Report of Independent Auditors and
Financial Statements for
Arizona State Lottery
A Proprietary Fund of the State of Arizona
June 30, 2016
CONTENTS
REPORTOFINDEPENDENTAUDITORS
MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)
BASICFINANCIALSTATEMENTS
Statementofnetposition
Statementofrevenues,expenses,andchangesinnetposition
Statementofcashflows
Notestobasicfinancialstatements
REQUIREDSUPPLEMENTARYINFORMATION
Scheduleofproportionateshareofthenetpensionliability
Scheduleofpensioncontributions
Notestorequiredsupplementaryinformation
R00EPORTONOFINDEPENDENTAUDITORSINTERNALCONTROLOVERFINANCIAL
REPORTINGANDONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDIT
OFFINANCIALSTATEMENTSPERFORMEDINACCORDANCEWITHGOVERNMENT
AUDITINGSTANDARDS
Scheduleofprioryearauditfindings
PAGE
1–2
3–7
8
9
10
11–25
26
27
28
29–30
31
REPORTOFINDEPENDENTAUDITORS
TotheCommissionersof
ArizonaStateLottery
Phoenix,Arizona
ReportontheFinancialStatements
We have audited the accompanying financial statements of the Arizona State Lottery (the “Lottery”, a
proprietary fund of the State of Arizona) as of and for the year ended June30, 2016 and the related
notestothefinancialstatements,whichcollectivelycomprisetheLottery’sbasicfinancialstatementsas
listedinthetableofcontents.
Management’sResponsibilityfortheFinancialStatements
Management is responsible for the preparation and fair presentation of these financial statements in
conformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica;thisincludes
the design, implementation, and maintenance of internal control relevant to the preparation and fair
presentationoffinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudor
error.
Auditor’sResponsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in conformity with auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing Standards,
issued by the Comptroller General of the United States. Those standards require that we plan and
performtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreefrom
materialmisstatement.
Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresin
the financial statements. The procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error.Inmakingthoseriskassessments,theauditorconsidersinternalcontrolrelevanttotheentity's
preparation and fair presentation of the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Lottery's internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of
significantaccountingestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationof
thefinancialstatements.
1
Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisfor
ourauditopinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
respectivefinancialpositionoftheArizonaStateLottery,asofJune30,2016,andtherespectivechanges
in financial position, and cash flows for the year then ended in conformity with accounting principles
generallyacceptedintheUnitedStatesofAmerica.
OtherMatters
RequiredSupplementaryInformation
AccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequirethatthemanagement’s
discussion and analysis on pages 3 through 7, the schedule of proportionate share of the net pension
liabilityonpage26,andthescheduleofpensioncontributionsonpage27bepresentedtosupplement
thebasicfinancialstatements.Suchinformation,althoughnotapartofthebasicfinancialstatements,is
requiredbytheGovernmentalAccountingStandardsBoardwhoconsidersittobeanessentialpartof
financialreportingforplacingthebasicfinancialstatementsinanappropriateoperational,economic,or
historical context. We have applied certain limited procedures to the required supplementary
informationinconformitywithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica,
which consisted of inquiries of management about the methods of preparing the information and
comparing the information for consistency with management's responses to our inquiries, the basic
financial statements, and other knowledge we obtained during our audit of the basic financial
statements. We do not express an opinion or provide any assurance on the information because the
limited procedures do not provide us with sufficient evidence to express an opinion or provide any
assurance.
OtherReportingRequiredbyGovernmentAuditingStandards
In accordance with Government Auditing Standards, we also have issued our report dated
January24,2017onourconsiderationoftheLottery’sinternalcontroloverfinancialreportingandon
ourtestsofitscompliancewithcertainprovisionsoflaws,regulations,contracts,andgrantagreements
andothermatters.Thepurposeofthatreportistodescribethescopeofourtestingofinternalcontrol
overfinancialreportingandcomplianceandtheresultsofthattesting,andnottoprovideanopinionon
internal control over financial reporting or on compliance. That report is an integral part of an audit
performed in accordance with Government Auditing Standards in considering the Lottery’s internal
controloverfinancialreportingandcompliance.
Scottsdale,Arizona
January24,2017
2
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)
ThisdiscussionandanalysisoftheLottery'sfinancialstatementsisa requiredcomponentoffinancial
reportingunderGovernmentalAccountingStandardsandwaspreparedbyArizonaLotteryManagement.
ItprovidesanoverviewoffinancialactivitiesasofandfortheyearendedJune30,2016,andshouldbe
readinconjunctionwiththeLottery'sfinancialstatementsandnotestothefinancialstatements.
