Call to Order and Roll Call
The sixth meeting of the Interim Joint Committee on State Government was held on Wednesday, November 16, 2011, at 1:00 PM, in Room 154 of the Capitol Annex. Senator Damon Thayer, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Damon Thayer, Co-Chair; Senators Jimmy Higdon, R. J. Palmer II, John Schickel, Dan "Malano" Seum, and Johnny Ray Turner; Representatives Kevin Bratcher, Dwight Butler, Larry Clark, Leslie Combs, James Comer Jr., Danny Ford, Derrick Graham, Mike Harmon, Jimmie Lee, Brad Montell, Lonnie Napier, Darryl Owens, Tom Riner, Carl Rollins II, Steven Rudy, Sal Santoro, John Will Stacy, Tommy Turner, and Brent Yonts.
Guests: Mark Sipek, Kentucky Personnel Board; Dinah Bevington, Personnel Cabinet; Steve Shannon, Kentucky Association of Regional Mental Health and Mental Retardation Programs; David Switzer, Kentucky Thoroughbred Association/Kentucky Thoroughbred Owners and Breeders; Susan Speckert and Greg Lamb, Kentucky Horse Racing Commission; Vince Gabbert, Keeneland Association, Inc.; Nelson Clemmens, AmWest Entertainment, Inc.; and Terence Meyocks, Jockeys’ Guild.
LRC Staff: Bill VanArsdall, Alisha Miller, Karen Powell, Brad Gross, and Peggy Sciantarelli.
Approval of Minutes
Due to lack of a quorum, the minutes of the October 26 meeting were not approved.
Subcommittee Report
Senator Thayer, Co-Chair of the Task Force on Elections, Constitutional Amendments, and Intergovernmental Affairs, reported on the November 15, 2011, Task Force meeting. The report was accepted as read, upon motion by Senator Thayer.
Administrative Regulation Review
The agenda included review of the following administrative regulations that were referred to the Committee on November 2, 2011, pursuant to KRS Chapter 13A:
PERSONNEL BOARD: 101 KAR 1:375 (Employee grievances and complaints)
PERSONNEL CABINET: 101 KAR 2:046 (Applications, qualifications and examinations); 101 KAR 2:056 (Registers); 101 KAR 2:105 (Sick leave sharing procedures); 101 KAR 2:106 (Annual leave sharing procedures).
Mark Sipek, Executive Director, Kentucky Personnel Board, and Dinah Bevington, General Counsel, Personnel Cabinet, briefly explained the regulations. There were no questions. Senator Thayer thanked the speakers and noted that the regulations had been duly reviewed by the Committee.
Regional Mental Health Programs—Retirement Issues
Guest speaker was Steve Shannon, Executive Director, Kentucky Association of Regional Mental Health and Mental Retardation Programs (KARP), the association of the Commonwealth’s 14 Community Mental Health/Mental Retardation Centers (CMHCs). Mr. Shannon spoke about KARP’s request for statutory change to allow the CMHCs to establish an alternate retirement plan for new employees hired after July 1, 2012. He provided a handout to the Committee relating to his testimony, which is summarized as follows.
Mr. Shannon said that the CHMCs served more than 178,000 persons in FY 2010. They employ about 9,000 individuals, and the 14 regional boards include approximately 310 members who volunteer their time. Through executive order, 13 CMHCs now participate in the Kentucky Employees Retirement System (KERS); Pathways, Inc., (Region 10) did not elect to join KERS.
The CMHCs will spend approximately $104 million for retirement cost in the FY 2011-12 biennium—equivalent to the annual budget of four CMHCs. The additional expense due to the increase in the mandated employer contribution rate was approximately $12 million in FY 2011 and is projected at $18 million for FY 2012. Each one percent rate increase equates to approximately $2.8 million for the 13 participating CMHCs, and since June 30, 2006, it increased from 5.89 percent to 19.82 percent. Additional increases are anticipated in FYs 2013 and 2014.
