Thursday, December 8, 2016

By the Numbers: the State of the Industry

Yesterday, my blogging colleague Bill Shanklin, on his HorseRacing Business site, pointed out that, as we all know, the number of races run each year and the number of foals born each year has significantly declined over the past two decades and made a couple of predictions for the future. Bill suggested that (1) the number of foals and races would continue to decline, although a full-time 24/7/365 betting menu would be available for us diehard degenerates via television and the internet, and (2) that urban development near Lexington KY and Ocala FL would lead to a spreading out of the breeding industry to more rural areas.

Following up, and looking at the actual numbers, I’ve gone into some additional detail, using numbers from the invaluable Jockey Club FactBook to illustrate some trends in the industry over the past 25 years and to make some extrapolations of my own.

First, to put some precision into the figures that Bill mentioned. In 1990, there were some 72,664 thoroughbred races run in the US. That number has steadily declined over the intervening years, reaching 38,941 in 2015, a drop of 46.5%, or nearly 2% per year, averaged over the whole period. And, as Bill mentioned, the foal crop has also declined, albeit in a much less straightforward manner. In 1990, there were 40,337 thoroughbred foals born, and in 2015, The Jockey Club estimates that there were 20,600.  That’s an overall decline of 49%, close to the drop in the number of races. But three-quarters of the decline is just in the past 10 years, as breeders quickly responded to the effects of the financial crash of 2008. From a foal crop of 35,050 in 2005, to the 20,600, last year, the drop has been more than 41% just in the past decade.

So, no argument about the  numbers; the foal crop is smaller and there are fewer races today than a quarter-century ago. But what of the future? Will the inexorable decline continue, as Bill suggests?

To get some handle (sic) on that question, examining a few more sets of figures may be helpful. Let’s start with an easy one: has there been a precipitous decline in field size, making it ever more difficult for the bettor to find value in a race? Back in the glory days of racing, field size was a healthy nine-plus (9.09 in 1950). That number held up pretty well until about 1990, when average field size was still a solid 8.91. Then it declined rapidly, dropping 8% to 8.20 by 1995, and remained at that level through at least 2010, when it was still 8.19. By 2015, however, field size had once again shown a sharp drop, as the effects of the decline in the annual foal crop worked their way through the system. Average field size in 2015 was only 7.82, a drop of 4.5% in just five years. It’s well established that, at least up to a field size of 10 or so, handle increases more or less proportionately to the increase in field size, so that a continued decline in the latter would inevitably reduce betting, all other things being equal.

Even without that impact, of course, handle has been disappearing even faster than the aging population of horse race bettors. Measured in current dollars, total US thoroughbred handle has apparently risen a bit, from $9.385 billion in 1990 to $10.675 billion last year. Even without adjusting for inflation, though, that 25-year span masks a more recent and precipitous drop, from a high (again in current dollars) of $15.062 billion in 2002, just 13 years ago, to the 2015 total. That’s a drop of nearly 30% in just 13 years. And the figures look MUCH worse if one adjusts for inflation. Measured in constant 1990 dollars, total US handle has declined from the $9.385 billion in 1990 to just $5.887 billion last year, a drop of more than 37% over then entire period and, more ominously, a drop, in constant dollars, of 46% from the high water mark for handle in 2002. And even these figures understate the impact on race tracks and horse owners, as an ever-greater part of total handle comes from off-track simulcasting, ADWs and other outlets that return less to the track presenting the races than does on-track (and, in some cases such as NYRA, in-network) betting. As betting declines, and returns from betting decline even further, most tracks have come to depend on slot machines or other non-racing gambling revenue. When cash-hungry state politicians start to raid that particular cash cow, the prospects for tracks and horsemen will become even bleaker.

Purses, thanks to slot machine largesse, haven’t declined nearly as much as total handle. In fact, even adjusting for inflation, the average purse per race has actually increased by more than 50% over the past 25 years. Total purses, measured in then-current dollars, were $714.5 million in 1990, rising to $1.074 billion in 2002 and then more slowly to $1.094 billion last year. Measured in constant 1990 dollars, that’s a decline of 15.5% over the entire 25-year period.

But for those owners who stayed in the game, the situation looks a lot different if one examines the average purse per race. Remember, the number of races has declined even faster than the number of foals born each year (declining field size, therefore, is a function of each horse running a bit less often than in earlier years). So if we look at the average purse per race over the period, there’s a substantial increase. Measured in current dollars, the increase is huge, from $9,832 in 1990 to $28,086 last year. Even correcting for inflation and measuring in constant 1990 dollars, there’s been a 57% increase, from 1990’s $9,832 to last year’s $15,488. For those of us who own race horses and are used to the old rule of thumb that the average horse earned about half of what it cost to keep it in training, that feels about right. The influx of slots money over the past two decades means that the average horse now earns about three-quarters of what it costs to keep it in training. Hey, progress is better than the alternative.

One last set of figures to suggest that perhaps in one sense the racing industry has already reached a point of some equilibrium. Back in 1990, the median price for a yearling sold at public auction was $7,000, and the total amount of purse money per foal born that year (an admittedly unscientific measure, but bear with me) was $17,715, or 2.53 times the average cost of a yearling. Fast-forward to 2015, and the inflation-adjusted median cost of a yearling was $12,430, while the purse money per foal was $23,820, or 2.65 times the median yearling price. In other words, buyers are, perhaps unconsciously, keeping the amount they pay for horses in some very rough proportion to the purse money available, even as the number of foals has substantially declined and overall purse money has declined. In fact, during the entire 25-year period from 1990, his purse-to-yearling price ration has moved in a fairly narrow band, between a low of 2.29 and a high of 2.75. That’s a pretty stable market over time.

