Integrity Fee Challenged as States Advance Sports Betting Bills
Prognosticators who were predicting a decision on March 5 in NCAA v. Chris Christie, the U.S. Supreme Court appeal of lower-court rulings blocking New Jersey’s sports-betting law which also challenges the constitutionality of the federal ban on sports betting, were disappointed last week.
However, the best odds for a decision that could overturn the 1992 Professional and Amateur Sports Protection Act (PASPA) are on the next regular date the high court announces decisions, which is April 2. Experts at the IMGL/ABA Gaming Law Minefield conference in Las Vegas last week, however, don’t expect to hear from the Supreme Court until late spring.
The case began in 2014, when New Jersey Governor Chris Christie signed a bill to create a self-regulated sports betting program centered in Atlantic City casinos. All of the major sports leagues—the NCAA, NFL, NBA and Major League Baseball—sued to block the legislation as a violation of PASPA. Last summer, SCOTUS made a surprise announcement that it would hear New Jersey’s appeal of lower-court rulings that held for the leagues.
The smart money, by the way, has moved from a long shot on New Jersey winning— from -1,000 after a lower-court ruling for the sports leagues to -250 last week, as bills have been introduced in 18 states to regulate sports wagering presuming PASPA is repealed.
Those views are held by a number of potential sports-betting stakeholders, including some of the sports leagues themselves, with the NBA and MLB both lobbying states to include a 1 percent “integrity fee” on all wagers for their leagues’ games, a prospect that many proponents of legal sports wagering consider unworkable, as it would squeeze operators to cut into already thin profit margins, rendering them unable to compete with the odds set by illegal bookmakers.
Gambling experts agree. Last week, famed gambler Jeff Ma—one of the leaders of the MIT blackjack team that inspire the book Bringing Down the House and the film 21—told CNBC that the push for a league cut of thin profits is “short-sighted.”
“Traditionally, a lot of the leagues are run by lawyers, so they think about how do we protect our assets; they don’t think about how do we monetize our assets,” Ma told CNBC at the recent MIT Sloan Sports Analytics Conference. “In this case, they are thinking protect and charge people money instead of focusing on the bigger opportunity down the road.”
Dr. Laila Mintas of Sportradar, a company that provides data to the NFL, NBA, NHL and several foreign betting operators, told CNBC that an integrity fee would not only keep bettors with the illegal bookmakers in the U.S., but would drive them offshore. “If you put too much burden on the (legal bookmakers), they will not be able to compete with the offshore markets,” Mintas said at the MIT Sloan conference.
The U.S. Supreme Court has yet to rule on New Jersey’s attempt to allow sports betting at city casinos and the state’s racetracks. The ruling—which could lead to sports betting in as many as 15 states should the court strike down a federal ban—could have been released March 5, when the court released two other decisions.
Though the court releases its decisions at its own pace, the March 5 release potential did spark a lot of media coverage which ultimately was disappointed. The court’s next scheduled release date is March 19, but again, there are no assurances that the sports betting case will be included.
The West Virginia Lottery Sports Wagering Act, which would legalize sports betting, passed both the House and Senate and awaits Governor Jim Justice’s signature. If he signs it, West Virginia would become the first state to enact a sports betting law, and be ready to implement it if and when the U.S. Supreme Court removes the 1992 federal ban.
The bill authorizes the West Virginia lottery to regulate and license sports betting at the state’s five licensed casinos and racetracks; it also would allow mobile sports wagering via approved online platforms or apps. Licensees would have to pay a $100,000 application fee, to be renewed every five years at the same rate. Gross sports wagering revenue would be taxed at 10 percent.
The state commissioned a study by gaming research firm Eilers and Krejcik that showed the West Virginia sports betting market would generate $13.4 million in revenue the first year, $21.7 million the second, $29.7 million in year three, $29 million the fourth year and $28.7 million in five years. The first $15 million in net profit will go to the State Lottery Fund, then to the Public Employees Insurance Agency Financial Stability Fund.
The legislation does not include the controversial 1 percent integrity fee promoted by Major League Baseball, the NBA and other sports leagues. The fee actually is a 20 percent cut of all sports book revenue. Connecticut’s sports betting legislation does not include the fee, however, bills in Missouri, Indiana and Illinois include it. The leagues claim the fees are needed for their protection. However, observers noted the leagues have rules in place forbidding players and officials to gamble as well as internal security to handle such matters. In addition, observers said the estimated amount of money these fees would bring in—at least $200 billion in annual illegal sports watering alone—far surpasses what integrity fee measures would cost.