This escalating unfunded mandate poses a huge risk to the CMHCs and the individuals they serve and support. The large personnel cost hampers the ability to secure competitive grant funding and has resulted in the loss of grants. The CMHCs are concerned about the ability to competitively negotiate with the three Medicaid managed care organizations. Service expansions to new markets and service diversification are restricted by having to account for a 20 percent—and increasing—employer contribution. There is reluctance to hire new staff, salary levels have become less competitive, and employee benefits such as tuition reimbursement are weakened due to the escalating KERS contribution.
The 13 participating CMHCs would like to thank the General Assembly for acting in 2010 to include additional funds for them in the state budget—$2.5 million in FY 2011 and $3.8 million in FY 2012. The budget also provided that the funding expansion could be used as a state match to draw down federal dollars through the Kentucky Medicaid program. Unfortunately, to date, the CMHCs have not realized any of the additional funding or an increased match rate in the Medicaid program. They are committed to using the appropriation as state match for additional federal dollars, and they have been working with the Kentucky Department for Medicaid Services to submit the state plan amendment required for an increase in Medicaid rates—which have not increased since 2001.
The CMHCs are proposing the KRS 61.520 be amended to treat them the same as regional universities, by allowing them to offer an alternative retirement plan, such as a 401(k), to new hires after July 1, 2012. Their first choice, however, would be receipt of the previously budgeted expanded funding. In absence of those additional dollars, the proposed statutory solution would not require a general fund appropriation, would not harm current employees or KERS, and would provide both short-term and long-term relief to the CMHCs. Without relief, hiring practices may be implemented that will exclude new employees from participation in KERS.
Representative Lee spoke about the need to lower costs so that the regional mental health agencies can continue to provide a safety net for Kentuckians in need. He said he hopes the General Assembly will address the problem in the 2012 legislative session.
Senator Thayer said that the issue is of importance and worth the Committee’s consideration. There were no further questions, and he thanked Mr. Shannon for his testimony.
Advance Deposit Wagering
By way of background, Senator Thayer explained that the Kentucky Thoroughbred Development Fund (KTDF) was established by the General Assembly in 1978. It is funded through the state pari-mutuel tax on wagers made in Kentucky and is used to supplement purses for certain races at Kentucky tracks. Only registered Kentucky-sired Kentucky-foaled horses are eligible to share in fund purse supplements. The fund was created to stimulate the demand for Kentucky-breds and to keep them racing in Kentucky. He also explained the mechanics of advance deposit wagering (ADW), which allows customers to set up accounts and place wagers by telephone, text message, or via the internet. Several ADW operators are based in Kentucky—Keeneland Select, AmWest Entertainment, and Churchill Downs’ Twin Spires.com.
Senator Thayer said he is very disappointed that Churchill Downs—a major player in the horse racing industry and ADW—declined his request to send a representative to testify before the Committee. He stated that the growth in parimutuel wagering is coming primarily from ADW wagers, which are not taxed in Kentucky. Therefore, the amount of money going into KTDF is decreasing. There is a willingness in the General Assembly to address this, as evidenced by House Bill 368, introduced in 2010, and Representative Larry Clark’s House Bill 387, which was enacted in 2011 to require licensing of ADW providers by the Kentucky Horse Racing Commission (KHRC). Senator Thayer said that he and Representative Clark have been discussing ways to direct a portion of ADW wagers into purse supplements for Kentucky-bred horses.
Guest speakers from KHRC were Susan Speckert, General Counsel, and Greg Lamb, Supervisor of Parimutuel Wagering. They provided a handout containing information on sites that conduct wagering on Kentucky races, the division of wagering dollars in Kentucky, and ADW wagering handle and taxation in Oregon. Also included in the handout were copies of administrative regulation 811 KAR 1:285 (Advance deposit account wagering) and the KHRC license application for ADW.
