worldonline gamblinglawreport FEATURED ARTICLE 04/09

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Head Office UK Cecile Park Publishing Limited, 17 The Timber Yard, Drysdale Street, London N1 6ND tel +44 (0)20 7012 1380 fax +44 (0)20 7729 6093 [email protected] www.e-comlaw.com US States utilise exemption from ban has decided to utilise an The current economic crisis is running a deficit or borrowing exemption from a ban preventing forcing States in the US to money to cover operating scramble to find alternative expenditures is not an option, as US States from authorising sports revenue streams to cover ever their constitutions, unlike the wagering to launch a sports lottery. increasing budget deficits. With tax federal constitution, require Linda J. Shorey, Robert A. Lawton, revenues falling significantly, the balanced budgets. This leaves States Anthony R. Holtzman and Ashley J. States are trying to find ways to with three primary options: increase revenues to avoid deep G draw down available reserves; Cameron, of K&L Gates LLP, cuts to state-supported programs G cut expenditures; or examine the plans and how they without increasing taxes on G raise taxes. illustrate that States are willing to individuals. One popular potential Drawing on reserves, of course, consider regulating forms of source for new revenues is the requires a State to have reserves gambling in order to meet State gambling industry. This article will and few, if any, have reserves provide a brief overview of the sufficient to weather a significant budget shortfalls. deficit problem, the perceived role downturn or recession. The two of the gambling industry in fixing remaining options are not always it, and Delaware’s related proposal viable either, particularly during a to take advantage of its exemption recession. from the Professional and Amateur Expenditure cuts and tax Sports Protection Act (PASPA) 1, a increases pose a dilemma because federal law, enacted in 1992, that they may further slow a State’s prohibits States from authorizing economy during an economic sports wagering. downturn and, thereby, contribute to an even greater reduction in tax Budget shortfalls revenues. When a State cuts According to the Center on Budget spending, among other things, and Policy Priorities, at least 47 employees will likely be furloughed States faced or are facing budget or laid off and have benefits shortfalls for the current and reduced, vendor contracts will upcoming fiscal years. The likely be canceled or restricted and combined budget shortfall for subsidies to educational these States for the remainder of institutions and non-profits will this fiscal year and the following likely be reduced. As a result, the two fiscal years is estimated to total private sector will likely have less more than $350 billion. The money to spend on salaries and amount of shortfall by State, in supplies, which in turn will result certain cases, is quite significant, in reduced spending and reduced e.g., for fiscal year 2009, California State tax revenues. If taxes are also is projected to have a deficit of increased, individuals and $13.7 billion, New Jersey $3.6 businesses will have even less funds billion, Massachusetts $2.4 billion, available to spend for Florida $2.3 billion, North consumption. The result is a Carolina $2.0 billion, and New vicious cycle that makes it unlikely York $1.7 billion. The projected a State can overcome its budget deficits grow substantially for fiscal deficit without some ‘outside year 2010, with California benefit’ to break the cycle. projected to have a deficit of $25.9 billion, Massachusetts $3.1 billion, Gambling as a viable Florida $5.8 billion, North alternative Carolina $3.3 billion, and New Increasingly, gambling is being York $13.7 billion. perceived by States as an ‘outside States are somewhat limited in benefit’ to help close budget how they can react to a budget deficits. According to the American shortfall. For the vast majority, Gambling Association, 20 States as world online gambling may 2009 13 US