Thisannualreportconsistsofthreetypesoffinancialstatementsandaccompanyingnotesthatprovide
explanations and details of accounting policies, account balances and activities. Account balances and
activities are shown as of and for the year ended June 30, 2016. The statement of net position; the
statement of revenues, expenses, and changes in net position; and the notes are presented using the
accrualmethodofaccounting.Underthismethod,financialtransactionsare recordedwhenearnedor
incurred regardless of when cash is received or disbursed. The statement of cash flows reflects cash
receiptsanddisbursementsduringthesame12‐monthperiod.
The statement of net position provides information about the assets, deferred outflows of resources,
liabilities, deferred inflows of resources, and net position of the Lottery. Assets consist of cash,
substantially all held by the State Treasurer, amounts owed to the Lottery from licensed Lottery
retailersandotherStateagencies,ticketinventory,andproperty.Liabilitiesrepresentamountsowedby
theLotterytovendors,toemployeesforwagesandbenefits,toprizewinners,andtootherStatefunds.
FundnetpositionrepresentstheportionoftheLottery'sassetsthatarenotencumberedbyliabilities.It
servesasanindicatorofthenetworthoftheLottery.
Asummaryofthefinancialresultsofoperationsforthe12‐monthperiodispresentedinthestatement
ofrevenues,expenses,andchangesinnetposition.OperatingrevenuesincludesalesofLotterytickets,
retailer licensing fees, and commissions earned on the sales of Lottery tickets at Lottery offices, and
specialevents.Directcostsandadministrativeexpensescomprisetheoperatingexpensessectionofthis
statement. Direct costs are variable expenses that fluctuate with the level of sales. Marketing and
overheadcostsareincludedintheadministrativeexpensescategory.
Nonoperating revenues consist of interest earned on prize fund cash investments from the State
Treasurer,interestcreditedtotheLottery'sMultistateLotteryAssociation(MUSL)unreservedaccount
forinterestearnedonprizereservesatMUSLandincomerecognizedfromcommonstock.Thetransfer’s
categoryincludestransferstootherstatefundsasrequiredbyLotterystatutes.
The statement of cash flows includes cash receipts and disbursements from operating, noncapital
financing, and investment earnings. This statement also includes a reconciliation of operating income
presentedontheaccrualbasisofaccountingtonetcashprovidedbyoperatingactivities.Thenotesto
the financial statements present information on accounting policies, transfers and statutory
requirements,commitments,contingencies,andretirementbenefits.Thesenotesareanintegralpartof
thefinancialstatements.
3
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)
SalesActivities
Revenues from the sale of Lottery products for the fiscal year ended June 30, 2016 were higher than
FiscalYear2015andalsoaLottery recordhigh.Asshowninthefinancialstatements,salesincreased
16.15% from the prior year, from $749.9 million in Fiscal Year 2015 to $871.0 million in the current
year.
ThefollowingtablecomparesLotteryproductsalesbetweenfiscalyears.Salesarepresentedinmillions
ofdollars.
ProductSales
FY2015
FY2016
Changes
Percentage
Scratchers(includingeconomic
$590.7
$48.7
8.99%
development)
$ 542.0
Powerball
93.6
160.3
66.7
71.26%
MegaMillions
46.8
44.7
(2.1)
‐4.49%
ThePick
25.8
33.1
7.3
28.29%
Fantasy5
17.1
16.3
(0.8)
‐4.68%
Pick3
9.7
10.6
0.9
9.28%
WeeklyWinnings
3.6
0.7
(2.9)
‐80.56%
InstantTabs
5.1
6.1
1.0
19.61%
AONand5Card
6.2
8.5
2.3
37.10%
Total
$ 749.9
$ 871.0
$ 121.1
16.15%
TotalRevenues
OtheroperatingrevenuesfortheyearendedJune30,2016,were$194,158comparedto$938,833for
the year ended June 30, 2015. Other operating revenue is comprised of license fees and other
miscellaneousrevenue.Totaloperatingrevenueswere$871.1millionfortheyearendedJune30,2016,
ascomparedto$750.9millionfortheyearendedJune30,2015.Asmentionedabove,theincreasewas
duetoanincreaseinsalesrevenues.
NonoperatingrevenuesfortheyearendedJune30,2016,were$31,092ascomparedto$67,236forthe
yearendedJune30,2015.Nonoperatingrevenueiscomprisedofinterestearnedoninvestedcashand
periodicrecognitionofcommissionsearnedbytheLottery.
4
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)
MajorExpenses
$640.7 million of the Lottery's total operating expenses of $660.4 million for the year ended
June30,2016 were incurred in direct support of the sales of Lottery games. $557.3 million of the
Lottery'stotaloperatingexpensesof$579.9millionfortheyearendedJune30,2015wereincurredin
directsupportofthesalesofLotterygames.Theseexpensesincludeprizeexpense,retailercommissions
and incentives, purchases of Scratchers tickets, compensation to the vendor for Scratchers ticket
distribution,andcompensationtothevendorwhomaintainsandsupportstheon‐linegamingsystem.
