California is the fifth largest economy in the world — should you carved it out of the US — but remains in the 20th Century regarding gaming law.
With a projected first-year tax revenue of $100 million, an individual would feel that California would want to have sports betting legalized as quickly as possible. But…it could be at least five years, or even longer, before sports betting is headquartered in the state.
A lot of the problem is the lack of understanding of the territory, and the way the stakeholders interact with each other and the state government. Hopefully this article will clear some of the smoke from the area.
As it is the next sector this decade that has flipped from prohibited to controlled, California already has any expertise in that regard. I’ll attempt to decode here what the issues are, in the hope that better understanding of those issues will help reach a win/win for all parties involved as economically as you can.
The lay of this property for California sports gambling Current stakeholders in CA gaming include these 3 entities:
Horse racing tracks
Cardrooms have been legal since 1936 (draw poker; hold’em and other poker matches were held to be lawful in 1987, player-banked table games were lawful in 1988). In all three instances, the cardrooms needed to go to court, challenge the nation’s gambling statute, and win.
They are subject to state law, which was criticized (and justly so, in my opinion) by tribal gambling interests. They are a politically powerful enough group, but light compared to the political power the tribes have in California.
Tribes originally offered bingo, then after winning the landmark Cabazon instance in 1987, which resulted in the Indian Gaming Regulatory Act, proceeded to slot machines, player-banked table games involving cards (house-banked card games in 1993), and finally went to the electorate to have their casinos completely legal in 2000. The ballot initiative, Prop 1A, amended the California Constitution as follows:
The Legislature has no power to authorize, and shall prohibit, casinos of the type currently operating in Nevada and New Jersey. (Art. IV, Sec. 19 (e))
The tribes (or rather, their attorneys and lobbyists) have translated this to mean they have a monopoly on anything which could be offered in a casino, which would include sports betting.
While horse racing is usually regarded as a mature industry, with two big tracks closing in the last ten years since the land was more valuable set to housing and other applications, it’s still a favorite pastime for many in California, and the horsemen have political clout too.
How they all intersect
As you might expect, the three stakeholders don’t enjoy each other.
The real stakeholders, naturally, are those of California, who’d likely see tax earnings exceeding $100 million in the initial year of performance, and upwards of this as the market matures.
On the other hand, the CA state budget is about $180 billion a year, so what’s relative. One would think there is enough cash to go around this time, which wasn’t the case with internet poker, which a minority of California tribes managed to defeat in the legislature over a nine-year (and counting) period.
A short legislative history of sport betting in California
Sports gambling has been discussed at the legislature for nearly two years now. Historical in 2016, Assemblyman Adam Gray (D-Merced), who’s also chair of the Assembly’s Governmental Organizational Committee (which manages, among other things, gambling in the state) introduced AB 1573, which would produce a frame for offering sports gambling.
The invoice has been fairly vanilla in terms of regulation: service suppliers licensing with a stakeholder to supply services. For a lot of reasons, including the federal sports gambling ban was intract at the moment, the bill never got past a hearing, nor was there any sort of informational hearing on the situation.
Assemblyman Gray returned 2017 using ACA 18, which will change the California Constitution to allow the legislature to regulate sports betting. This also went nowhere, although it’s interesting to note that Gray may or may not have needed his timeline backwards.
Normally, with regards to gaming growth in California, you will need the electorate to approve a ballot proposal , then the legislature would compose and approve regulations for this. There may or might not be a proposal here that lawmakers thought it originally wouldn’t require voter approval to promulgate sports betting regulations.
Changing the constitution?
Finally, a group called”Californians For Sports Betting” announced it would be attempting to get an initiative to the 2020 ballot that would repeal the aforementioned clause approved by the electorate in 2000.
The very first ballot proposal sought to strike down Article IV, Sec 19 (e) of the California Constitution. I originally believed this ballot proposal was sponsored by a sportsbook, because nobody with understanding of how California politics functions would understand that the tribes would spend upwards of $100 million, and not batting an eye on the checks, to conquer this step and protect their land interests.
What this accomplished was the following:
It bothered the tribes , they used their political ability to get any hearings canceled on the topic, so effectively killing any legislation for 2018.
The step also annoyed the cardroom industry, since it preempted anything they had been attempting to accomplish with sports betting, and because many tribes (wrongly) would believe the cardrooms were supporting the bill (they were not ). There’s not a lot of trust right now involving the cardrooms and the sportsbook operators.
