text:
State of Arizona
of the
Auditor General
Report to the Arizona Legislature
By Douglas R. Norton
Auditor General
August 1997
Report No. 97-12
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
August 28, 1997
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. Jim Higginbottom, Director
Arizona Department of Racing
Mr. A. Melvin McDonald, Chairman
Arizona Racing Commission
Transmitted herewith is a report of the Auditor General, A Performance Audit of the Arizona Department of Racing
and Arizona Racing Commission. This report is in response to a May 29, 1995, resolution of the Joint Legislative
Audit Committee. The performance audit was conducted as part of the Sunset review set forth in A.R.S. §§41-2951
through 41-2957.
The report addresses both the Department's and the Commission's effectiveness in regulating horse and greyhound
racing in the State. We found that the Capital Improvement Program overseen by the Commission has not met, and
is not likely to meet in the future, its objective of increasing state revenues. Further, the Commission has
inappropriately approved approximately $500,000 in capital improvement project items.
We also found the Department can improve its regulation of the industry. The Department does not do enough to
ensure that the $251 million wagered at commercial tracks is properly protected. It also does not assign enough staff
to adequately supervise several important functions at the greyhound tracks. Finally, commercial horse racing tracks
have been improperly exempted from paying taxes on the racing handles from the county fair race meets that the
tracks conduct.
In addition to the findings and recommendations presented in this report, this audit noted that tax relief legislation
enacted in 1994 has reduced pari-mutuel tax revenues from over $8 million annually to $2.8 million in fiscal year
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on August 29, 1997.
Douglas R. Norton
Auditor General
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Racing and Arizona Racing Commission pursuant to a May 29, 1995,
resolution of the Joint Legislative Audit Committee. This audit was conducted as part
of the Sunset review set forth in A.R.S. §§41-2951 through 41-2957.
The Arizona Department of Racing (Department) is responsible for the day-to-day
oversight of all racing activities within the State. The 5-member Arizona Racing
Commission (Commission) is responsible for setting overall Department policy,
allocating racing dates, and issuing permits to conduct racing.
The Capital Improvement
Program Should Be Terminated
(See pages 11 through 17)
The Legislature should consider terminating the Capital Improvement Program
(Program) because it has not met its intent nor is it likely to in the future. The
Legislature created the Capital Improvement Program to encourage improvements to
racetrack facilities for the benefit of the public and racing participants and to increase
state revenues from the additional wagering anticipated to result from those
improvements. However, state revenues have not increased as a result of track
improvements, a fact which led the Auditor General to recommend terminating the
Program in a 1986 performance audit of the Racing Commission (see Auditor General
Report 86-5). A recent shift to off-track betting further suggests that monies spent on
improving facilities will not lead to an increase in state revenue.
Regardless of whether the Program is terminated, the Commission should recover
$500,000 in capital improvement tax credits that it inappropriately approved. Despite
guidelines identified by the Legislative Council and outlined in the Auditor General=s
1986 performance audit and an opinion from the Attorney General regarding statutory
requirements for project approval, the Commission approved $500,000 in unallowable
capital improvement project items since 1990. As a result, in accordance with a 1981
Attorney General opinion, the Commission should recover these monies. This opinion
states that upon discovery of the error, a racetrack is obligated to repay and the State is
obligated to recover any public monies incorrectly withheld, regardless of any approval
that was previously granted.
The Department Should
Do More to Protect the
Wagering Public=s Money
(See pages 19 through 24)
Currently, the Department does little to ensure that the $251 million wagered at
commercial tracks is properly protected and distributed. Commercial tracks use a
computerized totalisator system to record the amount of monies wagered, compute
odds and payoffs, and distribute the dollars wagered to winning patrons, racing
participants, and the State. However, the Department does not actively monitor these
systems for the accurate calculation and distribution of these monies. For example, the
Department rarely visits tracks to assess controls or test system transactions to ensure
accurate calculations.
Although not a frequent occurrence, errors involving incorrect calculations of payouts
have occurred at Arizona tracks. One totalisator system incorrectly calculated payouts
as recently as December 1996. Additionally, other states have encountered fraud
involving the re-creation of unclaimed winning tickets. The Department should either
devote a staff position to properly monitor pari-mutuel activities or consider
contracting with an independent auditor.
The Department Should
Improve Oversight of
Greyhound Tracks
(See pages 25 through 29)
To better ensure the integrity of greyhound racing and the dogs= safety, the Department
needs to increase its oversight at greyhound tracks. Track personnel perform several
important regulatory functions without any supervision by state officials. These
functions include determining entries for upcoming races to ensure all greyhounds
receive equal opportunities to compete, weighing the dogs to ensure they do not
deviate from established weights that can affect performance, and identifying
greyhounds to ensure the animal entered actually runs.
The Department can improve its oversight of greyhound racing by better using its
existing staff at greyhound tracks and adding a part-time staff person at each
greyhound track. For example, by increasing the number of hours worked by racing
stewards, these stewards could supervise the race entries process and the weigh-in of
greyhounds, and examine the racing surface prior to races to ensure animal safety.
Adding a part-time staff person at each track will allow the Department to monitor
racing activities such as the weigh-in and identification of greyhounds when both
stewards are required to conduct hearings or observe the races.
The Department Should
Collect Pari-Mutuel Taxes
from Commercial Tracks That
Conduct County Race Meets
(See pages 31 through 34)
The Department should ensure that commercial tracks pay pari-mutuel taxes on the
racing handle generated from county fair race meets the tracks conduct. Currently, the
Commission grants race permits and dates to all 15 counties, but allows counties to sell
their race dates to commercial tracks. For the fiscal year 1996-97 county fair racing
season, 6 of the 15 counties sold their race dates to commercial tracks.
To date, commercial tracks have not paid pari-mutuel taxes on the racing handle
generated during county fair race dates. According to statute, racing meetings
conducted by county fair racing associations are exempt from the payment of pari-mutuel
tax, an exemption that commercial tracks have similarly applied when
conducting county race meets. For example, Turf Paradise did not pay pari-mutuel
taxes of $147,000 on the $7.35 million it generated in pari-mutuel handle on the county
race days it conducted in 1997. Turf Paradise also enhanced its hardship tax credit
status by $172,000. The hardship tax credit provides a tax credit against the pari-mutuel
tax for tracks that have suffered declines in business as measured by pari-mutuel
handle. By excluding the pari-mutuel handle generated on county race days from the
hardship tax credit calculation, Turf Paradise receives a bigger credit. However, A.R.S.
§5-110(F) stipulates that a county fair racing meeting conducted by an individual,
corporation, or association other than the properly authorized county fair racing
association shall be considered the same as a commercial meeting. Thus, commercial
tracks owe, and the Department should assess and collect, pari-mutuel taxes on the
operation of county fair race meets by commercial tracks. The Department should also
solicit advice from the Attorney General regarding the collection of pari-mutuel taxes
owed on the operation of county fair race meets by commercial tracks in previous
The Department Should Remedy
Improper Payroll Practices
(See pages 35 through 37)
The Department has engaged in improper payroll practices. First, the Department has
allowed its employees assigned to greyhound tracks to record their time as
Aperformances@ (a performance refers to one session of racing), with 5 performances
worked equaling a 40-hour work week. However, based on auditors= observations and
interviews with these employees and Department management, a performance usually
requires only 6 to 7 hours of work. Thus, a "full" work week may be only 30 hours of
actual work, but these employees receive pay for 40 hours.
Second, the Department recorded one employee=s time and paid him in a manner that
improperly allowed the employee to continue receiving state retirement benefits.
Other Pertinent Information
(See pages 39 through 43)
During the audit, other pertinent information was also collected regarding the impact
recent tax relief legislation has had on pari-mutuel tax revenues. While pari-mutuel tax
revenues were over $8 million annually from fiscal years 1991-92 through 1994-95, tax
relief the Legislature enacted caused these revenues to drop to $2.8 million in fiscal year
1995-96. As a result, revenues are insufficient to meet the $3.6 million in funding
requirements for the eight statutorily established funds the pari-mutuel tax helps
support, and the State now pays the full cost to regulate the commercial racing industry.
Prior to tax relief, the pari-mutuel tax, along with nominal revenues from license fees
and fines, more than covered the cost of regulation and funded the eight statutorily
established funds.
Table of Contents
Introduction and Background............................................................... 1
Finding I: The Capital Improvement
Program Should Be Terminated....................................................... 11
Background.................................................................................................................. 11
Capital Improvement
Program=s Intent Not Being Met ................................................................................ 12
Commission Inappropriately
Approved Projects....................................................................................................... 13
Commission Should Recover
Monies for Ineligible Project Item.............................................................................. 16
Recommendations....................................................................................................... 17
Finding II: The Department Should
Do More to Protect the
Wagering Public=s Money ................................................................. 19
Background.................................................................................................................. 19
Oversight of Pari-Mutuel Activities
Inadequate at Commercial Tracks ............................................................................. 19
Monitoring Needed to Protect
Against System Error and Fraud............................................................................... 22
Recommendations....................................................................................................... 24
Table of Contents (cont=d)
Finding III: The Department Should Improve
Oversight of Greyhound Tracks....................................................... 25
The Department=s Regulation at
Greyhound Tracks Does Not
Fully Protect Participants .............................................................................................. 25
The Department Can Do
More to Better Ensure the
Integrity of Greyhound Racing..................................................................................... 27
Recommendations.......................................................................................................... 29
Finding IV: The Department Should
Collect Pari-Mutuel Taxes from
Commercial Tracks That Conduct
County Race Meets............................................................................... 31
Background..................................................................................................................... 31
Commercial Tracks Do Not
Pay Taxes on County
Fair Race Dates............................................................................................................... 31
Excluding Pari-Mutuel Handle
Affects Tax Credit Status
and Revenue Distribution ............................................................................................. 32
Department Should Assess
and Collect Pari-Mutuel Taxes...................................................................................... 33
Recommendations.......................................................................................................... 34
Table of Contents (cont=d)
Finding V: The Department Should Remedy
Improper Payroll Practices.................................................................. 35
Some Employees
Receive Inflated Pay....................................................................................................... 35
The Department Allowed
Improper Payroll Agreement ........................................................................................ 35
Recommendations.......................................................................................................... 37
Other Pertinent Information ..................................................................... 39
Sunset Factors
Arizona Department of Racing................................................................... 45
Arizona Racing Commission ..................................................................... 51
Agency Response
Table of Contents (concl=d)
Table 1: Arizona Department of Racing
Pari-Mutuel Handle Reported by Commercial Tracks
Years Ended June 30, 1994 through 1996
(Unaudited) ................................................................................................... 2
Table 2: Arizona Department of Racing
Statement of Revenues, Expenditures and
Changes in Fund Balances
Years Ended June 30, 1995 through 1997
(Unaudited) ................................................................................................... 5
Figure 1: Arizona Department of Racing
Source and Distribution of Nonappropriated Racing Revenues
Years Ended June 30, 1995 and 1996
(Unaudited) ................................................................................................... 3
Figure 2: Arizona Department of Racing
Racing Handle Generated by
On-Track Versus Off-Track Wagering
Years Ended June 30, 1992 through 1996
(Unaudited) ................................................................................................... 13
Figure 3: Arizona Department of Racing
Pari-Mutuel Handle Generated by
Live Versus Simulcast Race Wagering
Years Ended June 30, 1992 through 1996
(Unaudited) ................................................................................................... 42
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Racing and Arizona Racing Commission pursuant to a May 29, 1995,
resolution of the Joint Legislative Audit Committee. This audit was conducted as part
of the Sunset review set forth in A.R.S. §§41-2951 through 41-2957.
The Arizona Department of Racing (Department) and the Arizona Racing Commission
(Commission) have existed separately since 1982, at which time the Legislature created
the Department. Prior to 1982, the regulatory activities the Department now performs
were performed solely by the Arizona Racing Commission, through an executive
secretary. By establishing the Department, the Legislature intended to strengthen
regulation of the racing industry by placing the Department in charge of day-to-day
oversight of racing activities. The Commission concentrates its efforts on setting overall
Department policy, allocating racing dates, and issuing permits to conduct racing.
