Summary

Voters created the California State Lottery (Lottery) in 1984 to provide additional money to benefit education. In 2010 the Legislature amended the California State Lottery Act (Lottery Act) and authorized the Lottery to set its prize payout amounts in such a way as to ensure that it provides the maximum possible funding to education. For this audit, we reviewed the Lottery’s revenues allocated to education, its operational practices, and the State Controller’s Office’s (SCO) oversight over the Lottery. This report draws the following conclusions:

The Lottery did not adhere to a requirement to increase its funding for education proportionate to its increases in net revenue. As a result, the Lottery failed to provide required funding of $36 million to education in fiscal year 2017–18. Further, the Lottery cannot demonstrate that its current prize payout rate is optimal for maximizing funding for education. Its only study on the optimal prize payout rate is 10 years old and the Lottery has not adhered to that study when planning its most recent budgets. Without accurate and up‑to‑date information about the optimal prize payout rate, the Lottery cannot demonstrate it is maximizing funding for education.

The Lottery’s regulations require it to follow a competitive bidding process for its procurements unless the procurement falls under certain limited exceptions. However, the Lottery had inadequate evidence that of 15 contracts we reviewed, the Lottery had followed its contracting regulations before entering eight noncompetitive agreements—totaling $5.7 million in value. Further, the Lottery had no evidence that it evaluated whether it obtained best value for 17 other agreements valued at about $720,000. The Lottery is generally exempt from Department of General Services (General Services) oversight of its procurement activity. However, our review shows that regular external review by the SCO of its procurement activity would create necessary accountability.

The Lottery Act assigns primary oversight responsibility over the Lottery to the SCO. However, the SCO inappropriately removed a significant finding from a recent audit report after the Lottery disputed the finding. It also submitted a report to the Legislature about the Lottery’s performance that was actually written by the Lottery, without adding its own independent analysis. Finally, its audits do not include reviews of the Lottery’s effectiveness or efficiency. These gaps leave the State without effective, independent, and ongoing oversight of the Lottery.

Other Areas We Reviewed

We reviewed the Lottery’s operational and administrative expenses for the last three fiscal years and found that the Lottery’s spending in these areas remained within the limits set by the Lottery Act. We reviewed a selection of the Lottery’s justifications for adding new staff positions and found that the Lottery adequately justified additions to its staff. Finally, we also reviewed 30 questionable prize claims that the Lottery investigated and paid out, and found that the Lottery’s investigators took reasonable steps to investigate the claims and used similar standards of evidence when recommending that the Lottery pay the prize claims.

Summary of Recommendations

Legislature

The Legislature should require the Lottery to pay the $36 million it owes to education and it should require the SCO to conduct regular audits of the Lottery’s procurement processes.

Lottery

By August 2020, the Lottery should determine the optimal prize payout rate and use that rate when setting its future budgets.

By August 2020, the Lottery should develop procurement procedures that explain how it determines that it is exempt from competitive bidding and that require its staff to maintain documentation supporting cases where it believes it is exempt from competitive bidding.

SCO

The SCO should immediately begin adopting policies and procedures that ensure that it publishes all relevant findings in its audits of the Lottery and includes effectiveness and efficiency reviews as part of its oversight of the Lottery.

Agency Comments

The Lottery disagreed with our conclusion that it has not maximized funding for education and it took issue with certain aspects of our other conclusions. However, the Lottery agreed with many of the recommendations that we made. The SCO disagreed with our conclusion that it has not effectively overseen the Lottery’s performance. The SCO did not address whether it would implement our recommendations.

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