Monday, January 24, 2011

Looming Municipal Debt Crisis the Key to Online Poker Legalization?

By Pauly
Los Angeles, CA

If online poker has a shot at legalization in the next 12-24 months, it's not going to be on a federal level spearheaded by Barney Frank or Harry Reid. Rather, if online poker has a legitimate shot at legality, it's going to be because your state is flat broke.

In the parlance of our poker times, almost 80% of the states in the union are broke dicks like Eskimo Clark. Here's why:
1. States are crippled with budgetary woes after spending more than their tax revenues can generate. If states cannot refinance their debt quickly or come to an agreement with their unions, they will be screwing the proverbial pooch.

2. Collectively, our states are sitting on a ticking time bomb with underfunded pensions in excess of a $3 trillion dollars. How deep of a hole is your state? This state-by-state interactive map of underfunded pension plans will show you some startling numbers.

3. Due to the budgetary crunch, states will have to cut back on providing funding to municipalities. As a result, many towns and even some of America's biggest cities (Los Angeles, New York, Chicago and Miami, not to mention smaller cities like Detroit and Oakland) will default on their debt obligations, that were once considered low risk investments, but now approaching junk status, especially in California. The city of Vallejo, CA was the first city to declare bankruptcy. The bad news is that the CEO of JP Morgan said that he expects more municipalities to go bankrupt in the immediate future.

4. The domino effect of the muni debt defaults will eventually ripple into the financial sector. At this moment, munis took a pounding last quarter for their worst performance since 1994. Over on the muni bond fund side of the equation, there has been a mass exodus and sell off. If cities go busto, then banks guaranteeing muni bonds with letters of credit will incur a catastrophic hit. Individual investors of bonds will be not be paid back because they will be at the back of a line of hordes of other creditors. Mutual funds that were vested in munis will also take a nose dive.

5. Unlike the sub-prime mortgage fiasco in 2008, do not expect the Fed to bail out the states. Fed Chairman Ben Bernanke clearly stated: NO BAILOUTS. The Fed only helps banks. If anything, they will most likely bail out any banks that got caught in the cross fire, but they certainly won't help the fledgling states. And don't think a Republican Congress, sprinkled with Tea Party members, are going to come to the rescue. State bailouts are not the GOP's thing either.
With all of the impending doom laid out on the table for you, there's a glimmer of hope that states might turn to online poker legalization and regulation as a solution to dig themselves out of an apocalyptic budget crisis. Don't get me wrong, the states' budgetary problems are ginormous and way too complicated to think that flipping the switch on online poker will easily fix everything. A few million dollars a year in tax revenue siphoned from online poker is just putting a band-aid onto a gaping gunshot wound.

However, if some states are simply unaware of the severity of the situation, or if they have gotten so desperate that they don't know what to do, then maybe...just poker would look like a plausible and immediate solution to bridge a budget gap. Just last year, the state of Colorado helped balanced their budget using $9 million in revenues derived from medicinal marijuana. It makes sense that broke states will possibly explore the marijuana route and some form of legalized online gambling. In fact, the two states that have taken the first steps to legalize poker on a state basis are New Jersey and California. It's not a coincidence because those states are about to be swallowed up by their own debts.

California supposedly has over $500 billion in underfunded pensions and they are staring down the barrel of a $19 billion budget deficit. When Prop 19 failed to pass last November, any chances of marijuana legalization went up in smoke. California is currently a medicinal marijuana state (a law that has been on the books since 1994), but even the marijuana-related sales tax revenue generated was not enough to make a difference.

Even the city of Los Angeles is on the verge of economic collapse. The police have gone from a law-enforcing organization to a revenue generator. Cops were told to write more tickets instead of allocating their time to fighting real crime. How bad is it in Hollyweird? If you're caught jaywalking, you will get slapped with a $191 ticket.

California desperately needs legalization of both marijuana and online poker in order to make a dent in their deficit. In the months after marijuana legalization was defeated, California politicians considered the possibility of legal online poker. That's the good news. The poker industry's biggest hurdle in California is the tribal gaming conglomerate, who is obviously opposed to opening up the state to online poker operators (especially European-based gaming companies).

New Jersey is in a horrendous financial situation (crushed by the real estate bubble, loss of thousands of jobs, ballooning budget, lower tax revenues), that's why they ushered in medicinal marijuana and the state legislature approved of an internet gaming bill. NJ really doesn't have a choice but to consider those two possibilities: weed and online poker.

