California is the fifth largest economy on earth — if you carved it out of the US — but is still in the 20th Century regarding gambling law.
With 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 could be at least five decades, if not longer, before sports betting is headquartered in the state.
Much of the problem is the lack of understanding of this territory, and the way the stakeholders interact with each other and the state authorities. Hopefully this article will clear some of the smoke out of the area.
As it is the second sector this decade which has flipped from prohibited to regulated, California already has any experience in that respect. I will attempt to decode here exactly what the problems are, in the hope that better comprehension of those issues will help get to some win/win for all parties involved as efficiently as possible.
The lay of this property for California sports gambling Present-day stakeholders in CA gaming include these three things:
Horse racing tracks
Cardrooms have been legal since 1936 (draw pokerhold’em and other poker games have been held to be legal in 1987, player-banked table games were legal at 1988). In all three instances, the cardrooms had to go to court, challenge the nation’s gambling statute, and win.
They are subject to state law, which has been criticized (and justly so, in my estimation ) by tribal gaming interests. They’re a politically powerful enough group, but light compared to the governmental 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 between cards (house-banked card games in 1993), and finally went into 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 lawyers and lobbyists) have interpreted this to mean they have a monopoly on anything that could be offered in a casino, which might include things like sports gambling.
While horse racing is generally regarded as a mature industry, with two major paths closing in the last ten years because the land has been more valuable put to housing and other applications, it’s still a popular pastime for a lot in California, and the horsemen have political clout as well.
How they intersect
As you might expect, the three stakeholders don’t like each other.
The actual stakeholders, naturally, are those of California, who’d probably see tax earnings approaching $100 million from the first year of performance, and up of that as the market evolves.
However, the CA state budget is about $180 billion a year, so everything is relative. An individual would think there is enough money to go around this time, which wasn’t true with online poker, which a minority of California tribes managed to conquer in the legislature over a nine-year (and counting) period.
A short legislative history of sport 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 Assembly’s Governmental Organizational Committee (which oversees, among other items, gambling in the state) introduced AB 1573, that could produce a frame for supplying sports betting.
The bill has been fairly vanilla in terms of regulation: service providers licensing with a stakeholder to supply solutions. For many reasons, for instance, federal sports gambling ban was intract in the time, the bill never got past a reading, nor was there some sort of informational hearing on the situation.
Assemblyman Gray returned 2017 with ACA 18, which will change the California Constitution to allow the legislature to govern sports betting. This also went nowhere, though it’s interesting to remember that Gray may or may not have needed his own timeline backwards.
Normally, with regards to gaming growth in California, you need the electorate to approve a ballot proposal , then the legislature would write and approve regulations for this. There may or might not be a suggestion here that lawmakers thought it initially would not require voter approval to promulgate sports gambling regulations.
Changing the constitution?
In the end, a group referred to as”Californians For Sports Betting” declared it would be attempting to get an initiative to the 2020 ballot which 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 initially thought this ballot proposal was sponsored by a sportsbook, because nobody with knowledge of how California politics functions would understand that the tribes could invest upwards of $100 million, rather than batting an eye on the tests, to conquer this measure and protect their land interests.
This accomplished was the following:
It irritated the tribes so much, they used their political power to get any hearings canceled on the topic, so effectively killing any laws for 2018.
The measure also annoyed the cardroom business, since it preempted whatever they had been attempting to achieve with sports gambling, and because many tribes (wrongly) would believe that the cardrooms were supporting the invoice (they were not ). There is not a lot of trust at this time between the cardrooms and the sportsbook operators.
There’s a panic among both some tribes and some cardroom operators the sportsbooks could just sweep and dominate the gaming business, and want to learn more before deciding how to move. 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 later, which left Art IV, Sec 19 (e) unchanged, but limiting the governor from negotiating compacts with tribes who want to conduct off-reservation gambling (which many tribes likely would encourage ), and directly authorizing the legislature to govern sports gambling, in the manner suggested by Gray’s 2016 AB 1573.
So, the present version of the ballot initiative appears more like it had been written by a celebration with some elegance regarding how gaming functions in California, or at least gained some help on the situation.
Finally, I would expect some version of the previous ACA 18 or AB 1573, or maybe 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 this is an unnecessary battle as to who gets to own the game.
The tribes originally attempted to play the monopoly card, but realizing that the monitors are simply too powerful 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 some tribes and tribal advocates have said, once you’re not just remodeling your unprofitable off-track-betting facility, you’re advertising the reopening of it also. In fairness, tribal interests are not necessarily aligned on this problem, based upon the tribe. As you are going to see, there’s going to be something here for everybody who’s spent in this to despise.
The biggest problem, as I see California, is that you have two big entities who operate gaming businesses with considerable political power, but actually don’t know either gambling nor the casino business.
Cardrooms and tribes stand to benefit Cardrooms can not have some interest in the outcome of any arrangement in their cardroom. Moreover, though some operators fantasize about having the ability to bank their own games (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 expensive. Game protection is an entirely different animal when it’s your bankroll whatsoever.
Tribal members receive a check, and if they are lucky, a healthy check, every month from gaming revenues, but do not really know how that check is created. Thus, you’ve got two associated, controlled industries which are essentially mom and pop businesses, no matter the size of them, that generally rely upon other people to advise them how to run their businesses.
The tribes generally are satisfied with the status quo and leary of anything but, and that is certainly understandable.
There are not any visionary Jack Binion or even Terry Lanni clones in tribal gambling or the cardroom market. What confusion that comes from that is definitely understandable. Unfortunately, this brings in a number of actors that don’t necessarily have their customers or investors best interests in mind.
