State Auditor Issues Report on KHRA Operations, Drug Testing

Edited press release

Three reports on the Kentucky Horse Racing Authority show the regulatory arm of Kentucky’s signature industry needs stronger financial management and accountability.

The 163-page document released Jan. 8 by state Auditor Crit Luallen also showed the KHRA needs additional expertise and resources to meet its mandates. The reports include financial and management audits, mandated by the 2006 Kentucky General Assembly, and a review of the Kentucky Thoroughbred Development Fund requested by the agency.

“Horses are Kentucky’s signature industry,” Luallen said. “The Kentucky Horse Racing Authority should be the best racing regulatory agency in the country. Despite recent improvements, the authority has continuing financial management problems and is not adequately performing its statutory responsibilities.”

The Auditor’s Office disclaimed an opinion of KHRA finances. A disclaimed audit opinion indicates auditors were unable to obtain the necessary information to give a financial opinion. The fiscal year 2006 financial audit was unable to substantiate the balance of the funds under the control of the KHRA due to the inadequacy of financial records. Financial management issues are a historical and ongoing problem that pre-dates the current authority.

Specifically, the financial reports document the lack of procedures in place to reconcile the KTDF. Financial records for the determination of allocations from the fund to the racetracks are inadequate and don’t comply with statutory requirements. This problem, described in the KTDF report, led to a multimillion-dollar settlement agreement reached between the KHRA and Kentucky racetracks in December 2006. In short, prior to the settlement, the KHRA didn’t know what the tracks owed the fund or what the fund owed the tracks.

The management audit found there is no independent review of pari-mutuel wagering or racetrack tote operations. The management audit also found the KHRA has no statutorily required pari–mutuel supervisor and each track pays its pari–mutuel taxes through a self-reporting mechanism. Kentucky was the only state of those tested that didn’t have a method to access the racetracks’ tote systems to conduct audits of pari-mutuel wagering to ensure proper payment of the tax.

The management audit compared the KHRA to similar regulatory agencies in 10 analogous states. The KHRA staff of 32 employees is the second lowest of the states compared and is 36 employees below the peer average. Kentucky’s rate of drug testing horses is only above Ohio, Texas, and Louisiana, and barely over half of the testing per live race day performed by New York, the report found. Not surprisingly, the number of positive drug tests was also low.

The KHRA has recently emphasized drug testing and has improved state regulations. However, the new testing procedures had not begun prior to the timeframe for this work.

The reports also repeated a recommendation from a previous Auditor’s Office report that the agency define and clarify its authority to charge licensed racetracks daily assessment fees. The general fund appropriation for the agency has been inconsistent, decreasing 62% since 2000, leading to increases in track assessments. The KHRA should establish by regulation a clearly defined and documented method of assessment of each racetrack.