Transfer of Funds to Public Education - 2nd Quarter

CALIFORNIA STATE LOTTERY Review Report QUARTERLY TRANSFER OF FUNDS TO PUBLIC EDUCATION For the Quarter Ended December 31, 2022 M M. C ALIA OHEN C ALIFORNIA S TATE C ONTROLLER April 2025 MALIA M. COHEN CALIFORNIA STATE CONTROLLER April 1, 2025 Ms. Harjinder K. Shergill-Chima, Director California State Lottery 700 North Tenth Street Sacramento, CA 95811 Dear Director 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 second quarter ended December 31, 2022. Our review found that the transfer amount of $637,279,087 is supported by the Lottery’s accounting records; and that the Lottery was on target to meet annual revenue allocation requirements for prize payouts, disbursement of funds to education, and administrative expenses, as specified in the Lottery Act, for the fiscal year ended June 30, 2023. If you have any questions regarding this report, please contact Roochel Espilla, Chief, State Agency Audits Bureau, by telephone at 916-323-5744, or email at respilla@sco.ca.gov. Thank you. Sincerely, Original signed by Kimberly A. Tarvin, CPA Chief, Division of Audits KAT/rs 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 April 1, 2025 Page 2 of 2 Copy: Florence Bernal, 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 Anthony Garrison-Engbrecht, Ph.D., Chair California State Lottery Commission Keetha Mills, Vice Chair California State Lottery Commission Gregory Ahern, Commissioner California State Lottery Commission Tiffani Alvidrez, Commissioner California State Lottery Commission Alexandre Rasouli, M.D., Commissioner California State Lottery Commission 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 1—Fiscal Year 2022-23 Year-to-Date Lottery Revenue Allocations ................... 4 Schedule 2—Fiscal Year 2021-22 Year-to-Date Lottery Revenue Allocations ................... 5 Attachment—California State Lottery’s Transfer Request Dated March 2, 2023 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 $637,279,087 to the Lottery Education Fund for disbursement to the public education community for the second quarter ended December 31, 2022. Based on the work performed, we determined that the requested transfer amount is 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, disbursement of funds to education, and administrative expenses, as specified in the Lottery Act, for the fiscal year ended June 30, 2023. Background In 1984, California voters passed Proposition 37, authorizing a state- operated lottery. Proposition 37 created the Lottery Act, codified in Government Code section 8880 et seq. The Lottery Act requires the quarterly transfer of a portion of revenues to the public education community and establishes the allocation percentages for lottery revenues. The Lottery Act requires revenues from the Lottery to be allocated to maximize the amount of funding allocated to the public education community. As amended by Assembly Bill 142 (Chapter 13, Statutes of 2010), 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 disbursement of 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. This report includes the transfer request for the quarter ended December 31, 2022, as an attachment. Review We conducted this review in accordance with Government Code section 8880.46.6, which authorizes the SCO to conduct quarterly and Authority 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 is 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 second quarter ended December 31, 2022. To achieve our objectives, we performed the following procedures: • 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%. • 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 them to supporting documentation. Results were not projected to the intended (total) population. • We determined whether the Lottery was on target to meet the annual revenue allocation requirements specified in the Lottery Act. • We verified that the requested amount had been transferred to the Lottery Education Fund. • We verified that the funds had been transferred from the Lottery Education Fund to the public education community. Results Based on the work performed, we determined that the requested transfer amount of $637,279,087 for the second quarter ended December 31, 2022 is 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, disbursement of funds to education, and administrative expenses, as specified in the Lottery Act, for the fiscal year ended June 30, 2023. In a letter dated March 2, 2023, the Lottery requested that the SCO transfer $637,279,087 to the Lottery Education Fund for disbursement to the public education community. On March 30, 2023, the Local Government Programs and Services Division of the SCO transferred $637,279,087 from the State Lottery Fund to the Lottery Education Fund; and as a result of the SCO apportionment process, the entire amount except $6 was disbursed from the Lottery Education Fund to the public education community on the same date. The remainder was apportioned during the subsequent quarterly transfer. For the six