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State of Confusion

A roundup of the states considering legalizing online gaming

State of Confusion

It’s not just Nevada and New Jersey anymore. Following the Department of Justice memo that was issued in December acknowledging that only online sports betting would be considered illegal under the federal Wire Act, many other states, as well as the District of Columbia, have started to queue up for online gaming.

As with most intrastate issues, the progress and reasons behind legalizing online gaming are diverse. The big question, however, is how the systems could be implemented in the states. National lottery organizations are lobbying Congress to prevent passage of any federal bill that would legalize online poker or online gaming of any sort, citing a states’ rights argument. Clearly, lotteries are eyeing online wagering as a huge revenue source, one that needn’t be shared with the casino industry.

The following is a review of every state that is considering some form of online gaming but in most cases does not consider the actions of any state-run lottery organizations.

Undoubtedly the state that has made the most progress is Nevada. Beginning last year, the state’s Gaming Control Board has held hearings, brought in consultants and drafted regulations concerning the legalization of online gaming. The regulations have been approved by the Nevada Gaming Commission and are slated to go into effect by the end of February.

At least five companies have applied to operate online casinos or provide services for online gaming. Only companies that already hold Nevada licenses are eligible to become licensed, so the players include companies like slot manufacturers IGT, WMS and Bally and operators like Michael Gaughan’s South Point.

Nevada Gaming Control Board Chairman Mark Lipparelli says the state needs to remain at the forefront of gaming in the U.S. and could approve the first operation—most likely an online poker room—by the end of the year.

New Jersey became the first state to pass a bill legalizing online gaming last year, only to see it vetoed by Governor Chris Christie who listed a long list of objections to the bill in his veto message. Christie was also heavily lobbied by Caesars Entertainment, the largest gaming operator in Atlantic City, to reject the bill because the company wanted to concentrate on the legalization of online poker at the federal level.

The bill is back, sponsored by state Senator Raymond Lesniak. While it was nearly passed in January, it was withdrawn when Christie indicated that, while there were still some aspects of the bill he objected to, he would approve it to keep New Jersey on the cutting edge of the gaming industry and to aid in the recovery of Atlantic City. Lesniak says he will address Christie’s objections to the bill and resubmit it when the legislature returns in the spring.

Still unclear is if Christie will insist on a statewide referendum. In November voters passed a bill permitting sports betting in Atlantic City casinos and state racetracks if the federal ban on sports betting nationwide is overturned somehow. Should a referendum be required, it’s likely New Jersey would lose the edge Christie is seeking to maintain.

The District of Columbia City Council last week repealed a bill that would have allowed the DC Lottery to set up an online gaming site. The city council’s Finance Committee voted 3-2 to repeal a 2010 law, and the measure now goes to the full 12-member panel that could start over.

A full council meeting earlier in the week revealed the deep divisions that exist over the implementation of internet gaming, a plan already formulated by the D.C. Lottery.

The Lottery had hoped to make the district the first U.S. jurisdiction to operate online gaming, with the lottery offering poker and casino games online to anyone within district boundaries. Natwar Gandhi, the city’s chief financial officer, added online gambling provisions to the D.C. Lottery’s technology contract with Intralot, a leading supplier of game content and transaction processing systems.

At the meeting, Councilman David Catania said Gandhi was out of line in implementing lottery provisions before the city council examined and voted on it, saying legislation needs to be approved for online gaming in an up-or-down council vote. “You have robbed me of my right to make a choice,” Catania said. “You have usurped my authority.” Catania is threatening to sue Gandhi over the matter.

Other councilmen feel differently—in particular, Marion Barry, the popular former D.C. mayor. Barry told Gandhi the city needs to move more quickly to implement the lottery’s online gaming plan. Barry and other pro-online gaming council members feel the 2011 budget support law, by approving funding, gave the lottery the authority to offer games of both skill and chance over the internet within district borders.

Barry pressed Gandhi for a promise to implement the games. “If I don’t get a commitment, I’m going to introduce a bill to remove your authority over internet gambling,” he said.

An exasperated Gandhi said he was trying to follow the law as it is written today. “The process was completely transparent, and we followed federal procedural guidelines,” Gandhi said.

