By Bennett Liebman
Government Lawyer in Residence
After New York State voters changed the State Constitution to authorize pari-mutuel wagering on horse racing in 1939, it was reasonable to have assumed that the major issues involving betting on horse racing had been resolved. That was hardly the case.
The battle on what would go into the law implementing pari-mutuel racing was as fierce as the battle to authorize pari-mutuel racing. The battle was not concluded until two weeks before the racing season in New York actually started on April 15, 1940. It appeared to be the major issue facing the legislature in 1940.
A host of interested parties/stakeholders made the enactment of the law especially tricky. The law itself can also be viewed as an example of the Marc Antony rule of legislation: “The evil that laws do live after them. The good is oft interred with their bones.”[1] It contains provisions remaining on the books that have continued to vex all of New York racing.
These parties included the following:
1) The legislative sponsors of pari-mutuels. This was largely Democratic Senate Minority Leader John Dunnigan assisted by Republican Assemblyman Norman Penny. Dunnigan had been the majority leader in the Senate when the Constitutional change authorizing pari-mutuels was first passed in 1938. Dunnigan was far and away the most active and vocal legislator in support of pari-mutuels, and the Republicans in the State Senate suggested they would be letting Dunnigan take the lead on advancing the bill.[2] Dunnigan had claimed that pari-mutuel racing would vastly increase the crowds at the racetracks and would bring in $10 million in revenue to the State. Dunnigan was the major player in this entire process.
2) The State Racing Commission, led by its Chairman, Herbert Bayard Swope. Swope, a renowned former journalist, viewed himself as being in overall charge of New York thoroughbred racing.
3) The existing thoroughbred tracks: Belmont, Empire City, Aqueduct, Jamaica and Saratoga.
4) The City of Saratoga Springs, anxious to avoid downstate competition with its race meet.
5) The Republican leadership in the legislature in New York State
6) The bookmakers at the tracks who had been the major losers when the State voted to authorize pari-mutuels.[3]
7) The Jockey Club, anxious to maintain its overall authority over thoroughbred racing in New York State.
8) Democratic Governor Herbert Lehman who seemed to want to avoid too many giveaways to the Republican legislative majority.
9) Businesses and individuals who wanted to start up harness racing ventures.[4]
The main issues faced by Dunnigan and the other interested parties included the following:
1) Did you put an end to bookmaking, or could bookmaking coexist with pari-mutuels?
2) At what rate to set the takeout rate? How much of the takeout would go to the State?
3) How many tracks would there be?
4) Would downstate tracks be competing with Saratoga?
5) Who regulated the tracks?
6) Would there be harness racing, and at what time of day would harness racing occur?
7) What would be the breakage rate?
8) What minimum fee would be charged for patrons to be admitted to the racetrack?
9) Would there be any demands placed on the existing track to revitalize its facilities?
10) Should there be free passes allowed? Who should get the free passes?
11) What was the length of the racing season?
As soon as the Legislature went into session in 1940, Dunnigan announced his plans.[5] Dunnigan was clearly motivated by a desire to maximize the amount of State revenue to achieve his $10 million revenue goal. He advocated an end to bookmaking, a 10% takeout rate split evenly between the state and the tracks, increasing the number of authorized thoroughbred tracks from five to nine, and forcing the existing thoroughbred tracks to vastly increase their capacity to handle the crowds that would come to the tracks due to the enactment of pari-mutuels. The downstate tracks would need to have 15,000 parking spots, 25,000 seats, and capacity for 50,000 fans.[6] The Racing Commission would be required to assign race dates to a downstate track while Saratoga was running in order to combat anticipated competition from horse racing during that time period in New Jersey.[7]
The minimum admission fee would be $1.50.[8] No provision was made for harness racing as there would be some time to evaluate whether harness racing was feasible under the pari-mutuel laws. Breakage would be to the dime,[9] and breakage would be shared equally by the State and the racetracks. No change was made in The Jockey Club’s powers over racing. On the State side, while the Racing Commission would oversee racing, the financial aspects of racing would be regulated by the State Tax Commission. There would be separate licenses for operating a track and for operating pari-mutuel racing at a track.
Dunnigan’s original plan ran into immediate trouble. It was assailed by anti-gambling forces who either wanted a revote on the Constitutional authorization of pari-mutuel racing or a study of the pari-mutuel issue. Localities wanted their share of the pari-mutuel tax. The existing tracks thought that their share of the takeout was too low and the demands for added capital construction were too great. Potential harness racing interests wanted to be included in the legislation.