The following table compares the game related expenses between fiscal years. All expenses are
presentedinmillionsofdollars.
GameRelatedExpenses
FY2015
FY2016
Differences
Percentage
Prizeexpense
Retailercommissions
On‐linesystemexpenses
Scratcherssystemand
distributionexpenses
Ticketspurchased
$ 486.7
51.0
7.5
$ 557.5
59.2
10.1
$ 70.8
8.2
2.6
14.5%
16.1%
34.7%
5.5
6.6
6.0
7.9
0.5
1.3
9.1%
19.7%
Total
$ 557.3
$ 640.7
$ 83.4
15.0%
Theincreaseingamerelatedexpensesisreflectiveoftheincreaseinproductsales.Seetheproductsales
scheduleabove.
Of the $19.7 million in Fiscal Year 2016 in other operating expenses, $10.8 million was used for
advertisingandpromotionand$5.2millionwasusedtocompensateLotteryemployees.Incomparison,
of the $22.6 million in Fiscal Year 2015 in other operating expenses, $13.8 million was used for
advertisingandpromotionand$5.9millionwasusedtocompensateLotteryemployees.
TransferstoOtherStateFunds
Note3tothefinancialstatementsdetailstheamountstransferredtootherStateFunds.InFiscalYear
2016theLotterytransferred$205.8milliontootherStateFunds.Incomparison,inFiscalYear2015the
Lotterytransferred$176.0milliontootherStateFunds.
5
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)
OtherFinancialInformation
StatementofNetPosition
FY2015
FY2016
$ 55.9
3.4
9.9
$ 109
3.7
9.6
Totalassets
69.2
122.3
Deferredoutflowsofresources
0.7
0.5
Totalassetsanddeferredoutflowsofresources
69.9
122.8
Currentliabilities
Netpensionliability
63.6
6.3
111.9
6.5
69.9
118.4
1.3
0.7
(1.3)
3.7
$ 69.9
$ 122.8
Currentassets
Capitalassets
Otherassets‐deposits
Totalliabilities
Deferredinflowsofresources
Netposition
Totalliabilitiesandnetposition
The Lottery's total assets at June 30, 2016 were $122.8 million. Assets consisted of cash held
substantiallybytheStateTreasurerof$91.5million,netreceivablesfromLotteryretailersforthesaleof
Lotteryproductsof$12.7million,Scratchersticketandpulltabinventoryof$4.8million,netinvestment
incapitalassetsof$3.7million,andadepositwithMUSLof$9.6million.
ComparablefiguresatJune30,2015were$69.9million.Assetsconsistedofcashheldsubstantiallyby
the State Treasurer of $42.5 million, net receivables from Lottery retailers for the sale of Lottery
products of $8.6 million, Scratchers ticket and pull tab inventory of $4.8 million, net investment in
capitalassetsof$3.4million,andadepositwithMUSLof$9.9million.
TotalliabilitiesatJune30,2016,were$118.5million,consistingof$7.2millioninaccountspayableand
accruedexpenses,prizeliabilitiesof$10million,amountsduetootherfundsof$30.5millionamounts
duetootherStateFundsof$64.3million,and$6.5millionofnetpensionliability.$111.9millionofthe
Lottery'sliabilitieswerecurrentliabilities.
TheLottery’stotalliabilitiesatJune30,2015,were$69.9million,consistingof$2.8millioninaccounts
payable and accrued expenses, prize liabilities of $12.6 million, amounts due to other funds of $ 20.8
millionamountsduetootherStateFundsof$27.4million,and$6.3millionofnetpensionliability.$63.6
millionoftheLottery'sliabilitieswerecurrentliabilities.
6
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)
At June 30, 2016, the Lottery recorded a deferred outflow of resources of $0.5 million and a deferred
inflowofresourcesof$0.7millionrelatingtopensions.
Total net position increased from a negative $1.3 million at June 30, 2015 to $3.7 million at
June30,2016.
In the sixth special session of the State Legislature in 2010, amendments were made to the Lottery
statutes allowing the State to issue Lottery Revenue Bonds. These bonds provide additional working
capitaltopayappropriatedexpendituresoftheState'sGeneralFund.Thebondsarepayablesolelyfrom
and secured by pledged revenues consisting of, until July 1, 2012, amounts distributable to the State
General Fund from the Lottery pursuant to Lottery law, and from and after July 1, 2012 all Lottery
revenuesdepositedtotheLotteryfundnetofLotteryoperatingexpenses.(SeeNote3tothefinancial
statements.)
