Audit States That California Lottery Failed To Pay $36 Million To Schools

Written By Derek Helling on February 28, 2020
California lottery audit

One of the selling points for state lotteries is that they share revenues with schools. According to a California Lottery audit, the Golden State’s lottery hasn’t done that to the extent it should have.

During one recent year, the lottery’s payout was $36 million less than the state’s auditor says it should have been. The shortfall happened because the lottery failed to comply with new regulations.

What the recent California Lottery audit revealed

The main reason for the deviation is because the lottery failed to comply with a 2010 law in one of the past three fiscal years. The state auditor performed the review because some legislators were suspicious that was the case.

That was the 2017-18 fiscal year and represents the $36 million shortfall. To understand how it happened, it’s necessary to understand the change in 2010.

From 1984 up until that point, state law required the lottery to pay out at least 34% of its revenue to a fund for California’s schools. The law earmarked the other 66% for operational costs and paying out winnings.

The state adjusted that requirement in 2010 to allow the lottery to have more control over how it pays out its revenue. That was simply because the Great Recession caused a significant downturn in income.

Over the past three fiscal years, revenue has rebounded significantly. Despite that, the lottery continued to use that discretionary power to pay out a lower percentage.

The solution to the problem, the report states, is more oversight over this facet of the lottery’s business. That is primarily up to State Controller’s Office.

How the State Controller’s Office can help out

The audit reveals that the State Controller’s Office has essentially let the lottery perform its own reviews. Even if only on a temporary basis, the controller’s office could either arrange for a third-party review of the lottery’s books or do that itself.

That may end up being the case. One of the state legislators who called for the inquiry, state Sen. Ling Ling Chang, says she intends to introduce legislation to provide more oversight for the lottery.

Whether that will be through the controller’s office remains to be seen. What’s more certain is that if the lottery loses some of its independence, that could affect its role in future expansions of legal gambling in California.

How this could affect the lottery’s future roles

California could see multiple constitutional amendments to expand legal gambling in the state on the ballot this November. Although it’s unclear whether that will include the lottery, that remains a possibility.

Legislators may be less likely to include the lottery now, however. While some might argue that could take away revenue from California’s schools, there are two reasons why that isn’t true.

The first is that state lottery and sportsbook customers aren’t usually the same people. Because of that, it’s unlikely sports betting will cannibalize the lottery.

The second reason is that the state could designate part of sports betting taxes for education and thus cover any losses even if fewer Californians were to play the lottery. All of that is hypothetical right now, however.

What seems more certain is that there will be more eyes on the lottery moving forward. If that leads to more dollars for education, that’s a win for California’s students.

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Derek Helling

Derek Helling is a lead writer for PlayUSA and the manager of BetHer. He is a 2013 graduate of the University of Iowa and covers the intersections of sports with business and the law.

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