Transfer of Funds to Public Education - 3rd Quarter

CALIFORNIA LOTTERY Report of Analysis QUARTERLY TRANSFER OF FUNDS TO PUBLIC EDUCATION For the Quarter Ended March 31, 2017 BETTY T. YEE California State Controller October 2017 BETTY T. YEE California State Controller October 18, 2017 California Lottery Commission 700 North Tenth Street Sacramento, California 95811 ATTN: Gregory Ahern, Chair Dear Commissioners: The State Controller’s Office analyzed the financial documentation supporting the California Lottery’s (Lottery) transfer of funds to the public education community for the quarter ended March 31, 2017. Our analysis found that the transfer amount of $383,870,781 appears to be supported by the Lottery’s accounting records and that the Lottery is on target to comply with the annual statutory percentages for prizes, education, and administration. If you have any questions, please contact Andrew Finlayson, Bureau Chief, Division of Audits, by telephone at (916) 324-6310 or by email at afinlayson@sco.ca.gov. Sincerely, Original signed by JEFFREY V. BROWNFIELD, CPA Chief, Division of Audits JVB/rg cc: Connie M. Perez-Andreesen, Vice Chair California Lottery Commission Nathaniel Kirtman, III, Commissioner California Lottery Commission Rowena Libang-Bobila, Commissioner California Lottery Commission Hugo López, Director California Lottery Nicholas Buchen, Deputy Director, Finance Division California Lottery Roberto Zavala, Deputy Director, Internal Audits California Lottery James Shannon, Audit Manager, Internal Audits California Lottery California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Contents Report of Analysis Introduction ......................................................................................................................... 1 Summary .............................................................................................................................. 1 Background .......................................................................................................................... 1 Objectives, Scope, and Methodology ................................................................................. 2 Results ................................................................................................................................... 2 Schedule 1—Fiscal Years 2016-17 and 2015-16 Year-to-Date Lottery Revenue Allocations.......................................................................... 3 Attachment—California Lottery’s Transfer Request of May 17, 2017 California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Report of Analysis Introduction This report presents the results of our analysis of the California Lottery’s (Lottery) quarterly request that the State Controller’s Office (SCO) transfer funds to the public education community. This analysis is part of our responsibility under the California State Lottery Act (Lottery Act). We performed this analysis to determine whether the transfer amount to the public education community was supported by amounts recorded in the Lottery’s accounting records, and to determine whether the Lottery is on target to comply with the annual Lottery Education Fund allocation requirements contained in the Lottery Act. Summary In a letter dated May 17, 2017, the Lottery requested that the SCO transfer $383,870,781 to the Lottery Education Fund for disbursement to the public education community. Our analysis found that the transfer amount appears to be supported by the Lottery’s accounting records and that the Lottery is on target to comply with the annual statutory percentages for prizes, education, and administration. On June 28, 2017, the SCO transferred $383,870,773 to the Lottery Education Fund. As a result of the SCO’s apportionment process, all requested funds except an immaterial amount were disbursed to the public education community. The balance will remain in the Lottery Education Fund to be apportioned during the next quarterly transfer. Background In 1984, California voters passed an initiative that authorized a state- operated lottery. The initiative created the Lottery Act, which requires the quarterly transfer of net revenues to the public education community and established the allocation percentages for lottery funds. The Lottery Act also requires the SCO to conduct quarterly and annual post-audits of all accounts and transactions of the California Lottery Commission and other special post-audits as the State Controller deems necessary. The Act requires revenues from the Lottery to be allocated to maximize the amount of funding allocated to the public education community. The Act requires that not less than 87% of the total annual revenues from Lottery ticket sales be returned to the public in the form of prizes and funds to education, and not more than 13% be allocated for Lottery expenses. Furthermore, the Act specifies that not less than 50% of the total annual Lottery revenues, in an amount to be determined by the Lottery Commission, be returned to the public in the form of prizes. In addition, the Lottery Commission must establish the percentages to be allocated to the benefit of public education. Each quarter, the Lottery requests that the SCO transfer net revenues to the public education community (see Attachment). The Lottery’s request usually occurs eight to ten weeks after the close of a