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A Review and Follow-Up Report of the South Carolina Education Lottery
December 2005

REPORT (PDF)     SUMMARY (PDF)

State law requires us to conduct a management audit of the South Carolina Education Lottery. We reviewed issues regarding administrative expenditures, the sale and advertisement of lottery tickets, and procurement. We also determined the status of recommendations that we made in our 2003 review of the lottery. Our findings are summarized as follows.

  • State law requires that administrative expenditures are not to exceed 15% of the lottery’s total revenue. In FY 04-05, the lottery’s actual administrative expenditures were $109,399,614 which was 11.4% of its total revenue.
  • The salaries of top executives at the lottery exceed those in other state lotteries. Although expenses for salaries comprise a small percentage of total lottery revenues, cost controls in this area could impact resources available for education.
  • Lottery officials have not documented that it is more cost-effective to purchase advertising products (promotional items) through its advertising contractor. Lottery staff is already involved in these purchases and it appears that this process could easily be assumed by in-house procurement staff.
  • In advertising its games and designing its lottery tickets, the lottery has not adequately communicated the odds of winning. Some advertisements contained no information on the odds of winning. In other advertisements, the lottery only indicated the overall odds of winning any prize, including a prize equal to the price of the lottery ticket. The lottery did not communicate the odds of winning a top prize in any of its advertisements or on any of its lottery tickets.
  • The lottery has repeatedly sold scratch-off lottery tickets after all of the top prizes, printed on the front of the tickets, have been claimed. In FY 04-05, the lottery sold $19.9 million worth of lottery tickets for 16 games after all of the top prizes had been claimed. As a result, some customers may have purchased lottery tickets under the inaccurate impression that they had a chance of winning a top prize. The top prizes for these games ranged from $1,300 to $100,000.
  • State law requires that a "lottery ticket must not be sold on the date of any general or primary election." This prohibition cost the lottery approximately $1.8 million in sales and $600,000 in net proceeds in calendar year 2004. A senior official with the South Carolina Election Commission stated that she did not believe the sale of lottery tickets on election days would negatively affect the election process.
  • In its annual analysis of the types of people who buy lottery tickets, the lottery has excluded individuals under the age of 18, who may not legally buy tickets. The lottery is required by state law to hire an independent firm to determine the "age, sex, education, and frequency of participation of players." This law does not instruct the lottery to exclude minors from its analysis. In other states, surveys of minors and undercover studies have found that minors were often able to buy lottery tickets.
  • Illegal gambling at some of the lottery’s retail outlets has been uncovered by South Carolina law enforcement agencies. We identified 46 lottery retailers who engaged in illegal gambling on their premises in FY 04-05. This illegal competition, mostly in the form of video gambling, may be causing the lottery to lose sales. Businesses are also less likely to pay the required taxes on income from illegal gambling. The lottery’s statutory authority to respond to illegal gambling, however, may be limited to cases in which a retailer has been criminally convicted. The Department of Revenue is authorized by state law to administratively suspend or revoke a retailer’s beer and wine permit, or impose a fine, for illegal gambling, with or without a criminal conviction.
  • The lottery has implemented six of the nine recommendations from our 2003 audit. In addition, recommendations regarding the use of lottery funds by other agencies have been implemented. The legislature did not approve appropriations for the teachers’ grant program, one of the three programs in which a majority of lottery funds were not spent. No legislative action has been taken regarding laws which restrict lottery advertising.