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March 5, 2004 2 Video lottery basics Betting on Video Lottery VLTs at racetracks in 2 other states Terminals to Raise Revenue Chart: Slots, video 3 gaming, and VLTs in the The issue of whether Texas should authorize video lottery terminals (VLTs) U.S.A. at pari-mutuel racetracks or other locations is being discussed in advance of an anticipated special legislative session in 2004 dedicated to revising the state’s Proposals to authorize school finance system. Supporters of state VLT authorization argue that the 4 VLTs in Texas electronic gaming machines could generate significant new revenue for public education without raising taxes and would spur economic activity without Box: Pari-mutuel racing in Texas expanding the footprint of gambling in Texas. Opponents of VLT authorization 5 counter that the machines would not raise significant revenue, would hurt the Box: What VLTs might economy, and would expand gambling with negative consequences for the state. 6 mean for Native Additional debate centers on where VLTs should be located and who should American gambling regulate them. Chart: Native American In 2003, Comptroller Carole Keeton Strayhorn raised the issue of authorizing 7 gaming in other states VLTs at Texas racetracks in her office’s e-Texas report, Limited Government, Unlimited Opportunity. The Comptroller’s Office and the Texas Lottery Debate: Revenue Commission (TLC) estimated that VLTs could bring between $1.5 billion and 8 $1.8 billion in additional revenue in fiscal 2006-07. During the 78th Legislature’s Box: Lottery revenue regular session, legislators introduced two bills that would have authorized the 8 and public education operation of VLTs in Texas, both of which died in committee. In December 2003, the House Licensing and Administrative Procedures Committee held a Debate: Economic hearing on the issue, and proposals to raise revenue through the operation of 9 growth and tourism VLTs have figured prominently in plans to overhaul the state’s school finance system. The governor says that all funding options, including VLT gaming, are Debate: Expansion of 9 gambling on the table. Debate: Social costs Those advocating the authorization of VLTs would have to surmount certain 10 constitutional and statutory hurdles. In September 2003, Attorney General Greg Debate: Ownership and Abbott issued an opinion that a constitutional amendment would be necessary to location legalize the machines because they are not among the specific exceptions to sec. 11 47(e) of the Texas Constitution, which otherwise prohibits lotteries. In addition, Debate: Oversight and provisions in the Government Code and Penal Code outlaw certain types of 12 regulation gambling and gambling machines. Number 78-14 Page 2 House Research Organization Authorizing the operation of VLTs in Texas also owners, and providers of the central computer system. would raise questions about whether it would allow for States generally get about half of the net income, which expanded gambling operations by Texas’ three Native averages about $200 to $250 per terminal per day, American tribes (see What VLTs might mean for Native- according to the comptroller. American gambling page 9). Currently, the Kickapoo Tribe is the only tribe in Texas that operates a gaming facility. Current law. Art. 3, sec. 47(a) of the Texas The Alabama-Coushatta and Tigua tribes closed their Constitution requires the Legislature to prohibit lotteries gaming facilities in 2002 when federal courts ruled in favor and gift enterprises. This section was amended and of the state after it sued to force the tribes to close their subsection (e) added in 1991 to permit the state lottery. In casinos. 1994, Attorney General Dan Morales ruled in opinion DM- 302 that without a constitutional amendment, the Legislature could not permit slot machines to be operated, Video lottery basics nor could the state operate them itself through contractors because the games were constitutionally prohibited VLTs are electronic games of chance played on video lotteries. In Opinion GA-0103 (September 23, 2003), terminals. Visually and internally they are similar — and Attorney General Abbott concluded that when voters sometimes identical — to slot machines. Most VLTs are approved the addition of subsection (e) to art. 47 of the video-based, overseen by state lottery agencies, and can be Constitution, they approved a “state lottery” based on the monitored, controlled, and audited by a central computer common understanding of the term at that time; therefore, system, which can be similar to the system that links TLC the Constitution does not allow the Legislature to authorize to individual lotto terminals throughout the state. By the state to operate video lottery terminals. contrast, slot machines can be video- or reel-based, may be overseen by other regulatory agencies, and may be In addition to these constitutional restrictions, the independent of a