BUDGETARYHIGHLIGHTS
TheLottery'sbudgetissetbythelegislativeappropriationsprocessonabiennialbasis.Thebudgetsfor
FiscalYears2015and2016weresetintheregularlegislativesessionof2014.TheLottery'sFiscalYear
2016 budget was amended in the regular legislative session of 2015. The Lottery's appropriation for
sales‐related expenditures is based on approved percentages of projected revenues and is allowed to
increase for these items without a supplemental appropriations request if actual revenues exceed
projectedrevenues.TheappropriationdoesnotincludeanamountforprizesbecauseLotterystatutes
set this amount at "not less than 50% of the total annual revenues accruing from the sale of Lottery
ticketsorshares."TheLottery'sappropriationwas$108.4millionforFiscalYear2016.
CONTACTINGTHELOTTERY'SFINANCIALMANAGEMENT
This management's discussion and analysis (MD&A) is designed to provide Arizona citizens, Arizona
government officials, our players, retailers, and other interested parties with an overview of the
Lottery'sfinancialactivityforFiscalYear2016andtodemonstratetheLottery'saccountabilityforthe
moneyitreceivedfromthesaleofLotteryproducts.
If you have questions about the MD&A or need additional information, contact the Arizona Lottery's
ChiefFinancialOfficer,4740EastUniversity,Phoenix,Arizona85034.
7
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
STATEMENTOFNETPOSITION
ASSETSANDDEFERREDOUTFLOWSOFRESOURCES
June30,
2016
CURRENTASSETS
Cashandinvestments,substantiallyallheldbytheStateTreasurer
Accountsreceivable,netofallowancefordoubtful
accountsof$290,000
Scratchticketinventory
Pulltabinventory
$91,527,784
12,696,733
4,659,946
183,109
Totalcurrentassets
109,067,572
CAPITALASSETS
Landandlandimprovements
Buildings
Furniture,fixtures,andequipment
Intangibleassets
Lessaccumulateddepreciationandamortization
1,268,695
4,494,206
2,706,845
599,324
(5,389,590)
Totalcapitalassets
3,679,480
OTHERASSETS
Deposit‐MUSL
9,574,340
Totalassets
122,321,392
DEFERREDOUTFLOWSOFRESOURCES
Deferredoutflowsrelatedtopensions
540,594
$122,861,986
Totalassetsanddeferredoutflowsofresources
LIABILITIES,DEFERREDINFLOWSOFRESOURCES,ANDNETPOSITION
CURRENTLIABILITIES
Accountspayable
Accruedexpenses
Prizeliability
Duetootherfunds
Duetootherstatefunds
Totalcurrentliabilities
$ 7,017,332
209,053
9,979,159
30,452,914
64,268,070
111,926,528
NETPENSIONLIABILITY
6,538,813
Totalliabilities
118,465,341
DEFERREDINFLOWSOFRESOURCES
Deferredinflowsrelatedtopensions
Totalliabilitiesanddeferredinflowsofresources
723,660
119,189,001
NETPOSITION
Netinvestmentincapitalassets
Unrestricted(deficit)
3,679,480
(6,495)
$ 3,672,985
Totalnetposition
8
Seeaccompanyingnotes.
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
STATEMENTOFREVENUES,EXPENSES,ANDCHANGESINNETPOSITION
YearEnded
June30,
2016
OPERATINGREVENUES
Ticketsales
Scratchers
Powerball
MegaMillions
ThePick
Fantasy5
Pick3
WeeklyWinnings
InstantTab
AON
Totalticketsales
Otheroperatingrevenues
Totaloperatingrevenues
OTHEREXPENSES
Directcosts
Prizeexpense
Retailercommissionsandincentives
Onlinesystemexpense
Scratchersystemanddistributionexpenses
Ticketspurchased
Totaldirectcosts
$590,705,714
160,329,555
44,658,835
33,067,826
16,279,219
10,556,314
744,488
6,068,982
8,534,892
870,945,825
194,158
871,139,983
557,439,184
59,183,636
10,144,332
5,998,643
7,869,753
640,635,548
Advertisingandpromotion
Wagesandrelatedexpenses
Contractservices
Depreciation
Administrativeexpenses
10,803,959
5,191,545
1,395,329
268,779
2,082,733
Totaloperatingexpenses
660,377,893
OPERATINGINCOME
210,762,090
NONOPERATINGREVENUES‐Investmentincomeandother
31,092
INCOMEBEFORETRANSFERS
210,793,182
TRANSFERSTOOTHERSTATEFUNDS
205,828,826
CHANGEINNETPOSITION
4,964,356
NETPOSITION,beginningofyear
(1,291,371)
NETPOSITION,endofyear
$3,672,985
Seeaccompanyingnotes.
