California is the fifth largest economy in the world — if you carved it out of the US — but is still in the 20th Century regarding gambling regulation.
Having a projected first-year tax revenue of $100 million, one would feel that California would wish sports betting legalized as quickly as possible. But…it could be five decades, or even longer, before sports betting is legalized in the state.
Much of the challenge is the lack of understanding of this territory, and the way the stakeholders interact with one another and the state authorities. Hopefully this guide will clear some of the smoke out of the area.
Because this is the next industry this decade that has flipped from prohibited to controlled, California already has some experience in that regard. I will attempt to decipher here what the issues are, in the expectation that better comprehension of those issues will help reach some win/win for all parties involved as efficiently as possible.
The lay of the property for California sports betting Current stakeholders in CA gaming include these three entities:
Horse racing tracks
Cardrooms are legal since 1936 (draw poker; hold’em and other poker matches were held to be legal in 1987, player-banked table games were lawful at 1988). In all three cases, the cardrooms needed to go to court, challenge the state’s gambling statutewin.
They’re subject to state regulation, which was criticized (and justly so, in my estimation ) by tribal gambling interests. They’re a politically powerful enough group, but pale by comparison to the governmental power that the tribes have in California.
Tribes originally offered bingo, then after winning the landmark Cabazon case in 1987, which resulted in the Indian Gaming Regulatory Act, moved to slot machines, player-banked table games between cards (house-banked card matches in 1993), and eventually 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 interpreted this to mean that they have a monopoly on anything which might be offered in a casino, which might include sports gambling.
While horse racing is generally considered to be a mature business, with two major paths final in the previous ten years since the land was more valuable put to housing and other uses, it’s still a popular pastime for many in California, and the horsemen have political clout too.
How they intersect
As one would expect, the three stakeholders don’t enjoy each other.
The real stakeholders, naturally, are the people of California, who’d probably see tax revenues approaching $100 million from the initial year of performance, and up of that as the market evolves.
On the other hand, the CA state budget is about $180 billion a year, so what’s relative. An individual would think there’s enough cash to move around this time, which wasn’t true with online poker, which a minority of California tribes managed to defeat in the legislature on a nine-year (and counting) period.
A short legislative history of sports betting in California
Sports betting has been discussed at the legislature for almost two decades now. Historical in 2016, Assemblyman Adam Gray (D-Merced), who’s also chair of the Meeting’s Governmental Organizational Committee (which oversees, among other things, gambling in the state) introduced AB 1573, that would create a frame for offering sports gambling.
The invoice was fairly vanilla in terms of regulation: service providers licensing with a stakeholder to supply solutions. For a lot of reasons, for instance, national sports gambling ban was intract in the moment, the bill never got past a reading, nor was there any sort of informational hearing on the situation.
Assemblyman Gray returned in 2017 using ACA 18, which will change the California Constitution to enable the legislature to regulate sports gambling. Additionally, this went nowhere, though it’s interesting to remember that Gray may or may not have needed his deadline backwards.
Generally, with respect to gaming growth in California, you need the electorate to approve a ballot proposal , then the legislature would compose and approve regulations for it. There may or might not be a proposal here that lawmakers thought it initially wouldn’t need voter approval to promulgate sports betting regulations.
Transforming the constitution?
Finally, a group referred to as”Californians For Sports Betting” declared it would be trying to get an initiative on the 2020 ballot which would repeal the above clause approved by the electorate in 2000.
The first ballot proposal sought to strike Article IV, Sec 19 (e) of the California Constitution. I initially thought this ballot proposal was sponsored by a sportsbook, since no one with knowledge of how California politics works would understand that the tribes could invest upwards of $100 million, and not batting an eye writing the checks, to defeat this measure and protect their land interests.
What this accomplished was the following:
It bothered the tribes , they used their political power to have any hearings canceled on the topic, thus effectively killing any laws for 2018.
The measure also annoyed the cardroom industry, since it preempted anything they had been attempting to achieve with sports betting, and because most tribes (wrongly) would believe that the cardrooms were behind the bill (they weren’t). There is not a great deal of trust right now between the cardrooms and the sportsbook operators.