Racing in Arizona
Arizona is one of only 11 states that features both horse (thoroughbred and quarter
horse) and greyhound racing, which occurs at 6 commercial tracks in the State. Horse
racing is conducted at Turf Paradise in Phoenix, Prescott Downs in Prescott, and Rillito
Park in Tucson. Greyhound racing is conducted at Phoenix Greyhound Park, Apache
Greyhound Park in Apache Junction, and Tucson Greyhound Park. In addition to
commercial racing, nine counties in the State conduct horse racing.
Pari-mutuel handle (the monies wagered on horse and greyhound racing), determines
the industry=s success. As illustrated in Table 1 (see page 2), Arizona commercial
racetracks generated $251.1 million in pari-mutuel handle during fiscal year 1995-96.
County fair racing generated an additional $12 million in pari-mutuel handle.
Combined, Turf Paradise and Phoenix Greyhound Park accounted for approximately 77
percent of the pari-mutuel handle generated during fiscal year 1995-96, with each track
generating over $96 million.
Recent developments in the racing industry, including off-track betting (OTB) and
simulcast races (out-of-state races received via satellite), have allowed the industry to
maintain pari-mutuel handle at its current level for the past three fiscal years despite
competition from the state lottery and Indian gaming casinos. For example, racetracks
significantly expanded the number of OTB sites in the State from 1991 through 1993,
which in turn has dramatically changed attendance and wagering patterns. Currently,
60 percent of pari-mutuel handle is generated at these sites, as compared to 25 percent
generated in fiscal year 1991-92. Similarly, the percentage of pari-mutuel handle
derived from simulcast races has significantly increased in the last three years. In fiscal
year 1991-92 it was 8 percent, as compared to 44 percent in fiscal year 1995-96.
Table 1
Arizona Department of Racing
Pari-Mutuel Handle Reported by Commercial Tracks
Years Ended June 30, 1994 through 1996
1994 1995 1996
Apache Greyhound Park $ 5,475,298 $ 7,275,403 $ 8,355,626
Fort Tuthill Downs1 798,671 648,383
Phoenix Greyhound Park 94,649,424 97,582,245 96,778,177
Prescott Downs 17,490,826 20,510,512 23,646,521
Rillito Park 2,112,114 1,912,466 2,371,906
Tucson Greyhound Park 27,918,424 21,523,676 23,643,705
Turf Paradise 101,467,993 97,767,117 96,357,212
Yuma Greyhound Park 1 88,240
Total $250,010,990 $247,219,802 $251,153,147
1 Fort Tuthill Downs did not conduct commercial racing in fiscal year 1995-96, and Yuma Greyhound
Park ceased racing activities after fiscal year 1993-94.
Source: Department of Racing=s Annual Report for fiscal year 1995-96.
State Revenues
Generated from Racing
The Department collects revenues from racing industry participants for deposit into the
State=s general fund and nine other funds specifically established in statute. While an
average of 77.5 percent of pari-mutuel handle is returned to the wagering public as
winnings, the track retains the remaining handle, which consists of purse monies paid
to the owners of winning horses and greyhounds, track revenue, and pari-mutuel taxes
paid to the State. As illustrated in Figure 1 (see page 3), the State received over $8.5
million in pari-mutuel tax revenue in fiscal year 1994-95. However, as a result of tax
relief legislation passed in 1994, pari-mutuel tax revenues dropped to $2.8 million in
fiscal year 1995-96 and contributions to the State General Fund decreased from over $5
million annually to $165,878. Recently, the Department reported a further decrease in
pari-mutuel tax revenues, since the tax only generated $2.63 million in fiscal year 1996-
97. (See Other Pertinent Information, pages 39 through 43 for additional information on
funding decreases.)
Figure 1
Arizona Department of Racing
Source and Distribution of Nonappropriated Racing Revenues
Years Ended June 30, 1995 and 1996
Source 1996
Total = $3,136,701
License Fees
Taxes $8,535,239
Total = $8,752,320
Total = $3,136,701
Total = $8,752,320
Amounts do not include General Fund appropriations or expenditures from them.
This category includes pari-mutuel taxes paid by racetracks for such tax liabilities incurred in the previous fiscal year and fees paid
by horse and greyhound breeders to certify their eligibility for breeders' awards.
This category includes the following funds: Agriculture Consulting and Training, Arizona Coliseum and Exposition Center, Arizona
Stallion Award, Greyhound Adoption Fund, and the Administration of the Arizona County Fairs Racing Betterment Fund, the
Arizona Breeders' Award Fund, the Arizona Stallion Award Fund, and the Greyhound Adoption Fund.
The Uniform Statewide Accounting System Revenues and Expenditures by Fund, Program,
Organization, and Object reports for the years ended June 30, 1995 and 1996.
Arizona County Fairs
Racing Betterment Fund
Arizona Breeders'
Award Fund $833,839
County Fair Racing
Fund $307,440
General Fund
County Fairs
Livestock and
Agriculture Promotion
Fund $1,209,555
License Fees
Pari-Mutuel Taxes
General Fund
Arizona County Fairs
Racing Betterment Fund
Arizona Breeders'
Award Fund $654,686
County Fair Racing
Fund $245,422
County Fairs
Livestock and
Agriculture Promotion
Fund $982,473
3 Other
Other 2
Other 2
The Legislature appropriates monies from the General Fund to regulate commercial
racing and support the Arizona Racing Commission. Additionally, the Department
receives legislative appropriations from the County Fair Racing Fund to conduct and
regulate county fair horse race meets. Finally, the Department relies on
nonappropriated monies from the Administration of the Arizona County Fairs Racing
Betterment Fund, the Arizona Breeders= Award Fund, the Arizona Stallion Award
Fund, and the Greyhound Adoption Fund to provide additional personnel to assist
with county fair race meets and breeders= awards.1 Table 2 (see page 5), presents the
Department's actual revenues and expenditures for fiscal years 1994-95, 1995-96, and
Commission and Department
Organization and Staffing
The Arizona Racing Commission, which consists of five members appointed for five-year
terms by the Governor, establishes policy for the regulation of racing in Arizona.
As such, the Commission has several specific statutory responsibilities. First, the
Commission sets all racing dates in the State, including dates for commercial and
county race meets. The Commission also promulgates rules to govern racing meetings.
Additional Commission responsibilities include approving permits to conduct racing
meetings, reviewing appeals of licensing and regulatory decisions made by the
Department Director, and approving all capital improvement applications racetracks
The Department of Racing, which assists the Commission in fulfilling many of its
responsibilities, is authorized 55.4 FTEs to provide direct oversight of racing activities
in the State. The Department has organized these personnel into several divisions,
# Investigations/Licensing DivisionCThe investigative staff consist of certified peace
officers who investigate offenses committed by license applicants or licensees. The
Department has authority to investigate any matter involving racing, including
testing licensees for drug and alcohol abuse. Examples of investigative work this
division performs include background checks of license applicants and
investigations involving violations of racing regulations. During fiscal year 1995-96,
the Department conducted 1,137 investigations and performed 102 human drug or
alcohol tests.
1 Breeders= awards are monetary awards the Department distributes to the breeders of winning horses or
greyhounds foaled or whelped in Arizona.
Table 2
Arizona Department of Racing
Statement of Revenues, Expenditures and Changes
in Fund Balances
Years Ended June 30, 1995 through 1997
1995 1996 1997
General Fund appropriations 1 $ 2,254,458 $2,358,928 $2,365,064
Pari-mutuel taxes 8,535,239 2,802,121 2,606,325
License fees 88,293 173,695 58,146
Fines 39,163 48,245 47,155
Other 103,291 143,895 54,490
Total Revenues 11,020,444 5,526,884 5,131,180
Personal services 1,348,758 1,447,137 1,399,263
Employee related 322,603 337,983 332,942
Professional and outside services 479,548 471,214 449,189
Travel, in-state 158,064 167,741 137,459
Travel, out-of-state 9,710 6,307 6,509
Other operating 197,487 204,159 274,502
Equipment 58,242 47,098 33,908
Total operating expenditures 2,574,412 2,681,639 2,633,772
Transfers to other funds 2 3,383,195 2,683,662 2,437,041
Transfers to State General Fund 3 5,089,327 234,442 68,300
Total operating expenditures and transfers 11,046,934 5,599,743 5,139,113
Excess of expenditures over
revenues and transfers (26,490) (72,859) (7,933)
Fund balances, July 1 4 181,423 154,933 82,074
Fund balances, June 30 4 $ 154,933 $ 82,074 $ 74,141
1 Amounts for fiscal year 1994-95 and 1995-96 include administrative adjustments for the prior fiscal year.
2 Includes transfers to the following funds: Agriculture Consulting and Training, Arizona Breeders' Award,
Arizona Coliseum and Exposition Center, Arizona County Fairs Racing Betterment, Arizona Stallion Award,
County Fairs Livestock and Agriculture Promotion, and Greyhound Adoption.
3 Amounts also include boxing revenues of $13,666, $31,255, and $19,135 in fiscal years 1994-95, 1995-96, and 1996-
97, respectively; and transfers from the County Fair Racing Fund of $64,572 and $37,309 in fiscal years 1994-95
and 1995-96, respectively.
4 Because the Department only expends monies from the County Fair Racing Fund and the Administration of the
Arizona County Fairs Racing Betterment Fund, the Arizona Breeder's Award Fund, the Arizona Stallion Award
Fund, and the Greyhound Adoption Fund, in addition to its General Fund Appropriations, only these funds'
balances were included.
Source: The Uniform Statewide Accounting System Revenues and Expenditures by Fund, Program, Organization, and
Object and Trial Balance by Fund reports for the years ended June 30, 1995 and 1996; the State of Arizona
Appropriations Report for the years ended or ending June 30, 1997 and 1998; and a statement of revenues,
expenditures, and changes in fund balance for the year ended June 30, 1997, as compiled by the
Department of Racing.
The Department also licenses all personnel involved in racing in the State, including
horse and greyhound owners, trainers, jockeys, grooms, exercise riders, track
management and officials, concessionaires, and pari-mutuel workers. During fiscal
year 1995-96, the Department issued 6,576 licenses.
In addition to these licensing and investigative duties, the Department conducts
inspections of all greyhound kennels and farms in the State to ensure the safety and
well-being of racing greyhounds. Additionally, the Department inspects and
monitors pari-mutuel wagering activities at all OTB sites in the State. OTB site
inspections ensure that management and workers are licensed and that pari-mutuel
wagering operations are conducted in accordance with racing regulations.
# Steward and Veterinarian DivisionsCThe Department must supervise and regulate
all live races and pari-mutuel wagering conducted at commercial tracks in the State.
Located at each commercial track, these personnel not only supervise actual live
racing, but also should either perform or supervise all activities that occur before,
during, and after race meets, such as animal identification to ensure the correct
animal actually runs, the race entry process, the weigh-in of greyhounds and horse
jockeys to ensure appropriate weights, and the testing of animals for prohibited
substances that can affect race outcomes. (See Finding III, pages 25 through 29 for
additional information on Department oversight of greyhound racing.)
# County Fair Racing DivisionCThe Department conducts and regulates all county
horse race meets in the State. The Department=s responsibilities for county fair
racing exceed its responsibilities for commercial racing in that the Department
provides the staff necessary to conduct the races. For commercial meets, the
commercial track's staff performs many of the racing activities and conducts racing
while the Department supervises these activities.
In addition to the personnel in each of these divisions, the Department employs
administrative and clerical staff, accounting staff, and computer support staff.
A final Departmental responsibility involves collecting and accounting for revenues for
the State Boxing Commission, including the collection of licensing fees and a tax levied
on gross receipts earned from boxing events. For fiscal year 1995-96, the Department
collected over $31,000 in boxing-related revenues, which it remitted to the State General
Fund. However, a recently issued Auditor General report on the Arizona State Boxing
Commission found that the Department does not adequately fulfill its responsibilities
for the collection of taxes owed on boxing event revenues (see Auditor General Report
1986 Report and Follow-up
As part of the current audit, concerns identified in the Auditor General=s 1986
performance audit of the Arizona Department of Racing and Arizona Racing
Commission (Auditor General Report 86-5) were reviewed. The 1986 report
recommended that the Department improve its drug surveillance program for horses
and greyhounds, including testing at least two animals per race for prohibited drugs,
and conduct electronic data processing audits of racetracks= pari-mutuel wagering
systems. The audit also recommended termination of the Capital Improvement
Program because it did not increase revenues for the State.