There’s a panic among both a few tribes and a few cardroom operators that the sportsbooks could only sweep and dominate the gambling business, and need to learn more before deciding how to proceed. Whether this fear is rationally based is not relevant.
A rewrite of the ballot measure
The promoters did rewrite the initiative a couple of months afterwards, which left Art IV, Sec 19 (e) unchanged, but restricting the governor from negotiating compacts with tribes who want to conduct off-reservation gaming (which many tribes likely would support), and immediately authorizing the legislature to regulate sports gambling, in the manner proposed by Gray’s 2016 AB 1573.
So, the current version of the ballot initiative appears more like it had been written by a party with some elegance regarding how gaming functions in California, or at least got some help on the situation.
Finally, I’d expect some variant of the previous ACA 18 or AB 1573, or perhaps both, to reappear shortly after the legislature reconvenes after the holidays.
Who’ll get to divide the cash, and if?
The stumbling block in all this is an unnecessary battle as to who gets to have the game.
The tribes initially tried to play the card, but realizing that the tracks are simply too strong to be excluded, loved them in an alliance against the cardrooms.
Moreover, it’s not a good look to state you are against sports betting, as a few tribes and tribal assistants have said, once you’re not only remodeling your unprofitable off-track-betting facility, you’re marketing the joys of it also. In fairness, tribal interests aren’t necessarily aligned with this issue, depending on the tribe. As you are going to see, there’s going to be something here for everybody who’s invested in this to hate.
The biggest problem, as I see California, is that you have two big entities that operate gaming businesses with substantial political power, but actually don’t know either gambling nor the casino enterprise.
Cardrooms and tribes stand to gain Cardrooms can not have any interest in the outcome of any arrangement in their own cardroom. Moreover, although some operators think of being able to bank their own games (and therefore eliminate the (Third-Party Providers of Proposition Player Services or TPPPS), the truth is that specific learning curve will be steep and probably very costly. Game protection is an entirely different animal when it is your bankroll at stake.
Tribal members get a test, and if they are lucky, a healthy check, every month from gaming revenues, but do not really understand how that test is created. Thus, you have two associated, regulated businesses that are fundamentally mom and pop companies, no matter the size of them, that normally rely upon other people to advise them how to conduct their businesses.
The tribes are happy with the status quo and also leary of anything but, and that is certainly understandable.
There are no visionary Jack Binion or even Terry Lanni clones in tribal gaming or the cardroom market. What confusion that comes from that is certainly understandable. Sadly, this brings in several of actors which don’t necessarily have their customers or investors best interests at heart.
No Lack of unsympathetic parties
The tribes, for the most part, rely upon their corporate lawyers and lobbyists, who, for the large part, oblige them by treating them like ATM machines, selling unneeded, unnecessary, and most importantly, unwinnable battle.
The latest development is a suit filed last month by two Southern California tribes against a number of cardrooms, asserting that they are running banked table games in violation of their so-called monopoly on table games.
The first issue is that if this is true, they’re suing the wrong people; their beef is with the state. The second problem is that if you’re going to sue the State over breach of compact (the appropriate filing and also cause of activity here), this lawsuit always is heard in federal court. Since there’s a failure to join a necessary party to the lawsuit (the State of California) which probably will not consent to be sued in state court, the likely result is probably that the matter will be dismissed on procedural grounds.
On the flip side, you have a number of”old school” cardroom investors who keep score by not how much they can make, but by how far they can get over. You have a few operators who honestly should not, in my opinion, hold gaming licenses, along with the tribes’ complaints into the state in their inability to regulate (read”field”) these operators is a legitimate one.
Additionally, it rather begs the question whether the state is suitably equipped to really enforce bad behavior (instead of allowing the miscreants write a test to”settle” the accusations). If they can’t revoke a licensee for egregious anti-money laundering violations, it makes you wonder if they can fairly regulate a company which handles substantially more money.
The tribes have fought the cardrooms for any number of years on the so-called player-banked sport issue. Cardrooms, due to California legislation, can provide table games, so long as the players charge the games rather than the home. Services called TPPPS will charge the games when no one would like to. The existence of the companies is at root the center and spirit of the meat that the tribes have with the state.
They claim that they have a”monopoly” on table games and slot machines, in which the fact is they have neither. They understand this, also. For many years, they have threatened all kinds of litigation.