“That’s just jive,” responded Barry. “I’m not happy with this situation.”

“I’m not happy with this situation, either,” said Gandhi.

In his response to Catania, Gandhi cited a 19-page report by D.C. Inspector General Charles Willoughby that supported the legality of the Intralot contract. The report concluded that the $120 million Intralot contract, including the internet gambling provision, was completely within the law, and verified what was intended to be the nation’s first approved internet gambling. The lottery claims that free games could be up and running within 30 days, and for-wager games could be available within several months.

D.C. Lottery Executive Director Buddy Roogow told the council the district can expect $13 million in annual revenue from online gaming, with gamblers limited to spending $250 per week online.

Councilman Tommy Wells noted that Roogow doesn’t even live in the district, but is assuming the authority to decide which games will be available—a decision he says should rest with council. “We should have had this discussion at the beginning,” Wells said. “Instead, we have truncated the process and are working backwards.”

Council is split between those who want to examine and vote on the issues and those who want to move ahead. The latter group emphasizes the need to seize the opportunity to be first in the nation with internet gaming. “If we’re not first, we will lose revenue,” said Councilman Michael Brown, who first sponsored the bill. “Rarely do we get the opportunity to get revenue out of the people who visit our city in droves.”

Maybe the most divided state (with the possible exception of Washington D.C.) in the online gaming fight is California. In the last legislative session, two competing online poker bills fought for attention, with neither bill prevailing. Supporters of the bills included some of the states Indian tribes that operate casinos and the state’s legal card rooms.

State Senator Rod Wright, a sponsor of one of the bills, told GGB News that there will be no competing bills during this year’s legislative sessions.

“Both sides are talking,” he said during a break in the National Conference of Legislators from Gaming States, held in Las Vegas last month. “No one wants the discord that we endured last year, so we’re going to meet in the middle and propose a bill that can get passed and signed into law.”        

That would mean that Governor Jerry Brown would have to get on board however. Brown has not indicated whether he would sign an online poker bill or not, but has gone on record as saying that he doesn’t see it benefiting the state one way or another.

Tribes in California are still divided, however. The California Online Poker Association, a coalition of 29 tribes and 30 card rooms, supports the idea of online poker, but the California Tribal Business Alliance, which includes the Lytton Band of Pomo Indians, owners of the San Pablo Lytton Casino; the Pala Band of Mission Indians, with a northern San Diego County casino resort; and the Paskenta Band of Nomlaki Indians, who have the Rolling Hills Casino in Tehama County, oppose any introduction of online gaming in California.

Meanwhile, COPA has launched a free-play online poker site. GGB News reported rumors last week that two California tribes—one from Southern California and another from the northern part of the state—plan to launch a pay-for-play online poker room in order to challenge the federal government to shut it down.

While Iowa flirted with consideration of an online poker bill last year the legislature punted the ball to the Iowa Gaming Commission, which was tasked with studying the issue.

Now the issue is back with Democrat state Senator Jeff Danielson, the chairman of the Iowa Senate’s State Government Committee, ready to introduce a bill that would legalize online poker.

“I think it’s an opportunity to capture some funding, if you can legalize it, for the state to capture the revenue,” he said. “I think people are doing it anyway.”

Danielson says Iowa residents annually spend more than $100 million playing online poker and he believes that money can be funneled into legal operations that will aid the state.

At the same time, Danielson says it’s really not about the money.

“I don’t give two hoots about the revenue for the state. Absolutely not,” Danielson said. “I’m sorry. We’re in the black. We have a surplus. There’s zero evidence. I don’t think that’s the reason to do this.”

Republicans in the House aren’t thrilled with the idea, so it’s just in the talking stage at this point.

Governor Dannel P. Malloy is taking steps to protect Connecticut’s gaming industry by exploring the prospect of online gambling. Malloy has been in talks with tribal officials from the state’s two casinos, Foxwoods Resorts Casino and Mohegan Sun, as well as representatives of the Connecticut Lottery, on creating a comprehensive strategy to face the mounting competition.

