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, 2023 M M. C ALIA OHEN C ALIFORNIA S TATE C ONTROLLER April 2025 MALIA M. COHEN CALIFORNIA STATE CONTROLLER April 25, 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 fourth quarter ended June 30, 2023. Our review found that the transfer amount of $560,448,056 is supported by the Lottery’s accounting records; and that the Lottery complied with 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. 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 25, 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 ................................................................................. 2 Results ................................................................................................................................... 2 Views of Responsible Officials ............................................................................................ 3 Restricted Use ...................................................................................................................... 3 Schedule 1—Fiscal Year 2022-23 Lottery Revenue Allocations .......................................... 4 Schedule 2—Fiscal Year 2021-22 Lottery Revenue Allocations .......................................... 5 Attachment A—California State Lottery’s Transfer Request Dated September 18, 2023 Attachment B—California State Lottery’s Revised Transfer Request Dated August 23, 2024 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 $560,448,056 to the Lottery Education Fund for disbursement to the public education community for the fourth quarter ended June 30, 2023. 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 complied with 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 percent 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 percent be allocated for administrative expenses. Furthermore, the Lottery Act requires that not less than 50 percent 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 June 30, 2023, as Attachment A. On August 23, 2024, the Lottery submitted a revision to its earlier transfer request. This report includes the revised transfer request for the quarter ended June 30, 2023, as Attachment B. 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. -1- California State Lottery Quarterly Transfer of Funds to Public Education 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 complied with the annual allocation requirements specified in the Lottery Act. We performed this review for the fourth quarter ended June 30, 2023. 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 percent. • 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 complied with 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 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 $560,448,056 for the fourth quarter ended June 30, 2023, is supported by the Lottery’s accounting records. In addition, we determined that the Lottery complied with 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 September 18, 2023, the Lottery requested that the SCO transfer $560,448,056 to the Lottery Education Fund for disbursement to the public education community. On September 29, 2023, the Local Government Programs and Services Division of the SCO transferred $560,448,056 from the State Lottery Fund to the Lottery Education Fund; and as a result of the SCO apportionment process, the entire amount except $75 was disbursed from the Lottery Education Fund to the public education community on the same date. On August 23, 2024, the Lottery submitted a revision to its earlier transfer request (Attachment A). The revision (Attachment B) reported an increase in the Lottery’s operating income for the fiscal year ended June 30, 2023, but did not change the requested transfer amount of $560,448,056. Despite -2- California State Lottery Quarterly Transfer of Funds to Public Education the revision, the Lottery complied with annual revenue allocation requirements specified in the Lottery Act. For the 12 months ended June 30, 2023, of the total revenues from ticket sales: • 64.51 percent was returned to the public in the form of prize payouts; • 24.15 percent was transferred to the public education community; and • 11.34 percent was used for administrative expenses. The Lottery returned 88.66 percent of total revenues from ticket sales in the form of prize payouts and disbursement of funds to education. The Lottery complied with annual allocation requirements specified in the Lottery Act. See Schedules 1 and 2 for a summary of Lottery revenue allocations and allocation percentages. Views of We discussed our review results with a Lottery representative via email on February 21, 2025. The Lottery representative agreed with the review Responsible 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 25, 2025 -3- California State Lottery Quarterly Transfer of Funds to Public Education Schedule 1— Fiscal Year 2022-23 Lottery Revenue Allocations Assembly Bill 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 percent of sales • Administrative expenses – Not more than 13 percent of sales • Prizes and disbursement of funds to education – Not less than 87 percent of sales • Other income – 100 percent 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 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 2022-23 9/30/2022 % of Sales 12/31/2022 % of Sales 3/31/2023 % of Sales 6/30/2023 % of Sales Sales $ 2 ,254,306,451 100.00% $ 4 ,661,534,818 100.00% $ 7 ,008,858,709 100.00% $ 9 ,239,353,311 100.00% Prizes 1 ,466,984,553 65.07% 2 ,977,491,532 63.87% 4 ,517,290,678 64.45% 5 ,960,301,724 64.51% Operating income to education 5 25,001,259 23.29% 1 ,148,496,936 24.64% 1 ,692,959,244 24.15% 2 ,231,053,935 24.15% Revenues returned to public 1 ,991,985,812 88.36% 4 ,125,988,468 88.51% 6 ,210,249,922 88.61% 8 ,191,355,659 88.66% Administrative expenses 2 62,320,639 11.64% 5 35,546,350 11.49% 7 98,608,787 11.39% 1 ,047,997,652 11.34% Miscellaneous income 1 4,699,045 2 8,482,455 4 7,564,859 7 7,611,112 Less: Withheld pending annual audit - - - 3 5,140,944 Release of prior amount withheld - - - 2 7,448,056 Allocation to Education Fund $5 39,700,304 $1 ,176,979,391 $1 ,740,524,103 $2 ,300,972,159 -4- California State Lottery Quarterly Transfer of Funds to Public Education Schedule 2— Fiscal Year 2021-22 Lottery Revenue Allocations Assembly Bill 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 percent of sales • Administrative expenses – Not more than 13 percent of sales • Prizes and disbursement of funds to education – Not less than 87 percent of sales • Other income – 100 percent 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 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 A— California State Lottery’s Transfer Request Dated September 18, 2023 California State Lottery Quarterly Transfer of Funds to Public Education Attachment B— California State Lottery’s Revised Transfer Request Dated August 23, 2024 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 www.sco.ca.gov S24-LOT-9004