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By Byron La Fleur
With the Supreme Court punting the right to legalize sports betting to the states, everyone is in a frenzy. But how do lotteries get a piece of the sports betting pie, and will it end up being worth all the trouble?
The Supreme Court of the United States (SCOTUS) has repealed the Professional and Amateur Sports Protection Act of 1992 (PASPA). In turn, this allows states to legalize sports betting if they so choose. But the reason for the repeal of PASPA has very little, if anything, to do with gambling.
In fact, the ramifications of the PASPA repeal extend well past betting. It could affect marijuana laws, gun control laws, sanctuary cities and even women’s health rights. “It is the most important federalism case the Supreme Court will have heard in many, many years,” said attorney Daniel Wallach, a Fort Lauderdale lawyer who specializes in gaming and sports law, before the case was decided. “This is less about sports betting and much more about the tension between federal sovereignty and state sovereignty.”
SCOTUS’s decision casts a bigger shadow over American politics than just the expansion of gaming because it was determined to be a direct command from the federal government to the states. PASPA didn’t criminalize sport betting. It prevented states from being able to pass legislation regulating sports betting.
During oral arguments, Justice Anthony Kennedy explained why this is concerning: “… the citizens of the State of New Jersey are bound to obey a law that the state does not want but that the federal government compels the state to have… [It] blurs political accountability. The citizen doesn’t know is this coming from the federal government, is this coming from the state government. That’s precisely what federalism is designed to prevent.”
The court’s opinion is rooted in the Tenth Amendment. The Federal government only possesses powers enumerated by the U.S. Constitution, with all others reserved for the states or people. In the opinion itself, the majority stated: It “unequivocally dictates what a state legislature may and may not do.”
“It is as if federal officers were installed in state legislative chambers and were armed with the authority to stop legislators from voting on any offending proposals. A more direct affront to state sovereignty is not easy to imagine,” Justice Samuel Alito Jr. concluded.
But the federal government still has a lot of potential power regarding sports betting. SCOTUS’s decision states that Congress can regulate sports betting directly if it so chooses. It can even prevent it outright.
GOP Senator Orrin Hatch, who coauthored PASPA, is planning to introduce new legislation regulating sports betting. “At stake here is the very integrity of sports. That’s why I plan to introduce legislation in the coming weeks to help protect honesty and principle in the athletic arena,” Hatch said in a statement.
The nature of the regulations by Hatch, who is retiring after this Congress, is unknown. He certainly has powerful support if his intent is to regulate rather than outright ban. The major sports leagues, including the NFL and NBA, have called on the U.S. Congress to establish regulations. Collectively, they’ve spent millions in lobbying efforts in the past.
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The repeal of PASPA, however, did not result in sports betting being legalized across the country. New Jersey would be allowed to begin sports betting immediately. A few other states that have enacted legislation that triggers with the repeal of PASPA. Delaware, Montana, Nevada, and Oregon have grandfathered sports betting laws. They should be able to expand their operations without additional legislation.
Most state legislatures will need to do something more, although what that is varies. For some states, it will require a new law. While that would be tough to overcome for most gambling expansion measures, the overwhelming popularity of sports betting suggests it might have an easier path. Nineteen bills have already been introduced in state legislatures. Add in the lobbying support from sports leagues and gambling entities with the alluring possibility of increasing state revenue without raising taxes, and many more states could enact legislation by 2020.
Other states have a tougher hurdle because they have a constitutional provision preventing any further expansion of gambling. California is in such a predicament. The California Constitution prohibits various gaming activities within the state, with a few notable exceptions. In 2017, Representative Adam Gray introduced ACA 18, which needs “two-thirds of the membership of each house concurring” to amend the constitution in order to allow sports betting.
In 2012, the California legislature passed Bill 142 which amended the Lottery Act to “maximize the amount of funding allocated to public education.” But a super majority is a near impossible encumbrance to overcome, and the legalization of sports betting is not as easy to defend to constituents as supporting education.
