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, 2021 M M. C ALIA OHEN California State Controller November 2023 MALIA M. COHEN CALIFORNIA STATE CONTROLLER November 29, 2023 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, 2021. Our review found that the transfer amount of $579,302,344 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 California State Lottery Act of 1984, for the fiscal year ended June 30, 2021. If you have any questions, please contact Roochel Espilla, Chief, State Agency Audits Bureau, by telephone at (916) 323-5744, or by email at respilla@sco.ca.gov. Sincerely, Original signed by KIMBERLY TARVIN, CPA Chief, Division of Audits KT/ac 300 Capitol Mall, Suite 1850, Sacramento, CA 95814 | P.O. Box 942850, Sacramento, CA 94250 | Fax: 916.322.4404 sco.ca.gov Mr. Alva Vernon Johnson November 29, 2023 Page 2 of 2 cc: Gregory Ahern, Chair California State Lottery Commission Tiffani Alvidrez, Commissioner California State Lottery Commission Anthony Garrison-Engbrecht, Commissioner California State Lottery Commission Keetha Mills, Commissioner California State Lottery Commission Alexandre Rasouli, M.D., Commissioner California State Lottery Commission Harjinder Shergill-Chima, Chief Deputy Director California State Lottery Nicholas Buchen, Deputy Director, Finance Division California State Lottery Sara Sheikholislam, Deputy Director, Internal Audits California State Lottery Emily Nguyen, Audit Manager, Internal Audits California State Lottery Mimi Alemu, External Audits Liaison, Internal Audits California State Lottery 300 Capitol Mall, Suite 1850, Sacramento, CA 95814 | P.O. Box 942850, Sacramento, CA 94250 | Fax: 916.322.4404 sco.ca.gov California State Lottery Quarterly Transfer of Funds to Public Education Contents Review Report Summary .............................................................................................................................. 1 Background .......................................................................................................................... 1 Review Authority ................................................................................................................. 1 Objectives, Scope, and Methodology ................................................................................. 1 Results ................................................................................................................................... 2 Views of Responsible Officials ............................................................................................ 3 Restricted Use ...................................................................................................................... 3 Schedule—Fiscal Year 2020-21 and Fiscal Year 2019-20 Year-to-Date Lottery Revenue Allocations .......................................................................... 4 Attachment—California State Lottery’s Transfer Request Dated June 7, 2021 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 $579,302,344 to the Lottery Education Fund for disbursement to the public education community for the quarter ended March 31, 2021. 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 the California State Lottery Act of 1984 (Lottery Act), for the fiscal year ended June 30, 2021. Background In 1984, California voters passed an initiative, Proposition 37, to authorize the creation of a state-operated lottery. The initiative created the Lottery Act, which is found in Chapter 12.5 of Government Code. 