Lottery Spending Requirements Before and After Changes to State Law
Figure 1 is a color-coded stacked bar chart that highlights the differences in the Lottery Act before and after the 2010 amendments. Before the Legislature changed the Lottery Act in April 8, 2010, state law required the Lottery to provide 50 percent of its annual revenue to prizes, 34 percent to education, and 16 percent to operations. Therefore, before the 2010 changes to the Lottery Act, state law required exact percentages of annual revenue to go toward prizes and education and capped spending on operations.
Starting April 8, 2010 to present, the Legislature requires that the Lottery provide at least 50 percent of its annual revenue to prizes, 13 percent to operations, and that the Lottery establish a percentage that maximizes the amount it contributes to education. Therefore, state law now establishes a minimum percentage that must go toward prizes and caps spending on operations. The source for this graphic is the Lottery Act.
The Lottery Has Not Met Required Education Funding Levels, Totaling $36 Million in Funds That Did Not Go to Education
Figure 2 is a color-coded stacked column chart that focuses on the amount of education funding that the Lottery provided to education during fiscal years 2015–16 through 2018–19 and additional education funding that the Lottery should have provided to education during these fiscal years. The color purple indicates the amount of education funding the Lottery should have provided and the color yellow indicates the additional amount of education funding the Lottery did not provide. Black horizontal dashes indicate the education funding that state law required the Lottery to provide to education to match growth in total net revenue. The Lottery's revenue has increased over the last four fiscal years from $1.58 million to $1.87 million. For fiscal years 2015–16 and 2018–19, the Lottery exceeded the amount of education funding that it was required to provide. However, the Lottery did not provide adequate funding to education for fiscal year 2017–18. Specifically, the Lottery should have provided approximately $36 million more to education in fiscal year 2017–18. A footnote for fiscal year 2016–17 states that the Lottery is required to match growth in total net revenue only in fiscal years where net revenue has increased from the previous fiscal year. In fiscal year 2016–17, net revenue had decreased so the Lottery did not need to match growth. A textbox summarizes this information and states that $36 million in funding did not go to education in fiscal year 2017–18. The sources for this figure are state law, audited financial statements from the Lottery for fiscal years 2015–16 through 2017–18, and unaudited financial data from the Lottery for fiscal year 2018–19.
The Lottery’s Inadequate Contracting Processes Do Not Always Ensure It Obtains Best Value
Figure 3 is a graphic that describes the frequency at which the Lottery cites exemptions from competitive bidding. On the left hand side of Figure 3 is a circular picture of three hands bidding on a contract with a large red dash through the middle of the picture. Underneath this picture is a yellow textbox that states that there are eight agreements worth $5.7 million in which the Lottery cannot show it followed its regulations and was exempt from competitive bidding. This picture then points to another circular grey picture on the right side of the graphic. The grey circle surrounds a contract and has a red carve-out with the words 21 percent in white text. Underneath the grey circle is another textbox that states the Lottery cited similar exemptions for 21 percent of its procurement activity, which is more than 300 agreements valued at $13.8 million-from fiscal years 2016–17 through 2018–19. The source for this graphic is the Lottery’s contract records.
21 Percent of the Lottery’s Procurement Activity Involved Noncompetitive Agreements
The graphic describes the three categories of agreements that the Lottery enters into and the number of agreements that fit in each agreement category during fiscal years 2016–17 through 2018–19. The three categories of agreements are competitive, master service or interagency, and noncompetitive. During fiscal years 2016–17 through 2018–19, the Lottery had 836 agreements, which had a total value of $65.6 million. Specifically, the Lottery had 395, or 38 percent, competitive agreements, which were valued at $25 million in total. However, the competitive agreement data that we portray in this graphic exclude one Lottery contract that was 30 times larger in value than the next highest contract. Further, the Lottery had 312, or 21 percent, noncompetitive agreements, which were valued at $13.8 million in total. Finally, the Lottery had 129, or 41 percent, master services agreements or interagency agreements, which were valued at $26.8 million. The source for this graphic is Lottery contract records from fiscal years 2016–17 through 2018–19.
The Lottery Entered Into $720,000 in Hotel Agreements for Trade Shows Without Ensuring That It Minimized Expenses
In the forefront of the page is a picture of a hotel with a caption that indicates the Lottery spent $720,000 in retailer trade show hotel agreements. The hotel graphic then uses a dashed line to separate into two different directions. On the left dashed line is another picture of hotels with text bubbles of dollar signs that states the Lottery does not have assurance of best value. On the right dashed line is a picture of an invoice document with a large red exclamation point. The invoice document states that the Lottery spent 99 dollars per gallon of tea, 45 dollars per dozen cookies, and 60 dollars per dozen granola bars at a single retailer trade show event. Underneath the invoice picture is a textbox that concludes these food and beverage costs are excessive. The sources for this graphic are Lottery contract records and hotel invoices.
The State Controller’s Office Inappropriately Removed an Audit Finding After the Lottery Requested Changes to a Draft Audit Report
The figure contains four pictures that demonstrate the events that took place before the State Controller’s Office (SCO) removed an audit finding from a draft audit report. The first picture is two individuals, sitting at a table talking. The caption reads the SCO shared findings from a draft audit report with the Lottery that included its concerns with $720,000 of hotel agreements. The second picture is an individual holding a crossed out audit report in one hand and a briefcase in the other. This caption states that an attorney from the Lottery contacted the SCO’s chief counsel and asked for adjustments to the hotel agreement finding. The third picture is a clock that is almost three quarters shaded in red with a large exclamation point in the red shading. Underneath the clock, the caption reads the SCO took less than 24 hours to decide to remove the finding, despite the weakness of the Lottery’s argument. In the final and fourth picture is an image of a person using a red pen to cross out the $720,000 finding in the SCO report. This caption states that the SCO inappropriately removed the finding before publishing the final audit report even though it had sufficient evidence supporting the finding. The sources for this graphic are SCO and Lottery email correspondence and SCO audit records.
The State Controller’s Office Submitted a Report on the Lottery’s Performance to the Legislature That Had No Independent Analysis and Was Three Years Late
The graphic describes the events that occurred before the State Controller’s Office (SCO) submitted a report to the Legislature on the Lottery without performing an independent analysis. Figure 7 contains three pictures that describe these events. The first picture is a table with three chairs: one chair represents the SCO, another represents the Chair of the Lottery Commission, and the third chair represents the State Superintendent of Public Instruction. On the table is the California Lottery Performance Review report, which had a due date of March 31, 2016. The caption for this picture states that the SCO was required to convene a review group to author a report on the Lottery’s performance after the 2010 amendments. The second picture is a man sitting at his desk, typing on a keyboard, with a big red circle with a slash in the middle of the picture. The caption states that the SCO allowed the Lottery to be the sole author of the report and that the SCO provided no independent analysis. The final and third picture portrays an arm with the text SCO on the shirt sleeve handing this report that the California Lottery authored to the Legislature on October 2019. The caption for this picture states that the SCO submitted the report to the Legislature more than three years after the required deadline. The sources for this figure are SCO email correspondence, interviews with SCO and Lottery staff, and the draft and final version of a report to the Legislature.