Transfer of Funds to Public Education - 2nd Quarter

CALIFORNIA LOTTERY Report of Analysis QUARTERLY TRANSFER OF FUNDS TO PUBLIC EDUCATION For the Quarter Ended December 31, 2006 J C OHN HIANG California State Controller July 2007 J C OHN HIANG California State Controller July 31, 2007 Joan M. Borucki, Director California Lottery 600 North Tenth Street Sacramento, California 95814 Dear Ms. Borucki: The State Controller’s Office analyzed the financial documentation supporting the California Lottery’s (Lottery) transfer of funds to public education for the quarter ended December 31, 2006. Our review disclosed that the Lottery’s accounting records supported the requested transfer of $286,422,555, and that the Lottery is on target to comply with the annual statutory percentages for prizes, education, and administration. If you have any questions, please call Andrew Finlayson, Chief, State Agency Audits Bureau, at (916) 324-6310. Sincerely, Original signed by JEFFREY V. BROWNFIELD Chief, Division of Audits JVB/vb cc: John Mass, Commissioner California Lottery Commission Rachel Montes, Commissioner California Lottery Commission Manuel Ortega, Commissioner California Lottery Commission Patt Eberhart, Director Finance and Administration California Lottery Cathleen Dinubilo, Chief Internal Audits Office California Lottery California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Contents Report of Analysis Summary .............................................................................................................................. 1 Introduction ......................................................................................................................... 1 Background .......................................................................................................................... 1 Objectives, Scope, and Methodology ................................................................................. 1 Results ................................................................................................................................... 2 Schedule 1—Summary of Lottery Transfers and Status of Compliance with Statutory Requirements ................................................... 3 Attachment—California Lottery’s Transfer Request of February 27, 2007 California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Report of Analysis Summary In a letter dated February 27, 2006, the California Lottery (Lottery) requested that the State Controller’s Office (SCO) transfer $286,422,555 to the Lottery Education Fund for disbursement to public education. Our review disclosed that the Lottery’s accounting records supported this amount and that the Lottery is on target to comply with the annual statutory percentages for prizes, education, and administration. Our analytical review did not disclose any unexplained changes in accounts in a comparison with prior periods. Accordingly, on March 30, 2007, $286,422,555 was transferred to the Lottery Education Fund. Introduction This report presents the results of our analysis of the Lottery’s quarterly request that the SCO transfer funds to public education. This analysis is part of our responsibility under the California State Lottery Act (Lottery Act). We performed this analysis to determine if the transfer of funds to public education was supported by amounts recorded in the Lottery’s accounting records and to determine whether the Lottery is on target to comply with the annual Lottery Education Fund allocation requirements contained in the Lottery Act. Background In 1984, California voters passed an initiative, which, by amending the State Constitution, authorized a state-operated lottery. The initiative created the Lottery Act, which requires the quarterly transfer of net revenues to public education, and established the allocation percentages for lottery funds. The Lottery Act also requires the SCO to conduct quarterly and annual post-audits of all accounts and transactions of the California Lottery Commission and other special post-audits as the State Controller deems necessary. Each quarter, the Lottery requests that the SCO transfer net revenues to public education (see Attachment). The Lottery request usually occurs eight to ten weeks after the close of the quarter. Objectives, We perform this analysis of the quarterly transfer of funds to public education in order to determine whether: Scope, and Methodology • Transfer amounts are supported by the Lottery’s accounting records; and • The Lottery is on target to meet the annual allocation requirements specified in the Lottery Act. We traced the transfer amount to Lottery financial statements and accounting records, and applied analytical review procedures to the lottery fund accounts by comparing them with those from the prior quarter and the prior year. To monitor progress in meeting the annual statutory requirements, we reviewed the actual costs for prizes and administration, as well as the quarterly fund transfer to public education. -1- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Results After reviewing the Lottery’s unaudited financial statements dated February 27, 2007, and the supporting records for the six-month period ended December 31, 2006, we determined that the Lottery’s request to transfer $286,422,555 to the Lottery Education Fund is supported by formal accounting records. According to the Lottery’s unaudited financial statements, the total amount available for transfer to education was $572,421,907 for the six-month period ended December 31, 2006. Of this amount, $285,999,352 was transferred to the Lottery Education Fund on September 30, 2006, leaving a balance of $286,422,555. This balance was transferred to the Lottery Education Fund on March 30, 2007. The amount transferred to public education was 34.05% of the total revenue for the six-month period ended December 31, 2006. The Lottery Act requires the Lottery to transfer at least 34% of the total annual revenue to the benefit of public education. All other income and unclaimed prizes were transferred to public education. The Lottery complied with the statutory requirement that administrative expenses not exceed 16% of sales. Administrative expenses for the six-month period ended December 31, 2006 were 12.06% of sales. To the extent that expenses are less than 16% of total annual revenues, the Lottery Act requires the surplus funds to be allocated to benefit public education. The surplus administrative funds were used to increase the prizes to the public. Original signed by JEFFREY V. BROWNFIELD Chief, Division of Audits -2- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Schedule 1— Summary of Lottery Transfers and Status of Compliance with Statutory Requirements Quarter Ended Fiscal Year 2006-07 09/30/2006 % 12/31/2006 % 03/31/2007 % 06/30/2007 % Sales 1 $ 790,585,222 100.00% $ 1,604,229,558 100.00% $ $ Prizes $ 424,411,747 53.68% $ 864,608,763 53.89% $ $ Administration $ 93,397,271 11.82% $ 193,449,040 12.06% $ $ Available for Education $ 272,776,204 34.50% $ 546,171,755 34.05% $ $ Other Income 2 13,223,148 553,314 Adjustment 3,909,760 3 — Transfer to Education $ 289,909,112 $ 546,725,069 $ $ Quarter Ended Fiscal Year 2005-06 09/30/2005 % 12/31/2005 % 03/31/2006 % 06/30/2006 % Sales 1 $ 884,100,492 100.00% $ 1,751,695,899 100.00% $ 2,679,710,604 100.00% $ 3,584,996,251 100.00% Prizes $ 473,050,791 53.51% $ 948,661,697 54.16% $ 1,447,084,544 54.00% $ 1,932,721,443 53.91% Administration $ 95,823,919 10.84% $ 198,884,893 11.35% $ 302,950,716 11.31% $ 413,062,844 11.52% Available for Education $ 315,225,782 35.65% $ 604,149,309 34.49% $ 929,675,344 34.69% $ 1,239,211,964 34.57% Other Income 2 12,419,435 23,970,392 35,412,975 48,786,115 Adjustment 3,531,079 4 — — (3,909,760)3 Transfer to Education $ 331,176,296 $ 628,119,701 $ 965,088,319 $ 1,284,088,319 Annual Statutory Requirements Prizes = Approximately 50% of sales Administration = No more than 16% of sales Available for education = At least 34% of sales Other income = 100% due to education Note: The actual percentage allocation is computed on an annual basis when determining whether the Lottery has met the allocation requirements. The percentages shown above indicate the Lottery’s year-to-date progress toward meeting these requirements. _____________________________________ 1 Quarterly amounts represent fiscal year-to-date totals. 2 Includes interest income, other income, and unclaimed prizes. 3 This amount represents the $3,909,760 withheld in the fourth quarter of FY 2005-06, pending the financial audit and resolution of accounting issues. 4 The amount represents the $3,531,079 withheld in the fourth quarter of FY 2004-05, pending the financial audit and resolution of accounting issues. -3- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Attachment— California Lottery’s Transfer Request of February 27, 2007 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, California 94250-5874 http://www.sco.ca.gov S07-LOT-902