While the Department responded to some of the recommendations made in the 1986 report,
many of the recommendations have not been implemented. For example, citing budgetary
constraints, the Department currently tests the winning horse or greyhound for all races and
will only test additional animals if the performance of those animals deviates from expectations.
However, the Department has increased the number of drug tests performed on each horse and
greyhound sample and currently contracts with a laboratory that participates in quality
assurance and testing integrity programs. Additionally, the Department does not conduct
electronic data processing audits of racetracks' pari-mutuel wagering systems (see Finding II,
pages 19 through 24). Finally, although the Legislature terminated the Capital Improvement
Program in June 1992, it reinstated the program in 1994 for horse tracks in counties with a
population of less than 500,000. Nonetheless, the Legislature should again consider terminating
the Capital Improvement Program prior to its scheduled expiration in 1999 since the Program
will not generate additional revenues for the State (see Finding I, pages 11 through 17).
Audit Scope
and Methodology
This audit focuses on efforts by both the Department and the Commission to fulfill their
respective responsibilities regarding the regulation of horse and greyhound racing in
the State. Specifically, the audit focused on the Capital Improvement Program, the
Department=s oversight of pari-mutuel wagering and greyhound racing, the current
condition of county fair racing in the State, Department compliance with state
personnel and payroll requirements, and revenues generated by the pari-mutuel tax.
Several methods were used to study the issues addressed in this audit, including:
# Interviewing various individuals involved in racing and the regulation of the
industry including management and operational staff at Turf Paradise, Phoenix
Greyhound Park, Tucson Greyhound Park, and Prescott Downs; several county fair
managers; horse and greyhound owners; all four Arizona Racing Commission
members; and Department management and staff, including horse and greyhound
stewards, investigators, and licensing staff;
# Reviewing all capital improvement projects the Commission has approved since
1990 to determine if projects met statutory criteria for approval and were
adequately monitored;
# Observing county fair race meets in two counties, and commercial horse and
greyhound race meets at five of the six commercial tracks, to determine the
Department=s role in regulating racing activities, including pari-mutuel wagering;
# Analyzing pari-mutuel handle and revenues generated through the pari-mutuel tax
since fiscal year 1991-92 to assess the impact of tax-relief legislation;
# Reviewing profit and loss statements and racing programs from county fair race
meets to analyze attendance, horse entries, handle, and profitability trends; and
# Surveying 19 other states= Racing Department, Commission, or Board; the Racing
Commissioner=s International (a clearinghouse for racing information and guidelines);
and the National Greyhound Association regarding the regulation of pari-mutuel
This report presents findings and recommendations in five areas:
# The Legislature should consider terminating the Capital Improvement Program
because its statutory intent to increase revenues to the State has not been met, nor
will it likely be met in the future.
# The Department needs to monitor pari-mutuel wagering activities in the State to
reduce the potential for fraud and abuse and ensure that the public and the State
receive accurate payouts.
# The Department should increase the level of oversight provided at greyhound
# The Department should collect any pari-mutuel taxes owed from county fair race
meets conducted by commercial tracks.
1 Nineteen states having similar characteristics to Arizona=s regulation of racing activities were identified
and contacted, including Arkansas, California, Colorado, Florida, Iowa, Kansas, Maine, Massachusetts,
Montana, New Hampshire, New Jersey, New Mexico, New York, Oklahoma, Oregon, Texas,
Washington, West Virginia, and Wisconsin. Nine of these states regulate multiple greyhound racetracks.
Six states have counties that conduct race meets. The remaining four states reported similar or higher
pari-mutuel handle figures than Arizona.
# The Department needs to remedy improper payroll practices.
In addition, the report contains an Other Pertinent Information section regarding the
impact of the pari-mutuel tax relief legislation passed in 1994, as well as responses to
the 12 Sunset review factors for the Department and for the Arizona Racing
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Director and staff of the
Arizona Department of Racing and the members of the Arizona Racing Commission for
their cooperation and assistance throughout the audit.
(This Page Intentionally Left Blank)
The Legislature should consider terminating the program it established in 1978 to aid
horse and greyhound racetracks in improving their facilities. Although the Capital
Improvement Program was intended to encourage improvement in racetrack facilities
that would increase attendance and ultimately increase state revenues, it has not met
this statutory intent. Regardless of any legislative action to terminate the Program, the
Commission should recover $500,000 in tax credits it improperly allowed through the
Program and monitor all remaining projects for compliance with the approved
application and statute.
The Legislature created the Capital Improvement Program to achieve two primary
objectives: 1) to encourage improvements in racetrack facilities to benefit the public and
racing participants; and 2) to increase state revenue from the rise in wagering
anticipated to result from such improvements. The State subsidizes the Program by
reducing pari-mutuel taxes for tracks undertaking capital improvement projects. Once
the Commission approves a project, racetracks pay for the project's initial cost, but
reduce pari-mutuel taxes owed until the entire project cost is recovered. Specifically,
tracks can reduce the taxes owed to the State by 1 or 2 percent of the monies wagered.1
The Legislature terminated the Program in June 1992, but reinstated it in 1994,
retroactive to June 1992, for horse tracks in counties with a population of fewer than
500,000 persons. The Program is now scheduled to expire in June 1999. Prescott Downs
is the only track eligible to apply for new capital improvement projects under the
current law.
1 For counties with a population of 500,000 or more, taxes due to the State are reduced by 1 percent of the
total pari-mutuel handle. In all other counties, taxes are reduced by 2 percent of the total pari-mutuel
Capital Improvement Program=s
Intent Not Being Met
Despite the benefits commercial tracks have realized by participating in the Capital
Improvement Program, the Legislature should consider terminating the Program
because it has not met its statutory intent nor is it likely to in the future. While the
Program is intended to increase state revenues, historically, state revenues have not
increased as a result of track improvements. The Auditor General=s 1986 performance
audit of the Racing Commission found that racing handles at Turf Paradise and Tucson
Greyhound Park had decreased, when measured in constant dollars, despite capital
improvements to these facilities (see Auditor General Report 86-5). Moreover, the audit
found that a variety of other factors, such as population changes, number of racing
days, and increased competition for the gambling dollar, are more likely to affect racing
handle. Therefore, the need for the State to support capital improvements at commercial
tracks for that purpose was questionable. Consequently, the Auditor General
recommended terminating the Capital Improvement Program.
The need for a capital improvement program is still questionable, since racing patrons=
current wagering preferences suggest that monies spent on improving facilities will not
lead to an increase in state revenue. While racing handle generated by commercial
tracks increased 14 percent, from $219.8 million in fiscal year 1991-92 to $250 million in
fiscal year 1993-94, it remained at that level for the subsequent two fiscal years, 1994-95
and 1995-96. However, during this time, the wagering that generates this pari-mutuel
handle shifted dramatically from on-track to off-track wagering. As illustrated in
Figure 2 (see page 13), on-track pari-mutuel handle declined from $163.9 million in
fiscal year 1991-92 to $99.5 million in fiscal year 1995-96, a decrease of 39 percent. In
contrast, off-track betting increased over 170 percent during this time and accounted for
60 percent of the $251.1 million in racing handle generated in fiscal year 1995-96.
Additionally, almost as many people now attend off-track betting sites as they do
racetracks. The following examples illustrate this point:
# Since fiscal year 1991-92, Tucson Greyhound Park (TGP) has received almost
$900,000 worth of tax credits for capital improvements such as refurbishing its
grandstand, starting box lounge, and concession stand and bar. These
improvements, however, did not prevent a decrease in on-track attendance or on-track
handle. In just four years, TGP=s annual on-track attendance fell from 317,199
to 137,360 in fiscal year 1995-96. Furthermore, on-track handle dropped from $33.6
million to $12.5 million for the same time period.
# For Prescott Downs, the only track now eligible for new capital improvement
projects, off-track wagering comprises 88 percent of its total racing handle. Thus,
new improvements to the facility are unlikely to result in an increase in on-track
handle since most bettors never even visit the track.
Commission Inappropriately
Approved Projects
In addition to the Capital Improvement Program not meeting the intent to increase
revenues for the State, the Commission has inappropriately approved several project
items for tax credits under the Program. Despite specific guidelines outlined by the
Legislative Council and reiterated by the Attorney General, the Commission
improperly approved over $500,000 in ineligible project items since 1990.
Projects must meet specific criteriaCAlthough statutes allow a broad range of projects
to qualify for the Capital Improvement Program, all must meet certain guidelines. In
conjunction with the 1986 performance audit of the Racing Commission (see Auditor
General Report 86-5), the Legislative Council identified two key criteria for approving
Figure 2
Arizona Department of Racing
Racing Handle Generated by
On-Track Versus Off-Track Wagering
Years Ended June 30, 1992 through 1996
143.4 151.6
1992 1993 1994 1995 1996
On-Track Wagering Off-Track Wagering
Source: Department of Racing's Annual Report for fiscal year 1995-96.
projects. In 1989, the Department requested an Attorney General opinion regarding
project approval criteria and the Attorney General established the same guidelines
offered by the Legislative Council. These criteria remain applicable today:
# Minimum Expenditure RequirementCWhile A.R.S §§5-111.02 and 5-111.03 allow a
racetrack facility to consolidate more than one capital improvement project on one
application, each project must still meet the minimum expenditure requirement of
# Related ComponentsCThe Legislative Council stated that individual components
of projects costing less than the minimum amount can be combined to receive
approval only if the components are closely related to the project=s overall intent.
In addition to the criteria identified by the Legislative Council, statute requires the
Commission to consider several other factors before approving capital improvement
projects. Specifically,
# Racetracks must submit a capital improvement project application—This
application should include projected costs, an estimate of additional pari-mutuel
revenues accruing to the State as a result of the project, a description of any public
safety concerns to be resolved by the project, and a management and construction
# Projects must promote safety—The Commission must determine whether the
capital improvement project will promote the safety of racing horses or dogs or
increase the safety, convenience, or comfort of the people attending the racetracks.
# Projects must meet definition of capital improvement—Statute defines a capital
improvement as an addition, replacement, or remodeling of a racetrack facility
including architectural and design expense. Capital improvements do not include
the cost of repairs and maintenance to keep a racetrack facility in ordinary operating
condition and do not include operational expenses. However, racetracks may
include water truck and tractor purchases as capital improvements.
Commission inappropriately approved $500,000 in project itemsCDespite the guidance
offered by the Legislative Council, the Attorney General=s Office, and statute, the
Commission inappropriately approved $501,125 in tax credits for project items that did
not meet statutory requirements. Specifically, 5 of the 6 projects approved since 1990
contained items that were inappropriately approved. While many of the project items
may have qualified as capital improvements, the lack of documentation supporting
their relationship to an overall project and failure to individually meet the minimum
expenditure requirement precludes them from tax credit consideration. Specifically, the
Commission approved the following:
# 1996 Prescott Downs projectCThis project involved the installation of a safety rail
around the track and other items for a total approved cost of $189,291. However,
included in this approved cost were $67,842 in unrelated items such as a coin
counter and packager, computer and printer, gift shop extension and awning, and
three utility vehicles.
# 1995 Prescott Downs projectCThis project included a variety of unrelated items for
a total approved cost of $216,413. Only two of the items in this project met eligibility
requirements, with the remaining items ineligible because they did not meet
minimum expenditure requirements and were unrelated to the two eligible items.
The cost of the ineligible items totaled $58,047.
# 1990 Prescott Downs projectCThis $199,633 project consisted of widening two
turns on the track to enhance overall safety. However, the Commission also
approved two addendums to the project totaling $74,631, which were unrelated to
the original project=s overall intent. These addendums included upgrading the
concession stand and re-roofing the manager=s office, items that on their own did
not meet minimum expenditure requirements.
# 1992 Tucson Greyhound Park projectCThis $409,344 project consisted of
constructing an exterior wall to surround the property as well as purchasing items
to enhance the clubhouse. However, $198,946 of the tax credit was granted for eight
additional items, including back-up power for tote equipment and new restrooms,
that did not qualify because they did not individually meet the minimum
expenditure requirement and were not related to the other projects.
