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gamblinglawreport
FEATURED ARTICLE
04/09
cecile park publishing
Head Office UK Cecile Park Publishing Limited, 17 The Timber Yard, Drysdale Street, London N1 6ND
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US
States utilise exemption from
sports betting ban
Delaware has decided to utilise an
exemption from a ban preventing
US States from authorising sports
wagering to launch a sports lottery.
Linda J. Shorey, Robert A. Lawton,
Anthony R. Holtzman and Ashley J.
Cameron, of K&L Gates LLP,
examine the plans and how they
illustrate that States are willing to
consider regulating forms of
gambling in order to meet State
budget shortfalls.
The current economic crisis is
forcing States in the US to
scramble to find alternative
revenue streams to cover ever
increasing budget deficits. With tax
revenues falling significantly, the
States are trying to find ways to
increase revenues to avoid deep
cuts to state-supported programs
without increasing taxes on
individuals. One popular potential
source for new revenues is the
gambling industry. This article will
provide a brief overview of the
deficit problem, the perceived role
of the gambling industry in fixing
it, and Delaware’s related proposal
to take advantage of its exemption
from the Professional and Amateur
Sports Protection Act (PASPA)1, a
federal law, enacted in 1992, that
prohibits States from authorizing
sports wagering.
Budget shortfalls
According to the Center on Budget
and Policy Priorities, at least 47
States faced or are facing budget
shortfalls for the current and
upcoming fiscal years. The
combined budget shortfall for
these States for the remainder of
this fiscal year and the following
two fiscal years is estimated to total
more than $350 billion. The
amount of shortfall by State, in
certain cases, is quite significant,
e.g., for fiscal year 2009, California
is projected to have a deficit of
$13.7 billion, New Jersey $3.6
billion, Massachusetts $2.4 billion,
Florida $2.3 billion, North
Carolina $2.0 billion, and New
York $1.7 billion. The projected
deficits grow substantially for fiscal
year 2010, with California
projected to have a deficit of $25.9
billion, Massachusetts $3.1 billion,
Florida $5.8 billion, North
Carolina $3.3 billion, and New
York $13.7 billion.
States are somewhat limited in
how they can react to a budget
shortfall. For the vast majority,
world online gambling may 2009
running a deficit or borrowing
money to cover operating
expenditures is not an option, as
their constitutions, unlike the
federal constitution, require
balanced budgets. This leaves States
with three primary options:
draw down available reserves;
cut expenditures; or
raise taxes.
Drawing on reserves, of course,
requires a State to have reserves
and few, if any, have reserves
sufficient to weather a significant
downturn or recession. The two
remaining options are not always
viable either, particularly during a
recession.
Expenditure cuts and tax
increases pose a dilemma because
they may further slow a State’s
economy during an economic
downturn and, thereby, contribute
to an even greater reduction in tax
revenues. When a State cuts
spending, among other things,
employees will likely be furloughed
or laid off and have benefits
reduced, vendor contracts will
likely be canceled or restricted and
subsidies to educational
institutions and non-profits will
likely be reduced. As a result, the
private sector will likely have less
money to spend on salaries and
supplies, which in turn will result
in reduced spending and reduced
State tax revenues. If taxes are also
increased, individuals and
businesses will have even less funds
available to spend for
consumption. The result is a
vicious cycle that makes it unlikely
a State can overcome its budget
deficit without some ‘outside
benefit’ to break the cycle.
Gambling as a viable
alternative
Increasingly, gambling is being
perceived by States as an ‘outside
benefit’ to help close budget
deficits. According to the American
Gambling Association, 20 States as
13
US
of 31 December 2007, have
commercial casinos, racetrack
casinos (‘racinos’), or a
combination of both2. These
gambling activities generated, in
total, almost $40 billion in
revenues, resulting in tax revenues
to the 20 States in excess of $8
billion. By far, Nevada was the
largest beneficiary, with almost $13
billion in casino revenues and over
$1 billion in tax revenues. But,
States that have only recently
authorized casino-style gambling,
such as Pennsylvania and New
York, have had impressive
beginnings, generating tax
revenues of $461 million and $450
million, respectively. With such tax
revenues, it is little wonder that
States increasingly see gambling as
a budget deficit cure-all.