There’s a panic among both some tribes and some cardroom operators that the sportsbooks could just sweep in and dominate the gaming business, and want to learn more before deciding how to proceed. Whether this fear is rationally based isn’t relevant.
A rewrite of the ballot measure
The promoters did rewrite the initiative a couple of months later, which abandoned Art IV, Sec 19 (e) unchanged, but limiting the governor from negotiating compacts with tribes who want to conduct off-reservation gaming (which many tribes probably would encourage ), and directly authorizing the legislature to regulate sports betting, in the manner proposed by Gray’s 2016 AB 1573.
So, the current version of the ballot initiative looks more like it was composed by a celebration with some sophistication regarding how gaming works in California, or at least got some help on the situation.
Finally, I’d anticipate some variant of the previous ACA 18 or AB 1573, or perhaps both, to reappear shortly after the legislature reconvenes following the holidays.
Who will get to split the cash, and if?
The stumbling block in all of this is an unnecessary struggle as to who gets to have the game.
The tribes originally attempted to play with the card, but realizing the monitors are just too strong to be excluded, enlisted them in an alliance against the cardrooms.
What’s more, it’s not a fantastic look to say you are against sports betting, as a few tribes and tribal assistants have stated, when you’re not just remodeling your unprofitable off-track-betting facility, you’re advertising the reopening of it as well. In equity, tribal interests aren’t necessarily aligned on this problem, based upon the tribe. As you’re likely to see, there is going to be something here for everybody who’s spent in this to hate.
The biggest difficulty, as I see California, is that you have two big entities who operate gaming companies with considerable political power, but really don’t know either gaming nor the casino enterprise.
Cardrooms and tribes stand to benefit Cardrooms can not have some interest in the results of any deal in their cardroom. Moreover, although some operators think of being able to bank their own matches (and therefore remove the (Third-Party Providers of Proposition Player Services or TPPPS), the truth is that particular learning curve will be steep and probably very expensive. Game protection is an entirely different animal when it is your bankroll at stake.
Tribal members receive a test, and if they are lucky, a healthy check, each month from gambling revenues, but don’t really understand how that test is created. So, you have two related, regulated businesses that are fundamentally mom and pop companies, regardless of the size of them, that generally rely on others to advise them how to run their businesses.
The tribes generally are happy with the status quo and leary of anything but, and that’s certainly understandable.
There are not any visionary Jack Binion or even Terry Lanni clones in tribal gaming or the cardroom industry. What confusion which comes from that is definitely understandable. Sadly, this brings in several of celebrities which don’t always have their clients or investors best interests in mind.
No Lack of unsympathetic parties
The tribes, for the most part, rely upon their corporate attorneys and lobbyists, that, for the most part, oblige them by treating them like ATM machines, promoting unneeded, unnecessary, and most importantly, unwinnable battle.
The most recent development is a suit filed last month by two Southern California tribes against numerous cardrooms, asserting they are conducting banked table games in violation of their so-called monopoly on table games.
The first problem is that if that is accurate, they are suing the wrong people; their beef is with the state. The second issue is that if you are going to sue the State over breach of compact (the proper filing and cause of action here), that lawsuit always is heard in federal court. Since there’s a failure to join a essential party to the litigation (the State of California) which probably won’t agree to be sued in state court, the likely outcome is probably that the issue will be dismissed on procedural grounds.
On the flip side, you have a number of”old school” cardroom shareholders that keep score by not how much they could create, but by how far they could get over. You have a couple of operators who honestly should not, in my opinion, maintain gaming licenses, and the tribes’ complaints into the state in their inability to regulate (read”discipline”) those operators is a legitimate one.
It also fairly begs the question whether or not the state is suitably equipped to really enforce bad behavior (instead of allowing the miscreants write a check to”settle” the accusations). If they can not revoke a licensee for egregious anti-money laundering violations, it makes you wonder if they can fairly regulate a business which handles substantially more money.
The tribes have fought the cardrooms for a number of years on the so-called player-banked game issue. Cardrooms, due to California law, can offer table games, so long as the players bank the matches rather than the house. Services called TPPPS will bank 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 assert that they have a”monopoly” on table games and slot machines, where the fact is they probably have neither. They know this, also. For many years, they’ve threatened all types of litigation.