quarter. -1- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Objectives, Scope, We performed this analysis of the transfer of funds to the public education community for the nine months ended March 31, 2017 in order to and Methodology determine whether:  The Lottery’s requested transfer amount of $383,870,781 is supported by accounting records; and  The Lottery is on target to comply with the annual allocation requirements specified in the Lottery Act. As part of our analysis, we traced the transfer amount to the Lottery’s accounting records and applied analytical review procedures to Lottery fund accounts by comparing them with those from the prior year. Results On June 28, 2017, the SCO transferred $383,870,773 to the Lottery Education Fund. As a result of the SCO’s apportionment process, all requested funds except an immaterial amount were disbursed to the public education community. The balance will remain in the Lottery Education Fund to be apportioned during the next quarterly transfer. After analyzing the Lottery’s unaudited financial statements and supporting records for the quarter ended March 31, 2017, we determined that the Lottery’s requested transfer amount of $383,870,781 to the Lottery Education Fund appears to be supported by accounting records. For the nine months ended March 31, 2017, of the total revenues from ticket sales:  63.46% was returned to the public in the form of prizes;  24.35% was transferred to the public education community; and  12.19% was used for administrative expenses. The Lottery returned 87.81% of the total revenues from the sales of tickets to the public in the form of prizes and funds to education. The Lottery is on target to comply the annual allocation requirements specified in the Lottery Act. See Schedule 1 for a summary of Lottery transfers and allocation percentages. Original signed by JEFFREY V. BROWNFIELD, CPA Chief, Division of Audits October 18, 2017 -2- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Schedule 1— Fiscal Years 2016-17 and 2015-16 Year-to-Date Lottery Revenue Allocations Three Months % of Six Months Ended % of Nine Months Ended % of Twelve Months Ended % of Fiscal Year 2016-17 Ended 9/30/2016 Sales1 12/31/2016 Sales1 3/31/2017 Sales1 6/30/2017 Sales1 Sales $ 1,520,852,245 100.00% $ 3,007,995,704 100.00% $ 4 ,591,845,645 100.00% Prizes $ 956,786,575 62.91% $ 1,901,324,398 63.21% $ 2 ,913,889,187 63.46% Operating income to education $ 379,715,792 24.97% $ 741,824,148 24.66% $ 1 ,118,104,575 24.35% Revenues returned to public $ 1,336,502,367 87.88% $ 2,643,148,546 87.87% $ 4 ,031,993,762 87.81% Administrative expenses $ 184,349,878 12.12% $ 364,847,158 12.13% $ 5 59,851,883 12.19% Miscellaneous income 2 $ 21,348,557 $ 33,795,876 $ 4 1,386,230 Adjustment $ - $ 8,764,910 3 Allocation to Education Fund 5 $ 4 01,064,349 $ 7 84,384,934 $ 1,159,490,805 Three Months % of Six Months Ended % of Nine Months Ended % of Twelve Months Ended % of Fiscal Year 2015-16 Ended 9/30/2015 Sales1 12/31/2015 Sales1 3/31/2016 Sales1 6/30/2016 Sales1 Sales $ 1,457,390,634 100.00% $ 2,887,389,853 100.00% $ 4 ,736,844,778 100.00% $ 6 ,275,597,288 100.00% Prizes $ 932,898,902 64.01% $ 1,859,560,540 64.40% $ 2 ,988,377,257 63.09% $ 3 ,955,791,373 63.03% Operating income to education $ 342,467,357 23.50% $ 668,910,184 23.17% $ 1 ,186,816,830 25.06% $ 1 ,559,668,537 24.85% Revenues returned to public $ 1,275,366,259 87.51% $ 2,528,470,724 87.57% $ 4 ,175,194,087 88.14% $ 5 ,515,459,910 87.89% Administrative expenses $ 182,024,375 12.49% $ 358,919,129 12.43% $ 5 61,650,691 11.86% $ 7 60,137,378 12.11% Miscellaneous income 2 $ 5,932,311 $ 11,616,162 $ 1 6,834,859 $ 2 7,748,062 Adjustment $ - $ 7,237,006 4 $ - $ ( 8,764,910) 3 Allocation to Education Fund 5 $ 3 48,399,668 $ 6 87,763,352 $ 1,203,651,689 $ 1,578,651,689 Annual Statutory Revenue Allocation Percentage Requirements Prizes – Not less than 50% of sales Administrative expenses – Not more than 13% of sales Prizes and funds to education – Not less than 87% of sales Other income – 100% to education _____________________________________ 1Statutory compliance is determined on an annual basis at fiscal year-end. The percentages displayed in the first three quarters show the Lottery's year-to-date progress toward meeting annual statutory requirements. The percentages may not total 100% due to rounding. 2Miscellaneous income includes Surplus Money Investment Fund interest earned, unclaimed prizes, and other income. 3This amount was withheld from the fical year 2015-16 fourth quarter transfer and was adjusted in the fiscal year 2016-17 second quarter transfer after the completion of the financial statement audit and resolution of accounting issues. 4This amount was withheld from the previous fourth quarter transfer and was included in this quarter's transfer after the completion of the financial statement audit and resolution of accounting issues. Except in the quarter it was presented, this amount was not included in the year-to-date Education Fund allocation amounts. 5The Education Fund allocation amount is sales plus miscellaneous income, plus the adjustment amount, less prizes, and less administrative expenses. -3- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Attachment— California Lottery’s Transfer Request of May 17, 2017 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250-5874 http://www.sco.ca.gov S17-LOT-4003