California is the fifth biggest 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 gambling legalized as quickly as possible. But…it might be five decades, if not longer, before sports gambling is legalized in the state.
Much of the challenge is the lack of understanding of the land, and the way the stakeholders interact with each other and the state authorities. Hopefully this guide will clear some of the smoke from the room.
Because this is the next industry this decade that has flipped from illegal to regulated, California already has any expertise in that regard. I’ll attempt to decode here exactly what the issues are, in the hope that better comprehension of those issues will help reach some win/win for all parties involved as economically as possible.
The lay of this land for California sports gambling Current stakeholders in CA gaming include these three entities:
Horse racing tracks
Cardrooms are legal since 1936 (draw poker; hold’em and other poker games have been held to be legal in 1987, player-banked table games were legal in 1988). In all three instances, the cardrooms needed to go to court, challenge the nation’s gambling statute, and win.
They’re subject to state regulation, that 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 political power the tribes have in California.
Tribes initially offered bingo, then after winning the landmark Cabazon instance in 1987, which led to the Indian Gaming Regulatory Act, proceeded to slot machines, player-banked table games involving cards (house-banked card games in 1993), and finally went into 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 they have a monopoly on anything that could be given in a casino, which would include things like sports betting.
While horse racing is usually regarded as a mature industry, with two big tracks closing in the previous ten years because the land has been more precious put to housing and other uses, it is still a favorite pastime for many in California, and the horsemen have political clout as well.
How they all intersect
As one would expect, the three stakeholders do not enjoy each other.
The actual stakeholders, of course, are the people of California, who would likely see tax revenues approaching $100 million from the first year of operation, and upwards of this as the market matures.
On the other hand, the CA state budget is roughly $180 billion annually, so what’s relative. One would think there is enough money to go around this time, which was not true with internet poker, which a minority of California tribes managed to defeat in the legislature on a nine-year (and counting) period.
A brief legislative history of sports betting in California
Sports gambling has been discussed in the legislature for nearly two years now. Early in 2016, Assemblyman Adam Gray (D-Merced), who’s also chair of the Assembly’s Governmental Organizational Committee (which manages, among other items, gambling in the state) introduced AB 1573, that would produce a framework for offering sports betting.
The invoice has been rather vanilla in terms of regulation: service providers licensing with a stakeholder to supply solutions. For many reasons, including the national sports betting ban was intract at the time, the bill never got past a reading, nor was there any type of informational hearing on the situation.
Assemblyman Gray returned 2017 using ACA 18, which would change the California Constitution to enable the legislature to govern sports gambling. This also went nowhere, though it’s interesting to remember that Gray may or may not have needed his timeline backwards.
Normally, with regards 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 thought it initially would not need voter approval to promulgate sports betting regulations.
Changing the constitution?
Finally, a group referred to as »Californians For Sports Betting » announced 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 believed this ballot proposal was sponsored by a sportsbook, because nobody with knowledge of how California politics works would realize that the tribes could invest upwards of $100 million, rather than batting an eye writing the checks, to conquer this measure and protect their land interests.
This accomplished was the following:
It bothered the tribes , they used their political ability to have any hearings canceled on the topic, so effectively killing any laws for 2018.
The measure also annoyed the cardroom industry, because it preempted whatever they had been attempting to achieve with sports betting, and because most tribes (wrongly) would believe that the cardrooms were behind the invoice (they were not ). There’s not a lot of trust at this time involving the cardrooms and the sportsbook operators.
There is a fear among both some tribes and some cardroom operators that the sportsbooks could only sweep in and dominate the gaming business, and need to know more before deciding how to move. Whether that fear is logically based isn’t relevant.
A rewrite of the ballot measure
The promoters did rewrite the initiative a few months afterwards, which left Art IV, Sec 19 (e) unchanged, but restricting the governor from negotiating compacts with tribes that want to run off-reservation gaming (which many tribes likely would encourage ), and directly authorizing the legislature to govern sports betting, in the way suggested by Gray’s 2016 AB 1573.
So, the present version of the ballot initiative appears more like it had been composed by a party with some elegance regarding how gaming functions in California, or at least got some help on the issue.
Finally, I’d expect some variant of the previous ACA 18 or AB 1573, or perhaps both, to reappear shortly after the legislature reconvenes after the holidays.
Who’ll get to split the money, and when?
The stumbling block in all of this is an unnecessary battle regarding who gets to own the game.
The tribes initially attempted to play with the card, but realizing that the monitors are simply too powerful to be excluded, loved them in an alliance against the cardrooms.
Moreover, it is not a good look to state you’re against sports betting, as some tribes and tribal advocates have stated, once you’re not just remodeling your unprofitable off-track-betting facility, you’re marketing the joys of it as well. In fairness, tribal interests are not necessarily aligned on this issue, based on the tribe. As you’re going to see, there’s going to be something here for everyone who’s spent in this to hate.
The biggest difficulty, as I see California, is you have two big entities who operate gaming businesses with considerable political power, but actually do not understand either gambling nor the casino business.
