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California State Lottery
The Lottery Has Not Ensured That It Maximizes Funding for Education

Report Number: 2019-112

February 25, 2020

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814

Dear Governor and Legislative Leaders:

As directed by the Joint Legislative Audit Committee, my office conducted an audit of the California State Lottery (Lottery). Our assessment focused on whether the Lottery was maximizing its funding for education, and the following report details the audit’s findings and conclusions. In general, we determined that the Lottery has not ensured that it maximizes funding for education and the State Controller’s Office (SCO) is not effectively overseeing the Lottery’s performance.

The Lottery has not followed state law, which requires it to increase its funding for education in proportion to its increases in net revenue. As a result, in fiscal year 2017–18, the Lottery failed to provide $36 million in funding for education. Further, the Lottery cannot demonstrate that its current prize payout rate is optimal for maximizing funding for education, leaving it unable to know whether it is diverting too much funding to prize payments. Finally, our review of a selection of the Lottery’s procurements identified that it often entered into noncompetitive agreements without adequate justification. Consequently, the Lottery may not have received the best value on these agreements, which could reduce the funding it provides to education.

Furthermore, the SCO has not effectively carried out its responsibility to oversee the Lottery’s performance, which it conducts through its audits and other means. Notably, the SCO inappropriately removed a finding from an April 2019 audit report, which questioned costs of $720,000 related to trade shows, after the Lottery requested changes to this finding. Further, the SCO’s audits of the Lottery do not review the efficiency and effectiveness of the Lottery’s operations. These deficiencies cast doubt on the SCO’s approach to its audits of the Lottery. Finally, the SCO did not adequately assess the Lottery’s performance related to changes to state law in 2010, including assessing whether Lottery’s funding for education was proportional to its increases in net revenue. Because state law generally exempts the Lottery’s operations from oversight by the Department of General Services and the Department of Finance, weaknesses in the SCO’s oversight leave the State without effective, independent, and ongoing monitoring of the Lottery’s performance.

Respectfully submitted,

California State Auditor

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