No shortage of unsympathetic parties
The tribes, for the most part, rely on their corporate attorneys and lobbyists, who, for the most part, oblige them by treating them such as ATM machines, selling unneeded, unnecessary, and above all, unwinnable battle.
The most recent development is a lawsuit filed last month by two Southern California tribes against a number of cardrooms, asserting that they are running banked table games from violation of their so-called monopoly on table games.
The first problem is that if that is true, they’re suing the wrong people; their beef is with the condition. The second problem is that if you’re going to sue the State over violation of compact (the proper filing and also cause of action here), this litigation always is heard in federal court. As there’s a failure to join a necessary party to the litigation (the State of California) which probably will not agree to be sued in state court, the most likely outcome is most likely that the matter will be dismissed on procedural grounds.
On the other hand, you have a number of”old school” cardroom shareholders that keep score by how much they can create, but by how much they can get over. You’ve got a couple of operators who frankly should not, in my view, hold gaming licenses, and the tribes’ complaints into the country in their inability to regulate (read”field”) those operators is a legitimate one.
It also fairly begs the question whether the state is properly equipped to really enforce bad behaviour (instead of letting the miscreants write a check to”settle” the accusations). If they can not reverse a licensee for egregious anti-money laundering offenses, it makes one wonder if they can 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 sport issue. Cardrooms, due to California legislation, can provide table games, as long as the players bank the games rather than the home. Services known as TPPPS will charge the games when nobody wants to. The existence of the companies is at root the heart and spirit of the beef the tribes have with the nation.
They assert that they have a”monopoly” on table games and slot machines, where the fact is they have neither. They know this, too. For 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 say. Why is this significant? Having a US District Court judge, which will be an appointed for life standing, the judgment is going to be about the legislation, and only the law, rather than the political triangulation elected state court judges often offer as a guise to interpreting law.
To find past movement in federal court, you’re going to have to prove you have been injured; in other words, you are likely to have to prove you really have a monopoly. Hanging your hat on a vaguely written part of the state constitution is a surefire method to jeopardize what monopoly may exist within your own mind.
While courts have used the term”monopoly” in their opinions regarding tribal gambling 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 challenged, in my opinion the clause is cloudy, especially in light that the tribes could have choosen more direct speech in composing the ballot proposal.
Moreover, in the litigation which has previously taken place, it’s been by individual members of tribes suing as humans, using some creative procedures for getting their grievances aired in (country ) court. Thus, looking at things from a purely historic fashion, the tribes likely know precisely where they are at with this.
The reality for CA sports gambling There are four problems that are static and real.
The convenience Element First, cardroom clients are almost always customers of advantage. Think about the person who would rather store at 7-Eleven (bad selection, high prices) compared to the Safeway, since the 7-Eleven goes across the street and he has to drive ten minutes into the Safeway.
Most gamblers just want to be in action as soon as possible. That’s why a gambler who lives in Alhambra, east of downtown Los Angeles, that is perhaps 45 minutes from San Manuel, among the best locals casinos everywhere, prefer to drive the 15 minutes to Commerce Casino, even though the amenities are poor and the cost of gaming is much greater.
As such, even if a number of those table games went away , the cardroom customer would likely just return to enjoying with the conventional player-banked games (i.e. Pai gow tiles, Pai gow poker, etc) or poker. Yes, cardroom revenues would decrease marginally but the tribes could get hardly any . Definitely no matter the millions they’ve invested with the lawyers and lobbyists with this particular issue so far, for sure.
Second, the real complaint that the tribes have the cardrooms on sports betting, is all about the real estate. The cardrooms, which the bigger ones are almost exclusively in metropolitan areas, the real estate favors the cardrooms.
With any introduction of sports betting, it’s possible that the path will replicate what other jurisdictions have done previously: roll out the merchandise as land-based simply to get started. This is about to the tribes, but perhaps they don’t have any 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 period to San Manuel, Pechanga or Chumash to make a wager?
This isn’t really firm the tribes are getting anyway, and you are almost certainly losing business due to it. Quite much like the table games difficulty, in my opinion.
What is the plan?
Third, it’s fairly clear the sportsbooks don’t have a plan for California, at least however. Exhibit A would be the very first ill-advised ballot proposal, which killed any chance of getting the matter to the Republicans in 2018, and surely did not help matters for 2020 and perhaps beyond.
Some European operators are online just; the thought of performing retail (walkup, traditional) mortifies some of them. But they’re also natural partners for its cardrooms, as in any legislation that goes through, the cardrooms likely would not have the ability to take stakes themselves, and could be consigned to charging to their operator-tenant.
So, some of this delay in the procedure is technology-driven, or rather the inability of several modern online operators to operate a”conventional” sportsbook. However, some operators have walkup books in Nevada, the UK, along with other authorities and can certainly use their expertise to a competitive edge when and if California opens for business.
Finally, and most importantly in my opinion, unlike the battle to get internet poker legalized, there’s more than enough money to go around. Pretax revenue for a mature California marketplace, retail publications simply, has been estimated to approach $1 billion, or roughly 40 times what online poker was estimated to bring in.
At a ten percent tax rate, which is a sensible one for all parties involved, tax revenue could approach $100 million.
While the legislature has traditionally deferred to the stakeholders to hammer out their own deal and get back to these, maybe its time for the legislature to legislate more harshly instead of defer, due to the quantity 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 economically as possible. Especially as there will be layers within this, due to the underlying previous disputes, the legislature will be well advised to be more proactive this time round.
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