Briefing Report: You Wanna Bet? Legalized Wagering on Sporting Events Gets a Second Look

Wednesday, February 6, 2013

Guilty!

So, you thought it was just a bit of innocent fun – “buying a box” in the office Super Bowl pool. Or filling out the brackets and placing a small wager on “March Madness.” It’s just a couple of bucks amongst friends, right? WRONG! You are in violation of both state and federal law and have participated in one of the world’s largest criminal enterprises – illegal gambling on the outcome of sporting events. Do not pass “Go;” do not collect $200. “Go directly to jail!”

Well, perhaps that is a bit hyperbolic. Kamala Harris and her Justice Department will not be “lowering the boom” on you for participating in your neighborhood homeowners’ association’s Super Bowl pool anytime soon. This minor-league sports wagering is too pervasive. But, betting on sports is bigger than just office pools. It is a multi-billion dollar international phenomenon and primarily, an all-cash business. The potential for abuse is profound.  Money spent on sports betting in California is a significant contributor to the underground, non-taxed economy. Local betting parlors and bookie operations flagrantly flout the law. Also, large-scale off-shore wagering sites accommodate those whose passions exceed that of the friendly bet.

Gamblers Gone Wild

How extensive is this illegal activity? Roll Call and CNBC have reported that wagering on professional football is in the $80 to $100 billion range, and in the $60 to $70 billion range on college football annually. It is suggested that the Super Bowl generates between $6 and $10 billion in wagers each year, and the FBI estimates that over $2.5 billion is bet on the National Collegiate Athletic Association’s (NCAA) basketball tournament known as “March Madness.”

Of particular note is the fact that the vast majority of these wagers are placed in unregulated and illegal markets with persons of questionable integrity. Less than $3 billion in sports wagers take place in legal environments. In Nevada, for instance, legal sports wagering represents less than one-percent of all sports betting nationwide. In 2011, $2.88 billion was legally wagered in Nevada’s sports books. The National Gambling Impact Study Commission (NGISC) estimated that illegal wagers are as much as $380 billion annually. According to the Nevada Gaming Control Board, approximately $93.9 million was wagered on the 2012 Super Bowl at legal sports books across the state. Of the total amount bet on the Super Bowl nationally, only about 1.5 percent is wagered legally by those over age 21 and physically present in the state of Nevada.1

So, What’s the Big Deal?

With billions of dollars wagered illegally each year in California on sporting events and, considering that many of the national professional sporting leagues, themselves, display the betting-lines, odds, and spreads on their own websites, why is this activity still illegal? In Europe, sports wagering is big business where it is legal, taxed, regulated and offered online.  Many states, including California, have considered or are seeking to make sports wagering legal – to bring it into the light of day and out of the shadows – not just to score new revenues for the state but, also, to provide consumer protection and dampen the inevitable criminal element involved in any huge, all-cash business.

Current federal law, the Professional and Amateur Sports Protection Act of 1992 (PASPA), prohibits states, other than Nevada, Montana, Delaware, and Oregon from authorizing sports wagering. Even if PASPA were to be changed to allow California to authorize a sports-wagering program, the state’s constitution may have to be amended by a vote of the people. The Penal Code has long established provisions banning "wagering pools" on "sporting events" which the State Supreme Court has "constitutionalized" in some of its rulings on other gambling issues.

The pre-existing sports wagering programs in Nevada, Montana, Oregon, and Delaware were grandfathered in by PASPA. Full-scale sports wagering in licensed sports books, regulated by the Nevada Gaming Commission and the state Gaming Control Board, have been legal in Nevada since 1949. The state lotteries in both Oregon and Delaware included sports lottery games based on beating the point-spreads of National Football League (NFL) games. Both Oregon’s and Delaware's football based lottery games have since been discontinued. Montana allows for certain non-banked sports pools, sports tab games, and fantasy sports leagues.

The Federal Problem

PASPA, also known as the "Bradley Act" for its author, Senator Bill Bradley of New Jersey, attempted to define the legal status of sports betting throughout the United States. Effectively, it outlawed sports betting nationwide. In addition to the exemptions for Nevada, Oregon, Montana, and Delaware, Congress provided a one-year window of opportunity from the effective date of PASPA for states that operated licensed casino gaming for the previous ten-year period to pass laws permitting sports wagering. The latter exception was crafted specifically for New Jersey. However, New Jersey failed to take advantage of this opportunity and carve out an exception for itself. Nonetheless, the fact that the law contained a carve-out was discriminatory against other states in its application and may have violated the Commerce Clause of the U.S. Constitution.

In 1992, when PASPA was being considered by Congress, the United States Department of Justice opposed it based in part upon its belief that the legislation was a substantial intrusion on states' rights. The Justice Department outlined three fundamental concerns in a letter to the Senate Judiciary Committee which was considering PASPA. First, the Department observed that Congress has historically left the decision on how to raise revenue to the states. Second, if PASPA were construed as anything more than a mere clarification of existing law, it would put into question issues of federalism. Third, the Department found provisions of the bill "particularly troubling" in that it permitted, not only the United States Attorney General to seek enforcement of PASPA through the use of civil injunctions but, also, amateur and professional sports organizations as well.

