States rush to legalize sports betting & expand gambling for revenue

By Diane M. Grassi

With the melt down of the global economy over the past 2 years, multi-national brokerage firms and trusted financial institutions bore the brunt of accusations of gambling away the financial health and futures of investors, primarily through the sale of toxic mortgages with credit default swaps as the vehicle in doing so.

Yet, it is the mainstreaming of gambling on many levels that has created a culture whereby it has become an acceptable norm for not only corporations but governments in the United States, on both the federal and state levels, to literally invest in the gambling industry, with the recession as the excuse for its necessity.

Yet, for years prior to the current recession, brokerage firms such as Goldman Sachs & Co., Merrill Lynch & Co. and Fidelity Investments were already investing their clients' stocks and mutual fund portfolios, in financing offshore casinos.

The question remains as to whether they skirted U.S. federal law, which prohibits offshore online gambling for Americans, as well as to whether they made reliable investments on behalf of their clients, many of whom remain unaware that such financial instruments are involved in such volatile industries. So, Wall Street was already in on the game.

Fast forward to 2010, where many U.S. states are on the precipice of bankruptcy and are desperate for that magic bullet to increase tax revenues without continually cutting services for their already over-taxed residents. And to that end, many state governors and state legislators are clamoring to push through laws in anticipation of overturning the federal law in place, prohibiting sports betting on both professional and amateur sports, otherwise known as the Professional and Amateur Sports Protection Act of 1992 (28 U.S.C. §3701) (PASPA).

To wit, the state legislature of New Jersey passed State Resolution No. 19 on January 12, 2010, which authorizes its President of the Senate to "take legal action concerning certain federal legislation prohibiting sports betting." It would repeal the federal ban on sports betting, in all other U.S. states, with the exception of Nevada, Delaware, Oregon and Montana, already permitted to offer parlay-type sports betting. Nevada, however, exclusively enjoys all types of sports betting, statewide, on any professional or amateur sports games, in any capacity.

Basically, New Jersey, and specifically Senator Raymond Lesniak, who originally launched a lawsuit on his own in March 2009 against the federal government, claims that the 1992 law violates the 10th and 14th Amendments to the U.S. Constitution, in that "It establishes a selective prohibition on sports betting in the U.S." The argument is that it violates the 10th Amendment to the United States Constitution by regulating a matter that is reserved to the States. And that it violates the 14th Amendment to the United States Constitution by being unconstitutionally discriminatory against the Plaintiffs and the people of the State of New Jersey.

Lesniak's case presently resides in the U.S District Court, District of New Jersey, seeking declaratory relief. But the upshot is that New Jersey believes that it "Would benefit significantly from lifting the federal ban and legalizing sports betting in this state, as increased revenues would be generated and numerous jobs would be created for New Jersey residents as a result of sports betting activities at Atlantic City casinos and New Jersey's racetracks, further enhancing tourism and economic growth," according to Resolution No. 19.

Prior to PASPA, the Wire Act was enacted in 1961. It was intended exclusively for prohibiting the placement of bets by telephone to bookmakers for sporting events, and was largely put in place by then U.S. Attorney General, Robert F. Kennedy, in order to discourage organized crime and bookmaking. But gaming and its technology has come light years since 1961, and it would appear that the Wire Act's shelf life has thus expired.

Meanwhile, in the U.S. Congress, House Representative Barney Frank (D-MA), Chairman of the House Financial Services Committee, has promoted a federal resolution to legalize and regulate the internet gambling industry in the U.S. (H.R. 2667). That proposal falls on the heels of the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). It proscribes that offshore internet gambling is a violation of federal law.

Furthermore, legislation was passed by the New Jersey legislature in its state Senate to amend the New Jersey State Constitution, allowing legalized sports betting, which the New Jersey voters would ultimately vote on in a referendum as early November 2010.

But this constant back and forth between drafting new law and upholding existing legislation on a federal level to regulate gaming, runs in direct conflict with those states introducing new laws, geared to open up the flood gates for a variety of legalized gaming platforms, including sports betting. In addition, the National Indian Gaming Association, with respect to state Indian gaming contracts, originally authorized by the U.S. federal government, presents other conflicts on both state and federal levels.

Therefore, with the rights of gamblers continually in flux, the question must be asked what about the rights of non-gamblers and the resources that will be expended towards the downside that accompanies a gambling culture, upon which states will necessarily become dependent?

In the state of Nevada alone, with unemployment approaching 23%, for those presently receiving extended unemployment benefits as well as those no longer receiving such benefits, it is the gaming industry specifically that is responsible for such a jobs freefall which accompanies a nearly $1 billion state budget shortfall. Add to that the highest mortgage foreclosure rates in the entire U.S. and there arises a recipe for disaster.

And as gaming drives all other industry including construction, conventions and tourism, primarily in Las Vegas, it would make one wonder what other state officials are thinking when gaming revenues in Las Vegas went down over 20% between 2008 and 2009, and it has yet to come out of its funk.

