SACRAMENTO — The California lottery skimped on giving $36 million in revenue to fund public education and spent $720,000 on food and travel expenses without considering cheaper options, the state auditor said in a report made public Tuesday.
Sales from scratch and lotto tickets have funded public schools and colleges in California since 1985. But the lottery should have accounted for an increase in profits during the fiscal year that ended in June 2018 by turning over an additional $36 million to finance public education.
The California State Lottery said in a written response that was included with the audit report that it disagreed with the auditor's findings and said that the agency gives as much as it can to fund education.
Lottery officials also spent $720,000 on 17 agreements with hotels at retailer trade shows between 2014 and 2018 without records to show that the agency considered competing offers for lower-cost hotels and food providers, the report said.
"Several of those agreements contained excessive costs for food and beverages," the audit said.
The audit also criticized the State Controller's Office tasked with overseeing the lottery for failing to track that spending. In April 2019, the State Controller's Office removed a finding from a report it conducted that questioned the lottery agency's expenses on the hotel agreements following criticism from a lottery attorney, according to the report.
After the State Controller's Office shared the draft finding of its audit with lottery officials, the California State Lottery lawyer "asked for adjustments to the hotel agreement finding" and the finding was removed within one day, the state auditor's report said.
The controller's office "inappropriately removed the finding before publishing the final audit report even though it had sufficient evidence supporting that finding," the state auditor's report said.
The lottery agency's response disputed that there was hotel overspending, saying that "after factoring in the time and cost associated with seeking out and negotiating rates with different hotels, the possibility that the Lottery could have achieved substantial savings by contracting with other hotels is questionable."
The state auditor report also said the controller's office submitted a financial performance report about the lottery that the lottery agency's officials prepared — without independent analysis of the documents by the controller's office. That performance report was delivered three years late to the Legislature, in October 2019, the state auditor's report said.
The state lottery during the fiscal year that was examined provided $1.7 billion to public education, about 1% of the state's annual budget for schools, according to the auditor's report.
Alva Johnson, the director of the California State Lottery, said the agency and the state auditor have a "fundamental difference of opinion over interpretation of the California State Lottery Act" and that it is unclear how a 2010 state law defined the lottery's net revenues.
Johnson also said the lottery agency has complied with its its mandate of "maximizing funding for education."
The state auditor's report said the law requires the lottery to provide as much funding possible for education after accounting for operating expenses and to increase funding every year based on the agency's profits.
"The Lottery has not used a budgeting process that is designed around meeting the Lottery Act's requirements," the state auditor wrote in its response to Johnson.
The state auditor's "findings demonstrate what we suspected all along. That the California Lottery has a culture of profits first and schools last," said Republican state Sen. Ling Ling Chang, who requested the audit.
"law requires the lottery to provide as much funding possible for education after accounting for operating expenses and to increase funding every year based on the agency's profits."
Why would they not just have a specific percentage based on GROSS sales. That way forcing the agency to figure out how to operate 'around' the payment to the schools, and guarantying the schools get the maximum amount each year. ??
So they don't believe the children are our future?
Here is the full report on the CA auditor website: https://www.auditor.ca.gov/reports/2019-112/index.html
In section 3 under "Sections" they really go after the State Controller Office, lol. The back and forth in the responses section is also a good read. Mostly it's just another interagency duck measuring contest, but Betty Yee (controller) is an elected official and Elaine Howle (auditor) is appointed, so it's mostly Betty's behind on the line. The question now is, will the lottery pay the $36 million the auditor says the lottery owes? And how?
The auditor's report hints that the lottery can make it up by "determin[ing] the optimal amount of prize payouts that maximizes the funding for education." in the report, but let's be honest, that's just code for paying winners less. Of course, the other way they can do it is with some voodoo that increases the unclaimed prize pool, which by law goes to education rather than back into the prize pool. By voodoo I mean nasty tricks that make players less likely to claim prizes.
Section 2, which is about awarding contracts without bids, doesn't mention the commissioners' role in constantly rubber-stamping the lottery directors' requests to extend existing contracts instead of opening up the process to bidders. I have watched a lot of commissioner meeting videos (back when they were available) and read many transcripts of these meetings, and the thing that always stands out to me is how the lazy the 4 or 5 commissioners are when it comes to obliging the directors' requests to extend contracts and pay whatever prices the vendors quote. The board is a side gig for all its members and they don't have time to research anything due to the demands of their actual day jobs, so they vote yes on everything and ask few if any questions. The board of commissioners serves no purpose but resume padding for its members.
IMHO...
Winners: Lottery vendors, auditor
Losers: Players, SCO, schools
Teflon-coated: commissioners, especially Gregory Ahern, who has been on the board forever and would vote yes to gold plate the toilets at lottery HQ.
"Why would they not just have a specific percentage based on GROSS sales. "
Because the net profit isn't a fixed percentage of gross sales. Requiring a fixed percentage of sales could mean that the lottery could be forced to cut costs in order to have enough to meet the required percentage. Obviously there's nothing wrong with cutting costs, but how you cut costs matters. They could cut costs by 75% by reducing the payouts by 80 or 85%, but that might cut sales by 80 to 90%. Next thing you know the lottery will be keeping 90% of gross sales and have a few hundred bucks profit to give to education.
We all know that things usually don't work as well as they could, but the lottery should be trying to maximize the actual amount that goes to education, not the percentage of sales or profits that goes to education.
It certainly did NOT help that the California lottery gave 212,500 dollars worth of lottery scratch-off tickets, FREE to The Ellen Show during December 2019. The loss has most likely contributed to the 36 million dollar revenue loss for funding California public education
Amen. They should just stop wasting money on promotions of any sort. The sooner they stop wasting the money on advertising the sooner they'll be able to give the money to education.
I agree..
Lottery officials have been partying at these hotels for 4 years running up the bill while holding money back from the schools. How far will the auditor take this? We all know that the lottery money isn't spent according to their pretty little spreadsheets.