MLB Commissioner Rob Manfred held a conference call with West Virginia media to explain the league’s position. Manfred said, “Unfortunately in West Virginia, there’s only one interested group that has dominated the substance of this bill, and that’s the gaming industry – the people seeking to make money from sports betting. It contains literally no protections toward the integrity of the sport. There’s no recognition of that risk. It does not protect young people in West Virginia, by limiting their access to sports betting. It does not protect people with gambling problems. All it does is maximize the opportunity for the gaming industry to make money. The structure of the bill is so fundamentally flawed, bettors will seek other states with better regulatory frameworks. As a result, the expected financial windfall for West Virginia will be much lower. We will continue to urge the Governor to veto the bill.” Even if Justice does veto the legislation, the votes exist for an override.
West Virginia bar owners also weighed in on the sports betting bill. West Virginia Restaurant and Bar Association Vice President and bar owner Jake Padlow said, “We are a group of restaurant and bar owners who are tired of getting slaughtered by out-of-state corporations that own racetracks in the state. Why should racetracks get to monopolize it? If our legislators can’t trust local businesses, but they can trust these out-of-state corporations, that says a lot.” The association’s President Mike Duplaga, also a bar owner, said the legislation will hurt his business. “We are busy on Sunday afternoons during football season. Why should I stand by and watch Wheeling Island take my customers over there where they can bet?” Duplaga said. “The tracks certainly have their lobbyists on the job in Charleston. The local folks feel like they are getting left out,” said the group’s attorney and former state Senate President Jeff Kessler.
In Oklahoma, HB 3375, passed the House Appropriations Budget Committee in an 18-8 vote and now moves to the full House. The bill—which does not include the leagues’ desired integrity fee–would amend the state constitution to legalize sports betting, but not horse or dog betting, at the state’s 70-plus tribal casinos. It also would expand tribal gaming to include non-house-banked table games. Tribes would pay the state 10 percent of the monthly net wins from sports books and non-house banked table games revenue.
The American Gaming Association estimated a regulated sports betting market annually could contribute $600 million to Oklahoma’s economy and generate up to $124 million in tax revenues for the state.
And in Iowa, state Senator Jake Highfill has proposed legislation that would place sports betting under the direction of the state’s casinos, regulated by the Iowa Racing and Gaming Commission. Properties would be pay a $25,000 license fee and a tax of 8 percent on sports betting revenue, which would be allowed on professional and college athletics. Bettors could wager in person at the casinos or via mobile phones—a move to attract younger participants. The Innovation Group said legal sports betting could generate $80-$90 million in new annual tax revenue for the state.
The Iowa legislation does not include the major leagues’ integrity fee. NBA Executive President of Communications Mike Bass said, “We agree that time has come to give fans a safe and legal way to bet on sports. But any law authorizing betting must include rigorous protections to safeguard the integrity of our games. The bill rapidly advancing through the Iowa legislature is deeply flawed and will not achieve that critical goal. It lacks the most basic requirements for strict regulation of sports betting. We hope the legislature rejects this severely flawed bill and restarts the process to draft a bill with thoughtful, stringent protections.”
MLB issued a statement noting, “The legislation quickly advancing in Iowa would create incredibly weak and insufficient oversight of sports betting, and would not sufficiently mitigate the potential risks to our game that will emerge from legalized sports betting. The steps for strong regulation have been studied and proven to be effective for years in betting markets overseas, but this bill does not even come close to mandating the necessary precautions.”
Highfill called the integrity fee a “non-starter” in the Iowa legislation and criticized the leagues for pushing their agenda. Highfill said the Iowa proposal has more bipartisan support among state lawmakers than any gambling bill he has worked on during his six years in the state legislature.
The stakes are high if sports betting is legalized in Massachusetts. According to estimates the state’s gamblers pay as much as $61 million in taxes if, first, the U.S. Supreme Court lifts the current ban and Bay State legislators adopted a regulatory framework.
The figures come from a white paper that was commissioned by the Massachusetts Gaming Commission and which recommended a path for adding another layer to the Bay State’s gaming landscape should the Professional and Amateur Sports Protection Act of 1992 be abrogated.
The White Paper posits that it is possible that other federal laws, such as the 1961 federal Wire Act, might still prevent sports betting from being conducted online because it prohibits the “interstate transmission of bets.”
In the White Paper the MGC writes “The introduction of a new aspect of the emerging gaming industry in Massachusetts presents an opportunity to bring a significant amount of gaming activity and revenues out of the shadows and into the legal market,” adding “With that transition would come the opportunity to cultivate the associated economic benefits—including tax revenues—while providing consumers of sports betting with protections not afforded them by illegal bookmakers.”
One of the references the 187-page paper cited was a study Oxford Economics did for the American Gaming Association that said if only brick and mortar casinos in the state were allowed to conduct sports betting that the annual taxes would be about $8.6 million at 6.75 percent. If the venues were expanded to retail and online, and the tax rate was 15 percent that amount would rocket to $61.3 million.
The state should also consider whether others besides casinos should be allowed to offer the service, such as racetracks and off-track better parlors, says the White Paper, and the possibility that all online gaming should be placed under an online gaming authority.