According to a recent Associated
Press article, at least 14 States are
currently considering proposals to
allow or expand slots or casinos3.
These include Texas, Kentucky,
New Hampshire, and New York,
which are all considering proposals
to allow the presence of video
gambling terminals at their
racetracks. Maryland and Kansas
recently passed legislation
authorizing slots gambling at
racetracks or at stand-alone
locations. A ballot proposal to
permit casino-style gambling in
Ohio has been submitted to the
Ohio Attorney General’s office. If
approved - and supporters of
gambling gather the necessary
signatures - Ohio residents will
vote on the issue this fall.
At some point, however, it seems
inevitable that the expansion of
casino-type gambling will suffer
from the law of diminishing
returns. Delaware is trying to avoid
being the poster child for this
impact. Delaware approved casinostyle wagering at the State’s three
racetracks in 1994, with the first
racino opening one year later. For
the next ten years, Delaware
14
operated with little competition
from surrounding States, except for
the casinos in Atlantic City, New
Jersey and racinos in West Virginia.
In 2004, Pennsylvania approved
slots to be operated at its racetracks
and stand-alone facilities. In
November 2006, Pennsylvania’s
first racino opened, with more
opening since then. In 2007, West
Virginia approved table games at
its existing racinos. In 2008,
Maryland approved racinos and
stand-alone slots casinos.
While the total impact on
Delaware of these actions by
nearby States is not known, there is
concern that Delaware will lose a
significant amount of tax revenues.
This is a realistic concern, given
that Delaware’s annual casino tax
revenues dropped $8 to $10
million when the initial
Pennsylvania racinos opened for
business. Delaware expects
Maryland’s recent authorization of
slots to be even more significant,
estimating a $70 million annual
loss in revenues once the slots
locations are fully operational. This
projected loss is significant to
Delaware’s budget woes because
revenues from the State lottery which includes traditional scratchoff games as well as slot machines
and other gambling devices at its
three racinos - account for 8% of
total budgeted revenues. Any
reduction in the amount of
gambling revenues received widens
the State’s budget deficit, currently
projected to be $700 million.
Delaware’s plan - sports
wagering
To counter the projected losses,
Delaware’s newly elected Governor,
Jack Markell, announced his
intention to seek reauthorization of
a sports lottery. The Governor
projects that his proposal, if
implemented, will result in $55
million in tax revenues in the first
year of operations alone.
Governor Markell is wagering
that Delaware can enjoy these
significant benefits because, as
explained more fully in the
following section, it is one of just
four States that can legally offer
sports wagering. Nevada is the
current mecca for legal sports
wagering in the US. While in 2008,
$2.58 billion was legally wagered in
Nevada, this amount represents
less than one percent of all sports
wagering in the US. The balance is
wagered with illegal gambling
operations. This is the key to
Governor Markell’s plan garnering a share of the sports
wagers illegally made. Delaware
would not directly compete with
Nevada’s sports books.
The National Gambling Impact
Study Commission estimates that
illegal sports wagers reach $380
billion annually and are placed
either through local sports book
operators or via the internet.
Delaware’s plan is to provide
another legal venue, located on the
heavily populated East Coast, for
wagers on sporting events. Even
with just a portion of the illegal
sports wagering market, the
amount of income to Delaware via
tax revenues and other revenues,
such as hotel accommodations and
food, is potentially significant.
Sports wagering also offers an
opportunity for Delaware to
differentiate its racinos and future
casinos from those in Pennsylvania
and Maryland, which offer only
slots, or West Virginia, which offers
slots and table games.
