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Consensus building in Illinois

Insight | Analysis

The Illinois legislature has a wide range of regulatory models to consider when it comes to sports betting. This is largely due to Representative Michael Zalewski putting forward an open-ended proposal with the ultimate goal of legalising the vertical, leaving the decision on the final model to his Assembly and Senate counterparts.

He tells why he believes this build-as-you-go approach will help generate sufficient support to bring sports betting legislation into law.

In February this year, newly installed Illinois Governor J.B. Pritzker factored in $200m in future tax revenue from wagering activities in his 2020 budget proposal. This included $17m of tax revenue for fiscal year 2020, such is his confidence that regulations will be passed in the current legislative session.

This effectively sounded the starting pistol on a race to regulate sports betting in the state, with Representative Michael Zalewski currently ahead of the pack with House Bill 3308.

When originally filed, HB3308 simply contained a title: “This act may be cited as the Sports Wagering Act.” The bill has been designed to offer Illinois lawmakers a blank slate through which consensus can be built on the best possible model for the state.

“Gambling bills in Illinois have traditionally been difficult to pass, as we have struggled to find the right recipe to pass legislation,” Zalewski explains. “This time, rather than waiting to the end of the session to put together one big bill, we’ve put out one that allowed for lots of different methods to be discussed.”

“I think it has actually worked out very well,” he says, with four amendments proposed when the bill was assigned to the House Rules Committee, and a fifth added ahead of a sports betting hearing held last week.

Zalewski suggests that the ultimate goal is to hit Pritzker’s financial targets. Pritzker has already suggested a model whereby 20 licences will be issued, at a cost of $10m each, with licensees then taxed at 20% of sports betting revenue.

Zalewski says that under this structure, the goal of raising $200m is “very reasonable”, and predicts that the state could then generate between $40m and $60m each year, depending on how fast the market matures. Raising the money may be the goal, but how it is raised remains up for debate.

Multiple models
Three of the models put forward retain the $10m licence fee. Zalewski himself has proposed what is being described as the “New Jersey model”. This would see land-based and riverboat casinos permitted to offer online and land-based wagering, and allowed to operate skins as sub-licensees. Land-based revenue would be taxed at 15%, with online and mobile wagering taxed at 20% of revenue.

The second amendment, put forward by Representative Katie Stewart, is described as the “Mississippi model”. This would see racetracks, casinos and off-track facilities allowed to offer wagering, though only 10 online licences would be available to land-based casinos.

Representative André Thapedi’s proposal, meanwhile, has been dubbed the “professional sports league amendment”. It cuts the tax rate to 12.5%, but mandates an additional levy of 0.25% of handle be paid to the Illinois Gaming Board. This would then be distributed to the US professional sports leagues and governing bodies.

The final proposal, Elizabeth Hernandez’s “lottery oversight amendment”, would see all sports betting conducted via the Department of the Lottery. It would limit sports betting in Illinois to land-based channels, with 50% of gross sports betting receipts to go to the state.

The quartet was joined by a fifth ahead of last week’s hearing, added by Representative Bob Rita. This simply sets out a so-called bad actor clause, which states that any business that has accepted wagers in the state before legislation is passed be blocked from applying for a licence.

It was made clear in the hearing that this is designed to block FanDuel and DraftKings from the market. The pair continued to offer daily fantasy contests in the state after the games were ruled to violate state law in 2015, and continue to dispute the ruling.

While he put forward the so-called New Jersey model, Zalewski says that he did so as the legislation is “the most similar to what people would broadly expect a bill to look like”.

Courting brick-and-mortar support
“It gives the brick-and-mortar casinos and racetracks priority, whose support will be needed,” he explains. “I’m not wedded to it by any stretch; the other amendments we filed are also viable regulatory models, though I think the New Jersey model is a good starting point.”

Ultimately, he says he will commit to supporting whichever regulatory model is chosen following the hearings and discussions with lawmakers.

Yet this could mean he may find himself committing to backing the bad actor clause, which could potentially lock FanDuel and DraftKings, the leading lights of New Jersey’s regulated market, out of Illinois.

“I think that amendment was put forward by a brick-and-mortar casino that was very interested in having sports wagering, that are very interested in having a corner of the market,” Zalewski says of Rita’s amendment. “They are very concerned that DFS will have an improper monopoly [due to the likes of FanDuel and DraftKings’ activity in the state], so asked for the amendment to be filed.

“We will work with the casinos and the fantasy sports operators to try to reach an agreed disposition.”

Despite the amendment shifting focus away from the core business of sports betting regulation during the hearing, he insists that bringing up such issues are important – even if he does suggest that it’s only a minor element of the debate.

“I think it’s always healthy to have a good discourse and to allow people to negotiate these things in the open air, so I don’t mind healthy disagreement,” he says. “I think the DFS operators are a small part of this conversation, but I’m happy to have this sort of dialogue.”

He says that such issues arise because, to an extent, the state’s brick-and-mortar casinos believe the sports betting conversation should centre around them.

“They’ve invested a lot of capital and employ a lot of people, so they do play an important role, but I think it’s important to put the best policy forward for the state, so that’s why we’re keeping our options open,” Zalewski says.

But keeping the options open means there is still a lot more work needing to be done. Zalewski says more hearings will take place in the coming weeks, to flesh out the proposals further, after which a new round of refined amendments will be introduced.

“When we do that we’ll hopefully whittle down our options and come forth with an agreed bill,” he says.

The clock is ticking, with the 2019 regular session ending on May 31. There is now just less than two months in which to finalise the preferred regulatory model and shepherd it through the two legislative chambers.

Despite this Zalewski says he feels “appropriately optimistic”.

“I think the governor really wants to get this done,” he says. “We have a majority of Democrats in the House and Senate, and Republicans have suggested they are willing to cooperate, so I would put my optimism levels at ‘appropriate’.”