

Two c a p i t a l improvement projects and components o f several other projects

t h a t were approved by the Racing Commission do n o t q u a l i f y f o r c a p i t a l

irnprovernent status. *** A1 tilough the c a p i t a l improvement statutes a1 1 ow a

* The m a j o r i t y o f the c a p i t a l improvement projects a t Tucson Greyhound

Park were completed by January 1984. The remodeling o f the grandstand

was completed during August 1984.

** House B i l l 2379 passed i n 1986, changed the take- out s t r u c t u r e and

increased the amount o f handle t h a t permittees must a l l o c a t e t o purses.

*** The Racing Commission has erroneously approved c a p i t a l improvement

projects i n the past. A previous Auditor General r e p o r t ( 81 - 5) found

t h a t the Commission improperly approved over $ 220,000 i n c a p i t a l

improvements f o r the purchase o f r o l l i n g stock ( t r a c t o r s and trucks)

a t Turf Paradise and Prescott Downs. The Turf p r o j e c t was

disqual i f i e d before any withholding began. The Attorney General

directed the Comri~ issiont o recoup . tile funas r r i t h t ~ eai by Prescott Do\ ins.

wide range o f projects t o q u a l i f y , the projects must meet c e r t a i n

requirements. However, the Commission approved two projects t h a t d i d not

meet the s t a t u t o r y minimum expenditure requirement. I n a d d i t i o n , the

Commission erroneously approved some components o f t h r e e o t h e r c a p i t a l

improvement projects.

Many p r o j e c t s q u a l i f y b u t r e s t r i c t i o n s apply - While the s t a t u t o r y

d e f i n i t i o n o f a c a p i t a l improvement allows a wide range o f projects t o

qua1 i fy, c e r t a i n r e s t r i c t i o n s apply. According t o A. R. S. SS5- 111.02 ( F)

and 5- 1 11.03( 6), a c a p i t a l improvement i s " an addition, rep1 acement o r

remodeling o f a race track f a c i l i t y . . . ." Since the term " f a c i l i t y " i s

not defined i n statute, a L e g i s l a t i v e Council i n t e r p r e t a t i o n was

requested. The Council concluded t h a t " f a c i l i ty" was broad and included

the operational aspects o f a race track as well as the s t r u c t u r e i t s e l f .

As a r e s u l t , items such as computer hardware, telephone systems and

two- way radios can be considered c a p i t a l improvements.

Although the s t a t u t e s a l l o w a wide range o f projects t o q u a l i f y , the

Legisl a t i ve Council determined t h a t a1 1 c a p i t a l improvement projects must

meet specific c r i t e r i a regarding minimum expendi tlires. * While A. K. S.

§ § 5- 111.02 and 5- 11 1.03 allow a permittee t o consol idate more than one

c a p i t a l improvement p r o j e c t on one appl i c a t i on, each p r o j e c t rnus t s t i l l

meet the s t a t u t o r y minimum expenditure requirement. Further, the

L e g i s l a t i v e Council stated t h a t i n d i v i d u a l components o f projects costing

less than the minimum amount can be combined t o receive approval oniy i f

the components are c l o s<