9
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
STATEMENTOFCASHFLOWS
YearEnded
June30,
2016
CASHFLOWSFROMOPERATINGACTIVITIES
Cashreceivedfromretailers‐netofvalidations,commissions,
andincentives
Cashfromothersources(PollardA/R,MUSL,assignmentfees,SuperiorCourt)
Cashpaymentsforprizesandrelatedtaxes
Cashpaymentstosuppliersofgoodsorservices
Cashpaymentstoemployees
$380,526,062
5,028,402
(128,156,749)
(32,988,867)
(5,361,219)
Netcashprovidedbyoperatingactivities
219,047,629
CASHFLOWSUSEDBYNONCAPITALFINANCINGACTIVITIES
PaymentstobeneficiariesperArizonaStatutes
(169,643,421)
CASHFLOWSUSEDBYCAPITALFINANCINGACTIVITIES
Paymentsforacquisitionofcapitalassets
(442,031)
CASHFLOWSFROMINVESTINGACTIVITIES
Receiptsofinterest
18,212
Netdecreaseincash
48,980,389
CASHATBEGINNINGOFYEAR
42,547,395
CASHATENDOFYEAR
$91,527,784
RECONCILIATIONOFOPERATINGINCOMETONETCASH
PROVIDEDBYOPERATINGACTIVITIES
Operatingincome
$210,762,090
Adjustmentstoreconcileoperatingincometonetcash
providedbyoperatingactivities
Depreciation
Pensionexpense
Employerpensioncontribution
Changesinoperatingassetsandliabilities
Accountsreceivable
MUSLinterest
Ticketandpulltabinventory
Deposit‐MUSL
Accountspayableandaccruedexpenses
Prizespayableandduetootherfunds
Netcashprovidedbyoperatingactivities
268,779
237,325
(362,004)
(4,138,341)
12,892
(58,844)
284,412
4,354,626
7,686,694
$219,047,629
10
Seeaccompanyingnotes.
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note1–NatureofOperationsandSummaryofSignificantAccountingPolicies
TheArizonaStateLottery(the"Lottery")wascreatedbyenactmentofTitle5,Chapter5totheArizona
RevisedStatutes(A.R.S.),whichwasaninitiativemeasureapprovedbythevotersoftheStateofArizona
(the "State") in 1980. The Lottery commenced operations in 1981. The accompanying financial
statementspresentinformationastothetransactionsoftheLottery.
For the period July 1, 2015 through June 30, 2016, the Lottery held 126 instant games of which 86
games expired during the fiscal year. During 2016, the Lottery continued the "The Pick," "Fantasy 5,"
"Pick 3," "Powerball," "Mega Millions," “Weekly Winnings,” and "All Or Nothing" on‐line games. As
required, the Lottery has deposits with "Powerball," and "Mega Millions," multistate on‐line lottery
games, of $9.6 million at June30, 2016. The Lottery also sold instant tab lottery tickets to non‐profit
organizationsandaged‐restrictedoutlets.ThesegamesareprintedandsoldbytheLottery,thoughare
administeredandpaidoutbythepurchasingnon‐profitorganizations.TheLotterypreparesitsfinancial
statementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.
State Lottery Fund – The State Lottery Fund (the "Fund"), which is a proprietary fund of the State,
accountsforrevenuesreceivedfromthesaleoflotteryticketsandthereceiptoflicensefees.TheFundis
operated in a manner similar to a private business enterprise where the governing body has decided
that periodic determination of revenues earned, expenses incurred, and net income is appropriate for
capitalmaintenance,managementcontrol,accountability,orotherpurposes.Activitiesaccountedforin
theproprietaryfundfollowsallapplicableGovernmentalAccountingStandardsBoardpronouncements.
The Fund accounts for prize payments, operational expenses (including consulting), promotional,
advertising expenses, and transfers of monies to other State funds. Receipts from each type of lottery
gameareallocatedasfollows:
 Not less than 50% of the total annual revenue from Lottery ticket sales is apportioned for the
paymentofprizestotheholdersofwinningticketsfortheperiodJuly1,2015toJune30,2016.
 Notmorethan18.5%isapportionedforpaymentofLotteryoperatingexpendituresasdefinedby
ArizonaRevisedStatute5‐555.Legislationenactedin2008setthislimitandalsoremoveda4%cap
onadvertisingexpenditures.
Cash and investments – Substantially all the Lottery's cash is held by the State Treasurer for pooled
investmentpurposes.StatutesrequiretheStateTreasurertoinvestthesepooledfundsinobligationsof
theU.S.governmentandarerecordedatfairvalue.
Accountsreceivable–Retailersarebilledweeklyforticketssold.Paymentsfromretailersaremainly
receivedthroughelectronicwithdrawalsfromretaileraccountsoneweekaftertheamountsarebilled.
