California Breakthrough

written by I. Nelson Rose

© Copyright 2010, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose,

California is about to become the test on whether politics really is the art of the possible.

At the end of May, State Senator Roderick (“Rod”) D. Wright (D-Inglewood) introduced SB 1485, inartfully named, “The Internet Gambling Consumer Protection and Public-Private Partnership Act of 2010.” SB 1485 would authorize intra-state online poker and other “authorized games” in California.

In the past, attempts to legalize Internet gaming in California have been stymied by fears of federal intervention, and opposition from politically powerful Indian gaming tribes.

But times have changed. The right-wing ideologues of President George W. Bush’s federal Department of Justice have been replaced by centralist prosecutors, who do not feel they have a duty to tell states what their public policies should be on gambling.

And there is no doubt that California has a strong public policy in favor of legal gaming. The “anti’s”, including Nevada casinos and religious groups opposed to the expansion of gambling in the Golden State, left the battlefield long ago. The tribal casino industry in California is already about the size of Nevada’s privately owned casinos, and it will surpass it in gross gaming revenue within a few years.

But for most of the last quarter of the 20th century, California gaming policy was a fight among conflicting interests. None had the power to make law, but they each had the power to prevent changes in the status quo.

The state had a thriving horseracing industry, which, until tribes started opening casinos, was one of the largest suppliers of political contributions to candidates for state office. Most of their money was targeted to state legislators on the Governmental Organization (“G.O.”) Committee, which oversees gaming.

California has had legal cardclubs since the 1850 Gold Rush. There were once almost a thousand small clubs, with two or three tables in the backs of bars, and a dozen bigger ones, with 30 to 40 tables, many in the Poker Capitol of the World, Gardena. Proposition 13, in 1978, which ended local government’s power to freely raise property taxes, led to the opening of super-clubs, like Bicycle and Commerce, with more than 100 tables each. The Commerce Casino was actually the largest casino in the world, in square footage, for a little while, although it had no banking games or slot machines.

Indian gaming was, at first, only another major political player. But when tribal bingo gave way first to gaming devices and then to true casinos, the political power of all other legal gambling interests began to fade.

California’s racetracks, some with great locations, have not folded, as have so many did in other parts of the country. But they were not immune from the problems generally faced by a 19th century sport that no longer has a monopoly on betting. No longer king, the racing industry does not even have the power to block legislation: It is not influential enough to demand that tracks get a share of any new Internet gaming revenue.

Over the years, the vast major of small poker clubs closed, unable to compete against other forms of gambling and the explosive growth of home entertainment technology. Fortunately for some of the largest clubs, they survived until that technology also led to Internet poker and televised tournaments. But cardclubs mainly fight holding actions against gaming tribes.

California’s tribes are by far the most influential political players when it comes to legal gaming. But they are fractured, with some wanting to go online, while others fear the competition.

The Great Recession added a new, and even more powerful, political force: the Democratic Party and even parts of the GOP. The state government in California is near bankrupt. Politicians are desperate to find additional sources of revenue.

How desperate? This November, voters will be asked to legalize marijuana, for the tax revenue.

Democrats have overwhelming control of both houses of the state legislature. But the Great Recession, and wild overspending during good times, has created a crisis. The Legislature has already frozen pay for teachers and other government workers, and cut essential government services. This endangers powerful Democratic constituents: labor unions and social program beneficiaries.

Arnold Schwarzenegger, a Republican, is governor. But he, too, is in favor of doing whatever is necessary to get the state’s budget back in line.

Ironically, California’s budget deficit was so great last year that a movement to legalize Internet poker could not get off the ground. State legislators felt they did not have the time to worry about a controversial issue that might raise a few hundred million dollars, when the budget deficit was in the tens of billions of dollars.

But, this year, the public won’t stand for more taxes, and there is nothing left to cut. By law, California must have a balanced budget. But there is literally no way to raise the $26 billion the state needs, this year alone, without causing a lot of people a lot of pain. So every idea, no matter how far out, is being considered.

As Sen. Wright responded to a critic who contended online poker would raise only $25 million, not the projected $250 million for the state, “That’s $25 million that we don’t now have.”

As Chair of the G.O. Committee, Sen. Wright is an influential leader of the Democratic Party. He comes from a safe African American district that takes in Inglewood and Watts. So, he is not subject to the political influence of California’s powerful and rich gaming tribes. Wright was elected three times to the State Assembly. He recently moved up to the State Senate, defeating an opponent funded by some casino tribes opposed to Internet gaming.