# 1991 Tucson Greyhound Park projectCThis $462,653 project consisted of
remodeling grandstand areas, the starting box lounge, and the concession stand and
bar. However, this amount included $78,275 of food equipment that the Attorney
General=s Office deemed ineligible because it did not meet the definition of a capital
improvement. Furthermore, the project included an unrelated item to construct a
canopy for greyhound vehicles at a cost of $23,384. While this canopy would qualify
as a capital improvement on its own merit, it did not meet the minimum
expenditure requirement and, therefore, was ineligible.
Although the Department contends its Attorney General representative reviewed and
approved each of these projects, documentation contained in project files or provided
by the Department only support Attorney General review for three of the five projects.
Of these three projects, the Attorney General representative only approved the 1990
Prescott Downs project, and did so after expressing doubts as to whether the items
were related. The Attorney General representative did not approve the inappropriate
items in the other two projects. The remaining two project files did not contain any
evidence of Attorney General review or approval.
In addition to not meeting statutory criteria for project approval, many of the capital
improvement applications submitted to the Commission failed to demonstrate the
extent to which such improvements would meet the Program=s overall intent. For
example, some capital improvement project applications did not provide an indication
that revenue increases would result from the project, while others even acknowledged
that revenues would not increase, but were needed to maintain revenues at current
Commission Should Recover
Monies for Ineligible Project Item
Even if the Legislature terminates the Program, the Commission still needs to take
action in two areas. First, the Commission should recover monies for project items that
were inappropriately approved and granted tax credit. Second, both the Commission
and the Department should monitor all remaining or anticipated capital improvement
projects for compliance with the approved application and statute.
Commission should recover moniesCThe Commission should recover monies for the
projects it has improperly approved and revoke any remaining, unused tax credits. In
two previous reports, the Auditor General cited the Racing Commission for improperly
approving projects, each time recommending recovery of the monies and/or
cancellation of any remaining tax credits resulting from the projects. Specifically, in
1981 and 1986 (see Auditor General Reports 81-5 and 86-5), improper project approvals
were documented totaling $229,044 and $290,445, respectively. While the Commission
did take action to recover monies or cancel remaining tax credits, it could not provide
documentation evidencing recovery of all tax credits improperly approved. However,
in 1981, the Attorney General issued opinion I81-100 (R81-108) which requires recovery
of incorrectly withheld public monies. In this opinion, the Attorney General maintains
that, upon discovery of the error, a racetrack is obligated to repay and the State is
obligated to recover any public monies that were incorrectly withheld, regardless of
any approval that was previously granted.
Commission/Department should ensure proper oversight of projectsCIn addition to
recovering monies for improperly approved projects, the Commission should ensure
proper oversight of any remaining or anticipated projects. According to A.R.S §§5-
111.02 and 5-111.03, the Director of the Department of Racing is required to conduct
periodic inspections of capital improvements at least monthly during the construction
period in order to ascertain compliance with the track=s application. The Director
indicated that he relies informally on the state stewards to provide him with status
updates of construction projects that are in progress. Although statute allows the
Director to delegate this responsibility, project files contained no evidence of any
Statute also requires the Commission to verify all project costs for tax credit
consideration upon completion of the project. The Commission can either request the
Auditor General to conduct this review of project costs or approve an independent
certified public accountant. Despite this requirement, none of the six files reviewed
contained evidence of a final review. Additionally, some files did not contain canceled
checks to confirm that racetracks actually incurred expenses for the project as presented
to the Commission in their application. As a result, the Commission lacks
documentation to support the tracks= qualification for tax credits. Therefore, the
Commission should verify the costs for all completed projects and obtain sufficient
documentation to warrant the tax credits it has granted.
1. The Legislature should consider repealing A.R.S. §5-111.02 to terminate the Capital
Improvement Program because it has not met its statutory intent and is not likely to
in the future.
2. In accordance with Attorney General opinion I81-100 (R81-108) which requires
recovery of incorrectly withheld public monies, the Racing Commission should
recover $501,125 in tax credits it improperly approved.
3. Both the Commission and the Department should obtain sufficient documentation
for all previously approved projects to verify completion of the project according to
the approved application and to verify project costs.
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The Department of Racing should do more to protect the monies that are wagered on
horse and dog racing in the State. Despite statutory requirements to monitor all pari-mutuel
activities, the Department does not regularly oversee these activities at
commercial tracks. Without sufficient monitoring, the potential for error and fraud
increases, jeopardizing the wagering public=s money. The Department can do more to
ensure the accuracy of both payouts to the public and taxes due to the State, as well as
minimize the risk of illegal activities, by developing a plan for regular monitoring
activities and assigning sufficient resources to carry out the plan.
Racetracks use a computerized totalisator system to record the amount of money
wagered for each race, compute the odds and estimated payoff associated with each
race, and to calculate the payout to the public, the State, and the racetrack. Tracks
typically contract with totalisator companies to provide both computer equipment and
programs as well as to supply on-site staff to operate the system. Currently, two
totalisator companies operate in Arizona. One company serves tracks operating in the
Tucson area while the other serves tracks operating in the Phoenix area and Prescott.
Totalisator machines essentially act as the track=s accounting system, processing
approximately $251 million per year in monies wagered at Arizona commercial
racetracks. As such, the numerous parties involved in racing, such as winning bettors,
tracks, the State, and horse and greyhound owners, rely on the totalisator system=s
accuracy to properly allocate monies wagered.
Oversight of Pari-Mutuel Activities
Inadequate at Commercial Tracks
Currently, the Department does little to ensure that the $251 million wagered at
commercial tracks is properly protected and distributed. For example, the Department
has not ensured that tracks employ necessary electronic data processing (EDP) controls
to protect against unauthorized access and safeguard monies wagered. Additionally,
until recently, it did not verify the wagering information provided by tracks to ensure
proper calculation of pari-mutuel taxes due to the State. Finally, although required by
statute to monitor wagering activities and pari-mutuel departments at all race meets,
the Department does not use its auditor position to conduct such activities at
commercial tracks.
Inadequate controls for safe and accurate distribution of wagersCThe Department
does not ensure that necessary controls are in place to ensure safe and accurate
processing of the wagering public=s money in a computerized environment. A secure
computerized environment contains measures that minimize the risk of unauthorized
access as well as strategies that detect data manipulation. Avoiding unauthorized access
can be achieved by screening employees before allowing them system access and
limiting system access to only those employees who are critical to operations. Detecting
data manipulation can be accomplished by monitoring the integrity of computer
programs, procedures, and data. The Department does not provide adequate oversight
in either area:
# System access not limitedCThe Department has not taken adequate measures to limit
system access. Currently, the only mechanism the Department has in place to monitor
access to the totalisator system is to license personnel associated with processing
wagers. Through the licensing process, the Department can screen potential employees
for criminal backgrounds and deny unsuitable applicants. However, the Department
may not be consistently licensing these individuals. A review of mutuel tellers at two
tracks revealed that as many as four tellers from one track were unlicensed.
Additionally, by not monitoring these systems, the Department cannot determine the
extent of unlicensed activity.
In addition, the Department does not ensure that tracks have taken adequate measures
to limit system access. For example, on the two occasions auditors visited Phoenix
Greyhound Park, one entrance into the room containing the totalisator system was
completely unsecured, with no mechanism such as a card key system or log-in sheet to
track or control those who entered.
# Insufficient transaction testingCThe Department inadequately tests the accuracy of
transactions handled by the totalisator systems. Because totalisator companies may
make operational changes to the system several times a month, regular transaction
testing by the Department is warranted to ensure the system accurately calculates
payouts after changes have been made. Historically, the Department has limited its
efforts in this area to testing the system programming and not actual transactions.
The Department=s tests consisted of entering hypothetical wagers into the system to
determine if it performed calculations correctly. This type of review assumes that if
the system calculates correctly under hypothetical conditions, it will calculate
correctly under authentic conditions. While valuable for detecting program
calculation errors, it cannot identify instances where an unauthorized individual
gained access to the system or where data was manipulated to fraudulently alter
calculations. Furthermore, a review of Department files suggests that Department
staff conducted these programming tests too infrequently to be an effective
monitoring strategy. While operational changes are made to these systems several
times each month, the Department tested hypothetical transactions at one track only
five times between 1990-1995. Additionally, the Department tested transactions at
two other tracks less than three times in that same time period, and three tracks
were not tested at all.
The Department did not verify figures used to calculate taxesCWhile the Department
infrequently tests totalisator transactions and does not ensure the adequacy of electronic
data processing controls, until recently, it also did not verify figures used to calculate
taxes due to the State. Currently, the Department requires all tracks to submit various
wagering figures at the end of each race day for statistical compilation and tax
calculation. The Department receives this information in two formats: a one-page
summary sheet completed by the track=s mutuel supervisor, which includes the track=s
calculation of taxes due; and numerous data reports generated by the totalisator system
to support the information provided on the summary sheet. However, as of February
1997, the Department did not verify the numbers provided on the track=s summary
sheet to those on the totalisator reports. Therefore, the Department could not ensure
that the tax liability the track calculated was accurate. Additionally, by not verifying the
accuracy of calculations performed by the totalisator system, the Department could not
ensure the accuracy of information provided in the totalisator system reports.
The Department does not use its auditor position(s) to monitor commercial
tracksCThe Department has limited its ability to oversee pari-mutuel activities by not
using its auditing position(s) to monitor commercial tracks. A.R.S '5-106 requires that
the Director of the Department appoint a supervisor of mutuels to monitor wagering
activities and pari-mutuel departments at all race meets. While the Department has a
pari-mutuel supervisor, he currently only monitors pari-mutuel wagering activities at
county fair races, which comprise less than 5 percent of all monies wagered on horse
and greyhound racing in the State. Furthermore, the Department abolished a full-time
auditor/inspector position in 1994 in exchange for an administrative assistant position.
Although the new position assumed some of the auditing duties, the person in this
position does not monitor pari-mutuel wagering activities.
Until recently, the Director of the Department of Racing did not acknowledge the need
to monitor pari-mutuel wagering activities, claiming that the advent of automated
totalisator systems lessened the need for auditors. However, the Director recently
directed the pari-mutuel supervisor to monitor wagering activities at commercial
tracks. Since October 1996, the pari-mutuel supervisor has visited two separate
racetracks to monitor and review a single day of wagering activities at each track, but
this has been the extent of his monitoring activities at commercial tracks. The pari-mutuel
supervisor also works as a greyhound steward from November through March
and in another state between June and September, which prevents him from devoting
additional time to monitoring wagering activities at all commercial tracks.
Monitoring Needed to Protect
Against System Error and Fraud
To protect the wagering public and the State=s interests, the Department should actively
monitor pari-mutuel wagering. Past instances of system error and fraudulent activity in
Arizona as well as in other states reveal the need for regular oversight. Therefore, given
the continued potential for error and the amount of money involved in pari-mutuel
wagering in this State, the Department should employ monitoring strategies similar to
those used in other states.
System error and fraudulent manipulation are possibleCBecause of the potential for
system error and fraudulent manipulation, proper oversight of pari-mutuel activities is
important. Although not a frequent occurrence, system errors have occurred at Arizona
tracks. For example, in April and May 1995, Department staff discovered system errors
at a Tucson track while testing the totalisator system=s programming. When entering
hypothetical bets into the system, the totalisator machine calculated the wrong payout
for two types of wagers under certain scenarios. Although totalisator personnel and
Department staff were told to verify the payouts if the same conditions occurred during
an actual race performance, the Department did not send anyone out to test the system
again for over a year and a half. A more recent error occurred at the same track during
an actual race performance. In December 1996, the track=s assistant mutuel manager
discovered the totalisator system had incorrectly calculated a payout for one type of
wager during a race, an error the racetrack could not explain. While the track did detect
the error and take appropriate action, this example illustrates the potential for errors,
which can affect race payouts, and the need to monitor these systems.
In addition to system error, totalisator machines are susceptible to fraud. Audit staff
discussed this potential with an official at the University of Arizona Racetrack Industry
Program, which is one of only two programs in the country that trains individuals to
perform racing-related activities. According to this official, it is important to regularly
monitor the security around pari-mutuel activities due to the potential for fraudulent
activities. In addition, he indicated that an auditor must be familiar enough with a track
environment to be able to identify unusual activities if they were to occur. Such
unusual activities have occurred in other states. For example, in two states, totalisator
company employees re-created unclaimed winning tickets and redeemed them for cash.
