Proposed Video Lottery Terminals may not generate the same revenue as real Slot Machines –may not be the answer
By LawReader senior editor stan billingsley jan. 24, 2009
House Speaker Greg Stumbo has introduced House Bill 158 to allow video terminal gambling at state race tracks. These may not be as popular as real slot machines in a casino format placed at locations which will draw traffic.
Representative Arnold Simpson of Covington has suggested that the provision of this bill to limit their placement only at race tracks is not to his liking and he wishes to permit the construction of a casino in the Covington area on the River in order to entice out of state customers from Cincinnati, Ohio.
The full text of Stumbo’s pending bill may be read at: Stumbo Bill
The Video Lottery Terminals, proposed in HB 158, appear to be based on a lottery system where each player at a terminal plays against other players then in the casino and also playing. This means that the jackpots are based on a different scheme than regular slot machines. We have seen such a system in a casino in Florida and were of the opinion that they weren’t as popular with the customers as regular slot machines. It this is true in Kentucky, then the Video Terminal aspect of the Stumbo bill may not generate the income predicted for casinos with real slot machines.
Video Lottery Terminal or VLT is a gaming machine that allows gamblers to bet on the outcome of a video game.
A VLT is similar to a slot machine, except that it is connected to a centralized computer system that determines the outcome of each wager using a random number generator. Although the outcome of each wager is random, VLT operators are able to program in advance the total amount and number of payouts that its central computer system will allow at its connected VLTs. In this manner, VLTs can be thought of as computerized scratch-off lottery tickets.
The payouts offered by VLTs are invariably poor. For example, in Las Vegas most slot machines offer a theoretical payout of approximately 98 cents for every dollar they take in (98%). By contrast, Canadian VLTs pay out 74% of their intake, on average. In Saskatchewan, the VLTs pay out 93% of total cash in.
Most US jurisdictions do not allow VLTs and those that do have attracted the same criticism the Canadian provinces have. However, some non-players have expressed tolerance for the machines.
In certain jurisdictions, VLTs are known as Video Gaming Devices (VGD) or Video Slot Machines. Most VLTs are multi-game devices, allowing the players to select, from an on-screen menu, the game(s) they wish to play. They are also known as poker machines and fruit machines in some areas.
If the Kentucky Legislature is serious about raising revenue then it is within their power to simply adopt legislation authorizing casino type gambling and avoid the Video Terminal concept.
Greg Stumbo, while Attorney General, issued a legal opinion that opines that a constitutional amendment is not necessary to authorize gambling in Kentucky. This opinion is based on a decision of the states highest court and is detailed in the following article. We believe that Stumbo had it right the first time and is making a mistake by seeking approval of VLT’s instead of going for slot machines and a traditional casino format.
The following article discusses Stumbo’s previous AG’s opinion, which shows a strong legal basis for the legislature to be able to introduce Casino style gambling without trying to shoehorn VLT’s into the “lottery” exception.
His AG opinion is based on the premises that the 1891 constitutional prohibition “against gambling” in Kentucky was only targeted at “lotteries” and all current prohibitions against gambling are statutory in nature. Therefore the Legislature may authorize casinos if they chose to do so.
There is case law that supports the conclusion that Kentucky does not need a Constitutional Amendment to permit the licensing of Casino Gambling
By LawReader Senior Editor Stan Billingsley – Feb. 7, 2008
Gov. Beshear made his support for a constitutional referendum to allow casino gambling a mainstay of his successful campaign for Governor in 2007. That issue as advanced by Gov. Beshear is based on the assumption that a constitutional amendment is necessary to permit the legislature to authorize and license casino gambling in Kentucky.
The belief that a constitutional amendment is required is based on an interpretation of Section 226 of the Ky. Constitution which has language that from l891 until l992 prohibited the establishment of “lotteries” in Kentucky. In l992 the public adopted a constitutional amendment that permits a state operated lottery.
Section 226 of the Kentucky constitution did not outlaw other forms of gambling in the 1891 section or in the amended section adopted in l995.
There is no specific provision of the Ky. Constitution that prohibits gambling in general, or that specifically prohibits other types of gambling including casino type gambling.
If gambling was prohibited by the constitution we would ask, how is it that pari-mutual betting has been historically allowed? The obvious answer is that pari-mutual betting at race tracks is a statutory creation and that casino gambling can also be authorized by an act of the legislature.
In fact the legislature has through the adoption of KRS Chapter 528 outlawed many forms of gambling. These statutory enactments can just as easily be amended by the legislature to permit casino style gambling.