Politics has shaped Sen. Wright’s proposal. Everyone knows that the way Internet poker will work in California is through skins: California cardclubs and gaming tribes will take their brandnames online. A player signing up at the Bicycle Club, for example, will see that club’s name on his screen’s poker table, even though he will be playing against players who see Commerce Casino and Morongo Casino on their “felts.”

But there is nothing in SB 1485 about skins. In fact, there is almost nothing in this long bill about regulation or licensing.

Instead, SB 1485 purports to create contracts between the three winning applicants and the state. The California Department of Justice will ask for RFPs (“Requests for Proposals”) for the right to operate three hubs. The bill is careful to say that the money the winners pay for their hubs is not a tax.

Interestingly, SB 1485 never says what those hubs are for. But everyone knows there will be skins, and there is a precedent with the hubs used for Internet betting on horseraces.

It is also clear that the big money will be earned by the hub operators, not the skins. In fact, it is expected that the hub operators will also be taking bets directly from players. The three competing hub operators can make agreements to share players to increase liquidity.

Who will get the hubs? The odds are stacked in favor of California’s presently licensed cardclubs and compacted gaming tribes, but anyone willing to incorporate and operate from the state, has a shot.

Criteria for licenses and work permits is the standard “person of good character, honesty, and integrity” “prior activities, criminal record, if any, reputation, habits, and associations do not pose a threat to the public interest,” etc. But the bill requires a scoring system, with factors including “quality, competence, experience, past performance, efficiency, reliability, financial viability, durability, adaptability, timely performance, integrity, security, and the consideration promised to the state.”

The last means this will turn into an auction, with the company offering the most money getting one of the licenses. It is much too early to know who will win, or how much it will cost. But, my guess is that it will be Harrah’s, because it has been the most aggressive in trying to get into every market, including online. It is also possible that MGM, IGT, Sciplay (the new partnership of Scientific Games and Playtech) and even PartyGaming might be willing to put up the $250 million+ cash-in-advance I expect the winner will have to pay.

The other two will be California based. Politically, it would be impossible for California to give all three hubs to out-of-state operators. In fact, SB 1485 expressly gives preferences to cardclubs and tribes. So, at least one hub has to go to a tribe, and one to a cardclub. Given the expense, it is likely that partnerships will be formed. Only if a tribe is willing to partner with a cardclub will the third hub be available to an outside company.

Losing bidders are not locked out. The bill provides lots of opportunities for experienced Internet operators and entrepreneurs to participate as subcontractors and suppliers. Since California has a population larger than Canada, a lot of people are going to be looking at this very closely.

When will this all happen? Soon. The authors, part of the Democratic Party, give the power to grant three five-year contracts for Internet gaming hub operators to the Department of Justice, not to the California Gambling Control Commission, the government agency that already regulates gaming. The reason is that the Department is headed by the Attorney General, Edmund G. (“Jerry”) Brown, Jr., a Democrat, and the party’s nominee for Governor. The Commission was appointed by the current Governor, Arnold Schwarzenegger, a Republican.

Brown might win in November. But the polls show him in a virtual tie with the Republican nominee, Meg Whitman. Whitman, who has already spent tens of millions of the billion dollars she made running eBay, cannot be easily dismissed. And no one knows how she feels about legal gambling.

So expect the Democratic Party to push this through before November.

If California legalizes intra-state Internet poker this year, other states will follow. The first will probably be small states with well-established landbased gambling, where attempts have already been made, such as Iowa and North Dakota. When the bandwagon starts rolling, other states will jump on board.

Then the states will ask for the federal Unlawful Internet Gambling Enforcement Act (“UIGEA”) to be amended, so that states can enter into compacts with each other. After all, if California, Nevada and North Dakota all say it is O.K. for their poker operators to take bets online and from players in each others’ states, why should the federal government care? In fact, why should there be any barrier on these states taking bets from players in foreign countries?

The great irony is all this movement for legalization was accidentally started by an opponent of Internet gambling, Bill Frist. This conservative Republican, then-Majority Leader of the U.S. Senate, rammed through the UIGEA by attaching it to the anti-terrorist SAFE Port Act.

But in his rush, he included exemptions, including expressly making intra-state online gambling legal, at least under the UIGEA.

Now everyone, including the states and federal regulators, say, “Well, it is clearly the intent of Congress that states are again free to set their own policies toward gambling. If a state wants to allow its operators to take bets online from its residents, the federal government should no longer stand in the way.”

© Copyright 2010. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law (1st and 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website,

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