Report: Virginia Lottery should be state’s primary gambling regulator

Virginia should give a single state agency the power to regulate most gambling, according to a new report that found splitting those duties among multiple agencies is creating oversight and enforcement gaps in a rapidly expanding industry.

Nonpartisan political analysts also determined a casino in Petersburg would be viable, while leaving it to the General Assembly to decide the best path forward for a casino in central Virginia after Richmond voters rejected one last year. The state could have financially viable casinos in Petersburg, Richmond or both cities, the report concluded, but each option would have different impacts on the profitability of other casinos and local tax revenues.

The pair of gambling reports, released Monday by the state’s Joint Legislative Audit and Review Commission, will presumably help lawmakers next year as they try to answer unresolved questions about Virginia’s push to expand legalized gambling.

Sen. Janet Howell, D-Fairfax, who chairs JLARC, said the Richmond versus Petersburg casino dispute will be “a major issue this upcoming session.”

“It’s likely to be a brawl,” Howell said in a hearing room filled with people in suits. “And it’s likely to have every lobbyist in Richmond involved, as you can see from the audience.”

It’s likely to be a brawl. And it’s likely to have every lobbyist in Richmond involved.

– Sen. Janet Howell, D-Fairfax

In 2018, before Virginia’s anti-gambling stance softened, roughly $3.4 billion were wagered on state lottery games, charitable gaming and traditional horse racing. That number grew steadily as the state approved more ways to gamble, with $13 billion estimated to be wagered in 2022. By 2025, when four casinos are expected to be open, total wagering could have grown to $21 billion.

JLARC recommended that the Virginia Lottery should become the primary gambling regulator, noting that the agency has already been beefing up its staff to handle sports betting and the four casinos being built around the state. The Virginia Racing Commission, which oversees live horse racing and the horse racing-adjacent Rosie’s slots enterprise, doesn’t have the staff to carry out its regulatory mission, JLARC found. Similarly, the report concluded the Virginia Department of Agriculture and Consumer Services — which regulates forms of charitable gaming like bingo, poker and slots-like machines called electronic pull tabs — also doesn’t have the resources to do its job.

“Gaming regulation is not the primary function of VRC and VDACS. Both agencies need more staff and better technology to ensure that all gaming under their purview operates with integrity,” JLARC staff wrote in an 85-page report on how Virginia regulates gambling.

Historical horse racing

The Virginia Racing Commission, which plays a dual role as both regulator and promoter of horse racing as an industry, currently has one part-time staffer specializing in oversight of the more than 2,600 slots-like historical horse racing machines at six Rosie’s locations across the state, the report found. The commission only has four full-time staffers, and JLARC concluded it isn’t regulating Rosie’s locations, which generate money for the horse industry, with the same level of oversight applied to casinos.

Notably, the Racing Commission isn’t required to participate in initiatives to address gambling addiction, the report found, even though other gambling interests are legally required to dedicate some profits to help people who might be suffering from the expansion of legalized gambling.

“Effective regulation contributes to Virginians’ perceptions of the gaming industry’s fairness and reputation, but VRC has not taken actions necessary to effectively regulate large-scale commercial gaming, which (historical horse racing) wagering has become,” JLARC wrote, adding the Racing Commission would need to quadruple its current staff to regulate historical horse racing machines adequately.

Charitable gaming

Several lawmakers who serve on the JLARC committee said they were troubled by what’s been going on in the charitable gaming industry, which was once known mostly for bingo and raffles but has grown over the last decade to nearly $1.5 billion in wagers in 2021.

Most of that wagering was done through slots-like electronic pull tab machines. But the industry is also trying to expand into charity Texas Hold ’em poker tournaments, a process that has created drawn-out controversy over how state-sanctioned poker should be run and the opening of several unlicensed poker rooms.

Gambling regulation is a “minor function” for VDACS, the state report says, which, as the agency’s name suggests, focuses primarily on farming and consumer protection. The agency has 21 charitable gaming positions, JLARC found, and 10 of them are vacant.

“VDACS does not have enough staff to conduct a sufficient number of audits or inspections of organizations that sponsor charitable gaming,” the report says.

Read more of the Mercury’s coverage of Virginia’s gambling expansion

Those audits, meant to ensure legitimate charities are getting the money they’re supposed to be getting, “typically discover over $1 million of unreported gaming revenue annually and hundreds of thousands of dollars in inappropriate spending from gaming accounts.”

Over the last three years, the report says, nearly half of the charities involved in gaming did not meet a basic requirement to devote 10% of the proceeds to charitable purposes.

“Although the use of proceeds requirement is intended to ensure that wagering on charitable gaming fulfills a public benefit, the Charitable Gaming Board has not enforced the policy,” the report says.