The statutes that outlaw casino style gambling are found at:
KRS 528.010 Definitions for chapter.
KRS 528.020 Promoting gambling in the first degree.
KRS 528.030 Promoting gambling in the second degree.
KRS 528.040 Conspiracy to promote gambling.
KRS 528.070 Permitting gambling.
KRS 528.080 Possession of gambling device.
Conclusion: Since the legislature can regulate gambling under its police powers, it can authorize gambling under the same authority.
In 2005, then Attorney General Greg Stumbo was asked by State Senator Ed Worley (D)-Richmond to review this very issue.
That opinion has been largely neglected, we believe, because the public perception, which was wrong, strongly concluded that the constitution clearly prohibited casino gambling. It one takes the time to actually read Section 226, that conclusion is debunked.
Perhaps it is time to pull up that AG opinion (OAG 05-003) and really read what it says.
We have done so, and we find the arguments persuasive, and well founded in the law.
The opinion notes that when the l891 constitution was adopted that many forms of gambling were occurring throughout Kentucky. There was however a long history of abusive lottery schemes in which the prize was often not given out even though the members of the public had bought a lottery ticket. These abusive unregulated lottery schemes were the target of Section 226.
The opinion concludes, “The framers of the Constitution clearly rejected the inclusion of other forms of gaming within the prohibition of “lotteries”, as defined above, when Ky. Const. Section 226 was passed. Hence, “lotteries” are constitutionally distinct from other forms of gambling.”
The opinion cites a ruling of the old Court of Appeals (then the highest court in Kentucky) handed down in l931 which demonstrates that the prohibition of other forms of gambling were considered by the Constitutional Convention of l891 and rejected. In that opinion the court upheld the legality of pari-mutual betting on horse races and found it was one of the other forms of gambling not prohibited by Section 226:
Opinion OAG 05-003: “The legal issue of the scope of the prohibition in Section 226 was not squarely presented to Kentucky’s Court of Appeals until 1931 in the case of Commonwealth v. Kentucky Jockey Club, Inc., 238 Ky 739, 38 SW2d 987 (1931).
The Court drew directly upon the Debates of the Constitutional Convention and found:
At the time section 226 was being considered in the convention that framed the Constitution, an amendment was proposed forbidding every species of gambling. Volume 1. Debates of Constitutional Convention p.1172. The delegate who proposed the amendment was asked whether his proposition embraced the prohibition of betting upon the speed of horses, to which he responded that it was his purpose to forbid all species of gambling and all games of chance in every conceivable form. He argued that all gambling was equally wrong, and that it was unfair to denounce gambling in the form of a lottery and to countenance it in other forms, such as betting upon horse races, and the like. The delegate from Lexington argued that it was not the appropriate place to deal with pooling privileges upon race courses, and other forms of gambling, because lotteries theretofore had been licensed by the Legislature, and the object of the pending section was not to deal with any other species of gambling, but to prohibit the Legislature from granting licenses to lotteries. The amendment was rejected, thus indicating that it was the intention of the Convention not to include in section 226 anything but lotteries of the type familiar at the time.” Id. at 993. “
The Attorney General’s Opinion makes a compelling and we think convincing argument that the state is not prohibited by any constitutional provision of the current constitution from adopting legislation permitted the licensing and regulation of casino gambling in the Commonwealth of Kentucky.
David Williams, Majority Leader of the Kentucky State Senate is against a referendum to allow the public consider casino gambling. He says he will not prevent a vote on the issue but suggests that the issue will not garner enough votes in the senate.
That may well be the case. Such opposition would almost surely derail any attempts at statutory legislation to allow casino gambling. Nevertherless, the issue we address is that the legislature could remedy the current revenue shortfall by adoption of such legislation and permit this new form of revenue to begin rolling in during the next fiscal year.
(Below we provide a news article providing a synopsis of OAG 05-003, and below that is a full text of OAG 05-003, and below that are the current provisions of KRS Chapter 528 that demonstrate the only laws that prohibit the establishment of casino gambling.)
News Article from March 21, 2005:
Attorney General Stumbo Finds Legislature Can Expand Gambling in Kentucky Without a Constitutional Amendment
FRANKFORT, KY (March 21, 2005) – Attorney General Greg Stumbo today released the (see below), requested by State Senator Ed Worley (D-Richmond.)
Worley requested the Attorney General’s opinion on the following question: Within the Constitution of Kentucky, are there limitations or prohibitions on the authority of the General Assembly to enact statutory language authorizing the expansion of gambling in Kentucky?