In summary, Ms. Speckert and Mr. Lamb explained that approximately 760 sites were conducting wagering on Kentucky races between January 1 and November 9, 2011. Based on total handle (see page 7), five of the top 10 sites are ADW sites; the TwinSpires and TVG ADWs rank third and fourth, respectively, in total handle. 811 KAR 1:285 provides that any ADW operating prior to November 4, 2011—the effective date of the administrative regulation—has a 60 day period in which to make a license application, with the deadline being January 3, 2012. Both TwinSpires and TVG will be able to continue operating until completion of the licensing process, but ADWs not operating prior to November 4 cannot begin operating in Kentucky until licensed. Any ADW that offers its services to Kentucky residents will be required to be licensed.
On the list of wagering sites, “Total Handle” includes the amount wagered both in Kentucky and on Kentucky races. The $135,490,843 million handle for Churchill Downs includes wagering from 36 other tracks around the country. “Commission” is the total amount deducted and includes profit to the track, purse money, and the parimutuel tax. After deduction of commissions and adjustments, “Runner Pay” is the amount paid to the public. Currently in Kentucky, if a track is handling more than $1.2 million daily, takeout on a win/place/show bet is 16 percent and 19 percent on all other wagers. Senator Thayer noted that approximately 80 cents of every dollar wagered is returned in winnings.
Based on a 2009 report to the Governor on the status of racing in Kentucky and its future, KHRC’s informational handout included several pie chart graphs to illustrate the portion of wagering money that goes to bettors, the state tax, KTDF, Kentucky purses, Kentucky tracks, out-of-state tracks and purses, and ADW companies. When Kentucky residents bet on out-of-state races via ADW, the state of Kentucky, KTDF, Kentucky purses and Kentucky tracks receive nothing. Likewise, when Kentucky residents bet on races at Kentucky tracks via ADW, the state and KTDF receive nothing. Senator Thayer explained that purses are determined by agreement between the race tracks and the Kentucky Horsemen’s Benevolent and Protective Association and the Kentucky Thoroughbred Association.
The bulk of the ADW companies are located in Oregon. In the second quarter of 2007, Churchill Downs started receiving wagers through its TwinSpires ADW in Oregon, which had a total handle that year of more than $88.5 million. By 2010, that total increased to more than $405 million.
Responding to questions from Senator Thayer, Ms. Speckert said that, to date, no ADWs have yet applied for a Kentucky license. All have been in contact with KHRC, but the number that will apply is unknown. Once licensed, the ADWs must provide quarterly reports to the commission of both the amount of money wagered by Kentucky residents and the amount wagered on Kentucky races. Numbers will likely start being reported from the ADWs in early summer 2012. KHRC will have access to any information that the licensed ADWs file with other states or the Commonwealth of Kentucky.
When queried by Representative Owens and Senator Thayer, Mr. Lamb said that Oregon charges ADWs a daily license fee of $200. He said the companies are given several options for payment of tax on gross mutuel wagering receipts. When first implemented, the tax rate was 0.125 percent of the first $60 million in gross mutuel wagering receipts during the license period and 0.25 percent on receipts in excess of $60 million. There was a cap of $300,000 for the first year (FY 2006); the tax then increased in $25,000 increments for FYs 2007 and 2008. Ms. Speckert said that, by law, KHRC may impose a license fee up to $10,000 annually to cover administrative costs, but the annual fee for ADWs will be $1,000, which is the amount that most states charge. KHRC will revisit the fee if annual regulatory costs exceed $1,000.
David Switzer, Executive Director of the Kentucky Thoroughbred Association /Kentucky Thoroughbred Owners and Breeders (KTA/KTOB), spoke about the decline of funding for KTDF. The Committee received paper copies of his PowerPoint presentation, which charts sources and distribution of wagering revenue in Kentucky and the percentage decline in KTA purses and KTDF funding from 2005 to 2011. In summary, Mr. Switzer said that KTDF differs from similar funds in other states in that non-Kentucky-bred horses may run in KTDF-supported races. KTDF receives 0.75 percent of the parimutuel tax from “live on track” wagers; the fund receives two percent from live races in Kentucky wagered at another Kentucky facility (intertrack) or simulcast wagers made in Kentucky on races outside Kentucky. There is no parimutuel tax on ADW bets made by Kentucky residents. In addition to KTDF, parimutuel tax revenue also supports the state’s General Fund, equine drug research, the Kentucky Standardbred Development Fund, the University of Louisville Equine School, and the Higher Education Equine Fund. Due to the movement of wagering to facilities that do not participate in the parimutuel tax, KTDF has declined 36.82 percent since 2005, and KTA purses have declined 18.77 percent.