Las Vegas Strip properties' construction is at a virtual standstill with over leveraged multi-national conglomerates also reeling from the worldwide mortgage crisis. It appears that it was not only the little guys at the slot machines who gambled with their fortunes over the past few years.

With respect to sports betting on the National Football League's (NFL) Super Bowl, Las Vegas betting revenues for the past 2 seasons of 2008 and 2009 were down considerably from years past. Nevada casino sports books in 2008 lost $2.6 million on the Super Bowl and in 2010 a total of $82.7 million was wagered with a net gain of only $179,000.00 more for casino sports books than in 2009. In contrast, $94.6 million was wagered in 2006, prior to the recession.

Yet, New Jersey is convinced and presupposes that sports wagering will generate hundreds of millions of dollars in state revenue over the course of a 5 year period, for its state alone. And it remains dedicated to also expand casino gambling in spite of its own realized massive decline in profits over the past 2 years.

But the state of New Jersey is hardly alone in its desire to gamble on gambling with many states introducing legislation and campaigning for both intrastate and interstate forms of gambling, both online and throughout casinos and racetrack locales throughout the U.S.

Currently, 48 states enjoy some form of legalized gambling and/or state lotteries, with the exception of Hawaii and Utah which do not presently permit any type of gambling, wagering or lotteries. However, Hawaii is presently weighing legislation for a stand-alone casino in Waikiki.

States in addition to New Jersey proposing sports betting and some type of expansion of casino gambling, including online gaming, with some states already preparing such legislation regarding sports betting in the event that PASPA is overturned includes: Iowa, Delaware, Massachusetts, California, Texas, Alabama, Missouri, Georgia, Florida, Pennsylvania, Indiana, Maine, New Hampshire, Connecticut, , Michigan, Kentucky, Illinois, amongst others.

In the case of Delaware it won the right in 2009 to offer 3-game parlay style sports betting at its 3 racetracks or racinos for NFL games only, as states that previously offered lottery style or legalized sports betting from 1976-1990 were exempt from PASPA. Yet, after its well fought challenge in federal court in 2009 for Delaware to be permitted to bet on all professional sports a la Las Vegas style without restrictions, it was defeated. But Delaware has not yet given up its fight and its case has been appealed to the U.S. Supreme Court.

Iowa is also leading the charge in crafting legislation to allow legalized sports betting. However, Iowa State Senator, Jerry Behn (R-Boone), thinks that gambling is a "Tax on the people who can afford it the least." Yet, his colleague, State Senator, Jack Kibbie (D-Emmetsburg), on betting on professional sports says, "People say I would love to do what they can do in Las Vegas."

Perhaps those with the same sentiments as those of Senator Kibbie will not be so game, so to speak, when there remains little discretionary income for such sin taxes to generate anticipated windfall profits.

With respect to California's new plan there comes an additional rub. It plans to introduce an online gaming network. Yet, it potentially could be in violation of Indian Gaming licenses or compact agreements that California entered into in 1999 with Native American tribes in its state. The compacts gave the tribes exclusive rights to any gambling that involved gaming devices including slot machines, roulette tables and video poker machines, etc.

Furthermore, it took 5 years for California to get the tribes to honor the payment of taxes due to the state of California by virtue of the compacts. The tribes withheld tax payments until 2004. However, the state of California still gives such exclusive rights to the Indian tribes through 2030, which remains a binding agreement to date.

Now, the California tribes have threatened to once again withhold paying the government of California its share of taxes due for gaming revenues, should California proceed with its online poker network plans. The state's position is that the compacts do not include poker and cover only games of chance. Yet, the tribal councils deem gaming devices to include computers used for online gaming, and thus negating California's plan.

Such a dust-up could resonate through the Native American community, with its 442 tribal casinos operated by 237 tribal governments and Alaska native villages in 28 states. Revenues translate into a nearly $30 billion a year industry for them.

And Congressman Frank's legislation to regulate internet poker would also be a direct threat to Indian gaming casinos, unless the Indian Gaming Regulatory Act of 1988 is somehow amended.

Ideally, California wants its poker network to go nationwide, raising revenues by ultimately licensing interstate networks and thereby generating additional profits through the ownership of such various licenses between states. The hope is that it could eventually trump PASPA.

Everything is politics, it would seem. But complicated legislative loopholes aside, basing entire economies — and California's alone is the six largest in the entire world — on games of chance is quite the risky proposition itself.

And how taxpayers can be expected to trust their state governments to invest in struggling enterprises, already in the red, in order to prop up their cash-strapped states, many nearing junk-bond status due to irresponsible governing, remains the $64,000.00 question.

Time was when Vegas thought gambling was recession proof. And there should be little doubt that Las Vegas now serves as the poster child for that which results when gamblers stop gambling and traveling to destination resorts.

And for public officials to abandon all reason and principles, looking for a quick fix, rather than by relying upon ingenuity for the creation of jobs and revenue outside of the gambling sector, could very well come back to bite them, in the end.

© Diane M. Grassi