California is the fifth biggest economy on earth — if you carved it from the US — but is still in the 20th Century regarding gaming regulation.
Having a projected first-year tax revenue of $100 million, one would feel that California would want sports gambling legalized as swiftly as possible. But…it could be five decades, or even longer, before sports betting is headquartered in the state.
A lot of the challenge is the lack of understanding of the territory, and how the stakeholders interact with one another and the state government. Hopefully this article will clear some of the smoke out of the room.
As this is the second industry this decade that has flipped from prohibited to controlled, California already has some expertise in that regard. I will try to decipher here exactly 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 efficiently as possible.
The lay of this land for California sports gambling Present-day stakeholders in CA gaming include these three entities:
Cardrooms
Tribes
Horse racing tracks
The cardrooms
Cardrooms are legal since 1936 (draw pokerhold’em along with other poker matches have been held to be legal in 1987, player-banked table games were legal in 1988). In all three cases, the cardrooms had to go to court, challenge the state’s gambling statute, and win.
They are subject to state regulation, which has been criticized (and justly so, in my opinion) by tribal gambling interests. They’re a politically powerful enough group, but light by comparison to the governmental power the tribes have in California.
Tribal gaming
Tribes originally offered bingo, then after winning the landmark Cabazon case in 1987, which led to the Indian Gaming Regulatory Act, moved on to slot machines, player-banked table games between cards (house-banked card matches in 1993), and finally went to the electorate to have their casinos fully 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 that they have a monopoly on anything which could be given in a casino, which would include things like sports betting.
Racetracks
While horse racing is usually regarded as a mature business, with two major tracks final in the last ten years because the land has been more valuable put to housing and other uses, it is still a popular pastime for a lot in California, and the horsemen have political clout too.
How they all intersect
As you might expect, the three stakeholders do not like each other.
The actual stakeholders, naturally, would be those of California, who’d probably see tax revenues approaching $100 million in the first year of performance, and up of that as the market matures.
However, the CA state budget is roughly $180 billion annually, so what’s relative. One would think there’s enough cash to go around this time, which wasn’t the case with online poker, which a minority of California tribes managed 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’s also chair of the Assembly’s Governmental Organizational Committee (which oversees, among other items, gambling in the country ) introduced AB 1573, which would produce a frame for offering sports betting.
The bill has been fairly vanilla in terms of regulation: service providers licensing using a stakeholder to supply solutions. For a lot of reasons, for instance, national sports betting ban was intract at the time, the bill never got past a hearing, nor was there some type of informational hearing on the situation.
Assemblyman Gray returned in 2017 using ACA 18, which would change the California Constitution to allow the legislature to regulate sports betting. This also went nowhere, though it’s interesting to remember that Gray may or may not have had his own deadline backwards.
Normally, with regards to gaming growth in California, you will need the electorate to approve a ballot proposal first, then the legislature would write and approve regulations for this. There may or might not be a suggestion here that lawmakers believed it initially wouldn’t need voter approval to promulgate sports gambling regulations.
Changing the constitution?
Finally, a group referred to as”Californians For Sports Betting” declared it would be attempting 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 Article IV, Sec 19 (e) of the California Constitution. I initially thought this ballot proposal was sponsored by a sportsbook, since nobody with knowledge of how California politics functions would understand that the tribes could invest upwards of $100 million, rather than batting an eye writing the tests, to defeat this step and protect their land interests.
What this accomplished was the following:
It irritated the tribes , they used their political ability to get any hearings canceled on the matter, thus effectively killing any legislation for 2018.
The step also annoyed the cardroom industry, because it preempted whatever they were trying to achieve with sports gambling, and because many tribes (wrongly) would believe the cardrooms were supporting the invoice (they weren’t). There’s not a lot of trust at this time between the cardrooms and the sportsbook operators.
There’s a fear among both some tribes and some cardroom operators that the sportsbooks could just sweep in and dominate the gaming 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 later, which left Art IV, Sec 19 (e) unchanged, but limiting the governor from negotiating compacts with tribes who wish to conduct off-reservation gaming (which many tribes likely would support), and directly authorizing the legislature to govern sports gambling, in the manner suggested by Gray’s 2016 AB 1573.
So, the current version of the ballot initiative looks more like it was composed by a party with some sophistication regarding how gaming works in California, or at least gained some help on the situation.
Finally, I would expect some variant of the prior ACA 18 or AB 1573, or perhaps both, to surfaced soon 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 battle regarding who gets to have the game.
The tribes initially tried to play with the cardbut realizing the tracks are just too strong to be excluded, loved them in an alliance against the cardrooms.
Moreover, it’s not a fantastic look to state you’re against sports gambling, as a few tribes and tribal advocates 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 issue, depending on the tribe. As you’re going to see, there’s going to be something here for everyone who’s invested in this to hate.
The biggest problem, as I see California, is you have two major entities who operate gaming companies with substantial political power, but actually don’t understand either gaming nor the casino business.
Cardrooms and tribes stand to benefit Cardrooms can not have any 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 hence remove 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 whatsoever.
Tribal members get a check, and if they are lucky, a wholesome check, every month from gambling revenues, but don’t really know how that check is generated. So, you’ve got two related, controlled businesses that are fundamentally mom and pop companies, no matter the size of them, that normally rely on other people to inform them how to run their businesses.