A forum on online gaming recently took place in Connecticut to explore not only the social costs of internet gambling, but what the state can do to leverage itself for the future. Bob Clark, of the State Attorney General’s Office; Chuck Bunnell, of Mohegan Sun Casino; Bill Satti, of Foxwoods Resort Casino; Anne Noble, of the Connecticut Lottery Corporation; Brooks Pierce, of Sportech, Inc.; and Carlos Reinoso, of the Connecticut Council on Problem Gambling, all spoke at the forum.

“Internet gaming is going to come to the United States,” Malloy said. “The tribes, the lottery, we’re all trying to figure this out together.”

Malloy sees New Jersey as the biggest threat to Connecticut, as that state moves forward with a plan to become the “epicenter” of a new online market. One of the hurdles Connecticut faces is the gaming compact signed 20 years ago with the Mashantucket Pequot and Mohegan tribes, owners of Foxwoods and Mohegan Sun, respectively. Both casinos give 25 percent of their slot revenue to the state, and both insist that Connecticut would have to renegotiate those compacts if they are looking to implement online gaming.

Bruce “Two Dogs” Bozsum, chairman of the Mohegan Tribe, wants the governor to allow the tribes to take charge of Connecticut’s online enterprise. It’s also an area that Foxwoods’ Chairman Rodney Butler is exploring, though more cautiously.

“There’s been a lot of talk about (internet gambling) lately,” Butler said in a recent interview. “Nothing is certain. It’s something we’re interested in and studying. We need to know more from the state before we start forming assumptions. The financial values people are placing on it vary widely. You have to be first to market to make it a success.”  

Meanwhile, Lt. Gov. Nancy Wyman, Malloy’s point person on the issue, is exploring opportunities for online lottery play, as well as offering keno outside the casinos.

A possible online poker operation run by Florida racetracks came close to being a reality last year, but the controversial measure was not considered during the last session of the legislature. Nonetheless, there were plans to locate a server at one of the racetracks and allow all the other tracks with poker rooms to take part; it just never got off the ground.

Gaming has not disappeared in the current legislature. In fact, it’s been front and center for the last several months. But the debate about whether to allow one to three massive integrated resorts in South Florida has overshadowed any mention of online gaming. Even in a bill submitted by state Senator Ellyn Bogdanoff that had something for every kind of gaming that currently exists in Florida, online gaming was not mentioned. So until there is some resolution on the proposal for massive land-based gaming expansion, online gaming will remain far on the back burner.

Even though the bill is likely shelved for this session (see Weekly Feature), it’s not likely that any legislator would take up online gaming at a time when the appetite for any gaming discussion has disappeared.

For another state that is considering a massive expansion of casinos, online gaming could prove to be the salvation. A bill that would have added five new casinos—including one in downtown Chicago—more positions for existing casinos and slots at racetracks passed the state legislature last year but Governor Pat Quinn refused to sign it without major changes, including fewer casinos and no racetrack slots.

But the architect of that bill, state Senator Lou Lang, sees an opportunity in online gaming. With Quinn dead set against slots at racetracks, Lang has been focused on a subsidy for the tracks to get them to drop the demand for slots. The only catch was that the subsidy would not be permanent and the tracks would soon be back demanding slots once more.

“Until you have a reliable and consistent source of funding that cannot be taken away from the racetracks,” Lang said, “they’re going to stick to their position of slot machines because if they get slot machines, it would be a property right that cannot be taken away from them. None of these other ideas are yet there.

“If we, by statute, created a subsidy for the horseracing industry, they would be concerned that it would be swept, they would be concerned that it wouldn’t be appropriated, there could be a concern that next year, we could pass another statute saying we’re not doing this anymore.”

The racing industry is reported to be interested in the idea, but not yet ready to make a commitment.

Illinois was one of the states—New York was the other—whose attorney general asked the Justice Department for its opinion about the online sale of lottery tickets that led to the December ruling. The state lottery has indicated it will begin online sales of lottery tickets as soon as possible.

Hawaii—the only state besides Utah with no legalized gambling–recently proposed an internet gambling bill.

In their introductions identical bills in the Hawaii House and Senate–HB 2422 and SB 2980–read, “The Department of Justice’s new interpretation allows state governments, subject to certain restrictions, to legalize and regulate Internet gambling operations and capture that revenue for the benefit of state governments.”

