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, 2010 J C OHN HIANG California State Controller June 2011 June 22, 2011 John Mass, Chair California Lottery Commission 600 North Tenth Street Sacramento, California 95811 Dear Mr. Mass: 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, 2010. Our review disclosed that the Lottery’s accounting records supported the requested transfer of $279,678,987, 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: Alex Fortunati, Commissioner California Lottery Commission John Menchaca, Commissioner California Lottery Commission Linh Nguyen, Acting Director California Lottery Michael T. Ota, Deputy Director Finance Division, California Lottery Roberto 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 ................................................................................. 2 Results ................................................................................................................................... 2 Schedule 1—Summary of Lottery Transfers and Status of Compliance with Statutory Requirements ................................................... 4 Attachment—California Lottery’s Transfer Request of February 25, 2011 California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Report of Analysis Summary In a letter dated February 25, 2011, the California Lottery (Lottery) requested that the State Controller’s Office (SCO) transfer $279,678,987 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, 2011, $279,678,987 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 that, 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. The Lottery Act was amended by Assembly Bill 142 on April 8, 2010. The bill was an urgency statute that went into effect immediately. Assembly Bill 142 requires revenues from the Lottery to be allocated to maximize the amount of funding allocated to public education. The bill requires that not less than 87% of the total annual revenues from Lottery ticket sales be returned to the public, and not more than 13% be allocated for Lottery expenses. The bill specifies that, of the 87%, not less than 50% of the total annual Lottery revenues, in an amount to be determined by the Lottery Commission, be returned to the public in the form of prizes. In addition, the bill requires the Lottery Commission to establish the percentage to be allocated to the benefit of public education at a level that maximizes the total net revenues allocated to the benefit of public education. -1- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Objectives, Scope, We perform this analysis of the quarterly transfer of funds to public education in order to determine whether: 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. Results After reviewing the Lottery’s unaudited financial statements and supporting records for the quarter ended December 31, 2010, we determined that the Lottery’s request to transfer $279,678,987 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 $533,222,202 for the six- month period ended December 31, 2010. Of this amount, $253,543,215 (an additional $528,409 withheld from the last quarter of FY 2009-10 pending annual financial statement audit and the FY 2009-10 audit adjustment) was transferred to the Lottery Education Fund on December 30, 2010. The balance of 279,678,987 was transferred to the Lottery Education Fund on March 30, 2011. The Lottery returned 87.28% of the total revenues from the sales of tickets to the public for the quarter ended December 31, 2010. Of the 87.28%, 54.82% was returned to the public in form of prizes, and 32.46% was transferred to public education. The Lottery Act requires the Lottery to return no less than 87% of the total annual revenues from the sales of Lottery tickets or shares to the public in the form of prizes and net revenues to benefit public education. The Lottery commission determines the percentage of total annual revenues be returned to the public in form of prizes and to be transferred to public education. However, the percentage of total annual revenues for prizes shall not be less than 50%. All other income and unclaimed prizes were transferred to public education. -2- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education The Lottery complied with the statutory requirement that administrative expenses not exceed 13% of the total revenues from the sales of tickets. The Lottery administrative expenses for the quarter were 12.72% of the sales. To the extent that expenses are less than 13% of the total annual revenues, the Lottery Act requires any surplus funds to be allocated to benefit public education. Original signed by JEFFREY V. BROWNFIELD Chief, Division of Audits June 22, 2011 -3- 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 2010-11 09/30/2010 % 12/31/2010 % 03/31/2011 % 06/30/2011 % Sales 1 $ 755,772,046 100.00% $ 1,588,919,168 100.00% $ % $ % Administration $ 96,130,047 12.72% $ 202,106,959 12.72% $ % $ % Prizes 410,400,634 54.30% 871,070,040 54.82% % % Available for education 249,241,365 32.98% 515,742,169 32.46% % % Total prizes and available for education $ 659,641,999 87.28% $ 1,386,812,209 87.28% $ $ Other income 2 $ 4,301,850 $ 17,480,033 $ $ Adjustment $ 4,990,627 4 $ — $ $ Adjustment $ (4,462,218) 5 $ — $ $ Transfer to education $ 254,071,624 $ 533,222,202 $ $ Quarter Ended Fiscal Year 2009-10 09/30/2009 % 12/31/2009 % 03/31/2010 % 06/30/20107 % Sales 1 $ 797,978,266 100.00% $ 1,493,295,907 100.00% $ 2,242,907,213 100.00% $ 3,040,959,866 100.00% Prizes $ 427,670,458 53.59% $ 793,743,387 53.15% $ 1,194,510,180 53.26% $ 1,611,371,074 52.99% Administration $ 94,051,992 11.79% $ 180,429,092 12.09% $ 273,754,469 12.20% $ 400,961,056 13.19% Available for Education $ 276,255,816 34.62% $ 519,123,428 34.76% $ 774,642,564 34.54% $ 1,028,627,736 33.82% Prizes and Available for Education — — — 2,639,998,810 86.81% Other Income 2 13,587,856 42,704,717 48,576,246 65,581,701 Adjustment 4,420,315 6 — — (4,990,627) 4 Adjustment 7,297,200 3 — — — Transfer to Education $ 301,561,187 $ 561,828,145 $ 823,218,810 $ 1,089,218,810 Annual Statutory Requirements Annual Statutory Requirements With AB 142 (enacted April 8, 2010) Prizes = Approximately 50% of sales Prizes = Not less than 50% of sales Administration = No more than 16% of sales Administration = No more than 13% of sales Available for education = At least 34% of sales Prizes and available for education = Not less than 87% of sales Other income = 100% due education Other income = 100% due 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. The first quarter through the fourth quarter of fiscal year (FY) 2009-10 includes net proceeds from investment restructuring. 3 The amount represents the $7,297,200 from the FY 2008-09 audit adjustment. 4 This amount represents the $4,990,627 withheld in the fourth quarter of FY 2009-10, pending the financial audit and resolution of accounting issues. 5 This amount represents the $4,462,218 from the FY 2009-10 audit adjustment. 6 This amount represents $4,420,315 withheld in the fourth quarter of FY 2008-09, pending the financial audit and resolution of accounting issues. 7 AB 142 was enacted on April 8, 2010. -4- California Lottery Analysis of the Quarterly Transfer of Funds to Public Education Attachment— California Lottery’s Transfer Request of February 25, 2011 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250-5874 http://www.sco.ca.gov S11-LOT-903