central control system. VLTs accept Government and Penal codes prohibit certain types of money or credits in return for a play of the game, and gambling. Government Code sec. 466.024(b) requires TLC players usually are rewarded with a slip of paper that can to adopt rules prohibiting any game that uses a video lottery be cashed out, redeemed for prizes, or used to play more machine. Video lottery machine is defined as any electronic games. VLT wagers usually range between 5 cents and $10 video game machine that, upon insertion of cash, plays or per play, depending on the type of machine. simulates a video game — including poker, keno, and blackjack — in which the winning player receives cash, The games played on VLTs may or may not be similar coins, tokens, or free games or credits that can be redeemed to a state’s lottery games. For example, playing a VLT for cash, coins, or tokens. Penal Code, ch. 47 prohibits most could be similar to playing a scratch-off lottery game in forms of gambling, including possession or use of which players try to purchase a predetermined winning gambling-device versions of a lottery. ticket that has been distributed randomly. The VLT equivalent of this system, used in New York, is called a “central determination win” in which the video lottery’s VLTs at racetracks in other states central computer system, rather than the machine itself, randomly chooses which plays are winners. Other types of Eight states allow video lottery terminals, video VLTs more closely resemble traditional slot machines, with gaming, or slot machines at racetracks, according to the winners chosen by random number generators in the National Council of State Legislatures (NCSL). Figure 1 individual machines. Some VLT games are purely games (opposite page) lists 19 states and their mix of slot of chance, while others are video versions of card games machines, video gaming, and video lottery terminals. Four such as poker and blackjack. states — Delaware, New Mexico, New York, and Rhode Island — allow VLTs only at racetracks, according to the About 90 percent of each dollar wagered on VLTs is NCSL. New York began its operations in January 2004, returned to bettors as prizes. The rest — called net income and as of the beginning of February had VLTs deployed at — is divided among the state, VLT venues, machine two racetracks. House Research Organization Page 3 Figure 1: Slots, video gaming, and video lottery terminals in the U.S.A.* State Casinos Racetracks Other venues** Colorado A Delaware C Illinois B Indiana B Iowa BC Louisiana A, B C D Maryland D Michigan A Mississippi B Missouri B Montana D Nevada AD New Jersey A New Mexico C New York C Oregon CD Rhode Island C South Dakota AD West Virginia CD A Land-based casino slots and video gaming B Riverboat casino slots and video gaming C Racetrack slots, video gaming, and/or video lottery terminals D Non-casino, non-track slots, video gaming, and/or video lottery terminals * does not include oceangoing cruise ships or Indian reservations ** includes bars, taverns, and truckstops Source: National Conference of State Legislatures Page 4 House Research Organization In her April 2003 e-Texas report, the comptroller to providing two years of public community or technical detailed state revenue from VLTs in three states: Delaware, college to Texas high school graduates, increased education Rhode Island, and West Virginia. In fiscal 2002, West spending on items such as health insurance and pay raises Virginia earned $263 million from its 7,021 VLTs, for teachers, and reducing the limit on annual residential Delaware earned about $195 million from 5,430 machines, property tax appraisal increases from 10 percent to 5 and Rhode Island earned $149 million from 2,492 VLTs. percent. Models for VLT ownership and operations. In Two bills introduced during the regular session of the general, there are three models for ownership and operation 78th Legislature would have allowed the operation of VLTs of state-authorized VLTs: the owner-operator model; the at Texas pari-mutuel racetracks. HB 2439 by Flores would hybrid owner-operator model; and the state-operator model. have authorized TLC to conduct video lottery games at state-licensed pari-mutuel tracks that obtained a video Under the owner-operator model, the holder of the lottery retailer’s license. The bill would have applied to state-issued VLT license — a racetrack, for instance — tracks in existence on January 1, 2003, and would have would make the necessary capital investments, such as required that VLTs be available for play whether or not a building or renovating the area to house the VLTs. The race was in progress. HB 2439 was left pending in the owner-operator also would be responsible for leasing or House Licensing and Administrative Procedures purchasing the VLTs and for operating the machines. The Committee. state regulatory agency would obtain the central computer system that links all the VLTs and monitor each machine.