HB 2422 and SB 2980 would create the Hawaii Internet Lottery and Gaming Corporation that would offer a wide range of online games exclusively in Hawaii. It would contract with a technology provider to power a site offering online poker, casino and lottery games. The provider would be chosen by a competitive bidding process, but no company that accepted any internet bet (with the exception of federally sanctioned horserace bets) from U.S. residents prior to the DOJ Wire Act memo could bid. Initially, Hawaii would permit bets on an intrastate basis only. However, the bills also would permit the state-owned gaming corporation to form agreements to offer multistate games.

Legislators in Hawaii may face opposition to internet gambling or any form of gambling among their constituents. According to a recent Civic Beat Poll of 1,358 likely voters, 59 percent think gambling should remain illegal in the state; only 33 percent said gambling should be legal. And 62 percent were against the idea of allowing a single casino in Waikiki.

North Dakota was one of the first states to consider legalizing internet poker back in 2006 is looking into selling lottery tickets directly to buyers online. The state legislature would have to approve the action.

North Dakota Lottery players already may purchase tickets through 13-, 26- and 52- week subscriptions online using a credit card. The lottery sold $23 million tickets in its last budget year said Lottery Director Randy Miller.

The statewide network of 400 retailers, who sell tickets for Powerball, Mega Millions and three smaller multistate games, are not happy about online ticket sales. Said Mike Rud, president of the North Dakota Retail Association, “If internet sales are what we want to do, let’s do it full bore. Take away the machines, let’s do it all online. We kind of view it as an all-or-nothing proposition.” Rud said the stores could use the space now given over to lottery equipment for other items.

Attorney General Wayne Stenehjem noted, “I certainly want to be careful that we’re not interfering with the good relationship we’ve developed with the retailers in North Dakota. We want to make sure we’re not cutting them out of the process.”

The move follows an opinion issued by the U.S. Department of Justice last month that said state lotteries could use their websites to sell individual tickets to their states’ residents. Officials in Illinois and New York had requested the opinion. As a result, the Illinois Lottery plans to start marketing on its web site tickets for Powerball and Lotto games by early April. Michael Jones, superintendent of the Illinois Lottery Illinois, said the state legislature authorized a trial run to test the system’s ability to make sure players younger than 18 and those from outside Illinois cannot buy tickets.

Jones said when Powerball or Lotto jackpots rise above $100 million, 300,000 to 500,000 additional players are drawn in. He noted market research shows internet sales would not hurt lottery ticket demand at traditional retailers. “Our lottery, and most lotteries, have not had any mechanism for many years to create new demand among people who don’t play the lottery now. The lottery’s been concentrating on selling more tickets to the same people, as opposed to selling tickets to a lot of people,” he said.

Said David Gale, director of the North American Association of State and Provincial Lotteries, “It’s the wave of the future. That’s very obvious. It’s a key element in attracting the emerging market that’s out there.”

Last year’s bill legalizing three large land-based casinos and one racetrack slot parlor was comprehensive, but at the last minute, a clause that would have allowed online casinos to be established was stricken from the bill.

A tough chairman of the state’s gaming commission was recently appointed. Steven Crosby has indicated that his agency will be in no rush to license operators or approve locations without long and careful study. So it’s unlikely that Crosby would be distracted by adding online gaming to his plate.

Meanwhile the Massachusetts lottery has long been one of the most aggressive in the country, conducting electronic keno games in bars, restaurants and convenience stores across the state. It’s more likely that the lottery would eye online gaming as another potential source of revenue for the state and assert that it’s merely an extension of lottery services, bypassing the legislative and regulatory process. 

Governor Martin O’Malley sent a letter to Senate Majority Leader Harry Reid last year, requesting that Reid halt efforts to legalize online gaming. O’Malley claimed that the federal government should not intervene in areas where the states should be in control. In the letter, O’Malley obliquely referred to the “dangers” of online gaming.

Last week, Maryland announced it would launch online sales of lottery tickets. In a state where residents buy fewer lottery tickets than surrounding states (a recent survey showed only 50 percent of Marylanders bought a lottery ticket in the past year versus 70 percent in surrounding states on the east coast), online sales could spark a bonanza in lottery sales. The state already has a mobile platform to buy lottery tickets.

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