Perhaps the most significant criticism came from Herbert Swope who complained about parts of the bill. He thought that the takeout was too high and that there should be minimal to no breakage. There was no reason for the legislation to mandate an increase in the size of the tracks. The Commission alone – rather than with The Jockey Club – should be licensing jockeys and trainers. He further suggested a stagger system under which the share of the pari-mutuel takeout between the tracks and the State would depend on the size of the handle – the amount wagered on the races by the public. The higher the handle, the greater the share would be to the State. Swope also suggested that some bookmakers ‒ who would be required to pay a high licensing fee ‒ be allowed at the tracks.[10]
Faced with all these competing interests, Dunnigan initially delayed taking any action. Then, in mid-February in advance of a public hearing on the bill, he added three significant amendments. He eliminated the minimum capacity requirements for the thoroughbred tracks, added a provision requiring that 80% of the pari-mutuel jobs at the tracks go to American citizens who had resided in New York for one year, and retained the State tax on racetrack admissions.[11] He also increased the support that the State would provide for harness racing at county and town fair tracks. Dunnigan stated that the bill could not pass with the added requirements placed on racetracks. He also believed that the passage of a pari-mutuel bill was a necessity in 1940 in order to provide sufficient revenue for Governor Lehman’s budget.
The public hearing on the racing legislation was held in Albany on February 26, 1940. The hearing largely turned into the Herbert Swope show. While religious groups and anti-gambling forces suggested a delay in the legislation, Swope recommended a series of changes in the Dunnigan bill. He recommended quick action on pari-mutuel legislation, suggested that there be no breakage at all in betting (or perhaps, as he called it, breakage to a penny), a lowered takeout of only 9%, limited bookmaking for large bets, a minimum $2 admission fee, and a ban on nighttime harness racing.[12]
No immediate changes were made in the legislation as a result of the hearing. Instead overall action on racing legislation was delayed during the pendency of a significant battle over the budget between Governor Lehman and the Republican legislative leaders. While both sides agreed on the necessity of added revenues that would come from the enactment of a pari-mutuel racing law, the actual resolution of the pari-mutuel issue was put on hold as the budget was enacted.
In mid-March of 1940, after the Republican legislative leaders largely worked out their budgetary issues, they and Dunnigan, began to make deals over the pari-mutuel legislation. The general structure of the Dunnigan bill was largely supported,[13] but certain specific aspects of the bill were amended to enhance the upstate areas of New York that were controlled by the Republican leadership.[14] Harness racing – largely an upstate activity at the time ‒ was authorized with a takeout of 15% at up to seven tracks to be regulated by a separate Harness Racing Commission. Additional State financial support was provided to the town and county fairs – again mostly upstate ‒ conducting harness racing. The mandate in the original Dunnigan bill that there be downstate racing during the Saratoga meet was dropped. Instead, it would be up to the Racing Commission to determine whether there would be downstate racing during the Saratoga season.[15] A fourth member would be added to the thoroughbred Racing Commission to make sure that the political parties were equally represented.[16] The Harness Racing Commission would similarly be composed of four members, two from each party.
The major fight in the Legislature was over whether to prevent bookmakers from operating at the tracks. The Assembly and the Senate initially seemed divided on the Swope proposal to allow bookmakers to take large wagers from bettors,[17] but, with Senator Dunnigan and Assemblyman Penny arguing against the bookmakers, both houses eventually agreed to ban all bookmaking from the New York tracks.
The legislative agreement was not the end of the matter. Governor Lehman weighed in against certain aspects of the bill. He disagreed with the requirement for four-member bipartisan commissions, the increase in the moneys to be distributed by the State to county and town fairs conducting harness racing, and the fact that the takeout was higher for harness racing than for thoroughbred racing.[18]
Lehman’s veto threat was only partially successful. The legislative leadership agreed to amend the bill to return to the three-member non-partisan commissions.[19] The leadership would not change the increase in funding to the fair tracks or the higher takeout for the harness tracks. With the Governor’s concerns muted, the Legislature gave final passage to the pari-mutuel bill – with the three-member commissions – on March 29.[20] The Governor quickly signed the bill on April 1,[21] only two weeks before pari-mutuel racing had its start at Jamaica, Queens, on April 15, 1940.
Contents of the Pari-Mutuel Legislation
The legislation separated harness racing from thoroughbred racing. The provisions of the law affecting one breed of racing were generally not applicable to the other breed.[22] Each breed of racing would be governed by separate, three-member racing commissions appointed by the governor subject to Senate confirmation.