So how does all this relate to the predictions that we started with, namely, the ongoing decline in racing? My own sense is that the number of races per year, and the number of active race tracks, will continue to decline, slowly if things don’t change, faster if the states start removing slot subsidies, but that the market for thoroughbreds will, as it has since 1990, continue to adjust so that race horse owners’ expected losses stay in a manageable range, in some proportion to the amount of purse money that’s available.

All this, of course, assumes more or less a continuation of the status quo. Bold moves, like significant takeout reductions, improvements in the tote system, free data, an integrated viewing and wagering system, etc., could boost handle and either grow the industry or at least ease the pain of its declining years. But, looking around at the folks who are in charge, I wouldn’t bet the rent on the likelihood of any such change coming soon. If you’re more hopeful than I, you can get in the mood here.


Thursday, December 1, 2016

Takeout - What's Optimal?

Everyone knows that the takeout -- the amount of total bets that the track holds onto before paying out the balance to holders of winning tickets -- is too high.The competition -- slot machines, casino table games, poker, sports betting -- typically sets takeout somewhere between 5% and 10%, while US racetracks have a blended takeout, averaging the different levels on different types of bets, of somewhere just over 20%. It doesn't take a genius to see that we're pricing our product too high.

Sure, if you have a better product, you can often charge a higher price. But is our product so superior to that of the slot parlors, casinos, poker rooms or sports books? Those of us who love Thoroughbreds and who admire the athleticism and competitive spirit of the horses and the skill and courage of the jockeys might say so, but we're probably not a very big slice of the population. And even then, we should question whether the product offered on a Saturday at Saratoga or Keeneland is no better than the Tuesday card at Finger Lakes, even though we may charge the same price (i.e., takeout) for all of them. It's no wonder that thoroughbred racing handle has stagnated over the past few decades -- actually, measured in inflation-adjusted dollars it has decreased -- while the amount bet on alternative forms of gambling has increased. The competitors offer a product that many people find to be just as good -- in the eyes of some even better, because it doesn't have the steep learning curve that betting on horses does -- and they offer it at a cheaper price.

So, with the exception of some horsemen's groups that are oblivious to the economics of betting and some track owners who don't care that much about profits from racing, because they're really in the ADW business or in slot machines or in producing games for smart phones (see Churchill Downs, Inc.), most people in horse racing who think about the takeout issue agree we should do better. The more difficult question is how to adjust our prices. There have been lots of economic studies of "optimal takeout," but, like most economists' studies, these incorporate unreasonable assumptions that ignore where bets are placed and what kinds of bets they are. Some practical experimentation is needed.

Recently, some tracks have introduced "low takeout" (i.e., 14-15%) bets, typically multiple-race wagers like the Pick 5. A few (Canterbury, for example), have tried reducing takeout across the board.  So far, these experiments haven't demonstrated that price-cutting really pays. But have we done the kind of analysis that would suggest more effective approaches? I think not.

As an example, let's take the takeout structure and the distribution of bet types at the NYRA tracks -- Aqueduct, Belmont and Saratoga. Single-horse bets (win, place and show) have a 16% takeout, two-horse bets (exacta, quinella and daily double) are 18.5%, and multi-horse bets, from a trifecta or Pick 3 through the Pick 6, are 24%, except that the Pick 5 (all the time) and the Pick 6 (on non-carryover days) are 15%. You can see the overall effect by looking at the NYRA financial reports. For example, in the second quarter of this year, NYRA's "on-track" handle was $165 million, and its gross revenue, i.e., the takeout, from that amount was $33 million, almost exactly a blended takeout rate of 20%.

In addition to that "on-track" handle (half of which, by the way, was bet through NYRA's own "NYRABets" online and phone betting app, rather than actually being handed across the teller windows at the track), NYRA's 2nd-quarter handle also included $460 million from simulcast and ADW revenue, from which it earned another $33 million. So its share of the takeout from exporting its signal was only about 7% -- better than for lower-class tracks, but a far cry from the 20% it makes on its home turf (or dirt as the case may be). And then NYRA also counted $56 million from bets placed on NYRA races at the various OTBs across New York State, on which it netted $6 million, or just under 11%. The difference between the overall 20% takeout and the 7% or 11% that NYRA actually receives from off-track and off-network bets represents money that is available to the entities receiving the NYRA signal to use for their operations or, importantly, use for rebates to big players. NYRABets' own rebate plan, according to its financials, costs less than 1% of the amount bet through its network, but for some single-purpose ADWs, especially those effectively owned by the bettors themselves, it can be as high as 10%.

So cutting takeout overall would have different effects depending on where a bet is placed. For bets on-track or on-network, takeout could be cut 5% at each level, to, say, 11%, 13.5% and 19%, without necessarily bankrupting the track, and allowing time to see if the takeout cut would pay for itself in increased handle. But if NYRA cut takeout by that much and still charged the ADWs the 7% sending fee that its financials suggest, then what would happen to the big rebates that the "whales" get through their ADW bets? At present, these "whales," mostly using sophisticated computer/robotic wagering programs to exploit small leverage opportunities in the pools, account for perhaps 20% of total US handle, concentrated in the major tracks, because that's where the pools are large enough to accommodate their big bets. If, say, NYRA cut its win takeout to 11% and still charged the ADW 7%, that would effectively limit rebate possibilities to 3-4%. Would the whales still be at that rebate level? Maybe, because they would face the same net, post-rebate, takeout as at present. But we don't know for sure.