When Senator Schickel raised the question, Mr. Switzer and Senator Thayer explained that in order to know how much money would be generated by taxing ADWs, KHRC must first analyze the wagering data reported by the ADWs that become licensed in Kentucky. When Representative Harmon asked, Mr. Switzer said he does not know whether any federal restrictions apply to taxing of ADWs.
Senator Thayer asked whether KTA has an official position on the issue of taxing ADWs, and Mr. Switzer said that the organization supports the efforts of Representative Clark and Senator Thayer.
Next to speak was Nelson Clemmens, Chief Executive Officer of AmWest Entertainment, Inc., a simulcast service provider founded in January 2004 and headquartered in Prospect, Kentucky. Mr. Clemmens noted that he is an owner and breeder of horses in Kentucky. His presentation is summarized as follows.
Mr. Clemmens said that AmWest operations are in Portland, Oregon, where most ADWs are hubbed. He said he would welcome KHRC’s embracing of competitive multi-jurisdictional hub legislation similar to that developed in Oregon, where it brings in a high volume of customers and significant tax revenue. As a horseman nothing would please him more than to have strictly on-track customers and wagers, with the stands filled every day; however, with few exceptions, the growing trend in wagering is mainly off-track, including simulcast. About 90 percent of wagers are now off-track, and about one-third of those are ADW.
AmWest has developed the most advanced wager pad in the industry, innovative marketing and promotional programs to attract customers, and has made a significant effort to bring additional revenue from international wagering into the U. S. market. AmWest is also supportive of taking advantage of the much larger source of revenue that is enjoyed by other major racing states—that is, supplements from casino racing.
Although it is true that interest in wagering has diminished because of the poor economy, much of the wagering has moved to offshore betting, which is primarily being operated by “book makers” with online sites. These piracy operations have become popular and have been detrimental to the horse racing industry. Since the trend is to wager more on the Internet, AmWest feels that the ADW model has a lot of merit when applied to horse racing. AmWest is a Kentucky company employing Kentucky residents and paying taxes in the state and, hopefully, driving overall handle. The company, which is licensed in Oregon, New York, Louisiana, and South Dakota, has interest in making the industry more competitive but has concern about imposition of additional taxes in an industry that is already fractured. Mr. Clemmens concluded his opening remarks by suggesting that racing commissions in general need to put as much as possible on a common platform.
The next speaker was Vince Gabbert, Vice President and Chief Operating Officer of Keeneland Association, Inc. He thanked Senator Thayer and Representative Clark for their work on behalf of the industry. He said Keeneland is extremely supportive of KTDF and wishes to cooperate in the efforts to garner more information on the ADW network and find a solution to the taxing issue.
Mr. Gabbert said Keeneland is in the infancy of its ADW program, Keeneland Select, which was launched in August 2011. He said it is important to understand that operators of ADW companies bear all of the overhead, marketing, and staffing costs involved. With state tax structures in mind, Keeneland made the business decision to offer ADW wagering in only five states—Arkansas, Florida, Kentucky, Louisiana, and Ohio. Residents of other states, including New York and California, are not allowed to wager through the Keeneland Select platform because the fee structure would make it nearly impossible to realize the necessary volume to derive any income from wagers. This decision will be evaluated as the program progresses. Keeneland is very supportive of on-track wagering and during race meets turns off the public WiFi in order to encourage use of the betting windows. As a sales company, however, Keeneland Select needs to make alternate forms and avenues available for wagering so that all customers have an opportunity to participate, as wagers are increasingly being made through phones and online. The amount of money wagered through ADWs has continued to grow and represents the greatest potential for growth in the future.