VDACS only recently gained the authority to enforce charitable gaming laws without the permission of the Charitable Gaming Board, a panel many lawmakers have criticized as being made up of insiders effectively overseeing their own industry. Earlier this year, the General Assembly stripped that board of some of its power in an effort to prevent conflicts of interest.

“What we have heard I found profoundly troubling,” Del. Lee Ware, R-Powhatan, said after the JLARC presentation on charitable gaming.

Officials believe Virginia also has more than 9,000 unregulated skill machines in truck stops, convenience stores and restaurants. Those machines — which were briefly regulated by Virginia ABC because they were set up in establishments with alcohol licenses — aren’t subject to gambling taxes and are currently operating in legal limbo as the industry challenges the General Assembly’s persistent effort to ban the games. Having no one keeping tabs on the money flowing through those machines creates “a risk for fraudulent activities,” JLARC said.

“As a result, businesses that receive a proportion of machine revenue have no way of knowing whether they are receiving the correct amount of money from the machine manufacturers,” the report says. “Further, consumers who play the machines have no assurances that the games are fair.”

The lack of regulation makes it difficult to know exactly how many skill machines there are, JLARC said, but the number could grow to 20,000 if left unchecked. If the state were to legalize and regulate the machines, oversight of that industry could also be handled by the Virginia Lottery, the report suggests.

Ellie Rigsby, a JLARC analyst, said that even though casino slot machines, historical horse racing machines, electronic pull tab machines and skill machines differ somewhat on technical and legal grounds, they feel almost the same to the person playing them

“From a consumer perspective, they’re extremely similar,” Rigsby said.

Centralizing gambling regulation with the Lottery, the report says, would make it a core focus for just one agency and allow the Lottery to develop the expertise to stay ahead of “emerging gaming-related issues.”

“Lottery employees, specifically in the gaming compliance division, receive extensive training on regulating casinos and sports wagering,” the report says. “Many of the current employees are former law enforcement officers or worked in other states on gaming compliance, so they have an understanding of the risks associated with gaming and the necessity of mitigating those risks through regulation.”

Giving the Lottery oversight of historical horse racing and charitable gaming, which could involve at least 20 new positions and transferring 21 existing jobs to the agency, would cost roughly $5.7 million. That’s $3.5 million more than what VDACS and the Racing Commission currently spend to perform similar but less robust regulation.

The state could also create an entirely new gambling oversight agency, the report says, but that approach would have “several drawbacks,” since policymakers just chose to make the Lottery the primary agency responsible for casinos and sports betting. Although the Lottery is partially funded by the sale of lottery tickets, which some see as giving the agency a vested interest in promoting a particular type of gambling over others, the JLARC reports notes the Lottery’s expanded regulatory functions have been funded through an additional $23 million in the regular budget.

Acknowledging the value of more niche gambling expertise, the JLARC report does not suggest doing away with the Racing Commission or the Charitable Gaming Board altogether.

Instead, it recommends keeping oversight of live horse racing with the Racing Commission, since that was the agency’s “long-time primary focus” before the legislature approved historical horse racing machines in 2018. The Charitable Gaming Board, the report says, could serve as an advisory board to the Virginia Lottery Board, or one of its members could also serve on the Lottery Board.

Representatives from VDACS and the Racing Commission said Monday they took no issue with anything in the JLARC report.

Crunching casino numbers for Petersburg and Richmond

In a separate report, JLARC said policymakers could put a casino in Petersburg or Richmond, since both locations would boost the state’s overall net gambling revenue.

Because the General Assembly picked five specific cities when it legalized casinos — Bristol, Portsmouth, Danville, Norfolk and Richmond — the state can’t leave it to free-market forces and casino builders themselves to decide where casinos should or shouldn’t go.

Lawmakers asked JLARC to look at the feasibility of a Petersburg casino after Richmond residents narrowly defeated a casino referendum in 2021, making the state capital the only one of the five cities to say no. Richmond officials are still pursuing the casino idea, and the JLARC report is fodder for the ongoing debate over which location would be best.

The Innovation Group, a Louisiana-based consulting firm that has helped JLARC on casino analysis before, said a fully operational Petersburg casino would generate roughly $204 million in net gaming revenue each year. An earlier report in 2019 found a Richmond casino would generate roughly $297 million. If casinos were built in both cities, the report released this week says, Richmond’s could generate $249 million while Petersburg’s could produce $140 million.

If the Richmond/Petersburg market got two casinos, the report says, other casinos and Rosie’s locations would see a bigger revenue drop as a result.

The analysis did not recommend one location or the other and mostly verified the financial math to justify any casino approach the General Assembly chooses to take.

“‘We’re not making any judgments as a staff,” said JLARC Director Hal Greer. “We’re just giving the numbers.”



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