And the effect of a takeout cut also varies by the type of bet. One of the reasons groups like HANA (the Horseplayers Association of North America) favor cutting takeout is that it would increase "churn," the number of times a player can keep betting before her money runs out. But if takeout is cut on a Pick 5, then that money, even if low-priced, is tied up for five races. Better than all day, but perhaps not so much. If churn is a factor,one would expect the effects of low takeout to be greatest at the single-horse bet. Yet few tracks have tried it there.

NYRA's most recent quarterly financials don't include a balance sheet. (By the way, it's now December; where are the 3rd quarter financials for the period that ended two months ago?) But still, it's reasonable to assume that there's a bit of cash in the bank. While I think an overall reduction of at least 5% is probably the right number, it would be great to see one of the major players in the game, like NYRA, try an across-the-board takeout reduction at, let's say 3%, reducing win place and show bets to 13%, two-horse bets to 16.5%, and everything else to 22%, for a blended rate of 17%. Even though that's still way more expensive that the non-racing competition, it might be enough to move the needle and start pulling in additional handle, perhaps even enough to make up for the price reduction. And let's pledge to keep the experiment in place for at least a year, so as to give it a fair test. That would go a long way to settling some of the so far mostly theoretical arguments about optimum takeout.

I know, I know. Changing the takeout, especially in New York, isn't easy. One has to go to the Legislature, the Gaming Commission, etc. etc. But NYRA's authorizing legislation for converting back to a private entity will be coming up in Albany in the next session anyway. Why not use the occasion to free NYRA to adjust takeout as it sees fit and maybe, just maybe, answer the question about whether a significant takeout reduction would bring gambling money back to the races.


Wednesday, November 23, 2016

Transparency: Partnership Division

A couple of recent events have spurred my interest in transparency. First, there's the ongoing saga of Donald Trump's business dealings around the world and his not very transparent, or real, charitable efforts. And then there was an online exchange with Terry Finley, the manager of the West Point Thoroughbreds partnership operation. Terry was asking me about the finances of the New York Thoroughbred Horsemen's Association (NYTHA) -- which are in fact available to any NYTHA member who wants to see them -- but the question brought to mind my own concerns about the finances of horse racing partnerships.

As I pointed out about three years ago, partnerships are a big deal in racing. At this year's Saratoga meet, for example, some 41 different public partnerships made a total of 211 starts, and that's not even counting "partnerships" that are just groups of friends or business acquaintances and that don't market themselves to the general public. They range from high-end groups like Dogwood (now winding down as Cot Campbell, the inventor of the genre, cuts back), Centennial, West Point, Team Valor, Eclipse or Lady Sheila, where the buy-in cost is in the high five or even six figures, to operations like my own Castle Village Farm, aimed at the everyday racing fan, and where the buy-in is as little as $1,000, or even $500 for those signing up for a second partnership.

Whatever the size or level of a partnership, a prospective partner should be able to look at its financial reports and get a sense of what her money is going for. Later in this piece, I'll review a few financial reports that Castle Village Farm distributes to its partners each month and that our team (business manager Jean Zorn and sales manager Joe Wall as well as myself) thinks give the right level of transparency, so the partners can see what their money is being used for. But first, let's look at the many ways that a partnership promoter can make a profit. That's important for a prospective partner, since, as we've seen, the typical race horse doesn't earn enough to pay for itself. To the extent that the partnership promoter makes a profit, that increases the likely loss for the other partners. Sure, some horses do well, but, for every Twilight Eclipse or Ring Weekend in West Point's stable of more than 70 horses, how many are there that have not come close to earning their keep, much less repaying their purchase price? A fair division of income between promoters and partners is necessary to keep the partners in the game long-term; people who feel they're being cheated are unlikely to return, even though they understood from the outset that race horse ownership is not exactly a safe investment.

So how do the promoters make money? There are only a few proven and oft-repeated approaches (leaving aside for the moment the tactic of simply stealing the partners' money, as notoriously practiced by the late, unlamented Karakorum Racing Stable).

First, a partnership can mark up the price of a horse that it has purchased. It's not uncommon for the high-end partnerships to pay, say $100,000 for a horse at auction and syndicate it to partners at a value of perhaps $250,000 ($25,000 per 10% share). Certainly, there's risk and expense involved in making the purchase. The partnership will typically hire a bloodstock agent (for a fee of 5% of the purchase price), pay vets and others to evaluate the horse, and carry the risk from the fall of the hammer at the auction until the horse is fully syndicated. And the partnership has (mostly) legitimate marketing costs, tailored to their intended clientele. For example, I once attended a Centennial marketing event at a Palm Beach club, complete with wine, hors d'oeuvres, Bill Mott and Jerry Bailey. None of that comes cheap. But whatever the markup is, it should be fully disclosed.

Alternatively, a partnership can take a percentage of each partner's initial capital contribution in lieu of or in addition to marking up the price of the horse. At Castle Village Farm, for example, we take 10% of that initial partnership contribution to pay our sales manager, 5% for the expense and expertise involved in selecting horses, and 3% for our thoroughbred retirement charity, Castle Village Cares (which also gets 1% of all our horses' earnings). That's a  modest 18% in total, and it's fully disclosed in the partnership business plan and partnership agreement.

Second, a partnership can take a percentage of a horse's earnings off the top, before distribution to the partners, or it can retain a percentage of the horse, without the obligation to pay that percentage of the horse's expenses. These amount to the same thing. Again, to use an example I'm familiar with, at Castle Village Farm, we take 5% of the first $100,000 in gross purses earned by each partnership, 10% of the next $100,000, and 15% of anything over $200,000.

