Transfer of Funds to Public Education - 4th Quarter

CALIFORNIA STATE LOTTERY Review Report QUARTERLY TRANSFER OF FUNDS TO PUBLIC EDUCATION For the Quarter Ended June 30, 2021 M M. C ALIA OHEN California State Controller March 2024 MALIA M. COHEN CALIFORNIA STATE CONTROLLER March 21, 2024 Harjinder K. Shergill-Chima, Director California State Lottery 700 North Tenth Street Sacramento, CA 95811 Dear Ms. Shergill-Chima: 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 June 30, 2021. Our review found that the transfer amount of $461,000,000 is supported by the Lottery’s accounting records, and that the Lottery complied with 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 MAILING ADDRESS P.O. Box 942850, Sacramento, CA 94250 SACRAMENTO 3301 C Street, Suite 700, Sacramento, CA 95816 | 916.324.8907 LOS ANGELES 901 Corporate Center Drive, Suite 200, Monterey Park, CA 91754 | 323.981.6802 Ms. Harjinder K. Shergill-Chima March 21, 2023 Page 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 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 MAILING ADDRESS P.O. Box 942850, Sacramento, CA 94250 SACRAMENTO 3301 C Street, Suite 700, Sacramento, CA 95816 | 916.324.8907 LOS ANGELES 901 Corporate Center Drive, Suite 200, Monterey Park, CA 91754 | 323.981.6802 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 A—California State Lottery’s Revised Transfer Request Dated September 7, 2022 Attachment B—California State Lottery’s Transfer Request Dated September 8, 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 $461,000,000 to the Lottery Education Fund for disbursement to the public education community for the quarter ended June 30, 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 complied with 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, 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 June 30, 2021, is included as Attachment A. 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 complied with 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 fourth quarter ended June 30, 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 reviewed a selection of accruals and determined whether they were adequately supported, accurately calculated, and correctly recorded. • 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 June 30, 2021. Results Based on the work performed, we determined that the requested transfer amount of $461,000,000 for the fourth quarter ended June 30, 2021, was supported by the Lottery’s accounting records. In addition, we verified 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, 2021. In a letter dated September 8, 2021 (Attachment B), the Lottery requested that the SCO transfer $461,000,000 to the Lottery Education Fund for disbursement to the public education community. On September 29, 2021, the SCO’s Local Government Programs and Services Division transferred $461,000,000 from the State Lottery Fund to the Lottery Education Fund. On September 30, 2021, $460,999,999 was disbursed from the Lottery Education Fund to the public education community. The difference of $1 between the requested transfer amount and the disbursment to the public education community is due to rounding. The remainder was apportioned during the subsequent quarterly transfer. On September 7, 2022, the Lottery submitted a revision to its original transfer request dated September 8, 2021. The revision reported a decrease in the Lottery’s operating income for the fiscal year ended June 30, 2021, but did not change the requested transfer amount of $461,000,000. Despite the revisions, the Lottery complied with annual revenue allocation