STATE OF WISCONSIN Report 21-10 Legislative Audit Bureau June 2021 NONPARTISAN • INDEPENDENT • ACCURATE Wisconsin Lottery Fiscal Year 2019-20 Wisconsin Lottery Fiscal Year 2019-20 STATE OF WISCONSIN Report 21-10 Legislative Audit Bureau June 2021 NONPARTISAN • INDEPENDENT • ACCURATE Joint Legislative Audit Committee Members Senate Members: Assembly Members: Robert Cowles, Co-chairperson Samantha Kerkman, Co-chairperson Dale Kooyenga John Macco Howard Marklein Mark Born Melissa Agard Dianne Hesselbein Tim Carpenter Francesca Hong Report 21-10 June 2021 Legislative Audit Bureau State Auditor The Legislative Audit Bureau supports the Legislature in its oversight of Joe Chrisman 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 Erin Scharlau of public programs. Bureau reports typically contain reviews of financial transactions, analyses of agency performance or public policy Assistant Financial issues, conclusions regarding the causes of problems found, and Audit Director recommendations for improvement. Brian Geib Team Leader Reports are submitted to the Joint Legislative Audit Committee Matt Rossi and made available to other committees of the Legislature and to the public. The Audit Committee may arrange public hearings on Auditors the issues identified in a report and may introduce legislation in Aidan Hutchison response to the audit recommendations. However, the findings, Phillip Stapel conclusions, and recommendations in the report are those of the Nancy Xiong Legislative Audit Bureau. Publications Designer and Editor 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 7 Events Subsequent to FY 2019-20 10 Audit Opinion 11 Management’s Discussion and Analysis 17 Financial Statements 29 Statement of Net Position as of June 30, 2020, and June 30, 2019 30 Statement of Revenues, Expenses, and Changes in Net Position for the Years Ended June 30, 2020, and June 30, 2019 31 Statement of Cash Flows for the Years Ended June 30, 2020, and June 30, 2019 32 Notes to the Financial Statements 35 Supplementary Schedules 57 Schedule 1—Statutorily Defined Lottery Administrative Expenses for the Years Ended June 30, 2020, June 30, 2019, and June 30, 2018 58 Schedule 2—Summary of Prize Expenses for the Years Ended June 30, 2016, through June 30, 2020 59 Auditor’s Report 61 STATE OF WISCONSIN Joe Chrisman Legislative Audit Bureau State Auditor 22 East Mifflin Street, Suite 500 Main: (608) 266-2818 www.legis.wisconsin.gov/lab Madison, Wisconsin 53703 Hotline: 1-877-FRAUD-17 [email protected] June 30, 2021 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, 2020, and June 30, 2019. Wisconsin Lottery ticket sales increased from $713.1 million in fiscal year (FY) 2018-19 to $725.4 million in FY 2019-20, or by 1.7 percent. This increase is the result of increased sales of scratch-off tickets that sold for $10 or more. As ticket sales increase, Wisconsin Lottery expenses also increase. Operating expenses increased from $520.8 million in FY 2018-19 to $542.9 million in FY 2019-20, or by 4.2 percent. 2017 Wisconsin Act 59, the 2017-19 Biennial Budget Act, created a general purpose revenue (GPR) appropriation for the Wisconsin Lottery. Under Act 59, the Wisconsin Lottery was provided with $40.0 million in FY 2018-19 for retailer compensation. 2019 Wisconsin Act 9, the 2019-21 Biennial Budget Act, provided the Wisconsin Lottery with $71.7 million in FY 2019-20 and $73.1 million in FY 2020-21 for retailer compensation, vendor fees, and certain general program operations. The provision of GPR funding increased net lottery proceeds available for the Lottery and Gaming Tax Credit in FY 2018-19 and FY 2019-20. The Wisconsin Constitution requires that net proceeds from the Wisconsin Lottery be used exclusively for property tax relief for Wisconsin residents. During FY 2019-20, net lottery proceeds used for property tax relief totaled $270.4 million. In October 2020, the Wisconsin Department of Administration and the Legislature’s Joint Committee on Finance authorized the use of $237.4 million in net lottery proceeds for the FY 2020-21 Lottery and Gaming Tax Credit. 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/BG/ss Wisconsin Lottery Ticket Sales Wisconsin Lottery Operating Expenses Property Tax Relief Statutory Requirements Events Subsequent to FY 2019-20 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, 2020, and June 30, 2019. We reviewed ticket sales, operating expenses, balances related to Wisconsin Lottery’s participation in the Multi-State Lottery Association (MUSL), 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 from $725.4 million in FY 2019-20, $713.1 million in fiscal year (FY) 2018-19 to $725.4 million in FY 2019-20, which was an increase of or by 1.7 percent. Sales of instant tickets, which are scratch-off and 1.7 percent from FY 2018-19. pull-tab tickets, increased by $62.4 million, or by 13.8 percent. This increase is the result of increased sales of scratch-off tickets that sold for $10 or more. Lotto ticket sales decreased $50.1 million, or by 19.1 percent, due to decreased Powerball and Mega Millions ticket sales resulting from the jackpots being lower in FY 2019-20 than those in FY 2018-19. 3 4 ❱ INTRODUCTION Figure 1 Wisconsin Lottery Ticket Sales (in millions) Wisconsin Lottery Operating Expenses Operating expenses were The Wisconsin Lottery’s largest expenses are prizes and retailer $542.9 million in FY 2019-20, compensation. Retailer compensation includes commissions and or 4.2 percent more than incentives that are paid to retailers to promote higher ticket sales. As in FY 2018-19. shown in Table 1, the Wisconsin Lottery’s operating expenses increased from $520.8 million in FY 2018-19 to $542.9 million in FY 2019-20, or by 4.2 percent, primarily because expenses for instant prizes increased as instant 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 (IGT), 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 approximately $18.3 million in FY 2018-19 and $18.8 million in FY 2019-20. INTRODUCTION ❱ 5 Table 1 Wisconsin Lottery Operating Expenses (in millions) Operating Expense Type FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 FY 2019-20 Prize Expenses $372.5 $363.0 $404.4 $431.9 $453.5 Retailer Compensation 43.5 41.3 46.5 49.7 50.9 Game Development and Production 19.4 18.9 19.7 20.2 21.5 Product Information 7.5 7.5 8.5 8.5 8.4 Other1 9.0 9.6 8.1 10.5 8.6 Total $451.9 $440.3 $487.2 $520.8 $542.9 1 Includes salaries, fringe benefits, supplies and services, and depreciation. In FY 2019-20, the The Wisconsin Constitution prohibits public funds or revenues derived Wisconsin Lottery spent from lottery operations from being spent for promotional advertising $8.4 million to provide and requires that any advertising provide only information about the information about its prize structures and chances of winning. The Wisconsin Lottery’s annual product information budget, which is established through the products. State’s biennial budget, was unchanged at $8.5 million from FY 2018-19 to FY 2019-20. The Wisconsin Lottery spent $8.4 million to provide information about its products in FY 2019-20. Property Tax Relief The Wisconsin Constitution requires that net proceeds available 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. 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.