California is the fifth largest economy on earth — should you carved it from the US — but remains in the 20th Century regarding gambling regulation.
Having a projected first-year tax earnings of $100 million, one would feel that California would want sports betting legalized as swiftly as possible. But…it might be five decades, if not longer, before sports betting is headquartered in the nation.
A lot of the problem is the lack of comprehension of this territory, and the way the stakeholders interact with each other and the state authorities. Hopefully this guide will clear some of the smoke out of the room.
Because this is the next sector this decade which has flipped from illegal to controlled, California already has some experience in that respect. I will try to decode here what the problems are, in the expectation that better comprehension of those issues will help get to a win/win for all parties involved as economically as possible.
The lay of this land for California sports betting Current stakeholders in CA gaming comprise these 3 entities:
Horse racing tracks
Cardrooms are legal since 1936 (draw poker; hold’em along with other poker games have been held to be legal in 1987, player-banked table games were legal at 1988). In all three cases, the cardrooms needed to go to court, challenge the nation’s gambling statutewin.
They’re subject to state law, that was criticized (and justly so, in my opinion) by tribal gambling interests. They’re a politically powerful enough group, but pale by comparison to the governmental power the tribes have in California.
Tribes initially offered bingo, then after winning the landmark Cabazon case in 1987, which led to the Indian Gaming Regulatory Act, proceeded on to slot machines, player-banked table games involving cards (house-banked card matches 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 lawyers and lobbyists) have translated this to mean they have a monopoly on anything which might be offered in a casino, which would include sports betting.
While horse racing is usually regarded as a mature business, with two major tracks final in the last ten years because the land was more valuable put to housing and other applications, it is still a favorite pastime for a lot in California, along with the horsemen have political clout too.
How they intersect
As you would expect, the three stakeholders don’t like each other.
The actual stakeholders, of course, would be the people of California, who’d likely see tax earnings approaching $100 million in the initial year of operation, and upwards of that as the market evolves.
On the other hand, the CA state budget is about $180 billion a year, so everything is relative. An individual would think there is enough money to move around this time, which wasn’t the case with online poker, which a minority of California tribes were able to conquer in the legislature on a nine-year (and counting) period.
A short legislative history of sport gambling in California
Sports gambling has been discussed in the legislature for almost two years now. Early in 2016, Assemblyman Adam Gray (D-Merced), who is also chair of the Assembly’s Governmental Organizational Committee (which oversees, among other things, gambling in the country ) introduced AB 1573, that would create a frame for supplying sports betting.
The invoice has been fairly vanilla in terms of regulation: service suppliers licensing with a stakeholder to provide solutions. For many reasons, for instance, national sports betting ban was intract at the time, the bill never got past a hearing, nor was there some sort of informational hearing on the situation.
Assemblyman Gray returned in 2017 using ACA 18, which will change the California Constitution to allow the legislature to govern sports gambling. This also went nowhere, although it’s interesting to note that Gray may or may not have had his deadline backwards.
Normally, with respect to gaming growth in California, you will need the electorate to approve a ballot proposal first, 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 require voter approval to promulgate sports gambling regulations.
Changing the constitution?
Finally, a group called”Californians For Sports Betting” announced it would be trying to get an initiative on the 2020 ballot that would repeal the aforementioned clause approved by the electorate in 2000.
The first ballot proposal sought to strike down Article IV, Sec 19 (e) of the California Constitution. I initially believed this ballot proposal was sponsored by a sportsbook, because nobody with understanding of how California politics works would realize that the tribes could spend upwards of $100 million, rather than batting an eye on 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 ability to have any hearings canceled on the matter, so effectively killing any laws for 2018.
The measure also annoyed the cardroom industry, since it preempted anything they were attempting to achieve with sports betting, and because many tribes (wrongly) would believe the cardrooms were behind the bill (they weren’t). There’s not a lot of trust at this time involving the cardrooms and the sportsbook operators.
There is a panic among both a few tribes and some cardroom operators the sportsbooks could just sweep in and dominate the gambling industry, and want 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 abandoned Art IV, Sec 19 (e) unchanged, but limiting the governor from negotiating compacts with tribes that wish to run off-reservation gambling (which many tribes probably would encourage ), and directly authorizing the legislature to regulate sports gambling, in the manner suggested by Gray’s 2016 AB 1573.
So, the current version of the ballot initiative appears more like it was written by a party with some elegance as to how gaming functions in California, or at least got some help on the issue.
Finally, I’d expect some version 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 divide the cash, and when?
The stumbling block in all this is an unnecessary struggle regarding who gets to have the game.
The tribes originally attempted to play with the monopoly card, but realizing that the monitors are simply too strong to be excluded, enlisted them in an alliance against the cardrooms.
What’s more, it is not a fantastic appearance to say you’re against sports gambling, as a few tribes and tribal advocates have stated, once you’re not only remodeling your unprofitable off-track-betting facility, you are advertising the joys of it as well. In fairness, tribal interests are not necessarily aligned on this problem, depending upon the tribe. As you’re going to see, there’s going to be something here for everybody who’s invested 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 actually do not understand either gambling nor the casino business.
Cardrooms and tribes stand to benefit Cardrooms can not have some interest in the results of any deal in their own cardroom. Moreover, although some operators think of having the ability to bank their own matches (and hence eliminate the (Third-Party Providers of Proposition Player Services or TPPPS), the reality is that specific learning curve is going to be steep and probably very expensive. Game protection is a totally different animal when it is your bankroll at stake.
