California is the fifth biggest economy on earth — if you carved it out of the US — but is still in the 20th Century regarding gaming regulation.
With 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 gambling is legalized in the state.
A lot of the challenge is the lack of comprehension of the land, and how the stakeholders interact with each other and the state government. Hopefully this article will clear some of the smoke out of the area.
As this is the next industry this decade that has flipped from illegal to regulated, California already has any expertise in that respect. I will try to decode here exactly what the problems are, in the expectation that better understanding of those issues will help reach some win/win for all parties involved as economically as you can.
The lay of the property for California sports gambling Current stakeholders in CA gaming comprise these 3 things:
Horse racing tracks
Cardrooms are legal since 1936 (draw pokerhold’em and other poker matches have been held to be lawful in 1987, player-banked table games were legal in 1988). In all three cases, 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 estimation ) by tribal gaming interests. They’re a politically powerful enough group, but light by comparison to the political power that the tribes have in California.
Tribes originally offered bingo, then after winning the landmark Cabazon case in 1987, which led to the Indian Gaming Regulatory Act, moved to slot machines, player-banked table games involving cards (house-banked card matches in 1993), and eventually went to the electorate to get 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 that could be given in a casino, which would include things like sports betting.
While horse racing is generally considered to be a mature industry, with two big paths closing in the last ten years since the land has been more precious put to housing and other applications, it’s still a popular pastime for a lot in California, and the horsemen have political clout too.
How they intersect
As you might expect, the three stakeholders do not enjoy each other.
The real stakeholders, naturally, would be those of California, who would likely see tax earnings exceeding $100 million in the initial year of operation, and upwards of this as the market matures.
However, the CA state budget is about $180 billion a year, so what’s relative. One would think there’s enough cash to go around this time, which was not true with online poker, which a minority of California tribes were able to conquer in the legislature over a nine-year (and counting) period.
A short legislative history of sports gambling in California
Sports gambling has been discussed at the legislature for nearly two decades 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, gaming in the country ) introduced AB 1573, that would create a frame for offering sports betting.
The bill has been fairly vanilla concerning regulation: service providers licensing with a stakeholder to provide services. For a lot of reasons, for instance, federal sports gambling ban was intract at the moment, the bill never got past a reading, nor was there any type of informational hearing on the situation.
Assemblyman Gray returned in 2017 with ACA 18, which will change the California Constitution to allow the legislature to regulate sports betting. Additionally, this went nowhere, although it’s interesting to remember that Gray may or may not have needed his own timeline backwards.
Generally, with respect to gaming expansion in California, you need the electorate to approve a ballot proposal first, then the legislature would compose and approve regulations for this. There may or might not be a suggestion here that lawmakers believed it originally wouldn’t need voter approval to promulgate sports gambling regulations.
Changing the constitution?
In the end, 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 first ballot proposal sought to strike Article IV, Sec 19 (e) of the California Constitution. I originally thought this ballot proposal was sponsored by a sportsbook, because no one with knowledge of how California politics works would understand that the tribes would invest upwards of $100 million, rather than batting an eye writing the checks, to defeat this measure and protect their property interests.
This accomplished was the following:
It irritated the tribes , they used their political ability to have any hearings canceled on the matter, thus effectively killing any legislation for 2018.
The measure also annoyed the cardroom industry, since it preempted whatever they had been trying to achieve with sports betting, and because most tribes (wrongly) would believe the cardrooms were supporting the invoice (they weren’t). There’s not a lot of trust at this time involving the cardrooms and the sportsbook operators.
There’s a panic among both some tribes and a few cardroom operators that the sportsbooks could just sweep and dominate the gambling business, and want to learn more before deciding how to proceed. Whether this fear is logically based isn’t relevant.
A rewrite of this 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 that want to run off-reservation gaming (which many tribes probably would encourage ), and immediately authorizing the legislature to regulate sports betting, in the way suggested by Gray’s 2016 AB 1573.
So, the current version of the ballot initiative appears more like it had been composed by a celebration with some sophistication as to how gaming works in California, or at least got some help on the situation.
Finally, I would expect some variant of the prior ACA 18 or AB 1573, or maybe both, to surfaced soon after the legislature reconvenes following the holidays.
Who will get to divide the money, and if?
The stumbling block in all of this is an unnecessary struggle regarding who gets to have the game.
The tribes originally tried to play with the cardbut realizing that the monitors are simply too strong to be excluded, enlisted them in an alliance against the cardrooms.
Moreover, it is not a fantastic appearance to state you’re against sports betting, as a few tribes and tribal assistants have stated, once you’re not just remodeling your unprofitable off-track-betting centre, you are marketing the reopening of it as well. In equity, tribal interests aren’t necessarily aligned with this problem, based on the tribe. As you are likely to see, there is going to be something here for everyone who’s invested in this to hate.
The biggest problem, as I see California, is that you have two big entities who operate gaming companies with considerable political power, but really don’t understand either gaming nor the casino business.
Cardrooms and tribes stand to benefit Cardrooms can’t have any interest in the results of any deal in their own cardroom. Moreover, though some operators fantasize about having the ability to bank their own matches (and therefore remove the (Third-Party Providers of Proposition Player Services or TPPPS), the reality is that specific learning curve is going to be steep and likely very costly. Game protection is an entirely different animal when it’s your bankroll whatsoever.
Tribal members receive a check, and if they are lucky, a wholesome check, every month from gaming revenues, but don’t really understand how that test is created. So, you have two associated, regulated industries that are fundamentally mom and pop businesses, regardless of the size of them, that generally rely on others to advise them how to run their businesses.
