The state government could increase funding for K-12 education by properly managing the California Lottery, which owes schools $36 million, the state auditor reported February 25.

The auditor originally calculated that the Lottery shortchanged schools by $69 million, but reduced the figure after Lottery officials belatedly provided more documentation.

“We shared our calculation with the Lottery of how we arrived at the $69 million that it owed to education several times before it received our draft report,” the auditor wrote. “It was not until the Lottery responded to our draft report that it fully documented its rationale for why it believed the amount of $69 million was incorrect. After carefully considering the Lottery’s response, we recalculated the amount it owed education and arrived at an amount of $36 million.”

Voters created the California State Lottery in 1984 after a campaign that featured the slogan, “The schools win too!” In 2010, the Legislature and governor amended the law to authorize the Lottery to set prize payouts in such a way as to ensure that it provides the maximum possible funding to education.

The auditor reviewed the Lottery revenue allocated to education, the agency’s operational practices, and the State Controller’s Office’s (SCO) oversight of the Lottery, and reported these conclusions:

  • The Lottery has not provided required funding to education.
  • 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.
  • 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.
  • 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 auditor reviewed 15 contracts and reported that in eight noncompetitive contracts, totaling $5.7 million in value, the Lottery did not have adequate evidence that it followed regulations.
  • The Lottery had no evidence that it evaluated whether it obtained best value for 17 other agreements valued at about $720,000.

The auditor also reported that the Controller’s Office “inappropriately removed a significant finding from a recent audit report after the Lottery disputed the finding” and “submitted a report to the Legislature about the Lottery’s performance that was actually written by the Lottery, without adding its own independent analysis.”

In a letter to State Auditor Elaine Howle, Controller Betty Yee wrote that the auditor’s claim “appears to be based on a misinterpretation of circumstances and is unsupported by evidence to demonstrate a finding was removed without proper analysis.”

Yee said the audit “makes assumptions and selective interpretations of fact that are inconsistent with responsible auditing practices,” and added: “Over the last 35 years, SCO has conducted more than 150 audits of the State Lottery, identifying thousands of findings and many millions in erroneous and misspent funds. The assertion SCO is not providing ongoing oversight of the State Lottery – based on incomplete presentation of a procurement practice, a misleading interpretation of AB 142 not supported by statute itself, and a critique of noncompliance of an auditing function prohibited by law – is not a balanced presentation of SCO efforts.”

Lottery Director Alva Johnson said her office “strongly disagrees” with the findings that the Lottery owes money to schools, and said the findings “arise from a fundamental difference of opinion over interpretation” of the Lottery Act and the 2010 changes.

“During the four fiscal years that the proportionality requirement has been in effect, the Lottery provided $6.7 billion to education, which is an increase of more than $1.3 billion from the previous four fiscal years and more than $2.2 billion from the four fiscal years prior to the first full year of changes under AB 142 [the 2010 changes],” Johnson added.

Howle disagreed with the responses from the controller and Lottery director, and wrote that she stands by her audit’s methodology and findings.