In his response, Attorney General Stumbo cited Section 226(3) of the Kentucky Constitution which prohibits the General Assembly from sanctioning a “lottery”, but stated that there is no constitutional prohibition which limits the General Assembly from authorizing and regulating other forms of gambling.
In his opinion request, Worley also asked Stumbo if the Kentucky Constitution distinguished between the forms of expanded gambling which would restrict the General Assembly from expanding gambling into any specific areas. Stumbo’s opinion states that only lotteries are a prohibited form of gambling under the Kentucky Constitution.
Language from the Debates of the Constitutional Convention of 1890, and later court cases, clearly indicates that horse racing and other forms of gambling are not unconstitutional, Stumbo found.
Four prior opinions of the Office of the Attorney General interpret the prohibitions placed on “lotteries”, “gift enterprises” and “schemes for similar purpose” to include other types of gambling. However, Attorney General Stumbo said, “It was time for a fresh and reasoned review of case law and the origins of gambling restrictions upheld in our Constitution in light of the questions posed by Senator Worley. To the extent that past opinions of this Office are in conflict with this opinion, they are overruled.”
“There are a lot of questions as to the Constitutional restrictions,” said Senator Worley. “I posed the question to the Attorney General from an informational standpoint. I believe that all of the members of the General Assembly, as well as the public, need to have an understanding as to what our Constitution permits so we can make a decision on how we want to proceed on this issue.”
Attorney General’s Opinion issued in 2005 by then A.G. Greg Stumbo
March 21, 2005
Subject: Constitutional limits upon the authority of the General Assembly to pass statutes which expand gambling in Kentucky.
Requested by: Mr. Ed Worley, State Senator, 34th Senatorial District
Written by: Robert S. Jones, Assistant Attorney General
Syllabus: Section 226(3) of the Kentucky Constitution prohibits “lotteries” or “schemes” which distribute money or other things of value purely by chance among persons who have paid for the chance to share in the distribution. Other forms of gambling were intentionally excluded from this prohibition.
Statutes construed: Ky. Const. Section 226(3)
OAGs cited: 80-409, 92-127, 93-58, 99-8
Opinion of the Attorney General
Senator Ed Worley requests the Attorney General’s opinion on the following questions:
1) Within the Constitution of Kentucky, are there limitations or prohibitions on the authority of the General Assembly to enact statutory language authorizing the expansion of gambling in Kentucky?
Answer: Qualified Yes. Ky. Const. Section 226(3) would prohibit the General Assembly from sanctioning a “lottery”, defined as a species of gambling, and described as a scheme for the distribution of prizes or things of value, purely by lot or by chance, among persons who have paid, or agree to pay, a valuable consideration, for the chance to share in the distribution, except as specifically authorized by Ky. Const. Section 226(1) and (2). There is no constitutional prohibition which limits the General Assembly from authorizing and regulating other forms of gambling.
2) Further, does the Kentucky Constitution distinguish between the forms of expanded gambling to restrict the General Assembly in any specific area of such expansion?
Answer: Yes. The framers of the Constitution clearly rejected the inclusion of other forms of gaming within the prohibition of “lotteries”, as defined above, when Ky. Const. Section 226 was passed. Hence, “lotteries” are constitutionally distinct from other forms of gambling.
These questions touch directly upon issues addressed by four prior opinions of the Office of the Attorney General, 80-409, 92-127, 93-058 & 99-8, which interpret the prohibition Ky. Const. Section 226(3) places upon “lotteries”, “gift enterprises”, and “schemes for similar purpose”. Because those opinions differ materially as to the breath of this constitutional limitation upon the General Assembly’s authority to enact various gambling laws, analysis of inconsistent opinions of past Attorneys General is of no benefit. Instead, a fresh and reasoned review of the origins of Section 226(3) and the case law which interprets the section is necessary to answer the questions posed.
The history of Section 226 of the Kentucky Constitution
Historically, the prohibition of lotteries was seen as ethically and morally distinct from other forms of gambling. In 1850 the U.S. Supreme Court wrote:
Experience has shown that the common forms of gambling are comparatively innocuous when placed in contrast with the widespread pestilence of lotteries. The former are confined to a few persons and places, but the lottery infests the whole community; it enters every dwelling; it reaches every class; it preys upon the hard earnings of the poor; it plunders the ignorant and simple.”
Phalen v. Virginia, 8 Howard 163, 12 L Ed 1030, 1033 (1850).
