Over time, NC gives in on gambling
Posted June 3, 2012
Updated June 4, 2012
Raleigh, N.C. — Gov. Jim Hunt was blunt in September of 1982 when asked about the possibility of creating a lottery to fund programs for children.
"I just don't think that's the right thing for the state to be doing," North Carolina's once and future governor told reporters at a weekly news conference three decades ago. "Inevitably, it means people losing money they really need."
He didn't feel much more kindly toward proposals to allow the Eastern Band of Cherokees to open a casino.
"I fought it for years," Hunt said last week.
When federal law finally forced him to negotiate a gaming compact with the tribe, he only allowed electronic poker and slots games, no live dealers.
By the time that the state House gave tentative approval last week to a rewritten compact that would allow live dealers at the Cherokee casino, Hunt said much had changed.
"I'm still a little bit uncomfortable about people losing some of their resources if they're poor," Hunt said. "But I'm not as uncomfortable with it as a I used to be."
Hunt forged the original restrictive compact with the Cherokees, saying that federal law forced him to make a deal. His attitude at the time was a common one. He feared legalized gambling would aggravate crime and lead to gambling addiction. Others opposed it on biblical grounds.
Hunt said his fears about bringing gambling to the state a generation ago have not come to pass.
That said, every step to expand gambling in the state still provokes objections. The lottery passed by the narrowest of margins in 2005. And a quickly spreading form of video sweepstakes is able to operate only because courts have turned aside legislative efforts to ban it.
Meanwhile, during House debate on expanding the Cherokee compact, opponents pointed to the social ills that accompany more gambling.
"What I don't want to see happening is North Carolina becomes the state of gambling," said Rep. Ray Rapp, D-Madison, who voted against the Cherokee expansion.
Other states quicker to bet on change
North Carolina has no horse racing or greyhound tracks.
The Cherokee casino opened on Nov. 13, 1997, decades after slots and table games took over in places like Atlantic City and Las Vegas.
North Carolina did not sell its first lottery ticket until March 30, 2006 -- 42 years after New Hampshire became the first state to start a modern lottery.
"This has always been a state that has characteristically resisted gambling," said the Rev. Mark Creech, a minister and constant presence at the General Assembly as director of the Christian Action League. Creech cites Hunt's initial compact with the Cherokees as the foothold gambling businesses needed to begin a drawn out expansion in the state.
North Carolina's history with legal gambling goes back to 1983, when the legislature legalized "beach bingo," a form of the game that is not supposed to offer prizes worth more than $10. Nonprofits have been allowed to offer raffles and their own bingo games for at least as long.
But even in the 1980s, North Carolina's status as the buckle in the Bible belt helped keep gambling at bay.
Hunt's hand was forced by a federal law that said tribes had the right to offer gaming on their lands. And that sent North Carolina policymakers down a road they had never been before.
"There was a bingo statute, but there was nothing comprehensive on the books," said Brad Wilson, who was Hunt's general counsel at the time. "We started from scratch, not only about what gaming would be permitted, but what the governance would be."
Allowing only computerized games, with no live dealers, was an attempt to limit the perceived negative impacts and allure of the games, Wilson said.
Wilson, now the CEO of Blue Cross and Blue Shield of North Carolina, said there were those at the time who were sure a casino would bring corruption and organized crime into the state. Over the years, as the casino operated with few problems, attitudes shifted.
"So, we have the lottery now, too. I'm not a social scientist, but my assumption would be in the public mind you might develop a comfort with whatever the endeavor might be the longer it's around," Wilson said.
That pattern can be seen throughout the United States, said David Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas. Familiarity with games and a growing need for revenue has driven legislatures to become increasingly permissive, he said.
Gambling revenue just a slice of state budget
"Some of (gambling's expansion) has been driven by the fiscal necessity for the states," Schwartz said. When the General Assembly voted to create the lottery in 2005, for example, lawmakers said it would provide a needed boost to education funding. WRAL Investigates: Lottery is replacement, not addition in school budgets
Over the years, promises that it would "supplement and not supplant" taxpayer funding were eroded, so today it is just another revenue source. And it's not that big.