Rhode Island has a different barrier it needs to overcome. In 1994, voters decided that no new types of gambling can take effect unless a majority of voters, both statewide and in the affected municipalities, approve. However, whether sports betting is a new form of gambling remains to be seen. In 2012 and 2016, Rhode Island voters approved Class III gaming. Rhode Island Lottery Executive Director Gerald Aubin believes sports betting falls under this category.
Returning to a national perspective, for states that decide to legalize sports betting, there is also a question of which entities will get to offer sports betting. Private businesses will fight tooth and nail to get a license for themselves while preventing other organizations from getting one. With billions of dollars on the table, millions will be spent on lobbying efforts.
Philip Bowcock, CEO of William Hill, has stated that the international bookmaker spent millions of dollars preparing for the repeal of PASPA. “If the U.S. Supreme Court votes in favor of repealing PASPA, then the U.S. clearly has to be the priority,” Bowcock said in an article by the Legal Sports Report.
Lotteries should be worried that private operators will spend enough to suppress their voice. Those concerns are validated with only 3 of the 19 pending sports betting bills referencing lottery.
But lotteries are certainly capable of running sports betting operations. “As states begin to consider sports wagering, the lottery industry is ready to help establish the real-world network that would be involved if called upon to do so,” said Charles McIntyre, the President of NASPL and Executive Director of the New Hampshire Lottery.
The Lotteries’ Role
If lotteries do take part, they will need to quickly adapt to the concept of risk management. Unlike traditional lottery games, sports betting has risk for the players and the operators.
A betting line consists of a point spread, a money line and/or an over/under. For instance, when two NFL teams play, one team is usually considered better. To adjust for this, sports books give incentives for people to pick the weaker team so that they have an even balance of people voting for both teams. If too many people pick one team and that team wins, the sports book will have to spend their own capital to pay all the winners. This can happen in several ways—for instance if the lines are not set properly or not adjusted after an injury mid-week.
Multiple lotteries, like Atlantic Lottery Corp., successfully manage their own risk for their retail betting operations. If a line becomes unbalanced, they monitor it as best they can and cancel taking additional bets if necessary.
The difficulty of risk management exponentially increases when sports betting is offered online. More savvy sport bettors (punters) expect more complicated features, such as live betting options that allow bets during the game.
In Denmark, Danske Spil’s new YouBet platform even allows for complicated transactions, like a marketplace that allows players to sell their bets mid-game to other players. The more bets a sports book offers, the more risk that needs to be managed. However, with modern algorithms and professional risk managers, the chance of losing money is improbable.
Risk management isn’t the only thing lotteries will have to acclimate themselves to. Traditional lottery game payouts hover around 50% for draw games and 68% for instant games. Depending on the jurisdiction, sports betting payouts range from 60% to 97%. If lotteries implement low payouts, it creates an environment for black market sports betting sites to proliferate. To remain competitive with other online illegal market competitors, payouts need to be higher than what most lotteries and their legislatures are comfortable with.
To offer a competitive product, U.S. lotteries will also need to modernize their sales channels. Steve Wagner, IT Director for the Connecticut Lottery, in testimony to his legislature to support sports betting, stated: “We would also like to leverage technology. The sports betting world is fluid, point spreads and odds can change frequently, and the sheer number of games for some sports makes it very difficult to get the most current data to the players. To truly implement sports betting in the best possible way would require the ability to place bets via the internet and mobile devices. This would allow the lottery to update lines in real time and give each customer the ability to view all games and options at their leisure.”
Connecticut Gov. Dannel Malloy met with legislative leaders to discuss the evolution of gambling in the state. He left the door open for internet wagering. “I need to know whether it’s the intention to include in-state, on-line gaming, because it would make sense to negotiate those things in one negotiation as opposed to two negotiations,” Malloy said for the Connecticut Mirror. “And I think, quite frankly, doing them together makes it more like we would reach agreements with the two tribal nations.”
However, internet sports betting is a potential landmine. While the Wire Act has been dormant for lotteries selling their traditional products online, it will not remain so for sports betting. It has clear provisions prohibiting the transmission of sports betting information across state borders. In the past, the Department of Justice (DOJ) has held that no telecommunications network exists solely in one state. Even a simple phone call between neighbors can first bounce to satellite, towers, or nodes in another state. Any sports betting product sold online would therefore violate the Wire Act. While it is true Nevada has internet sports betting, that does not mean the DOJ cannot challenge it or any other state that tries to adopt similar measures.