Thirty years later, the Court reflected on that statement and said:
They [lotteries] are a species of gambling, and wrong in their influences. They disturb the checks and balances of a well-ordered community. Society built on such a foundation would almost of necessity bring forth a population of speculators and gamblers, living on the expectation of what, ‘by the casting of lots, or by lot, chance, or otherwise,’ might be ‘awarded’ to them from the accumulations of others.
Stone v. Mississippi, 101 US 814, 818, 25 L Ed 1079 (1880).
In the early 1890s, when the current Kentucky Constitution was drafted and adopted, it is clear that the drafter’s understanding of a lottery was a system in which players wager that a particular number will be selected in a random drawing. At the time it was still the practice of the Commonwealth “to grant privilege to certain gentlemen to raise money by lottery…” This authority was conferred by the “act of 1838, and the amendatory act of 1869.”
Commonwealth v. Douglas, 100 Ky. 116, 24 S.W. 233 (1893).
In Douglas, supra, the Court of Appeals of Kentucky considered a challenge under the “contracts clause” of the U.S. Constitution to Section 226 of the newly written Kentucky Constitution by those who had purchased licenses to operate lotteries. The breath of the prohibition was not in question since the license holders clearly operated “lotteries” as the term was contemplated in the law of the time; however, language within the opinion provides a contemporaneous view of the people and practices Section 226 was intended to address:
We have, for instance, at this day, men confined in the state penitentiary for setting up and carrying on gambling shops whose tendencies are not much more demoralizing, if any, than the licensed lottery operator, who goes free under the protection of the law. Id. at 234.
Hence, the operation of “gambling shops” was seen as distinct from the gaming operated by the licensed lottery operator.
The legal issue of the scope of the prohibition in Section 226 was not squarely presented to Kentucky’s Court of Appeals until 1931 in the case of Commonwealth v. Kentucky Jockey Club, Inc., 238 Ky 739, 38 SW2d 987 (1931).
The Court drew directly upon the Debates of the Constitutional Convention and found:
At the time section 226 was being considered in the convention that framed the Constitution, an amendment was proposed forbidding every species of gambling. Volume 1. Debates of Constitutional Convention p.1172. The delegate who proposed the amendment was asked whether his proposition embraced the prohibition of betting upon the speed of horses, to which he responded that it was his purpose to forbid all species of gambling and all games of chance in every conceivable form. He argued that all gambling was equally wrong, and that it was unfair to denounce gambling in the form of a lottery and to countenance it in other forms, such as betting upon horse races, and the like. The delegate from Lexington argued that it was not the appropriate place to deal with pooling privileges upon race courses, and other forms of gambling, because lotteries theretofore had been licensed by the Legislature, and the object of the pending section was not to deal with any other species of gambling, but to prohibit the Legislature from granting licenses to lotteries. The amendment was rejected, thus indicating that it was the intention of the Convention not to include in section 226 anything but lotteries of the type familiar at the time.” Id. at 993.
The Court approached the issue by adopting a textbook definition of “lottery”:
A lottery, it is said, is a species of gambling, described as a scheme for the distribution of prizes or things of value, by lot or by chance, among persons who have paid, or agree to pay, a valuable consideration, for the chance to share in the distribution… Id. at 992.
Consequently, the Court refused to strike down laws allowing pari-mutuel betting on horse races. In doing so the parameters of legislative authority were delineated as follows:
That all forms of gambling are evil and characterized by vicious tendencies does not alter the fact of the individuality of each type. We are unable… to declare that the section of the Constitution condemning lotteries was understood by the people who adopted it as itself outlawing betting upon horse races, by the pari-mutual system, or the other forms of betting. It was then understood, as has been the accepted opinion, that the subjects of betting and gaming were within the absolute control of the police power, possessed by the legislature. It is the duty and function of the legislature to discern and correct evils, and evils within that power are not limited to some definite injury to public safety or morals, but embrace the removal of obstacles to a greater public welfare. (emphasis added)
Id. at 994.
Subsequent Case law
Since the Kentucky Jockey Club opinion, Kentucky’s highest court has addressed questions compelling it to define “lottery” under Section 226 on four occasions. In two of those cases, Worden v. City of Louisville, 279 Ky. 712, 131 S.W.2d 923 (1939), and Commonwealth v. Malco-Memphis Theatres, Inc., 293 Ky. 531, 169 S.W.2d 596 (1943), the court faced factual situations which clearly implicated the conduct of a “lottery” as that term was traditionally defined. The Worden opinion addresses a tailor shop which provided chances to win a weekly drawing. The Malco-Memphis Theatres case dealt with a ticket drawing to win a prize. In both, the court relied on the definition of a “lottery” identified in the Kentucky Jockey Club opinion and held the practices violated the law. In fact, the defense in Malco-Memphis Theatres conceded the drawings were lotteries, and argued instead that the participants had not paid consideration to enter insofar as the cost of the tickets did not exceed the normal cost for services.
