Late Legislation To Legalize Online Gambling in California

A couple of bills in the California legislature are still hanging around even though there are only a few weeks left in this year's legislative session.  Stranger things have happened than having bills that haven't gone through the full legislative review process get passed in the mad rush to get the end of session work completed.

In this case, although it is possible one or both of these bills are approved, I am not overly enthusiastic about their chances.  Personally, I am in favor of online gambling, but I much prefer the bills to be fully vetted and edited, with all stakeholders and opinion-holders having their full say in the matter.

Here's an editorial from a local newspaper that shares the same sentiment.  I agree.  In California, the tribes have huge leverage and influence.  And the tribes are not monolithic in their perspectives.  The tribes do compete against each other, which extends to the political arena.  In general, if all the tribes are not in consensus, the likely and easiest answer is no.

Online Poker Lobbying Group in California Quits

The reality that online poker is NOT coming to California soon finally reached consensus with a lobbying group specifically created to push for legalization.  The California Online Poker Association announced its winding down earlier this month, reported by GGBiGames.com.

The politics of the various tribes sunk the opportunity.  The tribes have a great deal of influence in California politics, particularly when it comes to gaming.  Since the tribes were not in alignment, online poker wasn't going anywhere.  Something eventually will come along, but probably not until enough other states move forward and California is faced with falling behind and losing revenue.

Assembly Committee Shelves Sports Betting Bill

Rather suddenly, the California sports betting bill sailing through the legislature was shelved by the Assembly Appropriations Committee.  A quick article reporting the event is here.  The easy explanation was that California did what it intended and helped goad the opponents of expanded legal sports betting, the sports leagues and NCAA, to file suit to stop the lead state, New Jersey.  According to the California bill's sponsor, they were in consultation with New Jersey to form a "bi-coastal" effort.  Once the sports leagues and NCAA filed the lawsuit against New Jersey, California could stop the bill without having to incur the expense of defending a lawsuit, letting New Jersey bear that burden.  Of course California can support New Jersey by way of amicus briefs, a less costly legal support option.

Although some legal experts feel the federal PASPA (Professional and Amateur Sports Protection Act) law, only letting a few states have sports betting will stand, other legal experts feel the PASPA will be found unconstitutional.  Those experts use the analogy of the government stating that only four states could have theaters that show movies with sound, while all others could only have silent movies.  Another example would be that only one or two states could grow apples, and all other states would be prohibited, being forced to buy apples from those limited sources. 

The arguments the sports leagues and NCAA are trying to make is that legal sports betting impacts the integrity of their games.  They don't seem to be able to explain how legal sports betting in states like Nevada don't impact integrity of their games.  Also, they seem to have been unable to articulate how illegal sports betting (which is most definitely occurring) that would be curtailed and be brought into the open if legalized, is somehow superior in their minds to legal sports betting.  Finally, experts note how states have always had the authority to set the parameters regarding gambling within their states.  The Washington Times has an article that discusses New Jersey's approach. 

It will be several months before this issue is settled, but it is fair to assume that the losing party will keep the issue alive on appeal and escalate to as high a court as possible.  Would this case eventually make it to the Supreme Court?  Perhaps.

California Sports Betting Bill Update

On August 8th, the Assembly Appropriations Committee moved the sports betting bill, SB 1390, into its suspense file, moving the bill to the next step.  Although the term "suspense file" seems like bad news, it isn't.

Bills that impact the budget go to the budget committee, while other bills with financial impact are reviewed by the appropriations committee.  This bill falls into the latter category.  Under the committee rules (both Senate and Assembly), bills that have a financial impact over a certain amount have to pass through the suspense file.  The bill has to be voted to be moved in to and out of the suspense file.  Moving this bill into the file is a necessary step.  The next step would be a future hearing where the bill will have to be voted out of the suspense file (and thereby out of the committee).  At that point, the bill is then back on the Assembly floor for final vote.

The bill has already completely passed the Senate and passed the Assembly Governmental Organization Committee.  If this bill does pass the Assembly, the bill in its current form does need to go back to the Senate for revote so that the Senate can approve the changes made in the Assembly.  Since the Senate previously passed the bill by a 33-2 vote, this revote would be a formality, in my view.

At that point, the bill would go to the governor for signature, with the bill coming into force January 1st of next year.

Poll Finds Californians In Favor of Sports Betting

Hot off the presses, a poll by the Field Research Corporation found that by a wide margin, Californians were in favor of legalizing sports betting and by a much smaller margin were in favor of legalizing online poker.  This poll was likely commissioned as there are a couple of bills working their way through the legislative process to legalize these exact things.  The sports betting bill is much further along in the process, having passed the Senate and is now in the Assembly Appropriations Committee, already having passed the Assembly Government Organization Committee.  A recent post on the sports betting bill can be found here.