And how bad off is the city of Chicago? In 2008, in order to generate income to plug a budget hole, the city sold off their parking meters to a group of investors from Abu Dhabi. Yes, for a mere $1.1 billion lump sum, the oil-rich Arabs now control the parking meters in Chicago for 75 years. What was the first thing that happened? A widespread increase in parking fees across the city.

Illinois is one of the most troubled states in the country. They recently hiked taxes in order to improve their state's muni bond credit rating in a desperate attempt to make their bonds more attractive to investors. But as the saying goes, "You can put as much lipstick you want on a's still going to be a pig."

Although Business Week says that the muni debt fears are "overblown", the reality probably lies somewhere in between nirvana and Hades. It seems improbable that every state will default on their debt, but then again the CEO of JP Morgan warned the public that municipal bankruptcies are imminent.

With other states scrambling to refinance their debt, a few of them might have no other alternative but to legalize online poker. Otherwise, if local and state services get shut down, and retirees all of a sudden see their checks bouncing, expect mass uprisings and anarchy.

There's an interesting twist to this saga. Right now, a bill is quietly being introduced into Congress that will allow states to declare bankruptcy. Only cities and towns can seek protection under bankruptcy laws, but that might change within a few weeks. Cash-scrapped Congress is secretly in favor of the new bill permitting states to declare bankruptcy, because then Congress won't have to buckle under pressure from their angry constituents to bail out the states.

I'm not the only one who thinks that state bankruptcy is a bad idea. As Kid Dynamite explained in a recent post titled Fix the Underlying Problem, any solutions that the states are exploring only fix past problems and fail to address future woes along with the cause of the problem in the bigger picture.

I don't see anything good that could come out of busto states getting bankruptcy protection. For one, you can kiss any hopes of legal online poker goodbye because states won't have to worry about raising cash overnight. At the same time, state bankruptcies will disrupt the daily lives of hard working Americans. If you or a family member is a teacher or fireman who has a state pension or if you own muni bonds for a state and that state declares bankruptcy, then you'll have to stand in the back of the never ending line with the rest of unsecured creditors. In short, it's like being one of Eskimo Clark's backers -- I doubt they'll get paid.

The future is grim no matter how you look at it. That's why there's very little chatter in the media about the looming municipal debt crisis. It's sort of like an asteroid ready to crash into Earth -- it's much easier to be the ostrich with its head buried in the ground, and let everyone go about their daily lives, rather than clue them in on the reality of the situation and that the end of the world could be right around the corner. The major players involved (governors, state comptrollers, and treasurers) are scrambling around like speedfreaks trying to figure out how to dig themselves out of a black hole. They started slashing their budgets left and right, but then what? If they can't come up with a quick (and long term) solution, then it's inevitable that the masses will finally revolt.

No body wants blood spilled on the streets. Depending on where you live and how desperate your politicians are, online poker might become a savior to your state. If one courageous state pulls the trigger, expect more insolvent states to jump on the online poker bandwagon. That's why you should be paying close attention to the state bankruptcy bill that's being introduced to Congress in the upcoming weeks. Also, keep tabs on the muni debt crises in three of the largest states in the union: California, Illinois, and New Jersey. These are the battle ground states for the future of the poker industry. If legal online poker can sneak into the mix via these atrociously broke states, then you can expect a few other cash-strapped states to follow suit.

Who would have thunk that poker might gain a step up on the legalization front because your state's comptroller failed to balance the budget and re-fund underfunded pensions? If that one-outer hits, well, you heard it here first.

Photo Credits: "Eat the Art" courtesy of Banksy; Anarchy courtesy of MatrixPhotos


  1. What are you, high?
    The chances of states defaulting on their muni debt are incredibly remote. There is too much to lose for them to even think of declaring bankruptcy. How would they ever borrow at a decent rate again?

    The 100-150 defaults that Meredith Whitney has been making all kinds of noise about are a tick on the elephant that is the muni bond market. Yes it is a big, blood swollen tick compared to the past, but it's still small.

    Crisis sells newspapers and attracts tv viewers. Don't believe the hype.

  2. I'm usually always high, but you're attempt to discredit my credibility about my state of mind while writing the post is nothing more than a cheap shot.

    If anything, your reading comprehension, or lack their of, should come under fire. You obviously missed the part when I said that states default on munis are highly unlikely. The threat of trying to make up the short fall in under funded pensions might urge politicians to listen to the online poker lobby.

    Meredith Whitey is just one of many people pointing out a potential problem. I linked up dozens of articles that offer up similar and diverse opinions.

    And per your last sentence, last time I checked, no one was buying newspapers. All the crisis in the world won't sell those dinosaurs.

    I'm not into hype. I'm just laying out the facts.