Delaware’s PASPA exemption
Delaware is one of only four States
exempt from PASPA’s prohibition
of State authorized sports
wagering. PASPA provides that:
‘It shall be unlawful for a
governmental entity to sponsor,
operate, advertise, or promote ... a
lottery, sweepstakes, or other
betting, gambling, or wagering
world online gambling may 2009
US
scheme based, directly or indirectly
... on one or more competitive
games in which amateur or
professional athletes participate, or
are intended to participate, or on
one or more performances of such
athletes in such games’4.
While PASPA sets forth a general
prohibition on sports wagering,
Congress, when it enacted PASPA,
recognized that certain States Delaware, Nevada, Oregon and
Montana - had already authorized
and established sports betting
games. Accordingly, in section
3704, Congress carved out
exemptions for State-run sports
lotteries, casino sports books then
in operation, parimutuel animal
racing and jai-alai. That is, the
PASPA prohibition does not apply
to ‘a lottery, sweepstakes, or other
betting, gambling, or wagering
scheme in operation in a State ... to
the extent that the scheme was
conducted by that State ... at any
time during the period beginning
January 1, 1976, and ending August
31, 1990’5. Congress included the
exemptions because:
‘The intent of the legislation is
not to interfere with existing laws,
operations, or revenue streams.
Therefore, it provides an
exemption for those sports
gambling operations which already
are permitted under State law. ...
All of the States which are
grandfathered by the bill have laws
authorizing some type of sports
betting scheme. Nevada has its
sports books, Oregon has a sports
lottery on football games, and
Delaware conducted sports lottery
in the past and still has a law on
the books. ... Montana also has
legalized certain forms of sports
betting. For years, Montana has
permitted sports pools and calcutta
pools. In 1991, they passed new
legislation that allows for fantasy
sports leagues and sports tabs
games. These are limited-stakes
sports wagering games played in
world online gambling may 2009
bingo parlors6’.
There is some dispute over the
scope of the PASPA exemptions,
which this article does not address.
However, at least on first blush, the
Delaware proposal, discussed in
more detail below, appears
consistent with what Delaware had
authorized pre-1991, given the
description of its authorized sports
wagering in PASPA’s Congressional
history:
‘Oregon and Delaware may
conduct sports lotteries on any
sport, because sports lotteries were
conducted by those States prior to
August 31, 1990. [PASPA’s
exemption] is not intended to
prevent Oregon or Delaware from
expanding their sports betting
schemes into other sports as long
as it was authorized by State law
prior to enactment of this Act. At
the same time, [PASPA’s
exemption] does not intend to
allow the expansion of sports
lotteries into head-to-head
betting7’.
Delaware’s sports wagering
plan
Delaware’s form of sports betting is
considered a sports lottery.
Delaware introduced its football
lottery ‘Scoreboard’ games in
September 1976. Scoreboard games
required bettors to make a
combination wager, i.e., (1) pick
the winners of selected National
Football League (NFL) games, and
(2) pick against the point spreads
of selected NFL games8. The type
of wager is known as a ‘parlay’
because bettors are required to
wager on more than one outcome
in a single bet. A parlay involves
more chance than is involved with
betting on the outcome of a single
sporting event.
Delaware is moving ahead with
its plan to offer sports wagering. As
announced in his budget address,
Governor Markell wants to make
Delaware the only State east of the
Mississippi River to have legal
sports betting - not only at the
three casinos currently operating in
the Delaware, but at up to
additional thirteen venues.
Governor Markell’s plan calls for
permitting up to three new casinos
that would offer slots and sports
wagering and up to ten non-casino
venues, such as sports bars and
restaurants, that would offer sports
betting. Governor Markell’s plan
would permit gamblers to place
parlay bets, i.e., trying to predict
the outcome of two or more games
at a time, but not straight wagers,
which are only available in Las
Vegas.