Accounts receivable represents amounts that have been billed but not yet collected. An allowance for
doubtfulaccountsisrecordedintheamountofanybalancesthatarenotpaidbyretailers,generallyone
weekafteramountsarebilled.
11
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note1–NatureofOperationsandSummaryofSignificantAccountingPolicies(continued)
Ticket inventory – Ticket inventory is stated at cost, which represents the amount incurred by the
LotteryforpurchasingtheticketslocatedintheLottery'swarehousesorheldbyretailers.Thecostof
ticketsischargedtooperationsupontherecognitionofrevenueundertheproceduresdescribedabove.
Capital assets – Capital assets of the Fund, which consists principally of buildings, land, land
improvements, and office furniture and equipment are stated at historical cost. The Lottery defines
capitalassetsasassetswithanindividualcostofmorethan$5,000.Thecostsofnormalmaintenance
andrepairsthatdonotaddtothevalueoftheassetormateriallyextendassets'livesarenotcapitalized.
Expenditures for normal repairs and maintenance are charged to operations as incurred, whereas
expenditures for major renewals, replacements, and betterments are capitalized and depreciated.
Depreciationiscomputedusingthestraight‐linemethod.Capitalassetsaredepreciatedonthefollowing
basis:
Buildings
40years
Improvements 40years
Fixturesandequipment
3–10years
Intangibleassets
6years
Investments and investment income – The provisions of GASB Statement No. 72, Fair Value
MeasurementandApplication,havebeenimplementedintheLotteryasofJune30,2016.Thisstandard
addresses the Lottery’s reporting related to fair value measurements and provides guidance for
applyingfairvaluetocertaininvestmentsanddisclosuresrelatedtoallfairvaluemeasurements.
TheLotteryreportsinvestmentsatfairvalueonthestatementofnetpositionasdeterminedbyquoted
marketpriceswithanyrealized orunrealizedgainsandlossesreportedinthestatementofrevenues,
expenses, and changes in net position. Investment income from all investments is recognized by the
Lotteryintheperioditisearnedandgainsandlossesarerecognizedasrevenueintheperiodinwhich
theyoccur.InvestmentincomealsoincludesearningsoninvestedcashheldbytheStateTreasurerand
investedprize,reservesheldbytheMultistateLotteryAssociation(MUSL).
Salesandrevenuerecognition–Revenueisrecognizedandtherelateddirectexpensesofticketsales,
includingprizeexpense,areaccruedbasedupontheknownrelationshipoftheamountofticketsalesto
theamountofprizesforeachgame.Thismethodofmeasuringrevenueisnecessaryinordertoproperly
match revenues and expenses. The Lottery’s operating revenues result from exchange transactions
associated with the principle activity of the fund. Non‐operating revenues result from non‐exchange
transactionsorfromancillaryactivitiesofthefund.
12
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note1–NatureofOperationsandSummaryofSignificantAccountingPolicies(continued)
Prize expense and prize liability – Instant ticket prize expense is estimated and recognized when
ticketpacksaresettledandisbasedonthedesignofthegame.Gamedesignsincludecertainguaranteed
prizesineachpackofticketsandprizesplacedrandomlybythegamingvendor.Whenvalidationsfor
thegamehaveended,differencesbetweenestimatedandactualprizesawardedfortherandomlyplaced
ticketsareadjustedtoprizeexpenseandprizeliability.Prizeexpensefordrawgamesisrecognizedas
drawings are held, based on the estimated or known cost of the prize payments. Prize expense is
adjustedasprizesareclaimedandtheactualcostoftheprizeisknown.Prizeliabilitiesforprizesare
recordedwhentheprizeexpenseisrecognized.Theprizeliabilityrepresentsaliabilityforprizeswhich
areunclaimedforgamesinprogress.Prizesunclaimedfor180daysafterthedrawingdateareforfeited
bytheticketholder.TheLotteryretains70%ofallforfeitedunclaimedprizes,underStatestatue,foruse
as additional prizes in future games. State statute also requires that 30% of all forfeited unclaimed
prizesbetransferredtotheCourtAppointedSpecialAdvocateAccount,afundwithintheState'sGeneral
Fund.InApril2015,SenateBill(SB)1477wassignedbytheGovernorofArizonawhichrequiresthat
15%ofallforfeitedunclaimedprizesbetransferredtothetribalcollegedualenrollmentprogramfund
butnottoexceed$160,000inanyfiscalyear.SB1477adjustedthe70%retainedforadditionalprizesin
future games to 55%. All remaining forfeited unclaimed prizes offset prize expense. SB 1477 was
effectivestartinginFY16.