In direct contravention of the federal law, the voters of New Jersey in 2012 approved a non-binding resolution to provide for licensed sports books at Atlantic City casinos. This authorization sets up grounds for a court challenge to PASPA. The current U.S. Justice Department, defending federal law, has joined a lawsuit filed by college and professional sports leagues seeking to prevent New Jersey from implementing it.2

Proponents of New Jersey’s action have argued that Congress overstepped its bounds in banning states from authorizing sports wagering within their boundaries thereby violating the 10th Amendment. Furthermore, as noted above, PASPA may violate the Commerce Clause of the United States Constitution as it was discriminatory in how it applied its exemptions. The one year window of opportunity to adjust state laws in order to qualify for the exemption was not provided to all states, but rather only to those states with established casino gambling for at least the 10 years prior to its enactment – New Jersey. As such, California was never eligible under PASPA because our constitution prohibits casinos. Even if the constitution had been changed at the time, California was still ineligible because of the 10 years of prior established casino gambling requirement in PASPA.

The California Question

Article IV, Section 19 of the California Constitution specifies that, “The Legislature has no power to authorize, and shall prohibit, casinos of the type currently operating in Nevada and New Jersey.” Furthermore, Penal Code Sections 330-339 prohibit betting pools or placing a bet or wager on the result of any contest or event, including a sporting event.

In 1998, the California electorate passed Proposition 5, also called the “Tribal-State Gaming Compacts Initiative.” This statutory initiative authorized the establishment of casino gambling on tribal lands. The California Supreme Court heard a challenge to Prop. 5 in Hotel Employees & Restaurant Employees International Union v Davis (1999) 21 Cal. 4th 585 where it found that, “[A] casino of ‘the type operating in Nevada and New Jersey may be understood, with reasonable specificity, as one or more buildings, rooms, or facilities, whether separate or connected, that offer gambling activities including those statutorily prohibited in California…”  The Court, therefore, interpreted Section 19 to mean that the Legislature has no power to authorize casinos which offer gambling activities that are statutorily prohibited in California. Thus, if a gambling activity is prohibited by California Statute, it is also prohibited under Article IV, Section 19, Subdivision (e) of the California Constitution. The Court, in fact, stated that, "[T]he available legislative history suggests that Section 19(e)…was designed precisely, to elevate statutory prohibitions on a set of gambling activities."

Ultimately, should the desire exist to authorize sports wagering, the California courts might need to decide whether a constitutional change will be needed. It must be noted, however, that in the past, the State Lottery, wagering on horse racing, and charitable bingo have all required constitutional changes in order to be legal.

Wagering on the Future

A bill seeking to authorize sports wagering in California passed the Senate last session but failed to make it out of the Assembly. SB 1390 (Wright) sought to legalize wagering on professional and collegiate sports or athletic events in California by licensing California card-clubs, horse racing tracks, satellite wagering facilities, and tribal casinos to offer sports betting within their facilities. Authorizing sports wagering at California's horse racing tracks and satellite wagering facilities on fair grounds, card clubs, and Tribal casinos, for instance, could improve the “turn”3 and bring more people into these facilities on slow business days. Such a plan might provide the vital financial help to the racing and fair industries which they have been seeking desperately. It could stabilize racing, an important agricultural industry that has been suffering decline over the last two decades. It is likely that a similar measure will be introduced this session.

As the court challenge to the federal prohibition proceeds, legalizing sports wagering in California could give California standing in any such case. Furthermore, in January, 2012, federal legislation was introduced to abolish the federal ban on intra-state sports wagering. House Resolution 3797, the “Sports Gaming Opportunity Act of 2012,” by Representative Frank LoBiondo (NJ), seeks to amend PASPA to allow all states a new window of opportunity to approve and establish sports betting within their borders. This federal legislation, along with a federal court challenge, could put California in the “driver’s seat” with regards to sports wagering should the state seek to authorize it.

But the challenges are still great. HR 3797 has not moved since its introduction last year. The major professional sports leagues and the NCAA oppose lifting the ban. They believe that rampant wagering on sports encourages cheating. Some participants may yield to the temptation to throw games or shave points. Many would argue that the opposite is true – that a legalized, regulated, and policed wagering environment will reduce cheating as sports-fixing schemes are, by their nature, done through illegal means.

All this may be moot anyway. No matter what the state does, unless federal law is changed or overturned, your little Super Bowl bet remains a crime…

For more information on this report or other Governmental Organization issues, contact Richard Paul, Senate Republican Office of Policy at 916/651-1501.


[1] American Gaming Association; http://www.americangaming.org/industry-resources/research/fact-sheets/sports-wagering
[2] Reuters, January 22, 2013
[3] The “turn” is the number of wagering opportunities offered – to “turn” the money.