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. Each quarter, the Lottery requests that the SCO transfer funds to the Lottery Education Fund. The Lottery’s request usually occurs eight to 10 weeks after the close of each quarter. The transfer request for the quarter ended March 31, 2021, is included as an attachment. Review Authority We conducted this review in accordance with Government Code section 8880.46.6, which authorizes the SCO to conduct quarterly and annual audits of all accounts and transactions of the Commission and other special audits as necessary. The SCO has the authority to examine any and all records of the Commission, its distributing agencies, Lottery contractors, and Lottery retailers. Objectives, Scope, The objectives of our review 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 review for the third quarter ended March 31, 2021. To achieve our objectives, we performed the following procedures: • We compared fiscal year (FY) 2020-21 audited income statement balances with FY 2019-20 audited income statement balances and performed analytical procedures for variances over 15%. • We traced amounts reported in the income statement to the Lottery’s accounting records. • We judgmentally selected sales and expense items, based on dollar amount and type, and traced to supporting documentation (results were not projected to the intended [total] population). • We determined whether the Lottery met the annual revenue allocation requirements specified in the Lottery Act. • We determined whether the requested amount was transferred to the Lottery Education Fund. • We verified that the funds were transferred from the Lottery Education Fund to the public education community for the quarter ended March 31, 2021. Results Based on the work performed, we determined that the requested transfer amount of $579,302,344 for the third quarter ended March 31, 2021, 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, 2021. In a letter dated June 7, 2021, the Lottery requested that the SCO transfer $579,302,344 to the Lottery Education Fund for disbursement to the public education community. On June 23, 2021, the SCO’s Local Government Programs and Services Division transferred $560,251,400 from the State Lottery Fund to the Lottery Education Fund. The remaining balance of $19,050,944 is a year-end adjustment amount that was withheld from the FY 2019-20 fourth-quarter transfer, pending completion of the financial statement audit and resolution of accounting issues. The year-end adjustment is typically transferred to the Lottery Education Fund for disbursement to the public education community in the following year’s second- or third-quarter transfer. However, the adjustment was not disbursed until the FY 2020-21 fourth-quarter transfer due to SCO mainframe computer system issues. For the nine months ended March 31, 2021, of the total revenues from ticket sales: • 66.46% was returned to the public in the form of prize payouts; • 22.30% was transferred to the public education community; and • 11.24% was used for administrative expenses. -2- California State Lottery Quarterly Transfer of Funds to Public Education The Lottery returned 88.76% 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 June 1, 2023. As there are no findings, the Lottery waived the exit conference and Responsible 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 and is available on the SCO website at www.sco.ca.gov. Original signed by KIMBERLY TARVIN, CPA Chief, Division of Audits November 29, 2023 -3- California