Next, a partnership can charge a management fee, in addition to or instead of a percentage of purse earnings. The management fee may, or may not, have any relation to actual overhead costs. At Castle Village farm, for example, that fee is $535 per partnership per month, and reflects actual costs like office rent, preparing annual tax returns for each partner, etc., but does not include any compensation for the management team. Other partnerships do it differently; the important thing for would-be partners is that they know whether a fee is charged, what it's for, and how much it is. Similarly, some partnerships, including ours, charge for additional out-of-pocket expenses that are outside the scope of what's covered by the regular management fee. At Castle Village Farm, we call that "partner liaison" expense, and it is whatever it is each month, and is fully disclosed.

Finally, a partnership can take a percentage, either of the gross or of the profit, when a horse is sold. A percentage of the gross seems to me to be problematic, for why should the partnership promoter get, say $5,000 when a $250,000 yearling is dumped in a $50,000 maiden claimer? In my opinion, the better practice is to take a percentage only of the profit, if any, on the sale. Most times there won't be any, but that's the nature of the game.

Now, as for transparency. At a minimum, prospective partners should know how much they're on the hook for, and in what categories. As the West Point website says, the most common question new folks ask is "how much does it cost?"(Although at that site, you have to sign up for a sales pitch to get the information.) Most partnerships are limited liability companies or limited partnerships, not sold on public markets, so there are few, if any, legal disclosure requirements. In some cases, the financial disclosure provided by partnerships is excellent, in others, it reminds me of the Wall Street law firm where I once worked, which sent each client a monthly bill that simply stated  "To our fee" and listed a (quite large) dollar amount.

As an example of what I think is adequate transparency and disclosure, here's a summary of what Castle Village Farm provides its partners and makes available to anyone asking about the possibility of joining us.

First, we provide a capital account for each partnership, showing the total amount of money that came in as partner contributions, the amounts deducted for sales costs, finder's fee and thoroughbred retirement (see above) and the cost of the horse (actual cost, no markup). In a new partnership, any excess is used to pay the horse's expenses, thus delaying any potential cash call. In our claiming partnerships, if a horse is claimed, we typically retain any excess of the claim proceeds over the amount used to buy a replacement horse in the capital account, in case that next horse in the partnership ends up being sold for less than we paid for it.

Second, each time a horse runs, we send partners a purse statement. To take an example, on October 17th this year, our mare Lemme Rock won an optional claimer at Finger Lakes. The race was worth a total of $17,400, so our 60% win share was $10,440 (gross purse). Then the statement shows that there were a lot of deductions: (1) fees deducted by the track -- principally for the local horsemen's organization and for jockey insurance -- totaled $361.30; (2) the jockey, the trainer and Castle Village Farm management each got 10%, or $1,044 each; (3) the mare's groom got $100; (4) Castle Village Cares, our thoroughbred retirement arm, got $104; (5) the trainer charged $25 for the raceday groom and pony fee; and (6) getting win pictures for each partner and mailing them cost $350, for total deductions of $4,072. So, from that $10,440 purse, the partners were credited with net of $6,368 -- more than enough to pay the bills at Finger Lakes and put aside something for the mare's winter vacation, but not really a bonanza. And each partner received a statement at the end of the month showing exactly the amounts just described.

Third, these purse statements then become part of the basic financial document sent to partners each month -- our Accounts to Partners. To continue with the same example, our Accounts to Partners for the Lemme Rock partnership for October showed that we'd started the month with $8,031 in the bank. Added to that was the $6,038 net from the October 17th race. So the partnership's available cash was a total of $14,399.

From that the statement shows deductions of $1,798 for training fees (we pay $58 a day at Finger Lakes); $373 for expenses paid out of pocket by our trainer such as the farrier, feed supplements, etc.; $265 in partner liaison expenses (see above); and $535 for our administration fee, for a total of $2,971. Obviously, keeping a horse at Finger Lakes is a lot cheaper than at Belmont, and there were no vet expenses that month, but still, keep in mind the winner's share was only $10,440.

So that left a total of $11,428 in the Lemme Rock partnership's operating account. Normally, at that point we'd retain two or three months' projected expenses and distribute the excess directly to the partners. But since the Finger Lakes season ends in November (if it hasn't already with multiple bad-weather cancellations) and we want to give Lemme Rock, who has four wins this year, some well-deserved time off, we retained that in the partnership so partners won't have to pay any cash calls before she starts racing again in the spring.

Just to be fair, let's also look at the Account to Partners for a horse that wasn't as successful. Our NY-bred colt Proletariat, winner of two races and $71,683 from 13 lifetime starts, had been on an injury rehab assignment in South Carolina and returned to Belmont in October. So, no purse earnings at all. Instead, here's what the Accounts to Partners for that partnership, consisting entirely of expenses, looked like.

(1) $770 for the first 11 days of the month training in South Carolina at $70 a day; (2) $883 for expenses, including van rides to the vet, shoeing, feed supplements, etc.; (3) $1,900 for training at Belmont (at $95 a day); (4) $185 for trainer expenses at Belmont; (5) $286 for vet bills in South Carolina; (6) $720 for the van from Camden to Belmont; (7) $265 in partner liaison expenses; and (8) $535 for the Castle Village Farm administrative fee, all for a total of $5,544. That's about as expensive as it gets for a horse in a month, but at least the partners know where the money went. Then each partner is billed her pro-rata share of that total. There are 42 partners in Proletariat, so the average cash call was $132, and specific partners' shares ranged from a high of $298 (5.38%) to a low of $23 (0.42%). I guess that's why we say we're an affordable partnership.

The important thing about these numbers is not the amounts, but rather that we disclose them, clearly and promptly. I may love our horses and hang out with them, but I never forget that it's the partners' money that pays for them.