Cardrooms and tribes stand to gain Cardrooms can’t have some interest in the results of any arrangement in their cardroom. Moreover, although some operators fantasize about being able to bank their own games (and hence remove the (Third-Party Providers of Proposition Player Services or TPPPS), the truth is that particular learning curve will be steep and probably very costly. Game protection is a totally different animal when it is your bankroll whatsoever.
Tribal members receive a test, and if they are lucky, a wholesome check, each month from gaming revenues, but don’t really understand how that check is generated. So, you’ve got two related, controlled businesses which are fundamentally mom and pop companies, regardless of the size of these, that normally rely on other people to inform them how to conduct their businesses.
The tribes generally are satisfied 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 market. What confusion which comes from that is certainly understandable. Unfortunately, this brings in a number of actors which don’t always have their clients 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 unnecessary, unnecessary, and above all, unwinnable conflict.
The most recent development is a suit filed last month by two Southern California tribes from a number of cardrooms, asserting that they are conducting banked table games in 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 state. The next problem is that if you’re going to sue the State over violation of compact (the proper filing and cause of activity here), this lawsuit always is observed 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 most likely result is probably that the matter will be dismissed on procedural grounds.
On the other hand, you have a number of »old school » cardroom investors who keep score by not how much they could make, but by how much they can get over. You have a few operators who honestly should not, in my view, hold gaming licenses, along with the tribes’ complaints to the country about their inability to govern (read »discipline ») those operators is a valid one.
Additionally, it rather begs the question whether or not the state is suitably equipped to actually enforce bad behaviour (as opposed to allowing the miscreants write a check to »settle » the accusations). If they can’t revoke a licensee for egregious anti-money laundering offenses, it makes one wonder if they could fairly govern a company which handles substantially more money.
The tribes have fought the cardrooms for any number of years on the so-called player-banked game issue. Cardrooms, due to California legislation, can provide table games, so long as the players charge the games rather than the house. Services known as TPPPS will charge the matches when nobody would like to. The occurrence of these companies is at root the heart 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 they probably have neither. They know this, also. For many years, they’ve threatened all kinds of litigation.
The issue is, any litigation against the State of California would always occur in federal court, and not say. Why is this important? Having a US District Court judge, which will be an appointed for life position, the ruling is going to be about the law, and only the law, instead of the political triangulation elected state court judges frequently offer as a guise to interpreting law.
To find past motion 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 richly composed part of the state constitution is a surefire way to sabotage what monopoly can exist in your mind.
While courts have used the word »monopoly » within their opinions 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 challenged, in my view the clause is cloudy, especially in light that the tribes could have choosen more direct language in composing the ballot proposal.
Moreover, in the litigation which has previously happened, it’s been by individual members of tribes suing as individuals, using some creative procedures 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 that are real and static.
The convenience Element First, cardroom customers are almost invariably customers of advantage. Consider the person who would rather shop at 7-Eleven (bad choice, high costs ) compared to the Safeway, since the 7-Eleven goes across the road and he has to drive ten minutes into the Safeway.
Most gamblers only want to be in action as soon as possible. That’s the reason why a gambler who lives in Alhambra, east of downtown Los Angeles, that is maybe 45 minutes from San Manuel, one of the greatest locals casinos everywhere, prefer to drive the 15 minutes to Commerce Casino, even though the amenities are inferior and the price of gambling is much higher.
As such, even though a number of the table games went off tomorrow, the cardroom consumer would likely just return to playing with the conventional player-banked games (i.e. Pai gow tiles, Pai gow poker, etc) or poker. Yes, cardroom earnings would decrease somewhat but the tribes could get hardly any . Definitely no matter the millions they’ve spent with the lawyers and lobbyists on this particular issue so far, for certain.
Second, the actual criticism the tribes have with 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 sport gambling, it is possible that the path will replicate what some other jurisdictions have done previously: roll out the merchandise as land-based simply to get started. This is about to the tribes, but maybe they don’t have any 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 double that period to San Manuel, Pechanga or Chumash to make a bet?
This is not really business the tribes are receiving anyway, and you are almost certainly losing business due to it. Quite similar to the dining table games issue, in my opinion.
What’s the plan?
Third, it’s pretty clear the sportsbooks don’t have a strategy 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 certainly didn’t help matters for 2020 and possibly beyond.
Many European operators are online just; the thought of doing retail (walkup, conventional ) mortifies a number of these. But they’re also natural partners for the cardrooms, as in any legislation that goes through, the cardrooms probably wouldn’t have the ability to accept bets themselves, and would be consigned to charging to their operator-tenant.
Thus, some of this delay in the process is technology-driven, or the inability of several modern online operators to operate a »traditional » sportsbook. But some operators have walkup books in Nevada, the UK, along with other jurisdictions and can certainly 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 get online poker legalized, there’s more than enough money to go around. Pretax revenue for a mature California marketplace, retail publications simply, was projected to approach $1 billion, or roughly 40 times what online poker has been estimated to earn.
In a ten percent tax rate, which will be a reasonable 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, perhaps its time to get the legislature to legislate more harshly instead of defer, because of the quantity 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 matter to ballot as efficiently as you can. Especially as there’ll be layers within this, because of the inherent previous disputes, the legislature will be well advised to be much proactive this time round.
Read more: streetnews.one