These employees had access to unclaimed winning ticket information and the
knowledge to replicate these tickets. By restricting access to this information or
constantly monitoring trends in the numbers of unclaimed winning tickets redeemed
for cash, a racetrack and/or auditor might prevent or detect this activity.
Department should develop plan to monitor pari-mutuel wagering activitiesCTo
protect against such occurrences at Arizona racetracks, the Department should perform
a variety of pari-mutuel monitoring activities similar to those used in other states.
Twelve states that generate at least $100 million in pari-mutuel handle were contacted
and it was found that ten of these states monitor pari-mutuel activities. Although the
degree of auditing varies, all ten test transactions to ensure that the totalisator system
accurately calculates information such as odds and payouts. This testing consists of
checking the system=s programming before each race meet and after every
programming change and/or randomly recalculating payouts. Some states with a large
racing industry, such as California, Florida, and New Jersey, verify every payout
computed by the totalisator system at every track to ensure the accurate distribution of
monies wagered. While not indicating the frequency of problems with inaccurate
payouts, these states do indicate that a sufficient number of inaccurate payout
calculations do occur to justify verifying every payout. Additionally, of the ten states
that audit, all rely on the figures generated by the totalisator system, not the tracks, to
calculate revenue due to the State.
In addition to ensuring the accuracy of totalisator calculations, other states use a
variety of strategies to avoid unauthorized system access and to detect fraudulent
manipulation should it occur. Methods used by other states to avoid unauthorized
access include locking the totalisator system room and assigning user access codes,
ensuring that unclaimed ticket information is secure, and ensuring that all pari-mutuel
employees receive a background check. For detecting unusual activity or fraudulent
schemes, some states review totalisator system logs that show the type of activity, the
person performing the activity, and the time of the activity. In addition, some states
conduct audits to identify patterns of unusual teller activities, such as an abundance of
cashed tickets and numerous canceled tickets.
Following the examples of other states, the Department should develop a plan to
properly monitor pari-mutuel wagering activities and ensure that the necessary
resources are devoted to carry out this plan. As mentioned earlier, the Department has
not consistently utilized its existing positions to monitor pari-mutuel activities at
commercial tracks since staff previously assigned to perform monitoring also have
other job responsibilities. Therefore, the Department needs to devote its existing pari-mutuel
auditing position(s) to conducting monitoring activities at commercial tracks on
a regular basis. Alternatively, the Department could study the possibility of hiring an
independent auditor to perform this function if it believes it does not have the auditing
expertise in-house or cannot devote a full-time position to conduct audits. Two other
states contacted, California and Washington, rely on contracted auditors to perform a
significant portion of their pari-mutuel monitoring activities.
1. The Department should develop a plan to properly monitor pari-mutuel activities at
all Arizona racetracks. The plan should include:
# Measures to minimize the risk of unauthorized totalisator system access;
# Strategies to detect fraudulent data manipulation of the totalisator system should
it occur;
# Methods to test the accuracy of totalisator-calculated payouts; and
# Methods to ensure the accuracy of amounts submitted by tracks for tax liability
2. The Department should ensure sufficient resources are dedicated to monitoring
pari-mutuel activities at all commercial racetracks by assigning at least one staff
person to perform this function on a regular basis or consider hiring an independent
auditor to perform the necessary monitoring activities.
To better ensure the integrity of greyhound racing, the Department needs to increase its
oversight of greyhound tracks. The Department=s limited supervision of greyhound
tracks can threaten the safety of both animals and licensees, as well as the confidence of
the wagering public. The Department could strengthen oversight of greyhound racing
by improving its use of existing staff at greyhound tracks and adding part-time staff to
perform several critical regulatory functions.
The Department=s Regulation
at Greyhound Tracks Does
Not Fully Protect Participants
The Department=s oversight at greyhound tracks does not adequately protect the public,
the animals, or the licensees. Currently, track personnel perform several important
racing activities without any supervision by state officials. An insufficient number of
staff and their limited job responsibilities contribute to the Department=s lack of
The Department inadequately supervises several key regulatory functionsCAlthough
the regulation of greyhound racing is necessary to protect animal safety and ensure the
confidence of the wagering public, the Department inadequately monitors several
racing activities. Key racing activities that lack Department oversight occur in the
paddock area, where greyhounds are held prior to and during race performances, and
track offices. Additionally, the Department does not ensure consistent and safe racing
by inspecting the condition of the racing surface. Currently, the Department either
allows track personnel to perform the following tasks without Department supervision
or simply neglects the activity altogether:
# Race entry selectionCThe selection of race entries occurs in the racing secretary=s
office and involves the selection of dogs for upcoming races and the determination
of their starting positions in these races. Despite an administrative rule requiring the
Department=s attendance during entry selection, the Department does not supervise
track personnel who perform this function. Oversight of this activity is important to
ensure that all greyhounds, trainers, and owners receive equal opportunities to
# Weigh-in/Weigh-outCThis activity, which occurs upon each greyhound=s arrival in
the paddock (weigh-in) and prior to each greyhound=s race (weigh-out), is
performed to provide assurance to the public and racing officials that greyhounds
run within one-and-one-half pounds of their established race weights.1 This process
is important because any significant weight gain or loss can affect an animal=s
performance. However, the Department does not supervise this activity to ensure
greyhounds are accurately weighed.
# IdentificationCThis paddock activity occurs prior to racing and helps assure that
the proper dogs are running, protecting the interests of the wagering public and the
animals themselves. Recent incidents at two greyhound tracks demonstrate the need
for Department supervision, since the track official responsible for identifying each
greyhound allowed misidentified dogs to run races. For instance, in September
1996, one track=s official allowed two greyhounds to race wearing the wrong
number blankets. One of the greyhounds involved actually won the race, resulting
in an incorrect payout of money to the public. In another instance, a track official
inaccurately identified two dogs, allowing them to run under each other=s name
from November 1996 until January 1997. While wagering remained unaffected,
since neither greyhound finished first, second, or third in any of the races they
competed in, the potential to adversely affect the betting public still existed.
# Track maintenanceCDespite an administrative rule requiring that greyhound
stewards promote safe conditions at tracks, the Department does not require
stewards to examine track surfaces prior to racing. Moreover, despite arriving at the
track two hours prior to race time, observations of steward activities, coupled with
interviews of Department management, indicate that the Department stewards
spend no time examining the track to ensure safe racing conditions.
Although the Department recently established a Track Condition Advisory
Committee at one greyhound track for greyhound owners, trainers, and track
management to discuss track conditions, concerns persist regarding track
maintenance. Injury reports the Department compiled during calendar year 1996
reported 214 injuries at one greyhound facility and 193 injuries at another, many of
which a greyhound owner and veterinarian attribute to substandard track
Insufficient staff hinders supervisionCThe Department=s limited presence at greyhound
tracks results primarily from the insufficient number of staff assigned and the limited
job responsibilities of those staff. Currently, the Department only assigns two stewards
1 Greyhounds are weighed twice because some animals may lose weight from the time they enter the
paddock to the time they must race.
and one veterinarian to each greyhound track in the State. Although greyhound
stewards arrive two hours prior to race time, they devote much of their time to
performing administrative duties, such as licensing and conducting occasional hearings
for violation of racing regulations. Consequently, the Department's greyhound
stewards do not provide oversight of any pre-race activities in the paddock. Likewise,
because both greyhound stewards must observe the actual races, they cannot monitor
racing activities in the paddock during race meets. The veterinarian, meanwhile, has
specific responsibilities relating to the collection of greyhound samples to test for
prohibited drugs. Because state veterinarians are responsible for the collection, custody,
and shipment of animal testing samples for analysis prior to and during live racing,
their duties preclude them from monitoring the paddock area.
The Department Can Do
More to Better Ensure the
Integrity of Greyhound Racing
The Department can strengthen its regulation of greyhound tracks. Unlike other
greyhound racing states, and its own level of horse racing regulation, the Department
currently devotes too few staff to oversee greyhound racing. Consequently, the
Department should better use existing staff and add a part-time staff person to
greyhound tracks.
Other states and Department regulation of horse racing require greater supervisionC
Compared to other states, and its own level of horse racing regulation, the Department
lacks personnel to adequately monitor greyhound racing activities. Nine states similar
to Arizona were surveyed, each of which regulates multiple greyhound tracks. Of these
nine states, seven employ more state officials at their respective tracks than Arizona
does. The number of assigned staff ranges anywhere from four to ten state officials per
greyhound track and includes more licensing technicians, investigators, and paddock
personnel. Further, eight of the nine states contacted require the presence of a state
official in the paddock area during greyhound weigh-in. Additionally, Kansas racing
regulations require racing officials to walk the race surface prior to each day=s racing to
ensure the surface is safe.
Department staffing at greyhound racetracks also appears inadequate when compared
to its staffing at horse racetracks. Currently, the Department allocates nine staff to each
commercial horse track as compared to the three staff it assigns to each greyhound
facility. Similar to greyhound tracks, the Department assigns two stewards and one
veterinarian to each horse track, but also assigns a licensing technician, two
investigators, one identifier, one administrative assistant, and one veterinarian
assistant. While the greater number of licensees involved in horse racing might
partially warrant this staffing discrepancy, the Department still must ensure the same
level of animal safety and public confidence for each type of race. As such, regulations
governing horse and greyhound racing often mirror each other. For example,
regulations require both greyhound and horse stewards to observe the selection and
determination of dogs= and horses= starting positions for upcoming races. Additionally,
stewards must be aware of any weight rule violations or any attempt to alter specified
weights for both greyhounds and horses. The Department=s absence in the paddock
area for greyhounds makes it more difficult to monitor these activities.
Department may need additional staff to adequately oversee greyhound racing C In
order to adequately oversee greyhound racing, the Department can better use its
existing staff at greyhound tracks, but may also need to add a part-time staff person at
each greyhound track. As indicated in Finding V (see pages 35 through 37), greyhound
stewards might only work 30 hours per week, yet receive compensation for a 40-hour
week. As such, the Department has some flexibility to increase the number of hours
worked by stewards and thus provide additional staff time to monitor or perform
racing activities that are conducted before actual racing begins. For example, stewards
could supervise the race entries process and the weigh-in of greyhounds, and examine
the racing surface prior to racing, while still performing licensing and other
administrative duties. However, since both Phoenix and Tucson Greyhound Parks
conduct racing seven days a week, the Department might need an additional part-time
state racing official at each greyhound track to provide coverage for staff days off.
Additionally, since both stewards must conduct hearings and observe actual racing, a
part-time state official could monitor racing activities occurring simultaneously with
hearings or actual racing. Specifically, this additional part-time position could:
# Perform licensing and other administrative duties prior to racing, allowing a
steward to consistently observe the selection and starting position of dogs for
upcoming racing performances and the weigh-in process;
# Observe the weigh-in process when both stewards are required to conduct hearings;
# Monitor the weigh-out and identification process in the paddock area when racing
commences, since both stewards must observe actual races during this time.
Adding a part-time position at Phoenix Greyhound Park and Tucson Greyhound Park
will cost the Department between $19,000 and $22,500 per position. Since Apache
Greyhound Park only operates for four months during the year, the addition of a part-time
position will cost between $6,500 and $7,800.
1. The Department should improve its scheduling of greyhound stewards to
adequately monitor all greyhound racing activities, including the race entries
process, the verification of greyhound weights, and the examination of track
2. The Department should consider requesting the necessary funding to add a part-time
position at each of Arizona=s three greyhound tracks to adequately monitor all
greyhound racing activities.
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The Department should ensure that commercial tracks pay pari-mutuel taxes on any
county fair race meets they conduct. Currently, commercial tracks avoid paying pari-mutuel
taxes on the pari-mutuel handle generated from these county race meets. In
addition, these tracks also enhance their hardship tax credit status, a credit against the
payment of pari-mutuel taxes, and reduce the amount of pari-mutuel tax revenues
available for distribution to the eight funds supported by the tax. The Department
should enforce the statute and ensure that commercial tracks pay the appropriate taxes.