So, Terry and everyone else out there: I hope you'll all be equally forthcoming about the finances of your partnerships. All of us, from Castle Village Farm to Centennial, Dogwood and Team Valor, provide good customer service. We (not speaking for the others, just CVF) take our partners to the barn and the training track to see their horses, we let them know when the horses are running, assist with licensing, get paddock passes for friends and family, and otherwise help partners enjoy the racing experience. How much a partner should pay for that experience is a matter for each individual to decide. In our case, the support and the experience comes at a pretty low price. For some other partnerships, a lot more.  But how can prospective partners decide if it's worth it unless the financial aspects of a partnership are transparent? I'm hoping that many of the partnership managers will join me in opening the books. Perhaps we could even set up a reference library on OwnerView. In any event, transparency is almost always the right thing to do. As most economists will tell you, markets only work efficiently when there's sufficient knowledge. Let's not keep partners and prospective partners in the dark and let's not feed them horse manure instead of facts.


Tuesday, November 15, 2016

Trump -- Horseplayers Shouldn't Have Been Surprised

Donald Trump's Electoral College victory last week shocked, shocked the mainstream media punditocracy and, apparently, both campaign staffs and the candidates themselves. After all, Clinton had maintained a steady lead in the opinion polls ever since the summer party conventions, and the received wisdom was that any other result was inconceivable.

So when Trump actually won, the first reaction, at least in my deep-blue part of the world, was incomprehension. How could the polls have been "wrong"?

But, in fact, the polls weren't wrong. If one followed fivethirtyeight.com, the premier poll-aggregation site, one saw that the election was, in fact, looking more and more like a horse race. And, whatever the odds, they are no guarantee. As some say, that's why they run the race.

When I began to be one of those who compulsively checked fivethirtyeight a dozen times a day, it was reporting that Clinton had about an 80% chance of winning the election. In horseplayer terms, that made her a 1-4 favorite. Pretty safe, but, as we all know, heavy favorites do on occasion lose. Still, not too much cause for alarm; most of us would be willing to single a 1-4 shot in our Pick Six or Pick Four bets.

[An aside re the odds: the election odds derived from the fivethirtyeight percentages are "true odds," based on 100% of the probability of the event. If Clinton was 1-4 (80%), then Trump was 4-1 (20%). That's different from the situation in horse racing. In New York, the takeout on a win bet is 16%, so the total probability reflected by the odds is 120%, not 100%. In a race, a 1-4 horse would have a crowd-determined probability of only 67%, and the 4-1 shot would have a 16.7% chance. But you all knew that already.]

As the election got closer, Clinton, while still an odds-on favorite, began to look more vulnerable. Her implied odds slipped, from 1-4 to 2-7, then to 1-3, 2-5. 1-2 and, on the eve of the election, to 5-9, implying only a 64% chance. If you ran the election a thousand times, yes, Clinton would win most of them. But, for better or worse, we run the Presidential election only once each cycle, and the 9-5 shot is going to win an appreciable percentage of the time.

So, distaste, fear and loathing, fine. But not shock. It could happen, and it did. Let's move on to the next race

Why is this so hard for the media and the party insiders to understand? There seems to be something about statistics and probability that baffles otherwise perfectly intelligent people. That difficulty served me well when I was a high school bookie, setting a line that added up to 150% and that wasn't questioned by my gullible classmates. But pillars of the media, even if self-designated, should know better.

The new Common Core standards that are being adopted by American schools include what looks to me like a pretty sensible unit on statistics and probability. Perhaps, with time, probability literacy will become more common. But we have a long way to go when even the elites don't understand.

Thursday, November 10, 2016

Time to Give Federal Regulation Another Look?

A little over a year ago, I took a first look at the Thoroughbred Horseracing Integrity Act of 2015, then newly introduced by Republican Andy Barr of Kentucky and Democrat Paul Tonko of New York, the co-chairs of the Congressional Horse Caucus. At the time, I concluded that the bill had serious flaws and was perhaps beyond redemption. In the event, despite a hearing in April, 2016, featuring a variety of anti-drug activists, the bill failed to advance out of committee, and little was heard of it once election season began.

Now, things have changed. Most importantly, there has been an election that empowered the Republican Party, which will control both the House and Senate when the 115th Congress meets in January and which will not face the same veto threat that it had in President Obama. A bill coming out of the House might well receive favorable treatment in the Senate; Congressman Barr was once an intern for Senate majority leader Mitch McConnell. 

Second, the promises of effective state-by-state regulation as an alternative to federal control seem not much closer to being fulfilled. Known "juice" trainers continue to operate in many jurisdictions, and the goal of uniform state rules, while closer, is yet to be achieved. 

Third, my own circumstances have changed, leaving me somewhat freer to put forward my own views. After 14 years as a member of the Board of Directors of the New York Thoroughbred Horsemen's Association (NYTHA), including the last two years as its Vice President, I am no longer on the NYTHA Board and hence don't feel honor-bound to support all NYTHA's positions. I still agree with many of those positions -- for example, permitting the continued use of Lasix until some equally effective solution to the problem of Exercise-Induce Pulmonary Hemorrhaging ("bleeding") is available -- but I feel I can take a more nuanced look at some issues. And the first of those is the Tonko-Barr bill, which is expected to be re-introduced in the new Congress.

Briefly, Tonko-Barr would direct the U.S. Anti-Doping Agency (the folks who brought down Lance Armstrong and who police this country’s human Olympic athletes) to create an independent, thoroughbred horseracing-specific, non-governmental and non-profit organization to establish uniform drug rules for thoroughbred racing. The bill would exert control by tying a track's ability to simulcast -- clearly an interstate commerce activity -- to its compliance with the federal drug rules.