Tribal members receive a test, and if they are lucky, a healthy check, every month from gaming revenues, but don’t really understand how that check is created. Thus, you have two related, regulated businesses that are essentially mom and pop companies, regardless of the size of these, that normally rely upon other people to inform 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 Terry Lanni clones in tribal gambling or the cardroom industry. What confusion that comes from this is definitely understandable. Sadly, this brings in a number of celebrities that 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 lawyers and lobbyists, that, for the large part, oblige them by treating them such as ATM machines, promoting unneeded, unnecessary, and most importantly, unwinnable conflict.
The most recent development is a lawsuit filed last month by two Southern California tribes from a number of cardrooms, asserting they are running banked table games from breach of the 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 problem is that if you’re going to sue the State over breach of compact (the proper filing and also cause of action here), that litigation always is observed in federal court. As there’s a failure to join a necessary party to the lawsuit (the State of California) which probably will not agree to be sued in state court, the most likely result is probably that the issue will be dismissed on procedural grounds.
On the flip side, you have a range of”old school” cardroom shareholders that keep score by how much they could make, but by how far they can get over. You have a couple of operators who frankly shouldn’t, 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.
Additionally, it fairly begs the question whether the state is suitably equipped to actually enforce bad behaviour (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 one wonder if they can fairly regulate a business which handles substantially more cash.
The tribes have fought the cardrooms for a number of years on the so-called player-banked game issue. Cardrooms, due to California legislation, can offer table games, so long as the players bank the games rather than the home. Services called TPPPS will charge the matches when nobody would like to. The existence of the companies is at root the heart 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 reality is they have neither. They understand this, also. For years, they have threatened all kinds 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 important? Having a US District Court judge, which will be an appointed for life standing, the ruling will be about the legislation, and just the law, instead of the governmental triangulation elected state court judges frequently offer as a guise to interpreting law.
To get past movement in federal court, you’re going to need to prove you’ve been injured; Quite simply, you are going to need to prove you actually have a monopoly. Hanging your hat on a richly composed part of the state constitution is a surefire method to jeopardize what monopoly may exist within your mind.
While courts have used the term”monopoly” in their remarks regarding tribal gambling in California, there has been no explicit grant of a biography by the electorate. The constitutionality of Art IV Sec 19 (e) has never been contested, in my opinion the clause is cloudy, especially in light that the tribes could have choosen more direct language in writing the ballot proposal.
In addition, from the lawsuit which has previously happened, it’s been by individual members of tribes suing as humans, using some creative procedures for getting their grievances aired in (state) court. Thus, looking at things from a purely historical manner, the tribes probably know precisely where they’re at with this.
The reality for CA sports betting There are four problems which are static and real.
The convenience Element First, cardroom clients are almost always customers of convenience. Think about the man who would rather shop at 7-Eleven (poor selection, high prices) compared to the Safeway, because the 7-Eleven goes across the street and he has to drive ten minutes into the Safeway.
Most gamblers only wish to be in action as soon as possible. That is why a gambler who lives in Alhambra, east of downtown Los Angeles, that is perhaps 45 minutes out of San Manuel, among the best locals casinos anywhere, prefer to drive the 15 minutes to Commerce Casino, though the comforts are poor and the price of gaming is much higher.
Therefore, even though some of the table games went away , the cardroom customer would probably just go back to playing the conventional player-banked games (i.e. Pai gow tiles, Pai gow poker, etc) or poker. Yes, cardroom revenues would fall marginally but the tribes could get hardly any of that. Definitely not any the millions they have spent with the lawyers and lobbyists with this specific issue up to now, for sure.
Second, the actual criticism the tribes have with the cardrooms online sports betting, is about the real estate. The cardrooms, which the bigger ones are nearly exclusively in metropolitan regions, the real estate favors the cardrooms.
With any introduction of sports gambling, it’s possible that the path will replicate what some other authorities have done before: roll out the merchandise as land-based simply to get started. This is concerning to the tribes, but perhaps they have no reason to worry about Let’s take the person who resides in West LA, would he like to drive 20-30 minutes to Hollywood Park (or a bit longer to Gardena or the Bicycle Casino in Bell Gardens) or at least double that time to San Manuel, Pechanga or Chumash to make a bet?
This isn’t really firm the tribes are getting anyway, and you are almost certainly losing business because of it. Very much like the table games issue, in my view.
What is the Strategy?
Third, it is pretty clear the sportsbooks don’t have a strategy for California, at least however. Exhibit A are the first ill-advised ballot proposal, which killed any possibility of getting the issue to the Republicans in 2018, and certainly didn’t help matters for 2020 and possibly beyond.
Many European operators are online only; the idea of doing retail (walkup, traditional) mortifies some of these. However, they’re also natural partners for its cardrooms, as in any legislation that goes through, the cardrooms probably would not be able to take stakes themselves, and could be consigned to charging rent to their operator-tenant.
Thus, some of the delay in the procedure is technology-driven, or the inability of some contemporary online operators to run a”traditional” sportsbook. But some operators have walkup books in Nevada, the UK, and other authorities and can surely use their experience to a competitive edge when and if California opens to business.
Ultimately, 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 market, retail publications simply, was estimated to approach $1 billion, or roughly 40 times that which online poker was estimated to earn.
In a ten percent tax rate, which is a sensible one for all parties involved, tax earnings 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 for the legislature to legislate more harshly instead of defer, because of the amount of potential tax revenue involved.
As stated in the beginning, the actual stakeholders in this are the people of the State of California, and as such they’re owed a duty by the individuals who represent them in Sacramento to get this issue to ballot as economically as possible. Especially as there will be layers in this, because of the underlying previous disputes, the legislature would be well advised to be more proactive this time around.
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