A.R.S. §5-111(E) provides that any county fair racing association may apply to the
Commission for one racing meeting each year, and the Commission shall set the
number of days and dates of such meetings. While some counties conduct their own
race meets, the Commission also allows counties to forgo conducting their own meets
by selling their race dates to commercial tracks. Currently, 6 out of the 15 counties sell
race dates. Specifically, in fiscal year 1996-97, Cochise, La Paz, Maricopa, Navajo, and
Pinal Counties sold their race meet dates to Turf Paradise, while Yuma County sold its
dates to Prescott Downs. In return for selling these dates to commercial tracks, counties
contract for a percentage of the pari-mutuel handle generated by the commercial tracks
on the racing dates sold. In recent years, this percentage has yielded between $14,000
and $39,000 for counties, allowing these counties to generate revenue without incurring
the expense of conducting a race meet.
Commercial Tracks Do Not
Pay Taxes on County Fair
Race Dates
To date, commercial tracks have not paid pari-mutuel taxes on the pari-mutuel handle
generated during county fair race dates. According to statute, racing meets conducted
by county fair racing associations are exempt from the payment of pari-mutuel tax. As
such, counties that conduct their own race meets do not pay taxes on the pari-mutuel
handle that is generated from these meets. Commercial tracks have similarly applied
this statutory exemption when calculating their tax liability to the State. Specifically,
when commercial tracks have purchased county race dates, they have not paid pari-mutuel
taxes on the pari-mutuel handle generated from those race dates. Since these
county race dates do not extend a commercial track=s race meet, but instead replace the
track=s originally scheduled commercial days, tracks reduce the amount of pari-mutuel
taxes paid. For example, Turf Paradise generated $7.35 million in taxable, live pari-mutuel
handle on county race days conducted in 1997, but did not pay pari-mutuel
taxes of $147,000 that it normally would have by operating commercial race days.
While statute exempts county fair racing associations from the payment of pari-mutuel
taxes on pari-mutuel handle generated from county race meets, this exemption does not
apply to other entities conducting county race meets. According to A.R.S. §5-110(F), a
county fair racing meeting conducted by an individual, corporation, or association
other than the properly authorized county fair racing association shall be considered
the same as a commercial meeting. Thus, commercial tracks should not exempt the
pari-mutuel handle they generate on county race dates from pari-mutuel taxes, since
they are actually conducting the county race meet and under this statute, the meet
would be considered a commercial meet, subject to pari-mutuel taxes.
Excluding Pari-Mutuel Handle
Affects Tax Credit Status
and Revenue Distribution
In addition to avoiding the payment of taxes, other implications result from commercial
tracks not paying taxes on the racing handle generated from county fair race dates.
First, by excluding this racing handle from the payment of taxes, commercial tracks can
enhance their hardship tax credit status, which further reduces the amount of pari-mutuel
taxes paid. Second, revenues available for distribution to the funds supported
by the pari-mutuel tax and the State=s General Fund are reduced.
Commercial tracks receive increased hardship tax creditsCIn addition to avoiding the
payment of pari-mutuel taxes on county race days, commercial racetracks also enhance
their hardship tax credit status. Established as a result of tax relief legislation passed in
1994, the hardship tax credit provides a tax credit against the pari-mutuel tax for tracks
that have suffered declines in business as measured by pari-mutuel handle. To
determine eligibility for this credit, the Department compares a track's previous year
pari-mutuel handle to a base year pari-mutuel handle figure. If the previous year is
lower than the base year, the track becomes eligible for a hardship tax credit, which is
then calculated based on a statutory formula. Tracks can then use this credit to reduce
their current year tax liability. By purchasing county dates, tracks have excluded the
total pari-mutuel handle generated on these dates from the hardship calculation. Thus,
a lower annual pari-mutuel handle figure as compared to the base year will either
increase the likelihood of a track=s eligibility for the tax credit or increase the amount of
the tax credit. For example:
# Turf Paradise generated $14.3 million in total pari-mutuel handle on county race
days conducted in fiscal year 1996-97, which it will be able to exclude from the
hardship tax calculation. By excluding this amount, Turf Paradise=s total hardship
tax credit is $411,000. However, if Turf Paradise included the pari-mutuel handle
from county race days in its hardship tax credit calculation, its tax credit would only
be $239,000. Thus, excluding the pari-mutuel handle generated on county race days
provides Turf Paradise with $172,0000 in additional hardship tax credits.
State and various fund beneficiaries receive less revenueCAnother impact of
commercial tracks avoiding payment of pari-mutuel taxes is a reduction in the amount
of revenues available for distribution to the eight funds supported by the pari-mutuel
tax and the General Fund. Each of the eight funds receives a specified percentage of the
pari-mutuel tax revenue, with any remaining amounts distributed to the General Fund.
For example, the County Fairs Racing Betterment Fund, from which the Department
disburses purse and betterment monies to counties that conduct race meets, receives 21
percent of pari-mutuel tax revenues generated by commercial tracks. However, by
replacing commercial dates with county fair race dates, Turf Paradise has avoided a tax
liability of $147,000 and enhanced their hardship tax credit status by $172,000. As a
result, the pool of monies available for distribution is potentially reduced by $319,000,
ultimately negating approximately $67,000 that might have otherwise been deposited
into the betterment fund. The other seven funds would be similarly affected,
depending on the percentage of pari-mutuel tax revenues to which they are entitled.
Department Should
Assess and Collect
Pari-Mutuel Taxes
The Department should determine commercial tracks= pari-mutuel tax liability on
racing handle generated from county race meets and collect any taxes owed. While
Department officials indicated that the Department has been unclear on whether county
race meets conducted by commercial tracks qualified for tax exemption status, the
statute appears clear that the racing handle generated from these meets should be
taxed. As such, the Department should assess and collect any pari-mutuel taxes owed
from the operation of county meets by commercial tracks in fiscal year 1997-98, as well
as in future years.
In addition, the Department should solicit advice from the Attorney General regarding
the collection of any pari-mutuel taxes owed from the operation of county meets by
commercial tracks in years prior to fiscal year 1997-98.
1. According to A.R.S. §5-110(F), the Department should assess and collect any pari-mutuel
taxes commercial tracks owe from the operation of county fair race meets in
fiscal year 1997-98 and in future years.
2. The Department should seek advice from the Attorney General regarding the
collection of pari-mutuel taxes owed from the operation of county fair race meets by
commercial tracks prior to fiscal year 1997-98 .
During the audit, several improper applications of state payroll regulations were
discovered that require the Department=s immediate attention. These areas include
using a payroll time recording system that may inflate actual hours worked for some
employees and entering into an inappropriate payroll agreement with one employee.
Some Employees
Receive Inflated Pay
Currently, Department management allows its employees at greyhound tracks to record
their time as Aperformances@ rather than actual hours worked, a method that inflates the
hours worked by these employees. A performance refers to one session (either a
daytime matinee or evening session) of racing conducted by a racetrack that requires
supervision by state employees. According to the time sheets submitted by these
employees, 5 performances per week equals a 40-hour work week. However, a
performance does not always require employees to work for 8 hours. Instead, based on
observations of these employees at greyhound tracks and interviews with these
employees and department management, a performance usually requires only 6 to 7
hours of work. Thus, during a given work week, these employees may work only 30
hours a week, but receive pay for 40 hours.
According to Department officials, this time recording practice for employees at
greyhound tracks is a longstanding tradition within the Department that facilitates
scheduling. However, there does not appear to be a need to record time in this manner
since the Department=s employees at horse tracks record actual hours worked rather
than performances.
The Department Allowed
Improper Payroll Agreement
Until recently, the Department has permitted an unusual payroll arrangement for one of
its employees to possibly allow this employee to receive state retirement benefits.
Beginning in 1990, the Department entered into an agreement with one employee
allowing him to accumulate time worked without receiving pay and then compensating
him during certain times of the year for those hours previously earned. Specifically,
beginning each fiscal year, this employee would report actual hours worked, but the
Department did not pay him for these hours. Instead, the Department manually tracked
the accumulated hours until the end of December, when it then began generating
paychecks for this employee. At that time, the employee would receive pay for 79 hours
of work, no matter how many hours he reported working. For example, in 2 separate
pay periods, this employee reported working no hours and 7 hours, respectively, yet
received pay for 79 hours of work. The Department would continue to generate payroll
checks reflecting 79 hours of work each pay period until the accumulated balance was
exhausted. The employee and Department would then repeat this practice every fiscal
This agreement presented several problems. First, the employee did not receive
compensation based on the number of hours actually worked in a given pay period.
Statute requires that all state employees receive compensation within five days of the
pay period worked. Second, the Department created time reports to reflect the 79 hours
of work for which this employee was paid, even though this employee did not report
working 79 hours during a pay period. The Department would either alter a time
report submitted by this employee or create a new time report reflecting the number of
hours for which he was paid. Third, Arizona State Retirement System guidelines allow
an employee to work the entire year and continue receiving retirement benefits as long
as the employee does not exceed 20 hours of work per week for more than 19 weeks in
the fiscal year. For those 19 weeks, the employee can even work full-time. However, if
this limit is exceeded, the employee may not receive retirement benefits, and both the
employee and state agency must contribute to the State=s retirement fund. A review of
this employee=s time cards indicates that his retirement benefits should have been
halted and he should have been a contributing member to the State=s retirement fund in
fiscal years 1993-94 and 1995-96.1 For these two fiscal years, the employee reported
working more than 20 hours for 23 and 24 weeks, respectively.
While the Department halted this practice in November 1996 and now pays this
employee for the time actually worked in each pay period, it should comply with state
retirement guidelines and withhold retirement contributions. Additionally, the
Department should determine the extent to which the employee should have been
contributing to state retirement and require him to pay that amount to the state
retirement system.
1 The Department could not produce this employee=s fiscal year 1994-95 time records for auditors to
1. The Department should establish a uniform method for recording hours worked to
ensure that all employees are paid only for the time they worked.
2. The Department should work in conjunction with the State Retirement Office to
determine the retirement status of the employee with the unique payroll
arrangement and take any corrective action required.
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During the audit, other pertinent information was collected regarding the pari-mutuel
tax structure and the impact recent tax relief legislation has had on pari-mutuel tax
Commercial Tracks
Receive Tax Relief
In 1994, faced with the prospect of increased competition from Indian gaming casinos
and a possible reduction in racing profits, the commercial racing industry lobbied for
and received reductions in pari-mutuel taxes. Effective July 1, 1995, the Legislature
provided an assortment of tax breaks to the industry, including:
# Tax reductions for greyhound tracksCincrementally reduces the pari-mutuel tax
levied on pari-mutuel handle greyhound racetracks generate from 7.5 percent (the
effective tax rate at the time the legislation was passed) to 5.5 percent beginning in
fiscal year 1997-98. Depending on the location of the track, the incremental rate
reduction differs slightly.
# Exempting simulcast pari-mutuel handle from taxationCexempts all pari-mutuel
handle generated from wagering on telecasts of out-of-state races from the pari-mutuel
tax. This provision applies to all commercial racetracks in Arizona, but does
not include telecasts of live races these tracks conduct.
# Creation of a hardship tax creditCprovides a tax credit against pari-mutuel taxes
for tracks that have suffered declines in business as measured by pari-mutuel
handle. To determine eligibility for this credit, the Department compares a track's
previous year pari-mutuel handle to its base year pari-mutuel handle figure. The
base year figure is the highest annual pari-mutuel handle figure reported to the
Department for one of the five fiscal years between fiscal years 1989-90 to 1993-94. If
the previous year=s pari-mutuel handle is lower than the base year pari-mutuel
handle, the track becomes eligible for the hardship tax credit, which is then
determined based on a statutory formula.
Tax Relief Impacts
State Revenues
Tax relief has significantly reduced the revenues generated for the State by the pari-mutuel
tax. Contributions to the State=s General Fund have decreased from over $5
million annually to $165,878 in fiscal year 1995-96, requiring the State to now pay for
the regulation of the industry. Additionally, pari-mutuel tax revenues are insufficient to
meet the minimum funding requirements of eight statutorily established funds,
prompting the beneficiaries of these funds to pursue additional monies from unclaimed
State revenues have declinedCTax relief has significantly reduced state revenues from
the pari-mutuel tax. For the four fiscal years prior to the tax relief legislation (i.e. fiscal
years 1991-92 through 1994-95), the pari-mutuel tax generated over $8 million annually.
