The California State Lottery should pay the state $36 million to make up for not putting enough money toward education, according to a State Auditor’s report published Tuesday.

California voters created the lottery in 1984 to provide money for education. The lottery’s revenue has increased in recent years, but the amount it has put toward education hasn’t kept pace, auditors found.

The lottery’s revenue has more than doubled since 2010, rising from about $3 billion to about $7 billion per year. A decade ago, the lottery sent about $1 billion to California schools. In the 2017-18 state budget year, schools received $1.7 billion from the lottery.

Auditors determined the lottery should have provided $36 million more on top of the $1.7 billion in the 2017-2018 fiscal year.

State Sen. Ling Ling Chang, R-Diamond Bar, requested an audit after news reports and department employees suggested the lottery was putting a smaller proportion of its revenues toward education.

“The findings today demonstrate what we suspected all along,” Chang said in a statement. “That the California lottery has a culture of profits first and schools last. They owe our schools millions of dollars and I will be introducing legislation to ensure our schools get what they are owed.”

The lottery counters that the overall amount it dedicates to education went up by about $300 million per year after 2010, when the Legislature passed a law that allowed the California State Lottery to award bigger prizes and participate in multi-state games.

Turnover at the lottery

Before the change, the lottery was required to provide 34 percent of its total revenue for education. The change required the lottery instead to “increase the amount it provides to education annually in proportion to the increases in its net revenues.”

For the fiscal years from 2016 through 2019, the lottery provided between 24 and 25 percent of revenues for education, according to the report.

The report says deputy directors at the lottery told auditors they don’t believe the law requires a “direct proportional relationship” between net revenue and education funding. Lottery officials contend their “core mission” is “maximizing funding for education,” the audit says.

The difference stems from a “fundamental difference of opinion” over how to interpret the California State Lottery Act and the changes of 2010, Lottery Director Alva Johnson wrote in a response to the audit.

The lottery, a self-funded state department, has been under scrutiny since summer 2018, when an anonymous lottery employee sent a letter to Gov. Jerry Brown with photos that allegedly showed senior lottery administration officials carrying on at Southern California piano bar, including one image of an official putting his head up a woman’s shirt. The letter, written on official lottery stationery, also described disparaging treatment of employees.

Top officials at the department have retired or resigned, including its former director, Hugo Lopez, who stepped down in June.

$60 granola bars

The new audit highlighted errors in lottery spending practices. It found the lottery didn’t follow bidding requirements for eight contracts worth $5.7 million and didn’t make sure it was getting the best value in 17 other agreements worth $720,000, according to the audit.

Many of the agreements were with hotels during conferences. The audit cites a 2014 trade show in Orange County at which the lottery paid a $45,000 food and beverage minimum for 320 registered guests.

That worked out to an average of about $141 per guest per day. The spending included $60 for a dozen granola bars and $45 for a dozen cookies, according to the audit.

The lottery should have weighed other options for places to stay, or worked on negotiating those prices, according to the audit.

A State Controller’s Office audit in April similarly found the lottery inappropriately spent about $300,000 on food, travel and accommodations.

Tuesday’s report from State Auditor Elaine Howle found shortcomings with the Controller’s Office’s audit, saying the Controller’s Office “removed a significant finding” from a recent audit report and submitted a report to the Legislature that was actually written by the lottery.

The finding was related to the $720,000 in agreements that the auditor found weren’t properly vetted.

In a written response, State Controller Betty Yee said the auditor overreached in criticizing the rigor of her office’s analysis. Yee said her office’s review showed the lottery vetted other hotels and that the prospects of saving more money elsewhere were “questionable.” Yee said retailers at the events paid attendance fees that reduced the $720,000 cost to about $550,000.

A lottery attorney questioned the controller’s interpretation of an underlying statute, and the Controller’s Office quickly modified its finding without full consideration, according to the audit.

Yee wrote that the time spent on the decision didn’t mean it wasn’t fully vetted, saying the lottery had made a legitimate legal argument.

This story was originally published February 25, 2020 at 9:51 AM.