Wisconsin Lottery Fiscal Year 2014-15
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Report 16-7 July 2016 Wisconsin Lottery Fiscal Year 2014-15 Legislative Audit Bureau n Report 16-7 July 2016 Wisconsin Lottery Fiscal Year 2014-15 Joint Legislative Audit Committee Members Senate Members: Assembly Members: Robert Cowles, Co-chairperson Samantha Kerkman, Co-chairperson Mary Lazich John Macco Alberta Darling John Nygren Kathleen Vinehout Melissa Sargent Janet Bewley Terese Berceau Report 16-7 July 2016 LEGISLATIVE AUDIT BUREAU State Auditor The Bureau is a nonpartisan legislative service agency responsible Joe Chrisman for conducting financial audits and performance evaluations of state agencies. The Bureau’s purpose is to provide assurance to the Special Assistant to Legislature that financial transactions and management decisions the State Auditor are made effectively, efficiently, and in compliance with state law Anne Sappenfield and that state agencies carry out the policies of the Legislature and Financial Audit the Governor. Audit Bureau reports typically contain reviews of Director financial transactions, analyses of agency performance or public Kendra Eppler policy issues, conclusions regarding the causes of problems found, and recommendations for improvement. Team Leader Amelia Slaney Reports are submitted to the Joint Legislative Audit Committee and made available to other committees of the Legislature and to Auditors the public. The Audit Committee may arrange public hearings on Jake Gasser the issues identified in a report and may introduce legislation in Caryn Names response to the audit recommendations. However, the findings, Jon Thomas conclusions, and recommendations in the report are those of the Joe Westby Legislative Audit Bureau. Publications and Design Coordinator The Bureau accepts confidential tips about fraud, waste, and Susan Skowronski mismanagement in any Wisconsin state agency or program through its hotline at 1-877-FRAUD-17. For more information, visit www.legis.wisconsin.gov/lab. Contact the Bureau at 22 East Mifflin Street, Suite 500, Madison, Wisconsin 53703; [email protected]; or (608) 266-2818. CONTENTS Letter of Transmittal 1 Introduction 3 Wisconsin Lottery Ticket Sales 3 Wisconsin Lottery Operating Expenses 4 Property Tax Relief 6 Statutory Requirements 7 Events Subsequent to FY 2014-15 10 Audit Opinion 11 Management’s Discussion and Analysis 17 Financial Statements 27 Statement of Net Position as of June 30, 2015, and June 30, 2014 28 Statement of Revenues, Expenses, and Changes in Net Position for the Years Ended June 30, 2015, and June 30, 2014 29 Statement of Cash Flows for the Years Ended June 30, 2015, and June 30, 2014 30 Notes to the Financial Statements 33 Supplementary Schedules 51 Schedule 1—Reconciliation of Lottery General Operations Expenses to the Budgetary Basis of Accounting for the Years Ended June 30, 2015, and June 30, 2014 52 Schedule 2—Statutorily Defined Lottery Administrative Expenses for the Years Ended June 30, 2015, June 30, 2014, and June 30, 2013 53 Schedule 3—Summary of Prize Expenses for the Years Ended June 30, 2011, through June 30, 2015 54 Auditor’s Report 55 July 20, 2016 Senator Robert Cowles and Representative Samantha Kerkman, Co-chairpersons Joint Legislative Audit Committee State Capitol Madison, Wisconsin 53702 Dear Senator Cowles and Representative Kerkman: As required by s. 13.94 (1) (em), Wis. Stats., we have completed a financial audit of the Wisconsin Lottery, which is administered by the Wisconsin Department of Revenue (DOR). We have provided an unmodified opinion on the Wisconsin Lottery’s fiscal year (FY) 2014-15 and FY 2013-14 financial statements. Sales of instant and lotto tickets increased from $568.8 million in FY 2013-14 to $574.6 million in FY 2014-15, or by 1.0 percent. Operating expenses increased from $408.7 million in FY 2013-14 to $415.4 million in FY 2014-15, or by 1.6 percent. During FY 2014-15, lottery proceeds used for property tax relief totaled $166.4 million. In October 2015, the Wisconsin Department of Administration and the Legislature’s Joint Committee on Finance authorized the use of $161.4 million in Wisconsin Lottery proceeds for property tax relief during FY 2015-16. Subsequent to FY 2014-15, the Wisconsin Lottery learned that an individual previously employed by the Multi-State Lottery Association, of which the Wisconsin Lottery is a member, was convicted of fraud in Iowa and was suspected of fraud in other states’ lotteries. This individual also had access to random number generators used in Wisconsin to determine the winning numbers for lotto games. In September 2015, the Wisconsin Lottery requested that the Wisconsin Department of Justice review a 2007 drawing for the Wisconsin’s Megabucks lotto game to determine if any illegal activity may have occurred. This review was ongoing