Compensatedabsences–Vacationleavevestswiththeemployeeasitisearned.Employeesmaycarry
forwardonlytheamountofvacationbenefitsequaltothemaximumallowableaccumulatedcreditsfor
the preceding calendar year. Accordingly, at June 30, 2016, the Fund's accounts payable and accrued
expensesbalanceincludesanaccrualofvacationpayandrelatedbenefitsof$209,053.Upontermination
orretirement,anemployeewillbecompensatedforaccumulatedleaveuptoamaximumof240hours,
dependentuponaccumulatedtimeandtheindividual'sbenefitsassociatedwiththeirrankasdefinedby
Statepersonnelrule#R2‐5‐403.Paymentwillbebasedontheindividual'srateofpayatterminationor
retirement.Upondeath,thesamebenefitsshallbepaidtotheemployee'sbeneficiary.
Pensions – For purposes of measuring the net pension liability, deferred outflows of resources and
deferredinflowsofresourcesrelatedtopensions,andpensionexpense,informationaboutthepension
plan’s fiduciary net position and additions to/deductions from the plan’s fiduciary net position have
beendeterminedonthesamebasisastheyarereportedbytheplan.Forthispurpose,benefitpayments
(includingrefundsofemployeecontributions)arerecognizedwhendueandpayableinaccordancewith
thebenefitterms.Investmentsarereportedatfairvalue.
Deferredoutflowsandinflowsofresources–Thestatementofnetpositionandbalancesheetinclude
separate sections for deferred outflows of resources and deferred inflows of resources. Deferred
outflowsofresourcesrepresentaconsumptionofnetpositionthatappliestofutureperiodsthatwillbe
recognizedasanexpenseorexpenditureinfutureperiods.Deferredinflowsofresourcesrepresentan
acquisition of net position or fund balance that applies to future periods and will be recognized as
revenueinfutureperiods.
13
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note1–NatureofOperationsandSummaryofSignificantAccountingPolicies(continued)
Commissions –Retailersreceiveacommissionof6.5%ongrossticketsales.
Advertisingcosts–Advertisingcostsareexpensedasincurred.
Income taxes – The Lottery is exempt from Federal and Arizona income taxes. Accordingly, no
provisionforincometaxeshasbeenmade.
Netposition–NetpositionoftheLotteryareclassifiedanddisplayedastwocomponents:
a. Netinvestmentincapitalassets–Consistsofcapitalassets,includingrestrictedcapitalassets,
net of accumulated depreciation and reduced by the outstanding balances of any bonds,
mortgages,notes,orotherborrowingsthatareattributabletotheacquisition,construction,or
improvementofthoseassets.
b. Unrestrictednetposition–Allothernetfundsthatdonotmeetthedefinitionof"netinvestment
incapitalassets"or"restricted".
Use of estimates – The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassets
andliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpenses
duringthereportingperiod.Actualresultscoulddifferfromthoseestimates.
Note2–CashandInvestmentsHeldbytheStateTreasurer
AllcashisdepositedorinvestedwiththeArizonaStateTreasurer(Treasurer).TheTreasurerispartof
theState'sfinancialreportingentityandissuesaseparatelypublishedAnnualFinancialReport.Acopy
oftheTreasurer'sAnnualFinancialReportcanbeobtainedfromitsWebsiteatwww.aztreasury.govor
bycontactingtheTreasurer'sOfficeat1700WestWashingtonSt.,151Floor,Phoenix,AZ,85007‐2812.
14
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note2–CashandInvestmentsHeldbytheStateTreasurer(continued)
A.R.S. requires state agencies' monies to be deposited with the Treasurer, and further requires those
depositstobeinvestedinvariouspooledfunds.CashandinvestmentsheldbytheTreasurerrepresent
the Board's portion of those monies. The Treasurer invests idle monies of the state agencies in an
internalinvestmentpool(Pool3)anddistributesinteresttotheparticipants.Interestearnedfromthese
investedmoniesisallocatedmonthlybasedontheaveragedailybalance.Participantsharesinthepool
arepurchasedandsoldbasedonthenetassetvalueoftheshares,andaparticipant'sportionofthepool
is not identified with specific investments. Accordingly, the Board's portion of these deposits and
investmentsapproximatestheBoard'svalueofpoolshares.TheTreasurer'sinternalinvestmentPool3
is not required to be registered (and is not registered) with the Securities and Exchange Commission
under the Investment Company Act of 1940. In accordance with A.R.S. §35‐311, the State Board of
Investmentsreviewstheactivitiesandperformanceofthepoolmonthly.
AtJune30,2016,theLottery'sdepositswiththeTreasurerwereasfollows:
Cash
Prizefundcash
TotalcashandinvestmentsheldbyStateTreasurer
$80,897,157
10,630,627
$91,527,784
Custodialcreditrisk–Forcashandinvestments,custodialcreditriskistheriskthat,intheeventofthe
failure of the counterparty to a transaction, the Lottery will not be able to recover the value of its
investmentsorcollateralsecuritiesthatareinthepossessionofanoutsideparty.AsofJune30,2016,all
oftheLottery'ssecuritiesareheldbytheStateofArizonaintheLottery'sname.TheLotterymanages
custodialcreditriskinaccordancewithA.R.S.anditsinvestmentpolicy.TheA.R.S.requirecollateralfor
depositsat102percentofalldepositsthatfederaldepositoryinsurancedoesnotcover.