of 31 December 2007, have operated with little competition Governor Markell is wagering commercial casinos, racetrack from surrounding States, except for that Delaware can enjoy these casinos (‘’), or a the casinos in Atlantic City, New significant benefits because, as combination of both 2. These Jersey and racinos in West Virginia. explained more fully in the gambling activities generated, in In 2004, Pennsylvania approved following section, it is one of just total, almost $40 billion in slots to be operated at its racetracks four States that can legally offer revenues, resulting in tax revenues and stand-alone facilities. In sports wagering. is the to the 20 States in excess of $8 November 2006, Pennsylvania’s current mecca for legal sports billion. By far, Nevada was the first opened, with more wagering in the US. While in 2008, largest beneficiary, with almost $13 opening since then. In 2007, West $2.58 billion was legally wagered in billion in casino revenues and over Virginia approved table games at Nevada, this amount represents $1 billion in tax revenues. But, its existing racinos. In 2008, less than one percent of all sports States that have only recently Maryland approved racinos and wagering in the US. The balance is authorized casino-style gambling, stand-alone slots casinos. wagered with illegal gambling such as Pennsylvania and New While the total impact on operations. This is the key to York, have had impressive Delaware of these actions by Governor Markell’s plan - beginnings, generating tax nearby States is not known, there is garnering a share of the sports revenues of $461 million and $450 concern that Delaware will lose a wagers illegally made. Delaware million, respectively. With such tax significant amount of tax revenues. would not directly compete with revenues, it is little wonder that This is a realistic concern, given Nevada’s sports books. States increasingly see gambling as that Delaware’s annual casino tax The National Gambling Impact a budget deficit cure-all. revenues dropped $8 to $10 Study Commission estimates that According to a recent Associated million when the initial illegal sports wagers reach $380 Press article, at least 14 States are Pennsylvania racinos opened for billion annually and are placed currently considering proposals to business. Delaware expects either through local sports book allow or expand slots or casinos 3. Maryland’s recent authorization of operators or via the internet. These include Texas, Kentucky, slots to be even more significant, Delaware’s plan is to provide New Hampshire, and New York, estimating a $70 million annual another legal venue, located on the which are all considering proposals loss in revenues once the slots heavily populated East Coast, for to allow the presence of video locations are fully operational. This wagers on sporting events. Even gambling terminals at their projected loss is significant to with just a portion of the illegal racetracks. Maryland and Kansas Delaware’s budget woes because sports wagering market, the recently passed legislation revenues from the State lottery - amount of income to Delaware via authorizing slots gambling at which includes traditional scratch- tax revenues and other revenues, racetracks or at stand-alone off games as well as slot machines such as hotel accommodations and locations. A ballot proposal to and other gambling devices at its food, is potentially significant. permit casino-style gambling in three racinos - account for 8% of Sports wagering also offers an Ohio has been submitted to the total budgeted revenues. Any opportunity for Delaware to Ohio Attorney General’s office. If reduction in the amount of differentiate its racinos and future approved - and supporters of gambling revenues received widens casinos from those in Pennsylvania gambling gather the necessary the State’s budget deficit, currently and Maryland, which offer only signatures - Ohio residents will projected to be $700 million. slots, or West Virginia, which offers vote on the issue this fall. slots and table games. At some point, however, it seems Delaware’s plan - sports inevitable that the expansion of wagering Delaware’s PASPA exemption casino-type gambling will suffer To counter the projected losses, Delaware is one of only four States from the law of diminishing Delaware’s newly elected Governor, exempt from PASPA’s prohibition returns. Delaware is trying to avoid Jack Markell, announced his of State authorized sports being the poster child for this intention to seek reauthorization of wagering. PASPA provides that: impact. Delaware approved casino- a sports lottery. The Governor ‘It shall be unlawful for a style wagering at the State’s three projects that his proposal, if governmental entity to sponsor, racetracks in 1994, with the first implemented, will result in $55 operate, advertise, or promote ... a racino opening one year later. For million in tax revenues in the first lottery, sweepstakes, or other the next ten years, Delaware year of operations alone. betting, gambling, or wagering

14 world online gambling may 2009 US

scheme based, directly or indirectly bingo parlors 6’. Mississippi River to have legal ... on one or more competitive There is some dispute over the sports betting - not only at the games in which amateur or scope of the PASPA exemptions, three casinos currently operating in professional athletes participate, or which this article does not address. the Delaware, but at up to are intended to participate, or on However, at least on first blush, the additional thirteen venues. one or more performances of such Delaware proposal, discussed in Governor Markell’s plan calls for athletes in such games’ 4. more detail below, appears permitting up to three new casinos While PASPA sets forth a general consistent with what Delaware had that would offer slots and sports prohibition on sports wagering, authorized pre-1991, given the wagering and up to ten non-casino Congress, when it enacted PASPA, description of its authorized sports venues, such as sports bars and recognized that certain States - wagering in PASPA’s Congressional restaurants, that would offer sports Delaware, Nevada, Oregon and history: betting. Governor Markell’s plan Montana - had already authorized ‘Oregon and Delaware may would permit gamblers to place and established sports betting conduct sports lotteries on any parlay bets, i.e., trying to predict games. Accordingly, in section sport, because sports lotteries were the outcome of two or more games 3704, Congress carved out conducted by those States prior to at a time, but not straight wagers, exemptions for State-run sports August 31, 1990. [PASPA’s which are only available in Las lotteries, casino sports books then exemption] is not intended to Vegas. in operation, parimutuel animal prevent Oregon or Delaware from Governor Markell is urging quick racing and jai-alai. That is, the expanding their sports betting passage of legislation that PASPA prohibition does not apply schemes into other sports as long embodies his plan so that Delaware to ‘a lottery, sweepstakes, or other as it was authorized by State law can take full advantage of the NFL’s betting, gambling, or wagering prior to enactment of this Act. At 2009 season, which begins in scheme in operation in a State ... to the same time, [PASPA’s September. It appears the Delaware the extent that the scheme was exemption] does not intend to General Assembly is working conducted by that State ... at any allow the expansion of sports toward achieving the September time during the period beginning lotteries into head-to-head goal. On 8 April, the Delaware January 1, 1976, and ending August betting 7’. House Gaming and Parimutuels 31, 1990’ 5. Congress included the Committee voted 5-4 to release a exemptions because: Delaware’s sports wagering substitute bill for the sports ‘The intent of the legislation is plan wagering legislation proposed by not to interfere with existing laws, Delaware’s form of sports betting is Governor Markell. As released, the operations, or revenue streams. considered a sports lottery. substitute bill would only permit Therefore, it provides an Delaware introduced its football the three existing casinos to offer exemption for those sports lottery ‘Scoreboard’ games in sports wagering, with no gambling operations which already September 1976. Scoreboard games competition from new casinos or are permitted under State law. ... required bettors to make a non-casino venues. All of the States which are combination wager, i.e., (1) pick grandfathered by the bill have laws the winners of selected National Conclusion authorizing some type of sports Football League (NFL) games, and As more and more States struggle betting scheme. Nevada has its (2) pick against the point spreads with large budget deficits, the lure sports books, Oregon has a sports of selected NFL games 8. The type of revenues generated from lottery on football games, and of wager is known as a ‘parlay’ gambling activities - as opposed to Delaware conducted sports lottery because bettors are required to tax increases - continues to grow. in the past and still has a law on wager on more than one outcome Only a handful of States allowed the books. ... Montana also has in a single bet. A parlay involves gambling of any kind - excluding legalized certain forms of sports more chance than is involved with lotteries - when Congress passed betting. For years, Montana has betting on the outcome of a single PASPA in 1992. By comparison, 37 permitted sports pools and calcutta sporting event. States now offer some form of pools. In 1991, they passed new Delaware is moving ahead with casino-style gambling, whether legislation that allows for fantasy its plan to offer sports wagering. As State authorized or Indian gaming. sports leagues and sports tabs announced in his budget address, This increased competition games. These are limited-stakes Governor Markell wants to make among the States reduces the sports wagering games played in Delaware the only State east of the amount of gambling revenues that world online gambling may 2009 15 US