at the time of our audit. The Wisconsin Lottery has taken some steps to address our prior concerns with controls over administering retailer accounts and plans further improvements when it implements a new integrated gaming computer system, which is anticipated in May 2017. We appreciate the courtesy and cooperation extended to us by DOR staff in completing this audit. Respectfully submitted, Joe Chrisman State Auditor JC/KE/ss Wisconsin Lottery Ticket Sales Wisconsin Lottery Operating Expenses Property Tax Relief Statutory Requirements Events Subsequent to FY 2014-15 Introduction The Wisconsin Lottery began operations in September 1988, after Wisconsin voters adopted a constitutional amendment in 1987 that allowed the Legislature to create a state lottery with net proceeds to be distributed for property tax relief. Since 1995, the Department of Revenue has managed the Wisconsin Lottery. As required by s. 13.94 (1) (em), Wis. Stats., we have completed a financial audit of the Wisconsin Lottery and have provided an unmodified opinion on its financial statements for the years ended June 30, 2015, and June 30, 2014. We reviewed ticket sales, operating expenses, property tax relief funded by net proceeds available from the Wisconsin Lottery, and compliance with selected statutory provisions. Wisconsin Lottery Ticket Sales From FY 2013-14 to As shown in Figure 1, the Wisconsin Lottery’s ticket sales increased FY 2014-15, ticket sales slightly from $568.8 million in fiscal year (FY) 2013-14 to increased by 1.0 percent $574.6 million in FY 2014-15, or by 1.0 percent. Sales of instant to $574.6 million. tickets, which are scratch-off and pull-tab tickets, increased by $18.5 million, or by 5.5 percent. That increase was largely offset by a decrease of $12.7 million, or 5.5 percent, in sales of lotto tickets, which are tickets with prizes based on the results of a drawing. This decrease was primarily the result of lower Powerball ticket sales due to fewer record jackpots than in the prior year. 3 4 INTRODUCTION Figure 1 Wisconsin Lottery Ticket Sales (in millions) Instant Games Lotto Games $700.0 600.0 $566.1 $568.8 $574.6 $547.6 $502.7 500.0 $229.8 $217.1 $225.1 $239.4 400.0 $200.1 300.0 200.0 $339.0 $357.5 $302.6 $322.5 $326.7 100.0 0 FY 2010-11 FY 2011-12 FY 2012-13 FY 2013-14 FY 2014-15 Wisconsin Lottery Operating Expenses From FY 2013-14 to The Wisconsin Lottery’s largest expenses are prizes and retailer FY 2014-15, the Wisconsin compensation, which includes commissions and incentives that are Lottery’s operating expenses paid to retailers to promote higher ticket sales. As shown in Table 1, increased by 1.6 percent to the Wisconsin Lottery’s operating expenses increased from $415.4 million. $408.7 million in FY 2013-14 to $415.4 million in FY 2014-15, or by 1.6 percent, primarily because expenses for instant prizes increased as instant ticket sales increased. INTRODUCTION 5 Table 1 Wisconsin Lottery Operating Expenses (in millions) Operating Expense Type FY 2010-11 FY 2011-12 FY 2012-13 FY 2013-14 FY 2014-15 Prize Expenses $292.7 $320.1 $329.2 $336.7 $342.4 Retailer Compensation 35.3 38.2 39.2 38.4 39.6 Game Development and Production 16.5 17.4 18.2 18.0 17.8 Product Information 7.4 7.5 7.5 7.5 7.5 Other1 8.2 8.0 8.2 8.1 8.1 Total $360.1 $391.2 $402.3 $408.7 $415.4 1 Includes staff salaries, fringe benefits, supplies and services, and depreciation. Game development and production expenses include donated prize expense, instant game ticket printing and delivery costs, and payments to GTECH Corporation, which provides an integrated gaming computer system to account for instant and lotto game activity and to network with retailer terminals. In recent years, game development and production expenses have generally increased as ticket sales have increased. However, despite continuing increases in ticket sales, game development and production expenses decreased slightly in FY 2013-14 due to a reduction of instant game ticket printing costs, and decreased again in FY 2014-15 due to a change in the contract terms with GTECH. Specifically, the Wisconsin Lottery paid GTECH approximately $13.4 million in FY 2013-14 and, under the revised contract terms, paid approximately $12.8 million in FY 2014-15. In FY 2014-15, the The Wisconsin Constitution prohibits public funds or revenues Wisconsin Lottery spent derived from lottery operations from being spent for promotional $7.5 million to provide advertising and requires that any advertising provide only information about information about the prize structures and chances of winning. The its products. Wisconsin Lottery’s annual product information budget, which is established through the State’s biennial budget, has remained unchanged at $7.5 million since FY 2007-08. The Wisconsin Lottery spent $7.5 million on product information in both FY 2013-14 and FY 2014-15.