The issue is, any lawsuit against the State of California would always take place in federal court, and not state. Why is this significant? With a US District Court judge, which is an appointed for life standing, the judgment will be about the legislation, and only the law, rather than the governmental triangulation elected state court judges frequently offer as a guise to interpreting law.
To get past motion in federal court, you are going to have to prove you’ve been hurt; Quite simply, you are going to have to prove you really have a monopoly. Hanging your hat on a richly composed part of the state constitution is a surefire method to sabotage what monopoly may exist within your own mind.
While courts have used the word”monopoly” within their opinions regarding tribal gaming in California, there has been no explicit grant of a monopoly from the electorate. The constitutionality of Art IV Sec 19 (e) hasn’t been challenged, in my opinion the clause is murky, particularly in light that the tribes could have choosen more direct language in writing the ballot proposal.
Moreover, in the litigation which has previously taken place, it has been by individual members of tribes suing as humans, using some creative methods 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 all of this.
The reality for CA sports gambling There are four issues which are real and static.
The convenience Element To begin with, cardroom clients are almost always customers of convenience. Think about the person who’d rather shop at 7-Eleven (bad selection, high costs ) than the Safeway, because the 7-Eleven is across the street and he must drive ten minutes into the Safeway.
Most gamblers just want to be in action whenever 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 best locals casinos everywhere, would rather drive the 15 minutes to Commerce Casino, even though the comforts are poor and the cost of gambling is a lot higher.
Therefore, even though some of the table games went away , the cardroom customer would probably just go back to enjoying with the traditional player-banked matches (i.e. Pai gow tiles, Pai gow poker, etc) or poker. Yes, cardroom revenues would decrease somewhat but the tribes would get hardly any . Certainly no matter the millions they’ve invested with the lawyers and lobbyists with this particular issue up to now, for sure.
Second, the real complaint that the tribes have with the cardrooms online sports gambling, is about the real estate. The cardrooms, which the bigger ones are nearly exclusively in metropolitan areas, the real estate favors the cardrooms.
With any debut of sports betting, it’s possible that the path will duplicate what some other jurisdictions have done previously: roll out the product as land-based only to get started. This is concerning to the tribes, but perhaps they don’t have any reason to be concerned. Let us take the man or woman who resides in West LA, would he prefer to drive 20-30 minutes to Hollywood Park (or a bit longer to Gardena or the Bicycle Casino in Bell Gardens) or double that time to San Manuel, Pechanga or Chumash to make a wager?
This isn’t really business the tribes are receiving anyway, and you are almost certainly losing business due to it. Quite similar to the table games difficulty, in my view.
What is the plan?
Third, it’s fairly clear the sportsbooks do not have a plan for California, at least yet. Exhibit A are the first ill-advised ballot proposition, which killed any possibility of getting the matter to the Republicans in 2018, and surely did not help matters for 2020 and perhaps beyond.
Many European operators are online only; the thought of doing retail (walkup, conventional ) mortifies a number of them. However, they’re also natural partners for the cardrooms, as in any legislation that goes through, the cardrooms probably would not be able to take stakes themselves, and would be consigned to charging rent to their operator-tenant.
So, some of the delay in the process is technology-driven, or the inability of some contemporary online operators to run a”traditional” sportsbook. But some operators have walkup novels in Nevada, the united kingdom, along with other jurisdictions and can certainly use their expertise to a competitive edge if and when California opens for business.
Finally, and most importantly in my view, unlike the battle to receive online poker legalized, there’s more than enough money to go around. Pretax revenue for a mature California marketplace, retail publications only, has been projected to approach $1 billion, or roughly 40 times that which online poker has been estimated to bring in.
At a ten percent tax rate, which is a sensible one for all parties involved, taxation revenue could approach $100 million.
While the legislature has traditionally deferred to the stakeholders to hammer out their own deal and contact these, perhaps its time to get the legislature to legislate more aggressively rather than defer, because of the quantity of potential tax revenue involved.
As stated initially, 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 economically as possible. Especially as there will be layers within this, because of the underlying preceding disputes, the legislature would be well advised to be much proactive this time round.
California is the fifth largest economy in the world — if you carved it out of the US — but is still in the 20th Century regarding gambling regulation.