The tribes are happy with the status quo and leary of anything but, and that is certainly understandable.
There are not any visionary Jack Binion or Terry Lanni clones in tribal gaming or the cardroom industry. What confusion that comes from this is certainly understandable. Sadly, this brings in a number of celebrities that don’t always have their customers or investors best interests at heart.
No shortage of unsympathetic parties
The tribes, for the most part, rely upon their corporate lawyers and lobbyists, who, for the most part, oblige them by treating them such as ATM machines, selling unneeded, unnecessary, and most importantly, unwinnable battle.
The most recent growth is a lawsuit filed last month by two Southern California tribes from a number of cardrooms, asserting they are running banked table games from violation of the so-called monopoly on table games.
The first problem is that if that is accurate, they’re suing the wrong people; their beef is with the condition. The second issue is that if you are going to sue the State over breach of compact (the proper filing and also cause of activity here), this lawsuit necessarily is observed in federal court. Since there’s a failure to join a necessary party to the lawsuit (the State of California) which probably won’t 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 that keep score by not how much they can make, but by how far they can get over. You’ve got a few operators who honestly shouldn’t, in my view, maintain gaming licenses, along with the tribes’ complaints to the state in their inability to regulate (read”discipline”) these operators is a valid one.
Additionally, it fairly begs the question whether or not the state is properly equipped to actually enforce bad behaviour (as opposed to letting the miscreants write a test to”settle” the accusations). If they can’t revoke a licensee for egregious anti-money laundering violations, it makes one wonder if they could fairly govern a company which manages substantially more cash.
The tribes have fought the cardrooms for any number of years on the so-called player-banked game issue. Cardrooms, because of California legislation, can provide table games, so long as the players bank the games rather than the house. Services known as TPPPS will bank the matches 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 nation.
They claim that they have a”monopoly” on table games and slot machines, where the fact is that they probably have neither. They understand this, also. For many years, they have threatened all kinds of litigation.
The problem is, any litigation against the State of California would necessarily occur in federal court, and not say. Why is this significant? With a US District Court judge, which will be an appointed for life position, the judgment 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; Quite simply, you’re going to have to prove you actually have a monopoly. Hanging your hat on a vaguely written part of the state constitution is a surefire method to sabotage what monopoly may exist in your own mind.
While courts have used the word”monopoly” in their remarks regarding tribal gaming in California, there has been no explicit grant of a biography from the electorate. The constitutionality of Art IV Sec 19 (e) hasn’t been contested, in my view the clause is murky, particularly in light that the tribes might have choosen more direct speech in composing the ballot proposal.
In addition, from the litigation 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. So, looking at things from a purely historic manner, the tribes probably know precisely where they are at with all of this.
The reality for CA sports gambling There are four problems which are real and static.
The convenience factor To begin with, cardroom customers are almost invariably customers of convenience. Think about the person who would rather store at 7-Eleven (poor choice, high costs ) compared to the Safeway, because the 7-Eleven goes across the road and he has to drive ten minutes into the Safeway.
Most gamblers only wish to be in action whenever possible. That’s the reason 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, would rather drive the 15 minutes to Commerce Casino, even though the comforts are poor and the cost of gambling is a lot greater.
Therefore, even if a number of those table games went away tomorrow, the cardroom consumer would likely 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 . Definitely no matter the millions they have spent with the lawyers and lobbyists with this particular issue so far, for sure.
Second, the actual criticism the tribes have the cardrooms on sports betting, 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 gambling, it is likely the path will replicate what some other jurisdictions have done previously: roll out the product as land-based only to start. This is concerning to the tribes, but maybe they have no reason to be concerned. Let’s take the person who lives 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’re almost certainly losing business because of it. Quite similar to the dining table games difficulty, in my opinion.
What is the Strategy?
Third, it’s pretty clear the sportsbooks don’t have a strategy for California, at least yet. Exhibit A would be the first ill-advised ballot proposal, which killed any possibility of finding the matter to the Republicans in 2018, and certainly didn’t help matters for 2020 and possibly beyond.
Some European operators are online just; the thought of performing retail (walkup, conventional ) mortifies a number of these. However, they’re also natural partners for the cardrooms, as in any legislation that goes through, the cardrooms probably wouldn’t be able to take bets themselves, and would be consigned to charging to their operator-tenant.
So, some of this delay in the procedure is technology-driven, or rather the inability of some modern online operators to run a”traditional” sportsbook. However, some operators have walkup books in Nevada, the UK, and other authorities and can surely use their expertise to a competitive advantage when and if California opens to business.
Finally, and most importantly in my opinion, unlike the battle to get internet poker legalized, there is more than enough cash to go around. Pretax earnings to get a mature California marketplace, retail publications only, has been projected to approach $1 billion, or about 40 times that which online poker has been estimated to earn.
In a ten percent tax rate, which will be a sensible one for all parties involved, taxation earnings could approach $100 million.
While the legislature has traditionally deferred to the stakeholders to hammer out their own deal and contact them, perhaps its time for the legislature to legislate more harshly rather than defer, due to the amount of potential tax revenue involved.
As mentioned in the beginning, the actual stakeholders in this are the people of the State of California, and as such they are owed a duty by the individuals who represent them in Sacramento to get this matter to ballot as efficiently as you can. Especially as there will be layers within this, because of the inherent preceding disputes, the legislature will be well advised to be proactive this time around.
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