The most recent case to address the lottery provision within Section 226 is Otto v. Kosofsky, Ky., 476 S.W.2d 626 (1971). That opinion addressed the constitutionality of a statute known as the “Bingo Licensing Act.” The court found that bingo fit the traditional definition of a “lottery” as envisioned by the drafters. But, despite the basic holding which reiterated the definition of lottery as “consisting of a scheme for distribution of prizes or things of value purely by lot or chance,” the opinion also cites to an ambiguous quote from A. B. Long Music Company v. Commonwealth, Ky., 429 S.W.2d 391 (1968), which could be interpreted as defining a “lottery” more broadly. A. B. Long Music Company is the sole opinion in the line of Kentucky precedent on the issue which suggests that the term “lottery” might be interpreted as a generic term which extended beyond the intention expressed by the drafters of the Constitution.
In A. B. Long Music Company, supra, the Commonwealth had impounded pinball machines pursuant to KRS 436.280. Impoundment was the enforcement mechanism for KRS 436.230 which prohibited “setting up, keeping, managing, operating or conducting a keno bank, faro bank or other machine or contrivance used in betting.” These statutes clearly authorized the actions taken by the Commonwealth and ultimately constitute the legal basis for the decision. Nevertheless, in dicta, the court addressed the definition of the word “lottery” as used within Section 226. Citing to a number of out of state cases, the court referenced the fact that bingo, beano, keno and lotto are simply variations upon the same game which fall under the generic term “lottery.” Indeed, this is true, but this fact is not relevant to the determination that the pinball machines were a “machine or contrivance used in betting” thereby supporting the State enforcement action under KRS Chapter 436.
Since the A. B. Long Music Company opinion fails to account for existing legal precedent surrounding Section 226, the only wisdom which should be drawn from the opinion is that regardless of its name, if the game meets the traditional test of a “lottery”, as bingo, beano, keno and lotto do, then those games would be forbidden under Section 226 as “similar schemes.” It is this language which the Otto, supra, opinion draws upon in finding that the Bingo Licensing Act was unconstitutional, and not the language which addresses the possibility that the term “lottery” may encompass a meaning beyond that intended by the framers of the Constitution.
Although more than 65 years have passed since the Kentucky Jockey Club, Inc. opinion was entered, it still provides the most thoughtful and relevant analysis of the questions at hand. Case law on the issue since that time, and up to the most recent published decision in 1971, has continued to recognize that the prohibition of “lotteries” under Section 226(3) of the Kentucky Constitution applies only to that subcategory of gaming traditionally identified as “lotteries”. Such “lotteries” are generally characterized by the purchase of a card or ticket which entitles the holder to a prize should, purely by chance or lot, the numbers, letters, or symbols on the ticket match a winning combination. These types of games are known by many names, bingo, beano, keno and lotto, as well as in slang references such as “numbers games”, yet they each carry the recognizable indicia of a “lottery” and therefore fall within the prohibition in Section 226(3).
Opinions of past Attorneys General have attempted to define “lottery” by analyzing the nature of “chance” employed by various games by weighing the relative significance of skill or luck necessary to win. However, the case law is clear; to be a “lottery” the winner must be chosen “purely by chance.” Other OAG opinions have questioned whether the traditional definition of a “lottery” will be sufficient the carry out the intention of the framers as new games are invented using new technology. Yet, this has not been a problem over the past 113 years. Moreover, the debates between the framers of the Constitution lay bare their intention to address a specific and easily identifiable problem, the sale of lottery licenses, when they drafted Section 226. They were aware that existing statutory laws made other types of gambling illegal when they rejected the amendment offered to broaden the lottery prohibition to all forms of gambling. It is therefore reasonable to conclude the framers of the Constitution were confident gambling would continue to be effectively regulated by statute, and further that statutory law, which is inherently more flexible than the dictates of a constitution, was the best way to regulate other forms of gambling in the future.
To the extent that past OAG opinions are in conflict with this opinion they are overruled.
GREGORY D. STUMBO
ROBERT S. JONES
ASSISTANT ATTORNEY GENERAL