However, in fiscal year 1995-96, the first year of tax relief, state revenues from the pari-mutuel
tax totaled approximately $2.8 million, representing a 67 percent decrease from
fiscal year 1994-95 pari-mutuel tax revenues as illustrated in Figure 1 (see page 3). Pari-mutuel
tax revenues for fiscal year 1996-97 decreased even more, totaling only $2.63
million. Additionally, based on Department estimates, the amount of revenues
generated by the pari-mutuel tax will only increase slightly. Specifically, the
Department projects that the pari-mutuel tax will generate an average $3.2 million
annually for fiscal years 1997-98 and 1998-99.
Reduction in revenues for General Fund requires State to pay for regulationCAs a
result of tax relief, the pari-mutuel tax now generates insufficient revenues to cover the
cost of regulating the commercial racing industry. Prior to tax relief, the pari-mutuel tax
provided monies to support eight statutorily established funds as well as contribute
revenues to the State=s General Fund. For the four fiscal years prior to fiscal year 1995-
96, the pari-mutuel tax, plus nominal revenues from license fees, breeders= award fees,
pari-mutuel taxes paid for liabilities incurred in the previous fiscal year, and fines,
contributed over $5 million annually to the State=s General Fund, after distributions
were made to the eight statutorily established funds.1 This contribution more than
covered the Department=s budget for regulating the industry, which averaged $2.26
million annually during the same time period. However, because the majority of
revenues generated by the pari-mutuel tax were required to support the eight
statutorily established funds, the General Fund contribution in fiscal year 1995-96
dropped to $165,878 (see Figure 1, page 3). Moreover, the Department projects that the
General Fund will not receive any pari-mutuel tax revenues for the three fiscal years
1996-97 through 1998-99. Therefore, the State must fully subsidize the cost for
regulating the commercial racing industry.
1 Revenues from license fees, breeders= award fees, pari-mutuel taxes paid for tax liabilities incurred in
the previous fiscal year, and fines have ranged from $178,000 to $332,000 annually for the past 5 years.
Alternative funding sources sought to support statutorily established fundsCWhile no
steps have been taken to address declines in contributions to the General Fund, the
Legislature has passed additional legislation to address revenue shortfalls for the eight
statutorily established funds.1 Initially, statute provided that pari-mutuel tax revenues
support eight specific funds requiring a total minimum funding level of $3.6 million
annually. However, as illustrated in Figure 1 (see page 3), the $3.1 million in tax
revenues generated from the pari-mutuel tax, fees, and fines in fiscal year 1995-96 fell
short of these funding requirements. As a result, with the exception of one fund, which
receives 1 percent of pari-mutuel tax revenue, each fund did not receive sufficient
revenues. For example, two funds should have received a minimum of $800,000;
however, each received $654,686 in fiscal year 1995-96. Additionally, another fund
should have received at least $1.2 million, but instead received $982,473.
Various interests, realizing that these funds would experience shortfalls, successfully
obtained an additional source of revenue. Specifically, in 1996, the Legislature passed
House Bill 2151, which as of July 1, 1997, authorizes 20 percent of the monies received
from unclaimed property to be allocated to the eight funds that receive pari-mutuel tax
revenues. The legislation specifies that these funds can receive revenues from the pari-mutuel
tax and unclaimed property, but caps the amount each fund can receive at its
statutory minimum amount or the aggregate total of $3.6 million. Pari-mutuel tax and
unclaimed property revenues received in excess of this amount will be deposited in the
State=s General Fund.
Other Side Effects Realized
by Commercial Tracks Due
to Tax Relief Legislation
Additional provisions of the tax relief legislation have yielded some interesting effects,
including the possible incentive for tracks to increase use of simulcast wagering and
transfer of hardship tax credits. Moreover, after applying the provisions of the revised
tax structure, three tracks did not pay pari-mutuel taxes in fiscal year 1995-96, with
Phoenix Greyhound Park accounting for almost 98 percent of the pari-mutuel taxes
paid to the State.
Greater percentage of pari-mutuel handle generated from simulcast wageringCThe
non-taxable status of simulcast racing may provide incentives to tracks to generate a
1 These eight funds are the Arizona Breeders= Award, Arizona County Fairs Racing Betterment, Arizona
Stallion Award, Arizona Coliseum and Exposition Center, County Fairs Livestock and Agriculture
Promotion, Administration of the Arizona County Fairs Racing Betterment Fund, the Arizona Breeders=
Award Fund, the Arizona Stallion Award Fund, and the Greyhound Adoption Fund, County Fair
Racing, and the Agricultural Consulting and Training Fund.
percentage of their pari-mutuel handle from these races. As illustrated in Figure 3,
commercial tracks simulcasted only 314 races in fiscal year 1991-92 and generated $18.1
million in pari-mutuel handle for those races. During that same year, commercial tracks
offered 17,287 live races, which yielded a pari-mutuel handle of $201.7 million, or
approximately 92 percent of total pari-mutuel handle. At that time, the State taxed all
pari-mutuel handle. However, since the tax relief legislation was passed, the number of
races held and the proportion of revenues generated by each type of racing has
reversed. During fiscal year 1995-96, the number of live races offered by commercial
tracks declined to 12,999 and generated $140.8 million in pari-mutuel handle. By
comparison, commercial tracks offered 79,799 simulcast races and generated $110.4
million in nontaxable pari-mutuel handle. Thus, whereas simulcast wagering once
represented less than 10 percent of total pari-mutuel handle, it now represents 44
percent of all pari-mutuel wagering in the State.
Figure 3
Arizona Department of Racing
Pari-Mutuel Handle Generated by
Live Versus Simulcast Race Wagering
Years Ended June 30, 1992 through 1996
201.7 205.1 196.9
18.1 28
1992 1993 1994 1995 1996
Live Race Wagering Simulcast Race Wagering
Source: Department of Racing's Annual Report for fiscal year 1995-96.
Hardship tax credit transferred between tracksCThe availability of the hardship tax
credit may benefit tracks that have not experienced significant hardship. As mentioned
earlier, each commercial track can qualify for a hardship tax credit based on a statutory
formula. In most cases, the tax credit has been applied to individual tracks. However,
two racetracks (Phoenix Greyhound Park and Apache Greyhound Park) are owned by
the same company and received approval from the Commission to transfer unused
hardship credits from one track to another. Current statutory language permits this
hardship tax credit transfer between tracks. Specifically, Apache Greyhound Park has
not incurred enough of a tax liability to apply its total hardship tax credit. Therefore,
the Commission allowed Apache Greyhound Park to transfer its racing operations, and
thus its unused hardship tax credit, to Phoenix Greyhound Park. For fiscal year 1995-96,
the transferred hardship credit totaled $373,865.
Most tracks did not pay taxesCBased on the tax relief provisions currently available to
commercial tracks, three tracks did not pay pari-mutuel taxes and two incurred only
minimal tax liabilities in fiscal year 1995-96.1 Even after applying the transferred
hardship tax credit, Phoenix Greyhound Park was the only track to pay a significant
amount of pari-mutuel taxes in fiscal year 1995-96, paying almost 98 percent of the $2.8
million in pari-mutuel taxes paid to the State. For fiscal year 1996-97, Phoenix
Greyhound Park paid 99 percent of the $2.63 million in pari-mutuel tax revenues
generated in that year.
1 Prescott Downs and Tucson Greyhound Park each paid small tax amounts.
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Arizona Department of Racing
In accordance with A.R.S. §41-2954, the Legislature should consider the following 12
factors in determining whether the Arizona Department of Racing should be continued
or terminated.
1. Objective and purpose in establishing the Department.
The Legislature created the Arizona Department of Racing (Department) in 1982
to regulate and supervise pari-mutuel racing and wagering conducted in
Arizona. Laws 1982, Ch. 310, §§1 and 48 state:
The Arizona legislature intends by this act to strengthen the regulation of the racing
industry in Arizona for the protection of the public peace, safety, and welfare through
the strengthening of the Arizona racing commission and creation of an Arizona
department of racing administered by a director with significant business and
administrative experience.
As such the Department is responsible for regulating all commercial and county
fair horse racing meetings, greyhound racing meetings, and pari-mutuel
wagering. Additionally, the Department collects pari-mutuel taxes and other fees
for distribution to the General Fund and eight statutorily established funds.
2. The effectiveness with which the Department has met its objectives and
purposes and the efficiency with which the Department has operated.
The Department has generally met its objectives and purposes by:
# Licensing all participants and officials involved in racing in the State,
including horse and greyhound owners, trainers, jockeys, grooms, exercise
riders, track management, concessionaires, and pari-mutuel workers;
# Conducting investigations of all license applicants and racing violations to
enforce compliance with racing statutes and rules;
# Assigning personnel to supervise actual horse and greyhound races and
other track activities, such as collecting urine samples from horses and
greyhounds to ensure the absence of banned substances that may affect the
outcome of races; and
# Conducting inspections of greyhound kennels and farms to ensure the safety
and well-being of Arizona=s racing greyhound population.
However, we found that the Department can more effectively meet its objectives
# Monitoring pari-mutuel wagering activities in the State to reduce the
potential for fraud and abuse. Such supervision would also ensure that the
public and the State receive accurate payouts (see Finding II, pages 19
through 24).
# Increasing the level of oversight provided at greyhound tracks. Currently, the
Department=s minimal supervision of greyhound racing activities threatens
both the safety of animals and licensees, as well as the confidence of the
wagering public (see Finding III, pages 25 through 29).
# Determining commercial tracks= tax liability on pari-mutuel handle
generated from county fair race meets they conduct and collecting any taxes
owed. Currently, commercial tracks do not pay pari-mutuel taxes and
enhance their hardship tax credit status when conducting county fair race
meets (see Finding IV, pages 31 through 34).
3. The extent to which the Department has operated within the public interest.
Generally, the Department has operated within the public interest by upholding
the integrity of pari-mutuel racing and wagering and protecting the health and
safety of racing animals, participants, and the public. However, the public
interest could be better served if the Department monitored pari-mutuel
wagering activities (see Finding II, pages 19 through 24), improved the level of
regulatory oversight at greyhound tracks (see Finding III, pages 25 through 29),
and collected pari-mutuel taxes owed from commercial tracks= operation of
county fair race meets (see Finding IV, pages 31 through 34).
4. The extent to which rules and regulations promulgated by the Department
are consistent with the legislative mandate.
The Department does not have the authority to promulgate rules and
regulations. Instead, this authority rests with the Commission.
5. The extent to which the Department has encouraged input from the public
before promulgating its rules and regulations and the extent to which it has
informed the public as to its actions and their expected impact on the
Concerns exist regarding the Department=s compliance with open meeting law
requirements at steward hearings. Since stewards maintain responsibility for
ensuring compliance with racing laws and regulations, they often make rulings
against licensees for various racing law violations. Although the hearings
conducted on such violations are open to the public, final decisions and
discussions leading to the decisions often occur behind closed doors. According
to the Attorney General=s Agency Handbook, §7.4.1 "all meetings of a public
body shall be public, and all persons desiring to attend shall be permitted to
attend and listen to the deliberations and proceedings." Therefore, the
Department should ensure that all aspects of steward hearings are open to the
6. The extent to which the Department has been able to investigate and
resolve complaints that are within its jurisdiction.
The Department receives complaints in different forms. For instance:
# Complaints filed with stewardsCBecause stewards maintain responsibility
for ensuring compliance with all racing regulations at tracks, they must
mediate and resolve disputes regarding racing activities. Although stewards
attempt to settle matters informally when possible, complaints involving rule
violations are investigated and result in steward hearings. During fiscal year
1995-96, Department stewards, at both horse and greyhound tracks, issued
889 rulings for violations of racing laws and rules. Based on a limited review
of these rulings, it appears the Department adequately investigates and
resolves complaints submitted to stewards.
# Complaints filed with the DepartmentCIn addition to complaints filed with
stewards, the Department receives complaints against Department officials.
Administrative rules provide that complaints against an official or employee
of the Department shall be filed with the Deputy Director in writing within
five days of the alleged act. While the rules stipulate a five-day limit, the
Department generally investigates complaints submitted after this time limit.
Since 1994, the Department has received eight complaints against
Department personnel. Investigations of these complaints appear to be timely
and thorough. However, the Department should formalize its process for
receiving and investigating complaints to better ensure public access to this
information. For instance, the Department should develop and maintain a
complaint log that describes when the complaint was received, the nature of
the complaint, the complainant=s name, and the disposition of the complaint.