The tribes are happy with the status quo and also leary of anything but, and that’s 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. Unfortunately, this brings in a number of celebrities which don’t necessarily have their customers or investors best interests at heart.
No shortage of unsympathetic parties
The tribes, for the most part, rely on their corporate attorneys and lobbyists, who, for the large part, oblige them by treating them such as ATM machines, promoting unneeded, unnecessary, and above all, unwinnable conflict.
The most recent growth is a suit filed last month by two Southern California tribes from a number of cardrooms, asserting that they are conducting banked table games from breach of their so-called monopoly on table games.
The first issue is that if that is accurate, they’re suing the wrong people; their beef is with the condition. The next issue is that if you’re going to sue the State over breach of compact (the proper filing and also cause of activity here), this litigation necessarily is heard in federal court. Since there’s a failure to join a essential 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.
Effective regulation?
On the other hand, you have a range of”old school” cardroom shareholders that keep score by not how much they can create, but by how much they could get over. You’ve got a few operators that frankly shouldn’t, in my view, maintain gaming licenses, and the tribes’ complaints to the country in their inability to govern (read”discipline”) those operators is a valid one.
It also fairly begs the question whether or not the state is suitably equipped to actually enforce bad behaviour (instead of letting the miscreants write a test to”settle” the accusations). If they can’t revoke a licensee for egregious anti-money laundering offenses, it makes you wonder if they could fairly govern a business which handles substantially more cash.
The tribes have fought the cardrooms for any number of years on the so-called player-banked sport issue. Cardrooms, because of California law, can offer table games, so long as the players bank the matches rather than the home. Services called TPPPS will bank the games when no one would like to. The occurrence of the companies is at root the center and soul 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 that they have neither. They understand this, also. For years, they’ve threatened all types of litigation.
The problem is, any lawsuit against the State of California would necessarily take place in federal court, and not state. Why is this significant? Having a US District Court judge, which is 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 get past movement in federal court, you’re going to need to prove you’ve been hurt; Quite simply, you are 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 jeopardize what monopoly can exist in your mind.
While courts have employed the term”monopoly” within their remarks regarding tribal gaming in California, there’s been no explicit grant of a biography 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 could have choosen more direct speech in writing the ballot proposal.
In addition, from the lawsuit which has previously taken place, it’s been by individual members of tribes suing as individuals, using some creative methods for getting their grievances aired in (state) court. So, looking at things from a purely historical manner, the tribes probably know precisely where they are at with all of this.
The reality for CA sports betting There are four problems which are real and static.
The convenience Element To begin with, cardroom clients are almost always customers of advantage. Think about the man who’d rather store at 7-Eleven (bad choice, high prices) than the Safeway, because the 7-Eleven is across the street and he must drive ten minutes to the Safeway.
Most gamblers only wish to be in action as soon as possible. That is the reason why a gambler who lives in Alhambra, east of downtown Los Angeles, which is perhaps 45 minutes out of San Manuel, among the greatest locals casinos everywhere, prefer to drive the 15 minutes to Commerce Casino, even though the comforts are poor and the cost of gambling is much higher.
As such, even though a number of the table games went away , the cardroom customer would probably just return to enjoying the conventional player-banked games (i.e. Pai gow tiles, Pai gow poker, etc) or poker. Yes, cardroom revenues would decrease somewhat but the tribes would get very little . Definitely no matter the millions they’ve invested with the attorneys and lobbyists on this particular issue up to now, for certain.
Geography
Second, the actual criticism the tribes have with the cardrooms on sports gambling, is about the real estate. The cardrooms, which the larger 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 replicate what other jurisdictions have done before: roll out the product as land-based simply to get started. This is about to the tribes, but maybe they have no reason to be concerned. Let us take the person who resides in West LA, would he prefer to drive 20-30 minutes to Hollywood Park (or a little 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 wager?
This isn’t really business the tribes are receiving anyway, and you’re almost surely losing business due to it. Very much like this dining table games issue, in my opinion.
What’s the Strategy?
Third, it is pretty clear the sportsbooks don’t have a plan for California, at least yet. Exhibit A would be the very first ill-advised ballot proposal, which effectively killed any chance of finding the matter to the Republicans in 2018, and surely did not help things for 2020 and possibly beyond.
Many European operators are online only; the idea of performing retail (walkup, traditional) mortifies a number of them. However, they’re also natural partners for the cardrooms, as in any legislation that goes through, the cardrooms likely would not have the ability to accept bets themselves, and could be consigned to charging to their operator-tenant.
So, some of this delay in the process is technology-driven, or the inability of several contemporary online operators to operate a”traditional” sportsbook. However, some operators have walkup books in Nevada, the united kingdom, and other jurisdictions and can certainly use their experience to a competitive edge if and when California opens to business.
Finally, and most importantly in my view, unlike the struggle to get internet poker legalized, there is more than enough cash to go around. Pretax revenue to get a mature California marketplace, retail books simply, has been estimated to approach $1 billion, or about 40 times what online poker was estimated to bring in.
In a ten percent tax rate, which is a reasonable one for all parties involved, tax revenue could approach $100 million.
Suggestion box
Though 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 stated initially, the actual 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 get this issue to ballot as efficiently as possible. Especially as there’ll be layers within this, because of the underlying preceding disputes, the legislature will be well advised to be much proactive this time around.
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