During the 2011 fiscal year, the lottery generated $446.9 million, which was divided up over various education programs. The $220 million dedicated to reducing class size in the early grades counted for 5.6 percent of the state's public school's budget, not counting money from the federal government or what counties budget toward their schools.
Another piece of lottery funding is dedicated to helping local school systems build and renovate buildings. In 2011, $100 million lottery dollars were split between 100 counties.
Since 2006, Wake County has received about $59 million in construction money, according to the Lottery Commission. By comparison, the last high school the county built, Rolesville High School, cost $61 million to build.
As for the Cherokee expansion, the state is expected to reap $90 million over the 30-year life of the compact, which lawmakers say will be put toward classroom personnel and materials. The annual budget for North Carolina is $20 billion.
"Will gambling revenue ever completely plug a budget gap? I would say no. Not even in Nevada," Schwartz said.
States have other reasons to expand gambling.
In the case of the Cherokee casino, Principal Chief Michelle Hicks said live dealers were needed to compete with casinos on reservations in neighboring states. And, he said, the extra money would help provide jobs and money both to his tribe and others in the surrounding counties.
"This is about taking care of our people," Hicks told a House budget subcommittee last week.
"The other argument is that people are already gambling in your state, and some of them are going away to gamble in other states," Schwartz said. "The argument is, let's capture those revenues and keep them at home."
That was certainly an argument borne when North Carolina added the lottery, said Director Alice Garland. In the years following the launch of the North Carolina Education Lottery, lottery revenue in South Carolina and Virginia dipped.
"It took Virginia three or four years to get back where their sales had been before our lottery started," Garland said.
Illegal bets still being placed
North Carolina's official lottery isn't the only numbers game in town. The North Carolina Department of Public Safety's Alcohol Law Enforcement Division still busts illegal games.
"We hit one ... over a three-months period of time, $350,000 went through it. So you're talking $1.4 million in a year on a localized, illegal lottery," said Mark J. Senter, the division's deputy director for law enforcement services. That illegal numbers game was operating in Wake County in 2011, even as legal lottery tickets were available all over the state.
ALE has 112 sworn officers for the entire state. It is charged with making sure the state's liquor and tobacco laws are followed, regulating mixed martial arts matches and enforcing gambling laws. With more than 27,000 retail ABC establishments and 6,770 lottery retailers to police, ALE has to be selective in which illegal gambling cases it takes up.
Most of their investigations are sparked from tips, sometimes from the family members of gamblers.
"Where you'll get a lot of your complaints from is the husband or the wife is calling saying, 'Hey, my significant other has gone in and lost $5,000, and we can ill-afford to lose that kind of money,'" Senter said.
Still, of the 10,972 charges brought by ALE in 2011, only 1.2 percent were for gambling-related crimes. According to the Administrative Office of the Courts, a combination of all police agencies across the state charged 744 defendants with gambling-related crimes in 2011. Those charges ranged from operating a lottery and possessing gambling machines to "allowing gaming in a public house."
To make an illegal gambling charge stick, three elements must exist. The game or wager "has to be predominated by chance, there has to be something at stake (money or whatever) and there has to be an awarded prize. If you're missing of any of those three things, you don't have gambling," Senter said.
So, technically, all those office pools aimed at picking the winners of the NCAA basketball tournament are illegal gambling, although prosecutions are virtually non-existent. Senter says his agency concentrates on gambling crimes that rise to the level of public nuisance, such as card games that bring late-night noise, drugs and other criminal elements to a neighborhood.
But the agency has little to nothing to do with one of the fastest spreading forms of gambling.
Video sweepstakes machines straddle the line
When North Carolina lawmakers created the lottery in 2005, they tried to end a 13-year run of legal video poker in the state.
Unlike machines on the Cherokee reservation, video poker machines that showed up in bars and convenience stores were supposed to be limited – both in the number of locations and machines, and in the amount of money that could be wagered and paid out.
But abuse was rife and all 100 of the state's county sheriffs asked that they be outlawed.