State Lottery Quarterly Transfer of Funds to Public Education Schedule— Fiscal Year 2020-21 and Fiscal Year 2019-20 Year-to-Date Lottery Revenue Allocations -4- S P O R A M A A F i s c a l Y e a r 2 0 2 0 - 2 1 a le s r iz e s p e r a t in g in c o m e e v e n u e s r e t u r n e d t o p u b lic d m in is t r a t iv e e x p e n s e s 2 is c e lla n e o u s in c o m e d ju s t m e n t l l o c a t i o n t o E d u c a t i o n F u n d 4 T h r e e M o n t h s E n d e d 9 /3 0 /2 0 2 0 $ 2 ,0 2 5 ,4 4 2 ,4 8 5 1 ,3 7 4 ,3 1 7 ,4 7 4 4 2 4 ,6 4 2 ,0 3 3 1 ,7 9 8 ,9 5 9 ,5 0 7 2 2 6 ,4 8 2 ,9 7 8 1 0 ,1 5 1 ,9 9 5 - $ 4 3 4 ,7 9 4 ,0 2 8 % o f 1 S a l e s 1 0 0 .0 0 % 6 7 .8 5 % 2 0 .9 7 % 8 8 .8 2 % 1 1 .1 8 % S i x M o n t h s E n d e d 1 2 /3 1 /2 0 2 0 $ 3 ,8 9 0 ,6 2 3 ,6 0 8 2 ,6 1 9 ,7 3 7 ,3 1 0 8 3 2 ,4 8 7 ,8 5 5 3 ,4 5 2 ,2 2 5 ,1 6 5 4 3 8 ,3 9 8 ,4 4 3 1 4 ,5 3 4 ,3 5 1 - $ 8 4 7 ,0 2 2 ,2 0 6 % o f 1 S a l e s 1 0 0 .0 0 % 6 7 .3 3 % 2 1 .4 0 % 8 8 .7 3 % 1 1 .2 7 % N i n e E n d e d $ 6 ,2 2 4 ,1 3 1 ,3 8 5 ,5 2 7 0 1 1 $ 1 ,4 2 M o n t h 3 /3 1 /2 0 8 ,2 8 5 ,6 9 ,4 3 1 ,3 8 ,7 4 1 ,3 8 ,1 7 2 ,6 0 ,1 1 2 ,9 8 ,5 3 2 ,2 9 ,0 5 0 ,9 6 ,3 2 4 ,5 s2 4 3 3 6 7 7 4 5 1 2 7 2 9 3 2 6 0 5 % o f 1 S a l e s 1 0 0 .0 0 % 6 6 .4 6 % 2 2 .3 0 % 8 8 .7 6 % 1 1 .2 4 % M T w o n t h 6 /3 0 e l v s E /2 0 en2 d1 e d S % a o l e f s 1 S P O R A M A A F i s c a l Y e a r 2 0 1 9 - 2 0 a le s r iz e s p e r a t in g in c o m e e v e n u e s r e t u r n e d t o p u b lic d m in is t r a t iv e e x p e n s e s 2 is c e lla n e o u s in c o m e d ju s t m e n t l l o c a t i o n t o E d u c a t i o n F u n d 4 T h r e e M o n t h s E n d e d 9 /3 0 /2 0 1 9 $ 1 ,6 6 3 ,2 3 9 ,2 6 7 1 ,1 0 6 ,2 0 0 ,8 0 5 3 5 9 ,5 0 4 ,0 5 2 1 ,4 6 5 ,7 0 4 ,8 5 7 1 9 7 ,5 3 4 ,4 1 0 5 8 ,1 5 7 ,9 8 0 - $ 4 1 7 ,6 6 2 ,0 3 2 % o f 1 S a l e s 1 0 0 .0 0 % 6 6 .5 1 % 2 1 .6 1 % 8 8 .1 2 % 1 1 .8 8 % S i x M o n t h s E n d e d 1 2 /3 1 /2 0 1 9 $ 3 ,3 5 5 ,7 3 9 ,2 0 1 2 ,2 2 3 ,1 0 0 ,4 2 3 7 2 8 ,6 4 1 ,9 4 6 2 ,9 5 1 ,7 4 2 ,3 6 9 4 0 3 ,9 9 6 ,8 3 2 7 4 ,5 3 8 ,8 7 3 - $ 8 0 3 ,1 8 0 ,8 1 9 % o f 1 S a l e s 1 0 0 .0 0 % 6 6 .2 5 % 2 1 .7 1 % 8 7 .9 6 % 1 2 .0 4 % E N i n e n d e d $ 4 ,9 8 3 ,3 0 1 ,0 8 4 ,3 8 5 9 8 2 $ 1 ,1 8 M o n t h s 3 /3 1 /2 0 2 0 1 ,7 6 0 ,6 2 8 0 ,3 8 8 ,5 1 5 3 ,1 1 9 ,3 3 6 3 ,5 0 7 ,8 5 1 8 ,2 5 2 ,7 7 7 0 ,4 1 0 ,0 8 0 3 ,4 8 0 ,0 9 7 7 ,0 0 9 ,5 1 3 3 % o f 1 S a l e s 1 0 0 .0 0 % 6 6 .2 5 % 2 1 .7 4 % 8 7 .9 9 % 1 2 .0 1 % T w e l v E n d e d $ 6 ,6 2 4 ,4 0 1 ,4 2 5 ,8 2 7 9 8 ( 1 $ 1 ,4 9 e M o n t h s 6 /3 0 /2 0 2 0 2 ,0 0 3 ,4 0 5 3 ,7 1 5 ,1 5 9 5 ,1 5 4 ,8 5 5 8 ,8 7 0 ,0 1 4 3 ,1 3 3 ,3 9 1 7 ,4 2 5 ,5 0 7 9 ,0 5 0 ,9 4 6 ) 3 ,5 2 9 ,4 1 6 5 % o f 1 S a l e s 1 0 0 .0 0 % 6 6 .5 0 % 2 1 .5 2 % 8 8 .0 2 % 1 1 .9 8 % 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 complying with 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 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 The Lottery 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 2019-20 fourth-quarter transfer and was adjusted in the FY 2020-21 third-quarter transfer after the completion of the financial statement audit and resolution of accounting issues. The $2 variance between this amount and the amount described in the Results section was due to rounding. California State Lottery Quarterly Transfer of Funds to Public Education Attachment— California State Lottery’s Transfer Request Dated June 7, 2021 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 www.sco.ca.gov S22-LOT-9002