requirements specified in the Lottery Act. -2- California State Lottery Quarterly Transfer of Funds to Public Education For the 12 months ended June 30, 2021, of the total revenues from ticket sales: • 66.65% was returned to the public in the form of prize payouts; • 22.07% was transferred to the public education community; and • 11.28% was used for administrative expenses. The Lottery returned 88.72% of total revenues from ticket sales in the form of prize payouts and funds to education. The Lottery complied with 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 May 10, 2023. 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 and is available on the SCO website at www.sco.ca.gov. Original signed by KIMBERLY TARVIN, CPA Chief, Division of Audits March 21, 2024 -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 is c a l Y e a r 2 0 2 0 -2 1 a le s riz e s p e ra tin g in c o m e e v e n u e s re tu rn e d to p u b lic d m in istra tiv e e x p e n se s 2 isc e lla n e o u s in c o m e d ju stm e n t llo c a tio n to E d u c a tio n F u T h r e e M o n th 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 n$d 4 3 4 ,7 9 4 ,0 2 8 % o f 1 S a le s 1 0 0 .0 0 % 6 7 .8 5 % 2 0 .9 7 % 8 8 .8 2 % 1 1 .1 8 % S ix M o n th 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 le s 1 0 0 .0 0 % 6 7 .3 3 % 2 1 .4 0 % 8 8 .7 3 % 1 1 .2 7 % N in e M o n th s 3 /3 1 /2 0 2 $ 6 ,2 2 8 ,2 4 ,1 3 9 ,4 1 ,3 8 8 ,7 5 ,5 2 8 ,1 7 0 0 ,1 1 8 ,5 1 9 ,0 $ 1 ,4 2 6 ,3 E n d e d 1 8 5 ,6 4 2 3 1 ,3 3 7 4 1 ,3 3 2 7 2 ,6 6 9 1 2 ,9 7 3 3 2 ,2 7 2 5 0 ,9 4 6 2 4 ,5 5 0 5 % o f 1 S a le s 1 0 0 .0 0 % 6 6 .4 6 % 2 2 .3 0 % 8 8 .7 6 % 1 1 .2 4 % T w e lv e M o n th E n d e d 6 /3 0 /2 0 2 $ 8 ,4 1 7 ,9 4 3 ,8 5 ,6 1 0 ,6 0 5 ,5 1 ,8 5 7 ,7 3 0 ,8 7 ,4 6 8 ,3 3 6 ,4 9 4 9 ,6 0 7 ,3 2 4 ,8 2 3 ,5 (1 4 ,2 8 0 ,8 $ 1 ,8 6 8 ,2 7 3 ,6 s1 1 4 7 1 9 2 0 0 7 1 8 9 7 7 1 5 ) 6 % o f 1 S a le s 1 0 0 .0 0 % 6 6 .6 5 % 2 2 .0 7 % 8 8 .7 2 % 1 1 .2 8 % S P O R A M A A F is c a l Y e a r 2 0 1 9 -2 0 a le s rize s p e ra tin g in c o m e e v e n u e s re tu rn e d to p u b lic d m in is tra tiv e e xp e n s e s 2 is c e lla n e o u s in c o m e d ju s tm e n t llo c a tio n to E d u c a tio n F u n d 4 T h r e e M o n th 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 le s 1 0 0 .0 0 % 6 6 .5 1 % 2 1 .6 1 % 8 8 .1 2 % 1 1 .8 8 % S ix M o n th 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 le s 1 0 0 .0 0 % 6 6 .2 5 % 2 1 .7 1 % 8 7 .9 6 % 1 2 .0 4 % N in e M o n th s E n d e d 3 /3 1 /2 0 2 0 $ 4 ,9 8 1 ,7 6 0 ,6 2 8 3 ,3 0 0 ,3 8 8 ,5 1 5 1 ,0 8 3 ,1 1 9 ,3 3 6 4 ,3 8 3 ,5 0 7 ,8 5 1 5 9 8 ,2 5 2 ,7 7 7 8 0 ,4 1 0 ,0 8 0 2 3 ,4 8 0 ,0 9 7 $ 1 ,1 8 7 ,0 0 9 ,5 1 3 3 % o f 1 S a le 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 lv e M o n th s E n d e d 6 /3 0 /2 0 2 0 $ 6 ,6 2 2 ,0 0 3 ,4 0 5 4 ,4 0 3 ,7 1 5 ,1 5 9 1 ,4 2 5 ,1 5 4 ,8 5 5 5 ,8 2 8 ,8 7 0 ,0 1 4 7 9 3 ,1 3 3 ,3 9 1 8 7 ,4 2 5 ,5 0 7 (1 9 ,0 5 0 ,9 4 6 $ 1 ,4 9 3 ,5 2 9 ,4 1 6 ) 5 % o f 1 S a le 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 included in the FY 2020-21 third-quarter transfer after the completion of the financial statement audit and resolution of accounting issues. 6 This amount was withheld from the FY 2020-21 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. California State Lottery Quarterly Transfer of Funds to Public Education Attachment A— California State Lottery’s Revised Transfer Request Dated September 7, 2022 Attachment B— California State Lottery’s Transfer Request Dated September 8, 2021 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 www.sco.ca.gov S22-LOT-9004