On thoroughbred racing, the authority given to The Jockey Club was unchanged. It basically continued its joint regulatory jurisdiction over the actual racing and licensing of participants with the Racing Commission. Control over the financial administration of pari-mutuel betting was given to the State Tax Commission. The racing season was to start on April 1 and end on November 15.[23] There was a separate license for the actual racing and for the pari-mutuel betting. The takeout at the thoroughbred tracks was 10% with breakage to the nickel. The State and the tracks would share equally in the breakage and the takeout. So-called “outs” moneys – moneys unclaimed by winning bettors – would be paid by the tracks to the State on April 1 of the next year.[24]
The minimum price for racetrack admission was set generally at $1.50, and free passes for patrons were restricted to discrete classes of individuals.[25] Eighty-five percent of the track’s pari-mutuel employees had to be citizens who had resided in New York State for at least two years. The Racing Commission could require tracks to run a race for horses bred in New York State. Certain pari-mutuel information had to be displayed to the public.[26]
Nine thoroughbred tracks could be authorized in the state. Six could operate downstate, and three upstate. There was no requirement that all the available dates had to be allocated.[27] Three could operate upstate, and the upstate racetracks had to be at least one hundred miles apart.[28]
Authorization of Harness Racing
On the harness side, many of the provisions were the same as on the thoroughbred side. There were separate licenses for racing and for pari-mutuel operations. Breakage and “outs” moneys were the same. The citizenship and residency requirements for pari-mutuel employees were the same. The public display requirements for pari-mutuels were the same as for the thoroughbred tracks. Free passes were restricted, and the Tax Commission would supervise the financial aspects of pari-mutuel racing.
The takeout rate was, however, set at 15%. The state tax was set at 5% of handle. Thus, the owners of the harness tracks retained 10% of the handle for their own uses. Seven pari-mutuel harness licenses were authorized, and the Commission could consider the number of track licenses issued and the location of the tracks previously licensed in determining whether to grant any license to a new applicant.[29]
Unlike the situation at the thoroughbred tracks, the Harness Racing Commission appointed all the racing officials and did not share authority with any group. All that was required was that the racing officials that it appointed had to be licensed by the United States Trotting Association, the non-profit membership organization which helped to establish uniform rules on harness racing. The minimum charge for admission to a harness track was set at fifty cents, and the racing season ran from April 15 to November 15.
The amount of State support for promotion of county and town agricultural fair harness racing was increased from $250,000 to $400,000.[30]
The Pari-Mutuel Law at Age 75
In 2015, significant parts of the 1940 legislation remain on the books, and these provisions tend to have a disconcerting effect on the regulation and the operating of racetracks.[31] They remain on the books even though they are at best antiquated and at worst harmful. The problem is that provisions that might have been necessary when racing was popular are an obstruction at a time when racing may be nearing its final furlong.
For example, the 1940 law only authorized pari-mutuel racing for specific horse breeds. In 1940, this was limited to harness and thoroughbred horses. While quarter horses were subsequently authorized for racing, other horse breeds – including Arabians and Appaloosas – have never been permitted to race. Had the 1940 legislation not been breed specific, it would have been possible to authorize additional breeds to race. As it stands now, these breeds are not permitted to run in pari-mutuel races in New York.
Also, by separating harness racing regulation from thoroughbred racing, the State allowed the rules of the two sports to develop separately. Generally speaking, all aspects of harness racing were prescribed under the harness rules, while much of thoroughbred racing regulation was left to the individual track. This difference was not technically fixed until the powers of the Racing Commission and the Harness Racing Commission were united in the State Racing and Wagering Board.[32] Nonetheless, more than forty years after the creation of the Racing and Wagering Board,[33] harness racing remains far more intensely regulated than thoroughbred racing.
A number of harness tracks have wanted to conduct wagering on mounted races where harness racing is conducted under saddle. The harness horses would arguably have been ridden by thoroughbred jockeys. But under Racing Pari-Mutuel Wagering and Breeding Law [Racing Law] Section 301.3 ‒ which is derived directly from Section 55 of Ch. 254, L. 1940 ‒ harness racing cannot “include any form of horse racing in which the horses participating are mounted by a jockey.” So the New York harness tracks are barred from conducting wagering on harness horses racing under saddle.
The 85% requirement for citizenship and New York residency for pari-mutuel employees remains on the books.[34] Yet, this is not a provision that has been reviewed or enforced with any consistency or regularity. Now with telephone and account wagering engaged in by the tracks, are these pari-mutuel employees dealing with patrons who are not physically on track subject to these 85% requirements? Beyond this, can these provisions possibly be constitutional under the Constitutional Privileges and Immunities Clause, the Equal Protection Clause and the Commerce Clause? In New York State, how would they survive scrutiny under Salla v. County of Monroe,[35] which invalidated preferential employment for one year for New York residents on public works projects?