7. The extent to which the Attorney General or any other applicable agency of
state government has authority to prosecute actions under the enabling
Racing statutes provide sufficient authority for the Attorney General to prosecute
actions that violate statutes. A.R.S. §5-115 establishes circumstances under which
individuals may be prosecuted for a class 4 felony. For example, A.R.S. §5-
115(A)(4) provides that a person is guilty of a class 4 felony if they knowingly
commit any corrupt or fraudulent practice in relation to racing that may affect
the result of a race. Similarly, under A.R.S. §5-115(B)(1), it is a class 4 felony for
an owner or trainer to enter an animal they know is drugged. Moreover, A.R.S.
§5-115(D) indicates that anyone conducting a racing meeting or operating an
additional wagering facility without first complying with statutes and rules
regarding licensing is guilty of a class 2 misdemeanor.
Further, A.R.S. §5-108.05(A) authorizes the Department to revoke, suspend,
and/or impose a civil penalty on licensees that violate racing rules or
8. The extent to which the Department has addressed deficiencies in its
enabling statutes which prevent it from fulfilling its statutory mandate.
The Department actively pursues legislative changes that will allow it to better
fulfill its statutory mandate. For example, in 1993 the Department sought
legislation regarding the humane treatment of greyhounds that gave the
Department the responsibility and authority to regulate the breeding, training,
housing, and transportation of racing greyhounds. During the 1997 legislative
session, the Department successfully pursued several statutory changes,
# Authorizing that 100 percent of the revenues from kennel/farm licensing be
provided to greyhound adoption agencies;
# Eliminating the requirement that stewards complete a qualifying
examination in lieu of certification as a steward by a national organization
approved by the Department; and
# Imposing restrictions to prohibit immediate family members of Department
employees from wagering on horse and greyhound races.
9. The extent to which changes are necessary in the Department=s laws to
adequately comply with the factors listed in the subsection.
Other than the legislative changes currently being pursued by the Department,
we identified no additional changes that are necessary in the Department=s laws
to comply with the statutory requirement of protecting animal, licensee, or
public health and safety.
10. The extent to which termination of the Department would significantly harm
public health, safety, or welfare.
Termination of the Department could adversely impact the safety and welfare of
licensees, animals, and the wagering public. The regulation of racing and pari-mutuel
wagering currently undertaken by the Department is vital to protecting
these interests. If the Department were discontinued, dangers involving physical
harm to human and animal participants, as well as fraudulent wagering
activities, could result.
11. The extent to which the level of regulation exercised by the Department is
appropriate and whether less stringent levels of regulation would be
The Department=s level of regulation appears appropriate, except for its
regulation of greyhound racing. The Department should increase the level of
oversight it provides at greyhound tracks (see Finding III, pages 25 through 29).
12. The extent to which the Department has used private contractors in the
performance of its duties and how the effective use of private contractors
could be accomplished.
The Department currently contracts with Industrial Laboratories Inc., of Denver,
Colorado, to conduct all testing of greyhound and horse samples. During fiscal
year 1995-96, a total of 16,418 samples were submitted to this lab to enforce
compliance with laws and regulations governing the use of medications and
drugs in greyhounds and horses. The Department contracts with the National
Institute of Drug Abuse/Substance Abuse Mental Health Services
Administration laboratory to analyze samples of licensees suspected of drug
and/or alcohol violations. During fiscal year 1995-96, the Department conducted
54 human drug tests, resulting in 16 positive tests for prohibited substances.
Similarly, the Department administered 48 breath/alcohol tests, resulting in 17
positive tests for alcohol at prohibited levels.
In addition to these contracts that the Department maintains, it could consider
hiring an independent auditor to monitor pari-mutuel wagering activities at all
Arizona racetracks (see Finding II, pages 19 through 24).
Arizona Racing Commission
In accordance with A.R.S. §41-2954, the Legislature should consider the following 12
factors in determining whether the Arizona Racing Commission (Commission) should
be continued or terminated.
1. Objective and purpose in establishing the Commission.
Created by the Legislature in 1949, the Commission handled the day-to-day
regulation of racing activities in the State until 1982, when the Legislature
established the Department of Racing. The enabling statutes for the Arizona
Racing Commission state that the purpose of the Commission is to:
A. . . issue racing dates, . . . prepare and adopt such complete rules to govern the
racing meetings as may be required to protect and promote the safety and welfare of
the animals participating in such racing meetings, to protect and promote public
health, safety and the proper conduct of racing and pari-mutuel wagering and any
other matter pertaining to the proper conduct of racing within this state.@
Additionally, statutes authorize the Commission to conduct hearings on
applications for racing permits, issue racing permits, review appeals of licensing
and regulatory decisions made by the Director of the Department of Racing, and
review applications to construct capital improvements at racetracks.
2. The effectiveness with which the Commission has met its objectives and
purposes and the efficiency with which the Commission has operated.
The Commission has generally met its objectives and purposes. However, we
found the Commission has not effectively fulfilled its responsibility in providing
adequate oversight for the Capital Improvement Program. This Program
provides tax credits to commercial tracks that undertake approved capital
improvement projects to improve their facilities, benefiting participants and the
wagering public, and increasing state revenues as a result of these
improvements. However, the Commission has inappropriately approved over
$500,000 in capital improvement tax credits for projects that did not meet
statutory requirements.
3. The extent to which the Commission has operated within the public
The Commission generally operates within the public interest by promulgating
rules and regulations to govern racing that protect and promote the safety and
welfare of racing participants, as well as to ensure the integrity of racing for the
people of Arizona. However, the Commission has not necessarily served the
interest of Arizona taxpayers by providing tax credits to commercial tracks for
capital improvement projects that did not qualify for the credits (see Finding I,
pages 11 through 17).
4. The extent to which rules and regulations promulgated by the Commission
are consistent with the legislative mandate.
Pursuant to A.R.S. §5-104(A)(2), the Commission may adopt rules A. . . to protect
and promote the safety and welfare of the animals in such racing meetings, to
protect and promote public health, safety and proper conduct of racing and pari-mutuel
wagering, and any other matter pertaining to the proper conduct of
racing in this state.@ Commission rules, as specified in the Arizona Administrative
Code section R19-2-101 through R19-2-523, are consistent with the purposes
outlined in Arizona statute.
5. The extent to which the Commission has encouraged input from the public
before promulgating its rules and regulations and the extent to which it has
informed the public as to its actions and their expected impact on the
The Commission had promulgated rules and regulations as needed. For
example, the Commission recently approved rules regarding the method for
paying breeders= awards to greyhound and horse breeders. With the
Department=s assistance, the Commission informs the public as to its actions and
solicits public input prior to adopting rules. Additionally, the Commission=s
rules underwent a five-year rule review in September 1995.
Overall, the Commission appears to comply with open meeting law
requirements regarding public input at meetings. Further, the Commission
actively meets with constituents, including animal owners and trainers, racing
permit holders, and other interested parties, on matters pertinent to pari-mutuel
racing in Arizona. Finally, our review indicates that Commission meeting notices
are posted in a timely manner and in accordance with the statement filed with
the Secretary of State.
6. The extent to which the Commission has been able to investigate and
resolve complaints that are within its jurisdiction.
The Commission=s responsibility for investigating and resolving complaints lies
primarily in the appeal of decisions made at the Department level. Specifically,
A.R.S. §5-104(A)(3) allows for the Commission to review appeals of licensing
and regulatory decisions made by the Director of the Department. The
Commission only heard one such appeal during fiscal year 1995-96.
7. The extent to which the Attorney General or any other applicable agency of
state government has authority to prosecute actions under the enabling
Statutes provide sufficient authority for the Attorney General to prosecute
actions that violate statutes. A.R.S. §5-115 establishes circumstances under which
individuals may be prosecuted for a class 2 misdemeanor, class 4 felony, or class
6 felony.
Additionally, A.R.S. §5-108.02 provides circumstances under which the
Commission can revoke the permit of any permittee.
8. The extent to which the Commission has addressed deficiencies in its
enabling statutes which prevent it from fulfilling its statutory mandate.
Although not currently pursuing any statutory changes, the Commission has
pursued legislative changes in the past to better fulfill its mandate. For example,
in 1993 the Commission sought legislation authorizing it to provide grants to
non-profit groups whose programs promote greyhound adoption. This
legislation passed as part of the 1993 Greyhound Humane Treatment mandate.
9. The extent to which changes are necessary in the Commission=s laws to
adequately comply with the factors listed in the subsection.
Based on our audit work, we recommend that the Legislature consider repealing
A.R.S. §5-111.02 to terminate the Capital Improvement Program since its
statutory intent to increase revenues to the State has not been met, nor will it
likely be met in the future (see Finding I, pages 11 through 17).
10. The extent to which termination of the Commission would significantly
harm public health, safety, or welfare.
While terminating the Commission would not significantly harm the public=s
health, safety, or welfare, the Commission serves a role by establishing policies to
govern and regulate racing. For instance, the Commission determines who will
conduct racing meetings and when they will be conducted. Additionally, the
Commission provides a forum for parties to address concerns about decisions
made by the Department.
If the Commission were terminated, the following statutory responsibilities
would have to be transferred to the Department:
# Promulgation of rules,
# Issuance of racing permits,
# Issuance of racing dates, and
# Approval of capital improvement projects (terminating the Program will
eliminate this function).
11. The extent to which the level of regulation exercised by the Commission is
appropriate and whether less stringent levels of regulation would be
The current level of regulation exercised by the Commission appears
12. The extent to which the Commission has used private contractors in the
performance of its duties and how the effective use of private contractors
could be accomplished.
Because the Commission functions primarily as a policy-setting body and appeal
board, there appears to be little opportunity to effectively use private contractors
in the performance of its duties. The Commission does, however, use a court
reporting service to transcribe the minutes of its public meetings and
Agency Response
August 14, 1997
Douglas R. Norton
Auditor General
2910 North 44th Street
Phoenix, AZ 85018
Dear Mr. Norton:
The Arizona Department of Racing has reviewed the preliminary report draft of the
performance audit conducted by the Office of the Auditor General concerning the
Arizona Racing Commission and the Arizona Department of Racing. We appreciate the
opportunity to respond to that report.
We believe that the Department of Racing operates effectively and efficiently as it
undertakes its legislative mandate to regulate pari-mutuel horse and greyhound racing
for the protection of the public peace, safety and welfare. We also recognize that it is
critical to pursue progression and improvement. To that end, the Department would
like to acknowledge the work undertaken and findings reported by the audit team. We
welcomed the opportunity to review and discuss the agency's operations with your
staff, and certainly have learned more about our activities as a result of this process.
In general, the Department already has corrected, or will in the near future correct,
deficiencies pointed out in the report. Due to the likelihood of significant policy
ramifications associated with two recommendations, the Department and/or
Commission wants to obtain guidance from the Legislature as to the appropriateness
of its response in these areas.
The response of the Department corresponds to the organization of the Report of the
Office of the Auditor General (hereinafter "Report").
In conclusion, let me again note our appreciation of the work compiled by you and
your staff. We look forward to working with the audit team, the Legislature, the
regulated industry and others as we continue in our efforts to more effectively and
efficiently supervise Arizona's pari-mutuel industry.
Respectfully submitted,
Jim Higginbottom
Introduction and Background
Department Responsibilities Associated with Boxing (Page 6)
In the summary of the Department's responsibilities, the Report refers to Auditor
General Report 96-14, a performance audit of the State Boxing Commission. The
Department is responsible for collecting revenues (gross receipts taxes, license fees
and fine payments) associated with boxing matches. While Report 96-14 was critical
of the Department, the Department has implemented several changes to improve the
collection of boxing revenues owed the State. Working with the Boxing Commission,
the Department developed new procedures to monitor promoter compliance with tax
collection requirements. The Department has no enforcement authority in boxing
matters; consequently, it must rely on the Boxing Commission to pursue sanctions
against promoters for noncompliance. In the eight months since these procedures
have been in effect, the Department has issued five letters of promoter noncompliance
dealing with eight separate violations. In addition, the Department has collected all
tax revenues owed to the State by promoters of 12 fights.
1986 Report and Follow-up (Pag
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