California Lottery owes millions to public schools, audit finds

The California State Lottery owes public schools $36 million, according to a recent state audit.

In 1984, the state lottery was created by the Lottery Act, which was approved by voters to supplement funding for public education in California through the sale of lottery tickets. In 2010, the Legislature amended the Lottery Act to set its prize payout amounts so that the maximum amount goes to public schools instead of the strict percentage (at least 34 percent) that was in place beforehand. The amended act also included the provision that the lottery was to increase its contribution to public education in proportion to increases in sales. It is important to note that lottery funds — even when paid in full — account for only about 1 percent of the state’s annual budget for schools.

Lottery not meeting its financial obligation to schools

The audit states that, since 2010, there have been questions as to whether the lottery has maximized the revenue it gives to education. The February report found that the lottery did not meet its obligations for fiscal year 2017–18 and owes $36 million to education funding due to its failure to provide “up to date analysis of the optimal balance between prize payouts and education funding.” Meaning, the lottery does not know if the prizes it offers result in maximum funding for education.

According to the audit, “since the 2010 amendments to the Lottery Act, the Lottery’s total operating revenue has increased by 115 percent and its funding to education has increased by 66 percent. In addition, the Lottery has decreased the proportion of total sales revenue that it directs to education from 33 percent in fiscal year 2010–11 to between 24 and 25 percent in fiscal years 2016–17 through 2018–19.”

In response to the audit findings, lottery representatives indicated that they did not believe the amendment required a direct-proportional adjustment to education funding, just an increase.

To remedy these issues, the audit recommends that the Legislature require the lottery to pay back the $36 million owed to education in fiscal year 2017–18, and it amend the Lottery Act to require a directly proportional relationship between increase in net revenue and increases to education funding contributions. For the lottery, the audit recommends that it determine the optimal amount of prize payouts that maximized education funding, establish a policy to annually review that amount and use the optimal prize amount when setting year-to-year budgets.

Questions about contract partners

The second section of the audit reviews how the lottery is awarding contracts — and concludes that the lottery does not follow its contracting obligations when it awards contracts without competitive bids. “As a result, the Lottery lacks a critical safeguard for ensuring that it always obtains competitive pricing, which is important because every dollar of its revenue that the Lottery spends on administrative costs is a dollar that it cannot provide to education,” the audit states.

The auditor identified several high-value contracts in which the lottery cited an exemption to its competitive bid requirement that did not include adequate documentation supporting the exemption. Without a good-faith effort to obtain contracts at the best price, the lottery cannot ensure that it is funding education at the maximum level.

The audit report recommends that the Legislature amend the Lottery Act to include more state oversight by the State Controller’s Office by requiring the department to conduct audits at least once every three years. Recommendations for the lottery procurement process include requiring its staff to provide adequate documentation supporting an exemption to competitive bidding and to instruct its contract department to deny all contracts that do not include such documentation.