The poll results were clear.  Any way you cut the population, a majority favored legalizing sports betting.  Republicans, Democrats, Independents, every age group and every geographic location is in favor.  Here is a snippet of the overall results:

Group / Favor / Oppose / No Opinion

Republicans  49/45/6
Democrats    64/31/5
Other            58/31/11

Male             61/34/5
Female         54/37/9

18-39            70/24/6
40-64            53/39/8
65 +              48/45/7

All                58/35/7

This is huge.  For any politician putting his/her finger in the wind, this makes no doubt about the will of the people of California - GIVE THEM SPORTS BETTING!  Oh, and by the way, the question was worded to ask if the person was in favor of sports betting AND having the state tax its proceeds.  So, not just sports betting, but sports betting and taxing it.  I would be shocked if the sports betting bill did not pass and get signed into law, setting up California to join New Jersey in a showdown with the unconstitutional federal PASPA law.  That being said, there are a couple of bills in Congress that would ease the PASPA restrictions, so that states could add sports betting in the next few years if they desired.

The results for legalizing online poker weren't quite as decisive, with a slight overall majority in favor.  The results for sports betting were far more positive - again, a majority of every demographic breakdown in favor.

The details on the poll results can be found here.

California Sports Betting Bill Moves Forward

The California Senate Appropriations Committee passed SB 1390, a bill authorizing sports betting in California, out of committee to the Senate floor for vote.  This is a big step, following on the heels of New Jersey's passing of a sports betting law in January.  As explained by the bill's author, California needs to have a sports betting law on the books so when the anticipated legal battle between New Jersey and the US Department of Justice is fought over the constitutionality of the Professional and Amateur Sports Protection Act (PASPA), California will also have an interest in the outcome.

What has been unexpected has been the bi-partisan support for this measure.  The bill had to pass through both the Governmental Organization and Appropriations Committees, with votes required to move them out (Appropriations actually needed votes to move in and to move out).  All three votes were unanimous, with no abstentions.  Both Republicans and Democrats are in support.  This bill has a real chance of getting through.  To track the bill's progress, you can use this link.

Nevada, currently the state with the de facto monopoly on sports betting, has got to be concerned.  If New Jersey implemented sports betting, yes, that would have some impact on Nevada.  If California implemented sports betting, what does Nevada have left as an attractant to California customers, still a major source of gaming revenue?  There was a previous post that posited an idea to help the northern Nevada casinos deal with increased gaming competition from California.  If sports betting comes to California, all of Nevada may need to consider this.

Exchange Wagering Going Nowhere Fast in California

A working committee of the California Horse Racing Board (CHRB) met in February to obtain industry feedback on the implementation of exchange wagering in California. Exchange wagering was approved by the legislature, with the crafting of rules delegated to the CHRB. The Thoroughbred Times reported on the four-hour meeting with the result that the committee would make no recommendation to the full board for implementing exchange wagering at this time. According to the story, "committee members said there appeared to be too much opposition from key industry players to current plans and suggested more discussion is needed."

Opposition? That's an understatement. Were there some proponents? Sure. Betfair (the company that is prepared now to offer exchange wagering), Del Mar racetrack and the Horseplayers Association of North America (gamblers). It only makes sense that Betfair would be in favor as they would operate the wagering platform. The horseplayers are naturally in favor of any wagering modification that reduces takeout (vigorish).

Del Mar racetrack could be considered a non-profit, as opposed to other tracks in California, such as Golden Gate Fields and Santa Anita. Both of those for-profit venues were strenuously opposed to exchange wagering. Representatives for those entities stated that those tracks would not approve exchange wagering on their races, even if the CHRB approved rules. There may have also been a threat of legal action if the CHRB approved exchange wagering at Santa Anita and Golden Gate Fields without those tracks' approval.

The current issues with exchange wagering apparently are:

• Cannibalization of current pari-mutuel pools
• The ability to bet on horses to LOSE (danger danger danger)
  
• Lack of protection of jockeys from arbitrary charges of race fixing
• Insufficient takeout and increased handle to compensate for lower pari-mutuel handle
• Possible "cost-plus" takeout scheme for exchange wagering operators
  
• De facto monopoly for the lead vendor proponent (Betfair)
• Not all entities economically benefit from exchange takeout compared to current scheme
  

That's a LOT of issues. I read the entire 199 page transcript of the proceeding. If you like, you can do the same by clicking here. There was much more than what was reported by the Thorougbred Times. It appeared to me reading the transcript that Betfair may not have as elegantly made their case to the point that some may come to the conclusion that Betfair may have been more spin-heavy as opposed to just stating solid facts and evidence in support of the exchange wagering concept. (Yes, I'm being deliberately diplomatic in my language).

