Transfer of Funds to Public Education - 4th Quarter

CALIFORNIA LOTTERY Report of Analysis QUARTERLY TRANSFER OF FUNDS TO PUBLIC EDUCATION For the Quarter Ended June 30, 2017 BETTY T. YEE California State Controller July 2018 BETTY T. YEE California State Controller July 16, 2018 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 June 30, 2017. Our analysis found that the transfer amount of $386,000,000 is supported by the Lottery’s accounting records, and that the Lottery complied with the annual statutory revenue allocation percentages for prize payouts, funds to education, and administrative expenses. If you have any questions, please contact Andrew Finlayson, Chief, State Agency Audits Bureau, 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/as 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 ................................................................................. 1 Results ................................................................................................................................... 2 Schedule—Fiscal Years 2016-17 and 2015-16 Year-to-Date Lottery Revenue Allocations.......................................................................... 4 Attachment—California Lottery’s Transfer Request of December 13, 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 Lottery Education Fund for disbursement to the public education community. Summary The Lottery requested that the SCO transfer $386,000,000 to the Lottery Education Fund for disbursement to the public education community for the quarter ended June 30, 2017. Based on the work performed, we determined that the requested transfer amount of $386,000,000 was supported by the Lottery’s accounting records. In addition, we determined that the Lottery complied with annual revenue allocation requirements for prize payouts, funds to education, and administrative expenses as specified in the Lottery Act for the fiscal year ended June 30, 2017. 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 a portion of revenues to the public education community and established the allocation percentages for lottery revenues. 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 prize payouts. 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 funds to the Lottery Education Fund (see Attachment). The Lottery’s request usually occurs eight to ten weeks after the close of each quarter. Objectives, Scope, The objectives of the analysis were to determine whether: and Methodology  The requested transfer amount was supported by the Lottery’s accounting records; and  The Lottery complied with the annual revenue allocation percentages specified in the Lottery Act for the fiscal year ended June 30, 2017. -1- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education We performed this analysis for the fourth quarter ended June 30, 2017. To achieve the objectives, we:  Compared current fiscal year audited income statement balances with prior-year audited income statement balances and performed analytical procedures for variances over ten percent;  Traced amounts reported in the income statement to the Lottery’s accounting records;  Determined that the Lottery met the annual revenue allocation requirements specified in the Lottery Act;  Reviewed a selection of accruals and determined that they were adequately supported, accurately calculated, and recorded in the correct period;  Determined that the requested transfer amount to the Lottery Education Fund occurred; and  Verified that funds were transferred from the Lottery Education Fund to the public education community for the current quarter. Results Based on the work performed, we determined that the requested transfer amount of $386,000,000 for the fourth quarter ended June 30, 2017 was supported by the Lottery’s accounting records. In addition, we determined that the Lottery complied with annual revenue allocation requirements for prize payouts, funds to education, and administrative expenses as specified in the Lottery Act for the fiscal year ended June 30, 2017. In a letter dated September 15, 2017, the Lottery requested that the SCO transfer $386,000,000 to the Lottery Education Fund for disbursement to the public education community. On September 29, 2017, the SCO transferred $386,000,000 to the Lottery Education Fund, and as a result of the SCO’s apportionment process, the entire balance of the Fund except $6.87 was disbursed to the public education community. This remainder was apportioned during the subsequent quarterly transfer. On December 13, 2017, the Lottery submitted a revision to the September 15, 2017 letter (see Attachment). The revision reported a decrease in the Lottery’s operating income for the fiscal year ended June 30, 2017 but did not change the requested transfer amount of $386,000,000. Despite the revisions, the Lottery met annual revenue allocation requirements specified in the Lottery Act. For the 12 months ended June 30, 2017, of the total revenues from ticket sales:  63.58% was returned to the public in the form of prize payouts;  23.97% was transferred to the public education community; and  12.45% was used for administrative expenses. -2- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education The Lottery returned 87.55% of the total revenues from the sales of tickets to the public in the form of prize payouts and funds to education. The Lottery complied with the annual allocation requirements specified in the Lottery Act. See Schedule for a summary of Lottery transfers and allocation percentages. Original signed by JEFFREY V. BROWNFIELD, CPA Chief, Division of Audits July 16, 2018 -3- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Schedule— 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 2016/2017 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% $ 6 ,233,468,423 100.00% Prizes $ 956,786,575 62.91% $ 1,901,324,398 63.21% $ 2 ,913,889,187 63.46% $ 3 ,963,453,360 63.58% Operating income to education $ 379,715,792 24.97% $ 741,824,148 24.66% $ 1 ,118,104,575 24.35% $ 1 ,494,177,874 23.97% Revenues returned to public $ 1,336,502,367 87.88% $ 2,643,148,546 87.87% $ 4 ,031,993,762 87.81% $ 5 ,457,631,234 87.55% Administrative expenses $ 184,349,878 12.12% $ 364,847,158 12.13% $ 5 59,851,883 12.19% $ 7 75,837,189 12.45% Miscellaneous income 2 $ 21,348,557 $ 33,795,876 $ 4 1,386,230 $ 5 1,347,608 Adjustment $ - $ 8,764,910 3 $ - $ ( 34,677) 6 Education Fund Allocation Amount 5 $ 4 01,064,349 $ 7 84,384,934 $ 1,159,490,805 $ 1,545,490,805 Three Months % of Six Months Ended % of Nine Months Ended % of Twelve Months Ended % of Fiscal Year 2015/2016 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 educations $ 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 Education Fund Allocation Amount 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 are presented to show the Lottery’s year-to-date progress toward meeting annual statutory requirements. 2Miscellaneous income includes Surplus Money Investment Fund interest earned, unclaimed prizes, and other income. 3This amount was withheld from the fiscal year (FY) 2015-16 fourth-quarter transfer and was adjusted in the FY 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/less the adjustment amount, less prizes, and less administrative expenses. 6This amount was withheld from the FY 2016-17 fourth-quarter transfer and will be adjusted in a subsequent quarter transfer after the completion of the financial statement audit and resolution of accounting issues. -4- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Attachment— California Lottery’s Transfer Request of December 13, 2017 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 http://www.sco.ca.gov S18-LOT-4000