Transfer of Funds to Public Education - 3rd Quarter

CALIFORNIA STATE LOTTERY Review Report QUARTERLY TRANSFER OF FUNDS TO PUBLIC EDUCATION For the Quarter Ended March 31, 2020 BETTY T. YEE California State Controller June 2021 BETTY T. YEE California State Controller June 2, 2021 Alva Vernon Johnson, Director California State Lottery 700 North Tenth Street Sacramento, CA 95811 Dear Mr. Johnson: The State Controller’s Office reviewed the financial documentation supporting the California State Lottery’s (Lottery) transfer of funds to the public education community for the quarter ended March 31, 2020. Our review found that the transfer amount of $383,828,694 is supported by the Lottery’s accounting records, and that the Lottery was on target to meet 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, 2020. If you have any questions, please contact Andrew Finlayson, Chief, State Agency Audits Bureau, by telephone at (916) 324-6310, or by email at afinlayson@sco.ca.gov. Sincerely, Original signed by KIMBERLY TARVIN, CPA Chief, Division of Audits KT/as cc: Gregory Ahern, Chair California State Lottery Commission Nathaniel Kirtman III, Commissioner California State Lottery Commission Keetha Mills, Commissioner California State Lottery Commission Peter Stern, Commissioner California State Lottery Commission Nicholas Buchen, Deputy Director, Finance Division California State Lottery James Shannon, Audit Manager, Internal Audits California State Lottery California State Lottery Quarterly Transfer of Funds to Public Education Contents Review Report Summary .............................................................................................................................. 1 Background .......................................................................................................................... 1 Objectives, Scope, and Methodology ................................................................................. 1 Results ................................................................................................................................... 2 Views of Responsible Officials ............................................................................................ 3 Restricted Use ...................................................................................................................... 3 Schedule—FY 2019-20 and FY 2018-19 Year-to-Date Lottery Revenue Allocations ........ 4 Attachment—California State Lottery’s Transfer Request Dated June 5, 2020 California State Lottery Quarterly Transfer of Funds to Public Education Review Report Summary The California State Lottery (Lottery) requested that the State Controller’s Office (SCO) transfer $383,828,694 to the Lottery Education Fund for disbursement to the public education community for the quarter ended March 31, 2020. Based on the work performed, we determined that the requested transfer amount was supported by the Lottery’s accounting records. In addition, we determined that the Lottery was on target to meet annual revenue allocation requirements for prize payouts, funds to education, and administrative expenses as specified in the California State Lottery Act of 1984 (Lottery Act) for the fiscal year ended June 30, 2020. Background On November 6, 1984, California voters passed Proposition 37, the Lottery Act, which authorized the creation of a state-operated lottery. The Lottery Act is found in Government Code Chapter 12.5, section 8880 et seq. The Lottery Act requires revenues from the Lottery to be allocated to maximize the amount of funding allocated to the public education community. The Lottery 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 prize payouts and funds to education and not more than 13% be allocated for administrative expenses. Furthermore, the Lottery Act requires that not less than 50% of the total annual Lottery revenues, in an amount to be determined by the California State Lottery Commission (Commission), be returned to the public in the form of prize payouts. In addition, the Commission must establish the percentages to be allocated to the benefit of public education. Government Code section 8880.46.6 states that the SCO shall conduct quarterly and annual audits of all accounts and transactions of the Commission and other special audits as the State Controller deems necessary. The Controller has the authority to examine any and all records of the Commission, its distributing agencies, Lottery contractors, and Lottery retailers. Each quarter, the Lottery requests that the SCO transfer funds to the Lottery Education Fund (Attachment). The Lottery’s request usually occurs eight to 10 weeks after the close of each quarter. Objectives, Scope, The objectives of our analysis were to determine whether: and Methodology  The requested transfer amount was supported by accounting records; and  The Lottery was on target to meet the annual allocation requirements specified in the Lottery Act. -1- California State Lottery Quarterly Transfer of Funds to Public Education We performed this analysis for the third quarter ended March 31, 2020. To achieve our objectives, we:  Compared current fiscal year audited income statement balances with prior fiscal year audited income statement balances and performed analytical procedures for variances over 15%;  Traced amounts reported in the income statement to the Lottery’s accounting records;  Judgmentally selected sales and expense items, based on dollar amount and type, and traced them to supporting documentation;1  Determined whether the Lottery met the annual revenue allocation requirements specified in the Lottery Act;  Determined whether the requested transfer amount to the Lottery Education Fund occurred; and  Verified that the 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 $383,828,694 for the third quarter ended March 31, 2020 was supported by the Lottery’s accounting