State Audit Reveals California Lottery Shortchanged Schools by Millions

California Joins Mega Millions Lottery

An audit of the California Lottery has found that the agency has shortchanged schools in the state by millions of dollars over the past four years, and has recommended that the money be repaid, according to a report in the Los Angeles Times.

The California Lottery was created by voters in 1984 to help provide money for schools across the state, however, while the lottery's revenue has increased in recent years thanks to new games and scratchers, the amount paid toward education hasn't kept pace, state auditors say.

"The Lottery did not adhere to a requirement to increase its funding for education proportionate to its increases in net revenue," the audit states. "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."

State Auditor Elaine Howle said the California Lottery failed to provide up to $36 million to schools in the fiscal year ending on June 30, 2018.

“The Lottery has not followed state law, which requires it to increase its funding for education in proportion to its increases in net revenue,” Howle wrote in a letter to Gov. Gavin Newsom and the Legislature.

"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," Howle added. "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."

Records obtained by The Times indicate that revenue for the state lottery has roughly doubled since 2010, rising from about $3 billion to $7 billion last year. In 2009, lottery officials paid out about $1 billion to California schools, but despite the ramp up in revenue, the state only paid $1.7 billion to schools for the 2017-18 fiscal year.

The audit originally stated that the lottery owed $69 million more, however, that amount was reduced to $36 million after hearing an explanation from lottery officials.

The audit states the Legislature should require lottery officials to pay back the $36 million, which is what auditors say the lotto owes California schools.

Update: The California Lottery issued a statement in response to the audit.

"We are pleased that CSA found no issues with the Lottery’s operational and administrative spending levels, its staffing levels and its investigative approaches for awarding prize claims. Lottery management and staff work diligently to ensure that our administrative expenses are within the statutory limit, resulting in an efficiently run department. 

“The Lottery strongly disagrees with CSA’s finding that it underfunded public education. At issue is the interpretation of the California Lottery Act, as well as the changes made in Chapter 13 of 2010 (AB 142, Hayashi). The intent of AB 142 was to increase absolute dollars to public education by increasing prize payout flexibility. The Lottery undeniably met this goal by providing $13.2 billion to education since prize payout flexibility was implemented. The Lottery has followed California State law. 

“CSA incorrectly claims education contributions were underfunded by $36 million. For context, this amount represents half of one percent of the Lottery’s total contribution of $6.7 billionover the four-year period reviewed by CSA.

“Lottery revenues and contributions to education were declining in the years prior to the passage of AB 142. The year before this change, the Lottery’s contributions to education were approximately $1.05 billion. In contrast, last year the Lottery provided $1.8 billion–the highest contribution to date. Had the Lottery utilized CSA’s interpretation of the law, it would have had to intentionally suppress sales for certain games, resulting in fewer dollars to public education.

“The Lottery will continue to implement appropriate corrective actions already identified by its Internal Audits Office, mandated external audits, and as noted by CSA. Last year, the Lottery began addressing administrative concerns and strengthening its procurement practices. While the Lottery agrees that more robust documentation for noncompetitive bid exceptions is necessary, it is important to note that the Lottery’s procurements are internally vetted and executed in accordance with California State law. 

“The Lottery disagrees with CSA’s underlying conclusions of the value of its Fairs and Festivals program. The Lottery must continually raise brand awareness, incentivize and persuade California adults to voluntarily purchase Lottery products to meet its mandate to provide supplemental funding to education.

Photo: Getty Images

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