Governor Markell is urging quick
passage of legislation that
embodies his plan so that Delaware
can take full advantage of the NFL’s
2009 season, which begins in
September. It appears the Delaware
General Assembly is working
toward achieving the September
goal. On 8 April, the Delaware
House Gaming and Parimutuels
Committee voted 5-4 to release a
substitute bill for the sports
wagering legislation proposed by
Governor Markell. As released, the
substitute bill would only permit
the three existing casinos to offer
sports wagering, with no
competition from new casinos or
non-casino venues.
Conclusion
As more and more States struggle
with large budget deficits, the lure
of revenues generated from
gambling activities - as opposed to
tax increases - continues to grow.
Only a handful of States allowed
gambling of any kind - excluding
lotteries - when Congress passed
PASPA in 1992. By comparison, 37
States now offer some form of
casino-style gambling, whether
State authorized or Indian gaming.
This increased competition
among the States reduces the
amount of gambling revenues that
15
US
each State potentially will receive.
For example, Connecticut, New
Jersey, New York, Pennsylvania,
and West Virginia - five States that
either border Delaware or are less
than a day-trip away - permit some
form of casino gambling. Delaware
gaming officials estimate that
Pennsylvania, West Virginia, and
New Jersey siphon up to $70
million a year from the State. If
Governor Markell’s plan to
authorize sports wagering reverses
the current trend of diminishing
gambling revenues, the impact will
be felt in the neighboring States.
The Governor predicts that sports
wagering will not only stop the
outflow of gambling revenues from
Delaware to nearby States, but will
actually generate an inflow of $55
million.
At least one legislator in a
neighboring State appears to fear
the potentially detrimental impact
on gambling revenues that might
occur if Delaware (or any other
State) allows sports wagering. On
23 March, several plaintiffs in New
Jersey, including New Jersey State
Senator Raymond Lesniak, the
Interactive Media Entertainment &
Gaming Association, the New
Jersey Thoroughbred Horsemen’s
Association and the Thoroughbred
Breeders Association of New Jersey,
filed a complaint in a US District
Court asserting that PASPA
violates the US Constitution. The
success of that litigation could
dictate how other States perceive
the feasibility of offering sports
wagering in the future. As the US
recession deepens, the pressure on
States to increase revenues without
further taxing its residents will be
increased. This amplification might
lead to further attacks on PASPA
by States desiring to obtain
additional revenues by authorizing
some form of sports wagering.
Linda J. Shorey Partner
Robert A. Lawton Associate
Anthony R. Holtzman Associate
Ashley J. Camron Associate
K&L Gates LLP
linda.shorey@klgates.com
robert.lawton@klgates.com
anthony.holtzman@klgates.com
ashley.camron@klgates.com
1. 28 U.S.C. §§3701-3704.
2. See American Gaming Association,
‘2008 State of the States: The AGA
Survey of Casino Entertainment’,
available at
http://www.americangaming.org/survey/i
ndex.cfm
3. See ‘States Roll The Dice on Legal
Gambling’, available at
http://cbsnews.com/stories/2009/01/25/
business/main4752432.shtml
4. 28 U.S.C. §3702.
5. 28 U.S.C. §3704. Section 3704 also
provided a one-year window for States
that operated casino gaming during the
prior 10-year period to pass legislation
authorizing sports wagering within that
State. This provision was included to
benefit the casinos in Atlantic City;
however, the New Jersey legislature did
not authorize sports wagering before this
window closed on 1 January 1994.
6. 138 Cong. Rec. S7274 (daily ed. June
2, 1992) (statement of Sen. DeConcini).
7. 1992 U.S.C.C.A.N. 3553, 3561.
8. Delaware’s Scoreboard lottery games
only lasted one NFL season. During that
season, Delaware apparently posted an
unfavorable spread on an NFL game,
which resulted in heavy betting on
certain combinations of football games.
Delaware Lottery officials became
concerned with the heavy betting and
canceled the lottery for that weekend.
Although the lottery was later reinstated
and the prizes were paid, Delaware did
not authorize the Scoreboard games for
the following season.
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