As soon as the ban took effect, a new type of game came into the state. The sweepstakes video games offered players a chance to win based on the purchase of phone or Internet time. Many of the games had the look and feel of slot machines, but those in the business say they were merely "entertaining displays" that revealed a prize and that players weren't actually gambling.
A pair of court cases dealing with the state's attempted ban are now on appeal to the state Supreme Court. In the meantime, the businesses have flourished throughout the state.
According to city records, 31 businesses in Raleigh are licensed to offer video sweepstakes machines. The number of machines at any single business ranges from 1 to 100. Each business pays a $2,500 license fee plus $1,000 per machine up to $20,000 under a 2010 city ordinance.
Other cities have similar ordinances, cashing in on revenue even though the games' existence is a legal gray area.
"I think $20,000 is a fair fee," said Chase Brooks, who heads the Internet Based Sweepstakes Organization, a trade group for operators of sweepstakes rooms.
Brooks operates four rooms in Wake County, three of them in Raleigh, and said the industry has become more accepted.
"They found out that it's not this drastic, nasty thing they thought," Brooks said of legislative critics. "Eighty percent of our customers are women over 40 ... It can't be a horrible place when you're grandmother is playing there."
With sweepstakes parlors settling in across the state, at least some lawmakers say it's time for a new tactic. Rep. Bill Owens, D-Pasquotank, said lawmakers should follow the lead of cities and tax the games.
"I did the first bill to outlaw them," he said. "That didn't work. We tried a couple more times, and that didn't work. If you can't beat them, join them and get some revenue out of it."
Voters apparently agree. A WRAL-Survey USA poll found that of 281 respondents familiar with video sweepstakes, only 13 percent said they should be outlawed entirely. Another 10 percent said the lottery should offer the games rather than private retailers. A combined 69 percent said the games should either continue operating as they are or be regulated and taxed by the state.
Brooks warns that there's only so much revenue the state can earn. Of the $940 million in gross revenue that might flow through an estimated 800 sweepstakes operations every year, 25 percent goes back to the manufacturers who design and license the games, Brooks said. The small businesses that operate the room take home about 7 percent at the end of the day. The rest of the money is bound up in leases, taxes, fees, prizes and other expenses.
When the current legislative session began, leaders in the House and Senate said they did not want to change the law with regard to sweepstakes until the N.C. Supreme Court ruled. That will leave most operators in business for the time being, Brooks said, but it's not ideal.
"I'd like to see a settled environment so I can create a business plan and follow it over five years," Brooks said. And Owens argues the new revenue could help plug holes in the state education budget.
But Creech, with the Christian Action League, said legalizing video sweepstakes would be no better than authorizing the Cherokee to have live dealers.
"Whenever government seeks to profit from gambling it becomes 'the House,' which means it has a vested interest against its own people," Creech said.
In addition to moral objections, Creech and other opponents say more gambling will siphon money from people who can least afford it.
There is at least some evidence to show that the expansion of sweepstakes has caused some problems.
In 2008, only 28 callers to the state's problem gambling help line were referred to treatment for addiction to "video poker." By 2011, that number had climbed to 235. Julie Henry, a spokeswoman for the Department of Health and Human Services, said officials believe the bulk of those "video poker" referrals over the last four years are related to sweepstakes machines.
No sure bet for the future
The future of sweepstakes machines will most likely come down to a state Supreme Court decision. And barring an unusual turnabout, lawmakers will approve the Cherokee expansion in the first part of June.
But no other gambling expansions are on the horizon.
"There are a couple of new draw games that we may look at in the future," said the lottery's Garland. Those would be akin to the Pick 3 and Pick 5 games the lottery runs now.
Lottery officials did research offering video lottery games, the state-run equivalent of sweepstakes games, but those results were set aside. The lottery board has taken no position on whether to expand its offerings that way, Garland said.
If lawmakers do return to gambling as a potential revenue source, UNLV's Schwartz cautions there's no such thing as a safe bet, even for the state.
"We've seen a lot of casinos declare bankruptcy," he said. "Donald Trump's casinos have declared bankruptcy three times."