months ended December 31, 2022, of the total revenues from ticket sales: • 63.87% was returned to the public in the form of prize payouts; • 24.64% was transferred to the public education community; and • 11.49% was used for administrative expenses. The Lottery returned 88.51% of total revenues from ticket sales in the form of prize payouts and disbursement of funds to education. The Lottery was on target to meet annual allocation requirements specified in the Lottery Act. See the Schedules for a summary of Lottery revenue allocations and allocation percentages. -2- California State Lottery Quarterly Transfer of Funds to Public Education Views of We discussed our review results with a Lottery representative via email on Responsible November 1, 2024. The Lottery representative agreed with the review results. Officials Restricted Use This report is solely 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 A. Tarvin, CPA Chief, Division of Audits April 1, 2025 -3- California State Lottery Quarterly Transfer of Funds to Public Education Schedule 1— Fiscal Year 2022-23 Year-to-Date Lottery Revenue Allocations AB 142 (Chapter 13, Statutes of 2010) requires revenues from the Lottery to be allocated to maximize the amount of funding allocated to the public education community. The statute requires the following annual revenue allocation percentages: • Prizes – Not less than 50% of sales • Administrative expenses – Not more than 13% of sales • Prizes and disbursement of funds to education – Not less than 87% of sales • Other income – 100% to education 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. Miscellaneous income includes Surplus Money Investment Fund interest earned, unclaimed prizes, and other income. The Education Fund allocation amount is sales plus miscellaneous income, less prizes, less administrative expenses, less amount withheld pending audit, plus amount released after completion of audit. -4- S P O R A M L R A a le s r iz e s p e r a t in g e v e n u e s d m in is t r is c e lla n e s s : W it e le a s e o l l o c a t i o a e h f n F is c a l Y e a r 2 0 2 2 - 2 3 in c o m e t o e d u c r e t u r n e d t o p u b t iv e e x p e n s e s o u s in c o m e h e ld p e n d in g a n p r io r a m o u n t w t o E d u c a t i o n a t io n lic n u a l a u it h h e ld F u n d d it T h r e e M o n t h s E n d e d 9 / 3 0 / 2 0 2 2 $ 2 ,2 5 4 ,3 0 6 ,4 1 ,4 6 6 ,9 8 4 ,5 5 2 5 ,0 0 1 ,2 1 ,9 9 1 ,9 8 5 ,8 2 6 2 ,3 2 0 ,6 1 4 ,6 9 9 ,0 $ 5 3 9 , 7 0 0 , 3 5 5 5 1 3 4 0 1 3 9 2 9 5 - - 4 % o 1 f 0 6 2 8 1 0 5 3 8 1 S . . . . . a 0 0 2 3 6 le 0 % 7 % 9 % 6 % 4 % s S ix M o n t h s E n d e d 1 2 / 3 1 / 2 0 2 2 $ 4 ,6 6 1 ,5 3 4 ,8 2 ,9 7 7 ,4 9 1 ,5 1 ,1 4 8 ,4 9 6 ,9 4 ,1 2 5 ,9 8 8 ,4 5 3 5 ,5 4 6 ,3 2 8 ,4 8 2 ,4 $ 1 , 1 7 6 , 9 7 9 , 3 1 3 3 6 5 5 9 8 2 6 8 0 5 - - 1 % 1 o 0 6 2 8 1 f 0 3 4 8 1 S . . . . . a 0 8 6 5 4 le 0 % 7 % 4 % 1 % 9 % s California State Lottery Quarterly Transfer of Funds to Public Education Schedule 2— Fiscal Year 2021-22 Year-to-Date Lottery Revenue Allocations AB 142 (Chapter 13, Statutes of 2010) requires revenues from the Lottery to be allocated to maximize the amount of funding allocated to the public education community. The statute requires the following annual revenue allocation percentages: • Prizes – Not less than 50% of sales • Administrative expenses – Not more than 13% of sales • Prizes and disbursement of funds to education – Not less than 87% of sales • Other income – 100% to education 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. Miscellaneous income includes Surplus Money Investment Fund interest earned, unclaimed prizes, and other income. The Education Fund allocation amount is sales plus miscellaneous income, less prizes, less administrative expenses, less amount withheld pending audit, plus amount released after completion of audit. Three Six Nine Twelve Months Months Months Months Fiscal Year Ended Ended Ended Ended 2021-22 9/30/2021 % of Sales 12/31/2021 % of Sales 3/31/2022 % of Sales 6/30/2022 % of Sales Sales $ 2 ,395,937,360 100.00% $ 4 ,533,125,189 100.00% $ 6 ,806,198,841 100.00% $ 8 ,853,250,168 100.00% Prizes 1 ,577,728,684 65.85% 2 ,986,801,701 65.89% 4 ,490,930,996 65.98% 5 ,825,673,018 65.80% Operating income to education 5 42,456,488 22.64% 1 ,018,287,217 22.46% 1 ,535,670,659 22.56% 2 ,015,049,317 22.76% Revenues returned to public 2 ,120,185,172 88.49% 4 ,005,088,918 88.35% 6 ,026,601,655 88.55% 7 ,840,722,335 88.56% Administrative expenses 2 75,752,188 11.51% 5 28,036,271 11.65% 7 79,597,186 11.45% 1 ,012,527,833 11.44% Miscellaneous income 2 5,670,503 3 7,498,282 4 8,255,185 6 2,324,583 Less: Withheld pending annual audit - - - 2 7,448,056 Release of prior amount withheld - - - 1 4,280,801 Allocation to Education Fund $ 5 68,126,991 $1 ,055,785,499 $1 ,583,925,844 $2 ,064,206,645 -5- California State Lottery Quarterly Transfer of Funds to Public Education Attachment— California State Lottery’s Transfer Request Dated March 2, 2023 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 www.sco.ca.gov S24-LOT-9002