The current laws mirror the 1940 law in determining what pari-mutuel information needs to be shown to the public.[36] However, what might have been sensible in 1940 in terms of displaying information on how much is being bet in the place and show pools on particular horses may not be of particular significance today. Current bettors rarely make place and show wagers, and it may not make sense to force the racetracks to display this information which may now be seen as irrelevant to most horseplayers.
The original 1940 law capped the number of pari-mutuel harness tracks at seven. This number was increased to eight in the 1950’s.[37] This number remains significant today since the grant of a harness racing license is basically a required element for a harness track to become a video lottery operator.[38]
The State Department of Taxation and Finance still technically retains the function as the financial administrator of racing.[39] Yet with the decline in the popularity of horse racing and the revenue derived from horse racing, the Department of Taxation and Finance had limited interest and expertise in pari-mutuel wagering. It also has little reason to be motivated to be involved with pari-mutuel racing. It no longer realistic to expect this agency to be in the position to regulate the financial aspects of horse racing. Yet the laws still require that certain pari-mutuel approvals must be obtained from the Department of Taxation and Finance.[40] This has made compliance with the approval process far more difficult than need be especially at a time when the Gaming Commission is supposed to be the one-stop center for all regulation of gambling. It now makes far more sense for the Gaming Commission to be in charge of all aspects of horse racing.
The decline in the popularity of racing also has played havoc with the original 1940 restriction in the law on free passes. It no longer made any sense to deny free passes to patrons when racing became unpopular and anyone could enter a casino or a racino for free.[41] Yet, the ban on free passes still remains technically in the law.[42] A workaround of the ban on free passes was not achieved until 2012 when the law was changed to add language stating that “free or reduced fee passes, cards or badges may be issued to the general public or segments of the general public in connection with any promotional campaign or marketing program sponsored by such corporation to increase attendance at live race meets.”[43] It would simply have made more sense to eliminate any language in the law on free passes.
Other portions of the 1940 law that remain in the statute books are more annoying than harmful. There still remains a distinction between a license to conduct pari-mutuel wagering on races and a license to conduct the underlying racing itself. This is a distinction without any significance.
There is still the requirement that the Commission can require a thoroughbred racing association to conduct one race for New York-bred horses in a year.[44] The language is largely unchanged since 1940. Yet, at the current time, the New York Racing Association runs hundreds of races for New York-bred horses. This is a provision whose time has clearly passed.
So New York’s first pari-mutuel racing law from 1940 still affects New York racing in 2015 and remains, as it was in 1940, the cause of considerable tsuris.[45]
[1] Adapted from Julius Caesar, Act III, Scene II.
[2] “Racing Leaders Map Plans for Pari-Mutuels,” New York Herald Tribune, November 9, 1939.
[3] Bookmakers operated at the tracks under a legal regime where taking wagers at the site of the tracks was not considered to be criminal activity.
[4] In retrospect, this group may have included many of the influential members of the State Legislature. As harness racing developed in the State, Dunnigan, Penny, Democratic Assembly Minority Leader Irwin Steingut, Republican Assemblyman Pat Provenzano, and a host of other political figures ended up with ownership interests in harness tracks. This perhaps could be generously viewed as an early instance of political insider trading.
[5] “Pari-Mutuel Bill Calls for Building of 4 More Tracks,” Nassau Daily Review, January 2, 1940; “Here Are Main Points About New Racing Bill Outlined by Dunnigan,” Saratogian, January 2, 1940; John G. Rogers, “Legislature Opens Today,” New York Herald Tribune, January 3, 1940.
[6] Obviously, this was opposed bitterly by the tracks as it might have been impossible in 1940 for the smaller tracks, Empire City, Aqueduct and Jamaica, to comply with the Dunnigan requirements. See “Five Racetracks Brand Some Race Bill Sections ‘Unfair, Impractical’” Saratogian, January 3, 1940.
[7] Pari-mutuel racing had been authorized by the voters in New Jersey in 1939.
[8] The admission fee was a tricky issue for the Legislature. There was a desire to protect the poor from betting by having a fairly high admission fee. This arguably would have deterred the poor from patronizing the racetracks. On the other hand, under the bookmaking system, admission was set at a high level because the State received its money from racing from the admissions tax. With the State receiving far greater money from the pari-mutuel tax, there was a need to lower the minimum admission fee to increase patronage, but not to make is so low that poorer people would bet on the races.
[9] Breakage refers to the rounding down of pari-mutuel payments to avoid paying out pennies to winning bettors. Thus, under dime breakage, a horse that should return $6.79 ‒ by actual odds for a $2 bet – would pay the winning bettor $6.60. Under nickel breakage, the return to bettors would be $6.70. Breakage has the effect of increasing the takeout on bettors.