each State potentially will receive. lead to further attacks on PASPA For example, Connecticut, New by States desiring to obtain Jersey, New York, Pennsylvania, additional revenues by authorizing and West Virginia - five States that some form of sports wagering. either border Delaware or are less than a day-trip away - permit some Linda J. Shorey Partner Robert A. Lawton Associate form of casino gambling. Delaware Anthony R. Holtzman Associate gaming officials estimate that Ashley J. Camron Associate Pennsylvania, West Virginia, and K&L Gates LLP New Jersey siphon up to $70 [email protected] [email protected] million a year from the State. If [email protected] Governor Markell’s plan to [email protected] authorize sports wagering reverses 1. 28 U.S.C. §§3701-3704. the current trend of diminishing 2. See American Gaming Association, gambling revenues, the impact will ‘2008 State of the States: The AGA be felt in the neighboring States. Survey of Casino Entertainment’, The Governor predicts that sports available at http://www.americangaming.org/survey/i wagering will not only stop the ndex.cfm outflow of gambling revenues from 3. See ‘States Roll The Dice on Legal Delaware to nearby States, but will Gambling’, available at actually generate an inflow of $55 http://cbsnews.com/stories/2009/01/25/ business/main4752432.shtml million. 4. 28 U.S.C. §3702. At least one legislator in a 5. 28 U.S.C. §3704. Section 3704 also neighboring State appears to fear provided a one-year window for States that operated casino gaming during the the potentially detrimental impact prior 10-year period to pass legislation on gambling revenues that might authorizing sports wagering within that occur if Delaware (or any other State. This provision was included to State) allows sports wagering. On benefit the casinos in Atlantic City; however, the New Jersey legislature did 23 March, several plaintiffs in New not authorize sports wagering before this Jersey, including New Jersey State window closed on 1 January 1994. Senator Raymond Lesniak, the 6. 138 Cong. Rec. S7274 (daily ed. June 2, 1992) (statement of Sen. DeConcini). Interactive Media Entertainment & 7. 1992 U.S.C.C.A.N. 3553, 3561. Gaming Association, the New 8. Delaware’s Scoreboard lottery games Jersey Thoroughbred Horsemen’s only lasted one NFL season. During that Association and the Thoroughbred season, Delaware apparently posted an unfavorable spread on an NFL game, Breeders Association of New Jersey, which resulted in heavy betting on filed a complaint in a US District certain combinations of football games. Court asserting that PASPA Delaware Lottery officials became violates the US Constitution. The concerned with the heavy betting and canceled the lottery for that weekend. success of that litigation could Although the lottery was later reinstated dictate how other States perceive and the prizes were paid, Delaware did the feasibility of offering sports not authorize the Scoreboard games for wagering in the future. As the US the following season. recession deepens, the pressure on States to increase revenues without further taxing its residents will be increased. This amplification might

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