records. In addition, we determined that the Lottery was on target to meet annual revenue allocation requirements for prize payouts, funds to education, and administrative expenses as specified in the Lottery Act for the quarter ended March 31, 2020. In a letter dated June 5, 2020, the Lottery requested that the SCO transfer $383,828,694 to the Lottery Education Fund for disbursement to the public education community. On June 23, 2020, the SCO’s Government Programs and Services Division (LGPSD) transferred $383,828,694 from the State Lottery Fund to the Lottery Education Fund. In our prior quarterly reports, we disclosed the following issue, which we also disclose in this report because it remained uncorrected during this review period. During the fiscal year (FY) 2018-19 first-quarter allocation calculations, while updating the average daily attendance (ADA) figures for approximately 2,500 educational entities, LGPSD transposed ADA numbers for some schools in two counties. LGPSD collected the overpayments from the two counties as soon as the errors were discovered. The ADA errors resulted in misallocations, totaling $5,196,819, to all educational entities that receive Lottery funding. LGPSD staff indicated that process changes are being implemented to minimize the potential for future ADA transposition errors. 1 As non-statistical sampling methods were used, the results were not projected to the intended population. -2- California State Lottery Quarterly Transfer of Funds to Public Education For the nine months ended March 31, 2020, of the total revenues from ticket sales:  66.25% was returned to the public in the form of prize payouts;  21.74% was transferred to the public education community; and  12.01% was used for administrative expenses. The Lottery returned 87.99% of total revenues from ticket sales in the form of prize payouts and funds to education. The Lottery was on target to meet annual allocation requirements specified in the Lottery Act. See the Schedule for a summary of Lottery revenue allocations and allocation percentages. Views of We discussed our results with Lottery representatives via email on February 10, 2021. As there are no findings, the Lottery waived the exit Responsible conference and draft report. We agreed the report would be issued as final. Officials Restricted Use This report is intended for the information and use of the Lottery, the Commission, and the SCO; it is not intended to be and should not be used by anyone other than these specified parties. This restriction is not intended to limit distribution of this report, which is a matter of public record. Original signed by KIMBERLY TARVIN, CPA Chief, Division of Audits June 2, 2021 -3- California State Lottery Quarterly Transfer of Funds to Public Education Schedule— FY 2019-20 and FY 2018-19 Year-to-Date Lottery Revenue Allocations Three Months % of Six Months % of Nine Months % of Twelve Months % of Fiscal Year 2019/2020 Ended 9/30/2019 Sales1 Ended 12/31/2019 Sales1 Ended 3/31/2020 Sales1 Ended 6/30/2020 Sales1 Sales $ 1,663,239,267 100.00% $ 3 ,355,739,201 $ 4 ,981,760,628 100.00% Prizes $ 1,106,200,805 66.51% $ 2 ,223,100,423 66.25% $ 3 ,300,388,515 66.25% Operating income to education $ 359,504,052 21.61% $ 7 28,641,946 21.71% $ 1 ,083,119,336 21.74% Revenues returned to public $ 1,465,704,857 88.12% $ 2 ,951,742,369 87.96% $ 4 ,383,507,851 87.99% Administrative expenses $ 197,534,410 11.88% $ 4 03,996,832 12.04% $ 5 98,252,777 12.01% Miscellaneous income 2 $ 58,157,980 $ 7 4,538,873 $ 8 0,410,080 Adjustment $ - $ - $ 2 3,480,097 5 Allocation to Education Fund 4 $ 417,662,032 $ 8 03,180,819 $ 1 ,187,009,513 Three Months % of Six Months % of Nine Months % of Twelve Months % of Fiscal Year 2018/2019 Ended 9/30/2018 Sales1 Ended 12/31/2018 Sales1 Ended 3/31/2019 Sales1 Ended 6/30/2019 Sales1 Sales $ 1,632,006,024 100.00% $ 3 ,717,330,531 100.00% $ 5 ,562,239,364 100.00% $ 7,388,050,316 100.00% Prizes $ 1,046,074,342 64.10% $ 2 ,340,130,361 62.95% $ 3 ,526,400,829 63.40% $ 4,715,592,673 63.83% Operating income to education $ 393,824,838 24.13% $ 9 45,471,555 25.43% $ 1 ,390,758,881 25.00% $ 1,809,721,391 24.50% Revenues returned to public $ 1,439,899,180 88.23% $ 3 ,285,601,916 88.39% $ 4 ,917,159,710 88.40% $ 6,525,314,064 88.32% Administrative expenses $ 192,106,844 11.77% $ 4 31,728,615 11.61% $ 6 45,079,654 11.60% $ 862,736,252 11.68% Miscellaneous income 2 $ 15,409,724 $ 3 0,919,170 $ 4 1,508,306 $ 6 1,025,893 Adjustment $ - $ - $ 2 ,803,132 3 $ ( 23,480,097) 5 Allocation to Education Fund 4 $ 409,234,562 $ 9 76,390,725 $ 1 ,435,070,319 $ 1,847,267,187 Annual Statutory Revenue Allocation Percentage Requirements Prize payouts – Not less than 50% of sales Administrative expenses – Not more than 13% of sales Prize payouts and funds to education – Not less than 87% of sales Other income – 100% to education _____________________________________ 1 Statutory 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. 2 Miscellaneous income includes Surplus Money Investment Fund interest earned, unclaimed prizes, and other income. 3 This amount was withheld from the FY 2017-18 fourth-quarter transfer and was adjusted in the FY 2018-19 third-quarter transfer after the completion of the financial statement audit and resolution of accounting issues. 4 The Education Fund allocation amount is sales plus miscellaneous income, plus the adjustment amount, less prizes, and less administrative expenses. 5 This amount was withheld from the FY 2018-19 fourth-quarter transfer and was adjusted in the FY 2019-20 third-quarter transfer after the completion of the financial statement audit and resolution of accounting issues. -4- California State Lottery Quarterly Transfer of Funds to Public Education Attachment— California State Lottery’s Transfer Request Dated June 5, 2020 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 http://www.sco.ca.gov S21-LOT-9000