In my opinion, exchange wagering is not going to happen in California anytime soon, if ever.

California Tribal Gaming Now Even More Competitive with Northern Nevada Casinos

This blog has discussed the threat to Reno and Tahoe casinos from California-based tribal gaming properties. The key advantage of the tribal casinos is that the tribal properties are much closer to the California population centers than Reno and Lake Tahoe. The New York Times has an article that highlights the proximity advantage as well as the upgrading of the tribal facilities to become more full-amenity hotel casinos.

I've posted a similar sentiment to the Times article a few months back. That post can be found here. The most controversial post on this blog regarding the topic can be found here. Specifically what do Reno and Lake Tahoe do to combat full-amenity tribal hotel casinos that are located much closer to California cities? In the last referenced post, I discussed that Nevada casinos may need to exploit the two things they can offer that California casinos can't - sports betting and legal brothels. Sports betting probably won't generate the level of revenue to make up for lost slot revenue, but legal brothels may be enough of a differentiator to pull sufficient traffic to the Reno and Lake Tahoe properties to hold their own. Right now, Reno and Lake Tahoe are hurting to the tune of a 25% decrease in gaming revenue since 2007.

The article describes that Reno properties are becoming more akin to the casinos that cater to the locals market, similar to how Stations Casinos operate their Las Vegas properties. The problem is that there may be too much casino capacity in Reno compared to the approximately 250,000 population base. In addition, the locations of the various Reno properties are not as well positioned as the suburban-located properties in the Las Vegas area.

California Horse Racing Committing Suicide?

California is in the final stages of approving two major changes to the horse racing industry in the state. The first is an increase in the takeout on pari-mutuel wagers known as "exotics." To simplify, wagers that include more than one horse (e.g. exacta, trifecta, etc.) will have the takeout increase by a couple of percent. I'm not sure how bad or good that change is, but my personal bias is that takeout is high enough already, and increased takeout (think tax) is likely to decrease handle (wagers), thereby making the net takeout revenue unchanged or perhaps reduced.

The second change is the most controversial and in my opinion could spell the demise of racing in California if not squelched. That is the allowing of exchange betting. Although touted by its major proponent, Betfair, I haven't seen a definitive study that shows how racing is benefited in any jurisdiction where Betfair can offer exchange wagering on races.

The way in which this bill added exchange wagering is highly suspect. One surmises that behind the scenes hanky panky was at play. This again is refuted by Betfair - equally and vehemently claimed by opponents that said the addition of exchange wagering only was inserted in the bill just two days before the deadline for amendments. Very fishy if you ask me. In my opinion, the Betfair doth protest too much.

If exchange wagering operates similarly to how it operates in other jurisdictions, the result will likely be the cannibalization of wagers from the pari-mutuel pools (at approximately 20% takeout) to the exchange (at approximately 5% takeout). Good for bettors, but bad for the industry. You see, if the industry now has problems distributing the revenue from 20% takeout, how can it survive dividing up 5%? Doesn't make sense.

Here's one way to describe a potential future. Assume that all the takeout on California racing now is 5 bets of $1 each. At 20% takeout, that gives 5 20-cent takeouts to divide up among tracks, ADWs, horsemen, purses, taxes, etc. Also assume a typical distribution of bettors where the high-rollers are conducting 3 of those bets, with the rest of the horseplayers conducting the remaining 2 bets.

Enter exchange wagering with a 5% takeout. For a $1 bet, only 5% is retained. Given that scenario, it is more than possible that the high-rollers will transfer some of their wagering activity from the 20% takeout pari-mutuel pools to the 5% takeout exchange pools. Let's assume 2 of their 3 bets move that way. What will result is that the 5 20-cent takeouts are replaced with 2 5-cent takeouts and 3 20-cent takeouts. An overall reduction in revenue to the industry by 30%. How in the heck does that make any sense?

For exchange wagering to provide MORE money, overall betting would have to increase by around a factor of 4 times just to be even. Do you really think that will happen? If it did, Betfair would have had that information published all over the place, and this legislation wouldn't have to been snuck in at the last minute.

If the Governor signs the legislation as I think he will, the only way to save California racing is to make sure the tracks and horsemen stick it to the exchange wagering companies to increase their takeout on exchange betting to EQUAL amounts to the current pari-mutuel pools. This way, any cannibalization of pari-mutuel wagering won't hurt the industry - the money will just be coming in from a different source.

Let's see how cooperative Betfair is then when faced with that takeout structure...

Update...the California Horse Racing Board has a press release discussing the bill here.