The issue is, any lawsuit against the State of California would necessarily occur in federal court, and not state. Why is this significant? Having a US District Court judge, which will be an appointed for life standing, the ruling will be about the law, and just the law, rather than the political triangulation elected state court judges frequently offer as a guise to interpreting the law.
To get past movement in federal court, you are going to need to prove you’ve been injured; in other words, you’re going to need to prove you actually have a monopoly. Hanging your hat on a vaguely written section of the state constitution is a surefire method to jeopardize what monopoly may exist in your own mind.
While courts have used the term”monopoly” within their remarks regarding tribal gambling in California, there’s been no explicit grant of a monopoly from the electorate. The constitutionality of Art IV Sec 19 (e) hasn’t been challenged, in my view the clause is murky, particularly in light that the tribes might have choosen more direct speech in writing the ballot proposal.
Moreover, from the lawsuit which has previously taken place, it’s been by individual members of tribes suing as humans, utilizing some creative procedures for getting their grievances aired in (state) court. Thus, looking at things from a purely historical fashion, the tribes probably know exactly where they’re at with this.
The truth is CA sports betting There are four issues that are real and static.
The convenience Element To begin with, cardroom customers are almost always customers of convenience. Consider the person who would rather store at 7-Eleven (poor selection, high costs ) than the Safeway, because the 7-Eleven goes across the road and he has to drive ten minutes to the Safeway.
Most gamblers only want to be in action as soon as possible. That’s why a gambler who lives in Alhambra, east of downtown Los Angeles, which is perhaps 45 minutes from San Manuel, one of the greatest locals casinos anywhere, would rather drive the 15 minutes to Commerce Casino, though the comforts are inferior and the price of gaming is much higher.
Therefore, even though some of the table games went off , the cardroom customer would probably just go back to playing with the traditional player-banked games (i.e. Pai gow tiles, Pai gow poker, etc) or poker. Yes, cardroom revenues would fall somewhat but the tribes could get very little of that. Definitely no matter the millions they have spent with the attorneys and lobbyists with this specific issue so far, for sure.
Second, the actual criticism the tribes have with the cardrooms online sports gambling, is all about the actual estate. The cardrooms, which the larger ones are nearly exclusively in metropolitan areas, the real estate favors the cardrooms.
With any introduction of sport gambling, it is likely the path will duplicate what other authorities have done previously: roll out the merchandise as land-based only to get started. This is about to the tribes, but maybe they have no reason to be concerned. Let us take the person who lives in West LA, would he like to drive 20-30 minutes to Hollywood Park (or a little longer to Gardena or the Bicycle Casino in Bell Gardens) or double that time to San Manuel, Pechanga or Chumash to make a bet?
This isn’t really firm the tribes are receiving anyway, and you’re almost certainly losing business because of it. Quite similar to the table games issue, in my view.
What is the Strategy?
Third, it’s pretty clear the sportsbooks do not have a strategy for California, at least however. Exhibit A would be the very first ill-advised ballot proposal, which effectively killed any chance of finding the issue to the voters in 2018, and certainly didn’t help things for 2020 and perhaps beyond.
Some European operators are online only; the idea of performing retail (walkup, traditional) mortifies a number of these. However, they are also natural partners for its cardrooms, as in any legislation that goes through, the cardrooms probably would not have the ability to accept stakes themselves, and would be consigned to charging to their operator-tenant.
Thus, some of this delay in the process is technology-driven, or rather the inability of some modern online operators to operate a”traditional” sportsbook. But some operators have walkup books in Nevada, the united kingdom, along with other jurisdictions and can surely use their experience to a competitive advantage when and if California opens to business.
Finally, and most importantly in my view, unlike the struggle to get internet poker legalized, there’s more than enough cash to go around. Pretax revenue to get a mature California marketplace, retail publications simply, was projected to approach $1 billion, or roughly 40 times that which online poker was estimated to bring in.
In a ten percent tax rate, which is a sensible one for all parties involved, taxation revenue could approach $100 million.
Though the legislature has traditionally deferred to the stakeholders to hammer out their own deal and get back to them, perhaps its time for the legislature to legislate more harshly instead of defer, because of the quantity of potential tax revenue involved.
As stated in the beginning, the real stakeholders in this are the people of the State of California, and as such they’re owed a duty by the people who represent them in Sacramento to find this matter to ballot as efficiently as possible. Especially as there’ll be layers in this, because of the inherent preceding disputes, the legislature would be well advised to be more proactive this time round.
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