Report 20-4 April 2020 Wisconsin Lottery Fiscal Year 2018-19 Legislative Audit Bureau n Report 20-4 April 2020 Wisconsin Lottery Fiscal Year 2018-19 Joint Legislative Audit Committee Members Senate Members: Assembly Members: Robert Cowles, Co-chairperson Samantha Kerkman, Co-chairperson Chris Kapenga John Macco Alberta Darling John Nygren Janet Bewley Melissa Sargent Tim Carpenter Katrina Shankland Report 20-4 April 2020 LEGISLATIVE AUDIT BUREAU State Auditor The Legislative Audit Bureau supports the Legislature in its oversight Joe Chrisman of Wisconsin government and its promotion of efficient and effective state operations by providing nonpartisan, independent, accurate, and Financial Audit timely audits and evaluations of public finances and the management Director of public programs. Bureau reports typically contain reviews of Erin Scharlau financial transactions, analyses of agency performance or public policy Team Leader issues, conclusions regarding the causes of problems found, and Dominic Schuh recommendations for improvement. Auditors Reports are submitted to the Joint Legislative Audit Committee Kasey Bernard and made available to other committees of the Legislature and to Lauren Pawlowski the public. The Audit Committee may arrange public hearings on Phillip Stapel the issues identified in a report and may introduce legislation in response to the audit recommendations. However, the findings, Publications Designer conclusions, and recommendations in the report are those of the and Editor Legislative Audit Bureau. Susan Skowronski The Bureau accepts confidential tips about fraud, waste, and 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 5 Statutory Requirements 6 Events Subsequent to FY 2018-19 9 Audit Opinion 11 Management’s Discussion and Analysis 17 Financial Statements 29 Statement of Net Position as of June 30, 2019, and June 30, 2018 30 Statement of Revenues, Expenses, and Changes in Net Position for the Years Ended June 30, 2019, and June 30, 2018 31 Statement of Cash Flows for the Years Ended June 30, 2019, and June 30, 2018 32 Notes to the Financial Statements 35 Supplementary Schedules 59 Schedule 1—Statutorily Defined Lottery Administrative Expenses for the Years Ended June 30, 2019, June 30, 2018, and June 30, 2017 60 Schedule 2—Summary of Prize Expenses for the Years Ended June 30, 2015, through June 30, 2019 61 Auditor’s Report 63 April 29, 2020 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. We have provided an unmodified opinion on the Wisconsin Lottery’s financial statements as of and for the years ended June 30, 2019, and June 30, 2018. Wisconsin Lottery ticket sales increased from $667.4 million in fiscal year (FY) 2017-18 to $713.1 million in FY 2018-19, or by 6.9 percent. This increase is the result of increased instant ticket sales as well as increased Mega Millions ticket sales resulting from a large jackpot in FY 2018-19. As ticket sales increase, Wisconsin Lottery expenses also increase. Operating expenses increased from $487.2 million in FY 2017-18 to $520.8 million in FY 2018-19, or by 6.9 percent. 2017 Wisconsin Act 59, the 2017-19 Biennial Budget Act, created a general purpose revenue appropriation to pay basic commission to retailers. Under Act 59, the Wisconsin Lottery was provided with $8.0 million in FY 2017-18 and $40.0 million in FY 2018-19 to pay retailer compensation. This increased proceeds available for the Lottery and Gaming Tax Credit in FY 2018-19. The Wisconsin Constitution requires that net proceeds from the Wisconsin Lottery be used exclusively for property tax relief for Wisconsin residents. During FY 2018-19, lottery proceeds used for property tax relief totaled $234.9 million. In September 2019, the Wisconsin Department of Administration and the Legislature’s Joint Committee on Finance authorized the use of $271.2 million in lottery proceeds for property tax relief during FY 2019-20. We appreciate the courtesy and cooperation extended to us by Department of Revenue staff in completing this audit. Respectfully submitted, Joe Chrisman State Auditor JC/ES/ss Wisconsin Lottery Ticket Sales Wisconsin Lottery Operating Expenses Property Tax Relief Statutory Requirements Events Subsequent to FY 2018-19 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 as of and for the years ended