Responding to questions from Representative Clark, Mr. Clemmens said that AmWest is a diversified operation that also has off-track betting facilities and offers other industry services. Handle has grown significantly since 2004. AmWest has grown competitively and is now one of the largest ADW providers in the industry. Routine procedures and controls exceed regulatory requirements, and financial statements are made available. He said that he personally supports and benefits from KTDF and is very keen on the growth and viability of the horse racing industry. He does not recommend specific percentages or a “silver bullet” but hopes to provide helpful feedback, as well as his full support. Representative Clark said that, with the baseline handle yet to be determined, he and Senator Thayer do not want to over-tax ADWs but want to see that a fair share goes to the industry. He said that the General Assembly needs and would appreciate any data and information that Mr. Clemmens is able to provide.
When Representative Clark inquired about Keeneland Select, Mr. Gabbert said that it has a partnership with TwinSpires.com to share technology and customer service. The call center is in Lexington.
Responding to questions from Representative Owens, Mr. Gabbert said Keeneland Select may be able to accept wagers from additional states in the future, but at this time, the costs of obtaining and developing the necessary market share would be significant. Mr. Clemmens said that there are probably “30 or so” ADWs in the United States, but only about 12 are of significant size.
Senator Thayer asked whether it would be possible for Kentucky to have a hub that could compete with Oregon, which has only one racetrack and no breeding industry. Mr. Clemmens said he believes it would be possible. He thinks Kentucky would be an attractive location for a multi-jurisdictional hub and that AmWest would prefer to have its hub revenue going to Kentucky. He said that Kentucky’s racing commission is very capable and that it could be done by administrative regulation, since, as noted earlier by Senator Thayer, a statute is already in place. He added that he is a fan of regulatory compliance, although the involvement of multiple government agencies adds to the burden. The industry needs to compete with the offshore betting menace and also be competitive with sports betting and other forms of entertainment. When Senator Thayer asked about impact on the job market, Mr. Clemmens said that a hub in Kentucky would likely bring in hundreds of jobs initially, and the increased tax revenue could bolster purses and make them more competitive.
Senator Thayer spoke about the importance of making the KTDF logo more significant and solicited input from Kentucky’s racing industry regarding an appropriate rate to tax ADWs without hurting price competitiveness in the marketplace. Mr. Gabbert agreed on the need to make the KTDF logo and purse structure as significant as possible. He said Keeneland purses during the 32-day racing period average about $600,000 daily, whereas daily purses during the winter at Turfway Park average only about $60,000. Because New York racetracks now offer video lottery gaming, purses in claiming races at Aqueduct that were offered for $10,000-$15,000 a month ago have now grown to $60,000-$75,000. He said Keeneland would like to be helpful but that he does not have enough information from a business standpoint to recommend a specific tax rate. Keeneland had record attendance this past fall but still did not meet the $1.2 threshold for daily live handle that would subject the track to a 3.5 percent tax. He lamented that the racetracks failed to realize the potential opportunity to place a hub in Kentucky when legislation passed almost eight years ago.
Representative Clark said his first concern is to capture more money for the industry to enhance purses. He said that KTDF is needed, but he voiced concern that the greater portion of those funds goes to three major horsemen in Kentucky and that not all race horse owners are allowed to participate. Senator Thayer clarified that Representative Clark apparently was referring to the Kentucky Breeders Incentive Fund, which is funded by the sales tax on stud fees that goes directly to successful breeders. He said KTDF would absolutely benefit “blue collar” horsemen that race at Kentucky tracks—particularly if the law is changed to permit KTDF funds to also support claiming races, as was proposed in the Senate version of House Bill 368.
The last speaker was Terry Meyocks, National Manager of the Jockeys’ Guild, and a third generation horseman, who signed up to testify. Mr. Meyocks said he hopes everyone will work together to do what is best to increase purses at Kentucky tracks and that the Kentucky General Assembly will do as much as possible to help the racing industry and horse breeders in Kentucky.
Adjournment
Senator Thayer said he looks forward to working with Representative Clark to develop appropriate legislation, and he encouraged input from the guest speakers. The meeting was adjourned at 2:50 p.m.