[10] The bookmakers would service high rolling bettors in the clubhouse. Swope was a huge bettor, and it would not be surprising if he had many friendships with the bookmakers who had worked at the New York tracks. See Steven R. Fox, Blood and Power, Morrow (1989) and Mike Dash, Satan’s Circus: Murder, Vice, Police Corruption, and New York’s Trial of the Century, Crown (2007) p. 107.
[11] “Proposes Three Amendments to N.Y. Race Bill,” Chicago Tribune, February 19, 1940.
[12] “Swope Calls On Legislators to Speed Race Bill,” New York Herald Tribune, February 27, 1940; “Mutuels Hearing Marked by Clash,” New York Times, February 27, 1940.
[13] The main change in the Dunnigan pari-mutuel legislation was the move to nickel breakage from dime breakage.
[14] John G. Rogers, “Pari-Mutuel Bill Reported,” New York Herald Tribune, March 22, 1940; “Pari-Mutuels Win in New York,” Chicago Tribune, March 22, 1940.
[15] It was certainly known that Swope was opposed to a simultaneous downstate meeting conducted while Saratoga was racing.
[16] Before the advent of pari-mutuels, Democratic Governor Lehman had appointed the three members of the racing commission.
[17] “Sweeping Changes Put in Mutuel Bill,” New York Times, March 14, 1940.
[18] “Relative to the Pari-Mutuel Bill Before the Legislature,” Public Papers of Governor Herbert H. Lehman, pp. 187- 188 (1940); James G. Hagerty, “Governor Assails Pari-Mutuel Bill with Hint of Veto,” New York Times, March 26, 1940.
[19] John G. Rogers, “4-Man Board Is Cut Out of Mutuels Bill,” New York Herald Tribune, March 27, 1940. See also
Jimmy Wood, “Sportopics,” Brooklyn Daily Eagle, March 27, 1940.
[20] John G. Rogers, “Teacher Pay Cut Balked,” New York Herald Tribune, March 30, 1940. Senate Majority Leader Joseph Hanley appeared to have harsh words for Herbert Swope saying during the course of the debate on the legislation, “I would absolutely refuse to confirm the appointment of any one who is a persistent bettor at the races.”
[21] Ch. 254, L. 1940. “Lehman Paves Way for Pari-Mutuels at Jamaica Opening,” Associated Press, Nassau Daily Review Star, April 2, 1940.
[22] See Article 1, Section 1, Ch. 254, L. 1940.
[23] The Herald-Tribune in an editorial had written, “And no one in his right mind could wish the racing season to start on April 1. April 15 … is a far wiser opening day.” “The Racing Bill,” New York Herald Tribune, March 23, 1940.
[24] In the initial legislation, bettors could claim winning moneys after April 1 of the succeeding year, and the amounts paid to the bettors would be credited to the tracks’ subsequent payments to the state. Article 1, Section 12, Ch. 254, L. 1940.
[25] This group included “public officers engaged in the performance of their duties” which would have included state legislators. See Article 1, Section 17, Ch. 254, L. 1940.
[26] The law required the track to display “in plain view of the public the total amount of sales separately for each win, place and show on every race and on each horse in such race.” Article 1, Section 6, Ch. 254, L. 1940.
[27] This meant that there was no requirement that there would be downstate racing during the Saratoga meet.
[28] This was similarly meant as a protection for Saratoga guaranteeing that there would not be a competing track within 100 miles of Saratoga.
[29] Article 2, Sections 39 and 40, Ch. 254, L. 1940.
[30] Article 3, Section 57, Ch. 254, L. 1940. This increase in funding had helped prompt the complaints about the legislation from Governor Lehman. See note 18 supra.
[31] See note 1 supra.
[32] Ch. 346, L. 1973.
[33] The Racing and Wagering Board is now the State Gaming Commission. Ch. 60, L. 2012.
[34] Racing Law, Sections 249 and 326.
[35] 48 N.Y.2d 514 (1979).
[36] Racing Law, Sections 234 and 313.
[37] See Racing Law, Section 305.
[38] Tax Law, Section 1617-a.
[39] Racing Law, Sections 108-a,112 and 235.3.
[40] See Racing Law, Sections 108-a and 112.
[41] This especially made no sense in New York State where all the harness tracks ran the racinos.
[42] See Racing Law, Sections 243 and 324.
[43] Ch. 370, L. 2012.
[44] Racing Law, Section 242.
[45] Yiddish for trouble and aggravation. You could replace it with the Italian expression “agita.”
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