In its most recent form, the bill had support from the following organizations:

The Jockey Club: the breed registry,responsible for the American Stud Book in Thoroughbred racing. It is an exclusive private, self-financed and appointed organization composed of some 100-plus othe richest owners and breeders in the sport.

The Water Hay and Oats Alliance (WHOA): formed in 2014 for the sole purpose of eliminating the use of Lasix in Thoroughbred racingMany of its members are also memberof The Jockey Club.

The Breeders Cup: the organization originally formed by Kentucky breeders to conduct a championship day oracing in the falto promote the breeding and sales oAmerican horses and their offspring in the international market. 

The Kentucky Thoroughbred Owners anBreeders (KTOB): the Kentucky breeders’ organization.

The Kentucky Thoroughbred Association (KTA): organized as a rival group to thKentucky HBPA, the group that represents owners and trainers active at Kentucky tracks. It is comprised primarily oKentucky breeders, and shares the staff, officers and directors of the KTOB.

The HumanSociety of the United States (HSUS): responsible for the demise of Greyhounracing in the United States.  HSUS is anti-horseracing and supports the elimination of Lasix anfurther restrictions othe use of therapeutic medications in racing horses. HSUS is not to be confused with the much larger and better known ASPCA.

            What's missing from this list? Racing fans and bettors, trainers, blue-collar horse owners, the people who actually, day to day, care for race horses. Unless the rest of us are brought on board, or at least consulted in an open, meaningful way, the bill, if enacted, will seem like just one more piece of elite "we-kow-what's good-for-you" medicine directed at the 99%. As this week's election showed, sometimes the 99% can prevail, in unexpected ways. So, before the bill is reintroduced, how about some meaningful consultation. It could start with open forums in both Barr's district, which includes Lexington KY, and Tonko's, which includes Saratoga. Reach out, through the horsemen's associations and the tracks, and see what the rest of us think.

            In addition to that consultation, which would certainly produce more ideas for improving the bill, here are some of my thoughts for aspects of the initial legislation that might merit some rethinking.

            For a start, the bill applies only to Thoroughbred racing. If the supporters’ concern really is doping in horse racing, why is the bill restricted tThoroughbreds, when there is significanStandardbred and Quarter Horse racing in the United States, all regulated by State Racing Commissions, and significant evidence of drug use in those breeds that’s far more prevalent than in Thoroughbreds?

Next, the bill includes a number of “findings,” which are supposed to be facts that Congress takes into account as reasons for the legislation. The only problem here is that a number of these “facts” in Tonko-Barr aren’t, well, all that factual.

            First, the bill says that the Interstate Horse Racing Act of 1978 applies to Thoroughbred racing. Wrong. The 1978 Act, which authorizes interstate betting and gives horsemen’s groups (except at NYRA tracks, but that’s another story) the right to bargain collectively with track owners, applies to all racing – Thoroughbred, Standardbred, quarter-horse, even greyhounds. The Interstate Horseracing Act of 197was not enacted to protect the Thoroughbred industry.It was designated to facilitate wagering on all racing in the United States, regardless obreed.  It was designed to protect the horsemen and small tracks from the predatory practices of large tracks -- still, or even more now, an issue, as recent anti-horsemen actions by Churchill Downs Inc. amply demonstrate -- to protect thhorsemen and the tens othousands oworkers in racing frounregulated wagering via simulcasting (an emerging phenomenon in the late 1970s). The Act was a product of total consensus by the entire racing industry of all breeds. The doping issue and the predatory practices of track owners and wagering platforms are an issue in all kinds of racing, not just, and not even mostly, in Thoroughbred racing.
            
            The preamble to the Bilstates that the adoption of uniform standards will promote full and fair disclosure of information to purchasers of breeding stock and the wagering public. That may well be the case, but it would be good if the bill contained implementation provisions to ensure that this information was actually made available to the public. In its current version, Tonko-Barr does not provide for such implementation.

            The Bill as currently drafted also states that uniform standardwill improve the marketplace fodomestic and international sales of the American Thoroughbred, will provide a platform foconsistency with all major international Thoroughbred horseracing standards, address growing domestic concerns over disparitieswith international rules”  There is in fact only one significant difference betweethe U.S.  and international racing – the raceday administration of Lasix. That seems to be what this bill is all about  concocting a mechanism by which The Jockey Club and the breeders can force their position on the elimination of Lasix upon an industry that generally opposes them. It gives USADA the power and authority to eliminate the use of raceday Lasix. If that is not the intention of the Bill's sponsors, then the Lasix issue should be clearly set off to the side. Many of us in the industry would support uniform standards, tough enforcement, and high-quality drug testing, but, for reasons that have been well explored over the past dozen years, we believe that continuing third-party-administered Lasix use on raceday is an appropriate action given the specific conditions of US racing -- horses stabled on track in urban areas, most racing on dirt, not grass, etc. In fact, in those jurisdictions where conditions most closely mirror those in the US – Hong Kong and Singapore – bleeding rates are even higher than in the US. 

            It is indisputable that most Thoroughbreds suffer from EIPH  the disease that causes respiratorbleeding in racing or breezing.  Lasix is recognized as the most effectivmedication in the treatment of EIPH.  The industry has strict regulatory controls on the administration oLasix, including time, dose and means of administration. To date, there is not a single scientific study to substantiate the claim that Lasix is detrimental to thhorse.

           The Bill states that the US has beeunable to adopt a uniform anti-doping and drug-testing program. This is only partially true. The industry is in the midst of implementing a uniform medication and drug testinprogram. in a generation. While the National Uniform Medication Program has been adopted by jurisdictions representing more than 70of the national handle, there are still states that lag well behind, including those that continue to harbor the most egregious violators. I can understand the urge to force these states' hand by adopting federal rules.