June 30, 2019, and June 30, 2018. We reviewed ticket sales, operating expenses, balances related to Wisconsin Lottery’s participation in the Multi-State Lottery Association, property tax relief funded by net proceeds available from the Wisconsin Lottery, and compliance with selected statutory provisions. Wisconsin Lottery Ticket Sales Ticket sales were As shown in Figure 1, the Wisconsin Lottery’s ticket sales increased $713.1 million in from $667.4 million in fiscal year (FY) 2017-18 to $713.1 million in FY 2018-19, which FY 2018-19, or by 6.9 percent. Sales of instant tickets, which are was an increase of scratch-off and pull-tab tickets, increased by $30.9 million, or by 6.9 percent from 7.4 percent. Lotto ticket sales increased $14.8 million, or 6.0 percent. FY 2017-18. This increase is due to increased Mega Millions ticket sales resulting from a large jackpot in FY 2018-19. 3 4INTRODUCTION Figure 1 Wisconsin Lottery Ticket Sales (in millions) $800.0 $713.1 700.0 $667.4 Lotto Games $627.1 $602.8 Instant Games 600.0 $574.6 $261.8 $247.0 500.0 $247.2 $216.9 $217.1 400.0 300.0 $451.3 $420.4 200.0 $385.9 $357.5 $379.9 100.0 0 FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 Wisconsin Lottery Operating Expenses Operating expenses The Wisconsin Lottery’s largest expenses are prizes and retailer were $520.8 million in compensation. Retailer compensation includes commissions and FY 2018-19, which incentives that are paid to retailers to promote higher ticket sales. was an increase of As shown in Table 1, the Wisconsin Lottery’s operating expenses 6.9 percent from increased from $487.2 million in FY 2017-18 to $520.8 million in FY 2017-18. FY 2018-19, or by 6.9 percent, primarily because expenses for lotto prizes increased as lotto ticket sales increased. Game development and production expenses include donated prize expense, instant game ticket printing and delivery costs, and payments to IGT Global Solutions Corporation, which provides an integrated gaming computer system to account for instant and lotto game activity and to network with retailer terminals. Game development and production expenses generally fluctuate based on changes in ticket sales. The Wisconsin Lottery paid IGT Global Solutions Corporation approximately $17.2 million in FY 2017-18 and $18.3 million in FY 2018-19. INTRODUCTION 5 Table 1 Wisconsin Lottery Operating Expenses (in millions) Operating Expense Type FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 Prize Expenses $342.4 $372.5 $363.0 $404.4 $431.9 Retailer Compensation 39.6 43.5 41.3 46.5 49.7 Game Development and Production 17.8 19.4 18.9 19.7 20.2 Product Information 7.5 7.5 7.5 8.5 8.5 Other1 8.1 9.0 9.6 8.1 10.5 Total $415.4 $451.9 $440.3 $487.2 $520.8 1 Includes staff salaries, fringe benefits, supplies and services, and depreciation. In FY 2018-19, the The Wisconsin Constitution prohibits public funds or revenues Wisconsin Lottery spent derived from lottery operations from being spent for promotional $8.5 million to provide advertising and requires that any advertising provide only information about information about the prize structures and chances of winning. its products. The Wisconsin Lottery’s annual product information budget, which is established through the State’s biennial budget, was unchanged at $8.5 million from FY 2017-18 to FY 2018-19. Property Tax Relief The Wisconsin Constitution requires that net proceeds from the Wisconsin Lottery be used exclusively for property tax relief. The proceeds are largely distributed to owners of primary residences in Wisconsin through the Lottery and Gaming Tax Credit. In FY 2018-19, $234.9 million in lottery proceeds was used to fund the Lottery and Gaming Tax Credit, as shown in Table 2. The total amount distributed for property tax relief is authorized early in the fiscal year and is based on an estimate of proceeds that will be available for distribution. Property tax relief is lower in years where fewer proceeds are anticipated to be available for distribution and is higher in years where more proceeds are anticipated to be available for distribution. The Wisconsin Lottery was provided with general purpose revenue to pay retailer compensation in FY 2017-18 and FY 2018-19, which increased proceeds available for the Lottery and Gaming Tax Credit in FY 2018-19.