The MGC writes, “Under that approach a regulatory body would be provided the authority to address the broad subject of online gaming (including sports betting) and thus could quickly react to an industry where change is constant.”
The intent of the paper was to give the legislature “a menu of the variety of approaches,” according to MGC associate counsel Justin Stempeck.
The high court is unlikely to do nothing, concludes the paper: “Although it is possible that the Supreme Court would uphold PASPA in its entirety, it seems unlikely given that the Court chose to hear the case and extensively questioned counsel during legal argument with respect to the commandeering issue at the heart of the case. The Supreme Court could have simply denied the writ of certiorari if it was going to leave PASPA unchanged.”
Currently there is no bill in circulation on sports betting, although a bill Senator Eileen Donoghue authored on daily fantasy sports that calls for a commission to be established to conduct a comprehensive study if the Supreme Court rules that any part of PASPA is unconstitutional.
Donoghue has speculated that if that happens, “things could happen very rapidly.”
House Chairman of the Committee on Economic Development and Emerging Technologies Joseph Wagner agrees that sports betting should be “expedited” in that case.
Although at first blush there wouldn’t seem to be a connection between daily fantasy sports and sports betting, DraftKings appears to think such a connection exists. It recently hired a sportsbook director to have on staff just in case it needs to move quickly.
Connecticut lawmakers figuratively showed the door last week to representatives of the NBA and Major League Baseball who wanted to help themselves to a share of the money that the state government might collect in the event that sports betting becomes legal—and the state chooses to regulate it.
As they have in all the states that are considering sports betting, the NBA and Major League Baseball representatives argued that they should be paid a 1 percent “integrity fee.” But while the other state lawmakers have included the fee in legislation being considered, Connecticut legislators wondered out loud what they would be getting in return.
The committee considering the legislation called the proposal something other than an “integrity fee,” they preferred “royalty” or “processing fee.”
NBA Vice President Dan Spillane, who was grilled by committee members, had to admit that the fee’s sole purpose was not to guarantee the integrity of the game. He also had to admit that the NBA commissioner Adam Silver has called such a fee a “royalty” as well.
He told the panel, “It’s the value of our product, the royalty aspect. And then the risk that comes along with it. It’s a form of insurance. I guess we could have broken the fee down into buckets. It’s akin to a royalty of the value of product we deliver.”
Some of the committee member said they believe that sports betting provides a benefit to professional sports by generating interest in the games and through the potential use of marketing and sponsorships.
Rep. Michael Dimassa declared, “I want my people to get the most bang for their buck. So if there’s a 1 percent fee I want some accountability.”
Other lawmakers said they thought the leagues want too much money, and besides, they pointed out, the money wouldn’t stay in the state.
A report by the American Gaming Association shows that more than 750,000 Connecticut residents bet more than $1.5 billion each year, mostly online.
In Louisiana, lawmakers presented bills to authorize sports betting at the state’s four live horseracing facilities and to allow online gambling. If approved, both actions would require voter referendums.
State Rep. Major Thibaut recently introduced HB 245, which would authorize “additional games and sports betting at eligible live horseracing facilities.” Currently the state has four such facilities, including the Fairgrounds Race Course and Slots in New Orleans. The measure would limit sports betting to one location in each of the four parishes that already allow live horseracing.
The proposal also would require voters in each parish to approve sports betting. It reads, “No gaming activities shall be allowed in an eligible facility in any parish unless the operation and conducting of gaming activities pursuant to this Chapter has first been approved at an election held for such purpose.”
In addition, Thibaut’s bill calls for “limitations on an eligible facility in Orleans Parish,” referring to Fairgrounds, but the legislation does not spell out those limitations.
The state already has a tax structure in place for casinos and racetracks, but the measure not address taxes or fees specific to Louisiana sports betting nor the controversial integrity fee promoted by the NBA and Major League Baseball.
In addition, state Senator Daniel Martiny recently introduced S 322, which would authorize parish-by-parish voter referendums to legalize online gaming. Every parish could determine if the proposal would be placed on the November ballot and a majority vote would be required. The ballot question would ask, “Shall internet gaming be allowed to be conducted within the parish of ______?” Online gambling would not begin before January 1, 2020, according to the measure.
The legislation also would require online gambling players to be at least 21 years old and living within the state of Louisiana. The Louisiana Gaming Control Board and gaming division of the office of state police would enforce all rules required to implement, administer and regulate internet gaming. Also, online gambling licenses would be restricted to riverboat and land-based casinos licensed by the LGCB.
S 322 does not mention taxation rates or licensing fees and does not authorizing specific forms of online gambling. However, it does include “gaming tournaments,” in which “players compete against one another in one or more games authorized by the board or in approved variations or composites thereof if the tournament is authorized by the board.”
The Louisiana legislature regular session will run March 12 through June 4. It met in “Extraordinary Session” since from February 19 through March 7.