            The Bill could build on the emerging consensus in the industry by specifically incorporating the ARCI (Association of Racing Commissioners International) Model Rules anProhibited Substance listing and by adopting the standards for drug labs of the Racing Medication and Testing Consortium (RMTC). These standards are accepted by most honest horsemen and using them as the foundation of federal regulation would go far toward allaying fears of the unknown.

           Another significant problem is that the bill effectively empowers the US Anti-Doping Agency (USADA), an agency with no experience with equine athletes, to control equine drug rules. The Bill's preamble sets up a false standard by referring to a UNESCO Convention: By ratifying the UNESCO Convention, the United States agreed tadopt appropriate measures consistent with thprinciples othe World Anti-Doping Code and to take appropriate action, including legislation, regulation,policies or administrative practices to implement that commitment.” True, but once again misleading. The UNESCO Convention applies to people, NOT to horses. There are equestrian events in the Olympics. Equestrian sport internationally igoverned by privatgoverning bodies in each country. In the United States, the governing body is the US Equestrian FederationIt is a private organization. It regulateitself and has its own rules.  USADA has no involvement whatsoever.  It has no expertise in the equine sport and equine drutesting. USEF has its own laboratory, and cooperates with other international equestrian bodies through the Federation Equestrienne Internationale (FEI). USADhas no involvement with the FEI.

            Those are some of the difficulties with the Bill's preamble and findings of fact. None of them are fatal; with good will, people from all parts of the racing industry could resolve their differences. Can the same be said about the operative provisions of the bill? Let's look at some of the issues.

            The Bill would cover owners [§3(9)], trainers[§3(20)], veterinarians [§3(21)], agents of these individuals and all backstretch workers. Each othese persons would be subject to investigation and penalties for rule violations. Breeders are not covered; why not? In the past, the doping of horses at yearling and two-year-old sales has been a major concern. Shouldn't the breeders who have been promoting this legislation be willing to adhere to the same standards as the rest of us? 

            This long list of covered persons weaken, if not eliminate, the longstandintrainer-responsibility rules by putting all owners, veterinarians, trainers, and others working with a horse in the same category. Anyone involved with thhorse would be exposed to sanctions at the directioof the "Authority," the regulatory entity being created by this legislation. As private entitythe Authority would not be publicly accountable in the formatioor execution of rules assigning liability to covered persons. Why would anyone own race horses if that meant the owner would be subject to sanctions because a trainer did something illegal without the owner's knowledge? 

            The Bill would effectively remove state racing commissions from their regulatory role, at least with respect to drug rules and enforcement. When the Bill becomes effective, the Anti-Doping Authority created under the Bill would have exclusive jurisdictiofor anti-doping matters for all covered horses, persons and races in Thoroughbred racing. The State RacingCommissionwill be completely stripped otheir authority in medication and drug testing matters,policy and regulation.

            It would be difficult, if not impossible, for State Racing Commissions to regulate under this Bill. Many commissions regulate both Thoroughbred and Standardbred racinand some regulate Thoroughbred, Standardbred anQuarter Horse racing. Each breed hathe samissues. Testing is done for all three.  How do you calculate who pays for that testing and who doesn’t? How will the labs be properly funded?  How do you avoid what will be an onslaught of litigation? In addition, the Bill needs to address how the drug regulation functions of the new Authority will mesh with the ongoing functions of the state commissions -- licensing participants, overseeing racing, and such.

            The Bill would create a new, quasi-public Authority, to be composed of the CEO of USADA, five USADBoard members and five individuals from the Thoroughbred industrynone owhom can (1) have a financial interest or provide goodoservices to covered horses (i.e., no owners or trainers); (2) be an officer, official or serve in any management capacity for any Thoroughbred industry representative (i.e., nobody from track management or from horsemen’s associations); or (3) be an employee or have a business ocommercial relationship with any such individuals oorganizations. Given these limitations, which eliminate anybody who might know anything, I havno idea who could serve on the Board. Perhaps a retired track executive. But owners and trainers don't retire; they usually die with their boots on.  Thus, the Bilvirtually eliminates anyone with any knowledge anexpertise of horse racing from serving on thAuthority. If there's a concern about conflicts of interest, how about ex officio spots for owner and trainer representatives. And perhaps a spot reserved for fans and bettors, through HANA, the Horseplayers Association of North America?

            Majority control of the proposed Authoritis vested in the U.S. Anti-Doping Agency. USADA starts with six of the 11 spots on the Authority's Board, and non-USADBoard members are to be selected by USADA. It is important to note that USADhas no experiencwith equine welfare matters, which is vital tstriking a balance between humane horse treatment and ensuring the integrity of each racing contest

            USADA starts out with a six-member majority on the new 11-member Authority Board. The remaining five members are to be chosen by USADA from people nominated by various racing constituencies, but if USADA doesn’t like any of the nominations, it can just go ahead and pick whomever it likes as the additional Board members. If an independent authority with federal enforcement powers is to be set up, more thought needs it be given to its composition.

            As for the substance of the medication rules, the Bill provides that the Anti-Doping Program must include: (1) a list otherapeutic and prohibited substances; (2) schedule of sanctionfor violations; (3) programs relating to anti-doping research aneducation; (4) testing procedures, standards and protocols foboth in-competition and out-of-competition testing; (5) procedures for investigating, charging and adjudicatinviolationfor enforcement of sanctions; and (6) laboratory standardfoaccreditation, testing requirements and protocols. This is largely duplicative ohow the industry is currently regulated. Why not incorporate the existing standards, some of which are referenced above, rather than re-inventing the wheel?

