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, 2007 J C OHN HIANG California State Controller June 2008 J C OHN HIANG California State Controller June 25, 2008 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, 2007. Our review disclosed that the Lottery’s accounting records supported the requested transfer of $265,807,229 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/sk cc: John Mass, Commissioner California Lottery Commission Cynthia Flores, Commissioner California Lottery Commission Rachel Montes, Commissioner California Lottery Commission Manuel Ortega, Commissioner California Lottery Commission Patrick Meroney, Acting Deputy Director Finance Division California Lottery Robert Zavala, Chief Internal Audits 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 21, 2008 California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Report of Analysis Summary In a letter dated February 21, 2008, the California Lottery (Lottery) requested that the State Controller’s Office (SCO) transfer $265,807,229 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 28, 2008, $265,807,228.10 was transferred to the Lottery Education Fund. The difference of $.90 is due to rounding errors in prior quarters. 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 performed 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 and supporting records for the quarter ended December 31, 2007, we determined that the Lottery’s request to transfer $265,807,229 to the Lottery Education Fund was supported by formal accounting records. According to the Lottery’s unaudited financial statements, the total amount available for transfer to education was $572,476,778 for the six-month period ended December 31, 2007. Of this amount, $306,669,549 (an additional $18,060,789 of adjustments were transferred which were related to the fourth quarter of fiscal year 2006-07) was transferred to the Lottery Education Fund on December 28, 2007, leaving a balance of $265,807,229. This balance was transferred to the Lottery Education Fund on March 28, 2008. The amount transferred to public education was 34.87% of the total revenue for the quarter. 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 quarter were 11.69% 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. The Lottery returned 53.44% of the total quarterly revenues to the public in form of prizes. Original signed by JEFFREY V. BROWNFIELD Chief, Division of Audits June 25, 2008 -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 09/30/2007 % 12/31/2007 % 03/31/2008 % 06/30/2008 % Sales 1 $ 827,465,875 100.00% $ 1,568,732,800 100.00% Prizes $ 439,733,766 53.14% $ 838,191,741 53.44% Administration $ 95,226,483 11.51% $ 183,456,973 11.69% Available for Education $ 292,505,626 35.35% $ 547,084,086 34.87% Other Income 2 14,163,923 25,392,692 Adjustment 3,997,089 4 — Adjustment 14,063,700 5 — Transfer to Education $ 324,730,338 $ 572,476,778 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% $ 2,540,930,473 100.00% $ 3,318,346,505 100.00% Prizes $ 424,411,747 53.68% $ 864,608,763 53.89% $ 1,359,562,937 53.51% $ 1,765,643,368 53.21% Administration $ 93,397,271 11.82% $ 193,449,040 12.06% $ 306,246,677 12.05% $ 414,334,148 12.49% Available for Education $ 272,776,204 34.50% $ 546,171,755 34.05% $ 875,120,859 34.44% $ 1,138,368,989 34.30% Other Income 2 13,223,148 553,314 38,965,434 Adjustment 3,909,760 3 — — (3,997,089)4 Transfer to Education $ 289,909,112 $ 546,725,069 $ 914,086,293 $ 1,188,086,293 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 $3,997,089 withheld in the fourth quarter of FY 2006-07, pending the financial audit and resolution of accounting issues. 5 The amount represents the $14,063,700 audit adjustment for the fourth quarter FY 2006-07, due to reduction in on-line direct ticket costs. -3- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Attachment— California Lottery’s Transfer Request of February 21, 2008 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, California 94250-5874 http://www.sco.ca.gov S08-LOT-902