The problem with trying to offer a highly competitive product that would force out the illegal operators is that it is a losing proposition. The lotteries’ enormous profit margin is due to their legislatively-protected monopoly. While lottery vendors are prepared to equip the lotteries with industry-leading tools, even a semi-competitive environment, such as a regulated license market, will drastically lower the profits that can be returned to good causes.
Consider the French sports betting market. While the national lottery, FDJ, has a sports betting monopoly for all brick and mortar stores. But internet was opened in 2010 to companies who purchased a license. It is a competitive sports betting market regulated by the French independent administrative authority, ARJEL. In FY15-16, ARJEL reported that sports betting internet wagers totaled $1.6 billion among the 11 licensees. Profits to the government, however, dwindled to $163 million. That results in a per capita of $2.47.
In comparison to the private French companies, the Delaware Lottery has only been allowed to offer NFL parlays for the past eight years (2010, the same of the online French market) at retail and casino locations. This is a significant handicap. Being limited to the NFL means they can only accept bets for roughly 20 weeks. The parlay rule prevents people from betting on the Super Bowl. The lottery also doesn’t exist in a complete monopolistic environment, as illegal offshore betting companies exist online. Yet even with these factors, sales were $39.4 million in FY15-16. The profits to the government were $5.3 million. That results in a per capita of $5.47, which is $3 higher than the highly competitive French market. (Note: FY15-16 was chosen instead of FY16-17 because NFL sports betting underwent a historically bad year. Delaware’s profits that year, as well as the industry at large, were not indicative of their usual results.)
Now these two markets are not perfectly identical. But it does beg the question of how beneficial it would be for the states to copy such a competitive environment. If states want to allow for sports betting and maximize their returns, it behooves them to use the only gaming monopoly that exists in their state: the lottery. But the lobbying power of casinos and B2C sports betting companies will push states into a more competitive environment. The sports leagues are also pressuring legislators to make the market as competitive as possible.
Currently the NBA and MLB are lobbying states that if sports betting is legalized, they are entitled to a 1% integrity fee on handle. They believe they need this because they will have to spend more money preventing players from being bribed. A competitive market would have a much higher handle, which would be beneficial for the leagues. (However the sports betting industry have scoffed at an integrity fee, saying that margins are too slim to support this.)
A very strong possibility is that most states will create a competitive market with a licensee model. This is bad news for lotteries that don’t have oversight or work with private operators. But another equally fair question is if it’s a fight the lotteries must win. Sports betting margins are slim. Delaware’s example reveals just how small of a sum sports betting brings in. In the same fiscal year, the Delaware Lottery transferred $249.9 million to the state. Sports betting represented 2% of that total transfer.
Richard Auxier, Research Associate at the Urban-Brookings Tax Policy Center, stated that sports betting will not provide a massive boost to revenue. Auxier reported that Nevada’s sports betting revenue was nearly $250 million. However, Nevada’s 6.75% tax rate means the state only saw about $17 million in tax revenue from the activity.
Even if lotteries get a small share of sports betting, there may be a silver lining. The genuine excitement behind sports betting in capitals all over the U.S. is palpable. With such fervor behind a massive national expansion of gambling, it is very possible that lotteries will be able to convince their own legislatures to expand their traditional programs. A rising tide lifts all boats, after all. If that were to happen, even the loss of sports betting would be a small price to pay, for instance, for lotteries to begin selling their entire portfolio online.
“One of the interesting things with regards to almost every single state bill is it explicitly calls for some form of mobile or interactive wagering,” Keith Whyte, Executive Director, National Council of Problem Gambling, said at La Fleur’s 2018 D.C. Conference. “Even in states where other forms of long-established gambling are not allowed to go online, they are looking to move to the next generation through sports betting. Sports betting might lead to a wider spread of interactive gambling, because there are many forces aligned for that. It may change the landscape for lotteries.”