            State and federal laws and regulations already govern the practice of veterinary medicinand substances available for proper veterinary care. The Bill would put the Authority in the role of regulating the practice of veterinary medicine. Moreover, a list of prohibited substances and methods already exists in the RCI Model Rules and prohibited substance standards.

            Investigation and adjudication procedures already exist and are governed by lawgoverning such regulatory matters in the applicable states. Almajor racing laboratories are accredited to the international ISO17025 standard and participate in the quality assurance program of the International Association of Official Racing Chemists. In addition, the Racing Medication and Testing Consortiuhas an accreditation program and developed lab standardwhich have been adopted by the ARCI and relied upon by State regulatory agencies when procuring laboratory services. Againthis isomething that already exists and could be incorporated into the federal standards rather than being recreated from scratch.

            The Bill provides that the Authority mustake into consideration international anti-dopinstandards when creating the list opermitted and prohibited substances and other rules for lab testinin-competition and out-of-competition testing and sanctions. This effectively means the Authority must eliminate racedaLasixwhich ion the WADA list of banned substances. If the Bill's sponsors are not intending to ban Lasix, the Bill needs to say so.

          The Bill would shift State drug testing programto the Authority and eliminate the need for the existing programs or personnel oState regulatory Commissions. As this language only applies to Thoroughbred racingthose states regulatinStandardbred or QuarteHorse races will need to keep a drug testing, investigative, and adjudicatioinfrastructure in place, and current costs currently allocated across all breeds will need to be absorbed by Standardbred and Quarter Horse racing activity. The Bill also shifts investigationand the responsibility for adjudicatory hearings associated with medication rule violations in Thoroughbred racing tthe Authority. There is nprovision for appeals beyond the Authority. Whatever we think of the absurd length of time that it currently takes for courts and commissions in the various states to hear appeals, there’s clearly a due-process issue here. Some avenue of appeal beyond the Authority is necessary. As a example, in a tax dispute with the IRS, a taxpayer dissatisfied with the administrative decision may appeal either to Tax Court or the federal District Court and then to the Circuit Court of Appeals. The Bill should incorporate a similar appeal route for Thoroughbred drug violations.

            The funding provisions of the Bill are also a cause for concern. The Authority will be initially funded by loans (The Jockey Club, Breeders’ CupWHOA, etc.).Thereafter, the Authority will access a per-start fee trepay its loans and cover its costs. The State RacinCommissions will be responsible for collection the feeand paying them to the Authority by the 20th day oeach month. This will amount to a significant tax oeach owner and trainer in addition to alothe other currently assessed licensing fees, workers’ compayments, etc. In essence, the horsemen will brequired to pay for this program. The Statehave timplement the assessment. The tracks initially opposed the Bill because they said they would not pay.  The coalition supporting the Bill certainly doesnt want it to come frotakeoutwhich is prohibited under the Bill, and they're probably right; takeout is too high already, so they artaxing the owners and trainers. Horse ownership is already a losing business, whatever public perception may be, and the addition of an unknown future assessment certainly won’t help recruit new owners. The Bill itself makes no attempt to calculate what this Authority will cost and sets no limits. State RacinCommissions will be responsible for collecting fees, buhow much will the fees be, and who will pay them? There is no telling how much of a financial burden this Authority would place on horsemen. The horsemen will be required to fund the Authority while having no inpuas thomuch it will cost or how the monies will bspent. Bear in mind that the average Thoroughbred race horse earns less than 75% of the cost of keeping it in training. Imposing an additional tax on owners for the privilege of losing money doesn't seem like the greatest idea.

            In addition, there is not one dime of federal assistance in the Bill to combat instances ohorse doping in Thoroughbred racing. Congress currently allocates approximatel$9,000,00each year to the White House Office of Drug Policy tsupport anti-doping activities in sport. This proposal does not require that any of those fundbe used to assist efforts in horse racing. Sharing would be a virtue.

            Unlike a government agency, whose financial support is reviewed, transparent anpublicly accountable, the proposed Authority is permitted to accept private donations not disclosed to thpublic, creating the possibility that certain covered persons coulexert undue influence by virtue omonies they havcontributed or loaned to the Authority. Under thiconstruct the independence othe entity is undermined as it is financially beholden to private individuals oorganizations and not part of a public process as statagencies are.

            Under this proposal, the Authority also determine sits own budget shielded from public and industry review, accountability and input. An assessment is then levied on the stateto funoperations and debservice on whatever private loan arrangements theyhave made. In essence, the Authority is given a blancheck. This problem could be fixed through an open budgetary process, involving disclosure and public hearings.

            As I said at the outset, a good case can be made for federal regulation. It could enhance our sport's credibility in the eyes of the public, it could resolve the problem of those few states that are lagging behind in getting rid of the cheaters, and it could even reduce the total cost of drug enforcement through economies of scale. But for a federal bill to be both acceptable and workable, it needs to go through a wider consultation process, it needs to clearly lay the Lasix issue off to one side, and it needs to resolve some of the substantive issues raised here. The vast majority of us in racing want the sport to be clean; we just want a way of getting there that's fair and workable.

One final note: as long as we're talking about amending the Interstate Horseracing Act, how about getting rid of the provision that bars collective bargaining by horsemen at NYRA tracks -- and only NYRA tracks. At all other racing venues, horsemen and track management must have an agreement in place before the track can simulcast its signal. The NYRA exception was placed in the bill at the behest of the Jockey Club grandees who then controlled New York racing. With NYRA due to return to private ownership, it's about time to get rid of this anachronism.