Concentration of credit risk – Statutes do not include any requirements for concentration of credit
risk.
Interest rate risk – Statutes require that public monies invested in securities and deposits have a
maximummaturityof5years.Themaximummaturityforinvestmentsinrepurchaseagreementsis180
days.
15
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note3–TransfersandStatutoryRequirements
AsrequiredbyA.R.S.Section5‐505,theLotteryrecordedtransfersduringtheyearendedJune30,2016,
asfollows:
GeneralFund
$115,276,818
UniversityBondFund
38,647,533
HealthyArizona
20,476,300
MassTransit(LTAF)
11,502,000
HeritageFund
10,000,000
CommerceAuthorityArizonaCompetesFund
3,500,000
Court‐appointedSpecialAdvocateFund
3,966,175
EconomicSecurityHomelessServices
1,000,000
InternetCrimesAgainstChildren/Victim'sRightsEnforcement
1,000,000
DepartmentofGaming
300,000
TribalCollegeDualEnrollmentFund
160,000
TotaltransferstootherStatefunds
$205,828,826
ThesetransactionsmettheminimumpercentagerequirementsimposedupontheLotterybystatute.
Of the transfer balances above, the following was included in due to other State funds as of
June30,2016:
Universitycapitaldebtservicesfund
Stategeneralfund
Arizonacommerceauthorityfund
Courtappointedspecialadvocatesfund
$38,647,533
20,426,570
3,500,000
1,693,967
Totalduetootherstatefunds
$64,268,070
16
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note4–CapitalAssets
CapitalassetactivityfortheyearendedJune30,2016isasfollows:
Beginning
Balance
Increases
Decreases
Transfers
Ending
Balance
$ 937,830
$ ‐
$ ‐
$‐
$ 937,830
330,865
4,036,728
‐
457,478
‐
‐
‐
‐
330,865
4,494,206
2,667,721
599,324
39,124
‐
‐
‐
‐
‐
2,706,845
599,324
8,572,468
496,602
‐
‐
9,069,070
(330,865)
(2,172,118)
‐
(107,713)
‐
‐
‐
‐
(330,865)
(2,279,831)
(2,418,055)
(199,773)
(61,179)
(99,887)
‐
‐
‐
‐
(2,479,234)
(299,660)
Totalaccumulateddepreciation
(5,120,811)
(268,779)
‐
‐
(5,389,590)
Totalcapitalassets,net
$3,451,657
$ 227,823
$ ‐
$‐
$3,679,480
Capitalassets,notbeingdepreciated:
Land
Capitalassets,beingdepreciated:
Landimprovements
Buildings
Furniture,fixtures,and
equipment
Intangibleassets
Totalcapitalassets
Lessaccumulateddepreciationfor:
Landimprovements
Buildings
Furniture,fixtures,and
equipment
Intangibleassets
Note5–PledgedRevenues
TheLotteryhaspledgedportionsofitsgrossrevenuestowardsthepaymentofdebtserviceontheState
Lottery Revenue Bonds Series 2010A issued by the State. These bonds provide additional working
capitaltotheStatetopayappropriatedexpendituresoftheState'sGeneralFund.Thebondsarepayable
solelyfromandsecuredbypledgedrevenuesconsistingof,untilJuly1,2012,amountsdistributableto
the State General Fund from the Lottery pursuant to Lottery law, and from and after July 1, 2012, all
Lottery revenues deposited to the Fund net of operating expenses of the Lottery. At June30,2016,
pledged revenues totaled approximately $200,769,350, of which $37,501,750 was required to be
transferred to cover debt service. Future pledged revenues required to be transferred to pay all
remaining debt service for the bonds through final maturity of July1, 2029 is approximately
$487,513,500.
17
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note6–Commitments
The Lottery enters into various contracts for goods and services during the normal course of its
business.AllcontactsandpurchasingactivityaresubjecttotheArizonaStateProcurementCodeandthe
rulesoftheArizonaStateProcurementOffice.Allcontractshaveincorporatedintothemthe"Standard
TermsandConditions"asrequiredbytheArizonaStateProcurementOffice.Thesetermsandconditions
inallthecontractsallowforcancellationforlackoffundinginthecurrentfiscalyearornextfiscalyear.
ThecontractmayalsobeterminatedfortheLottery'sconvenienceatanytimewithnopenaltywhenitis
inthebestinterestoftheState.TheLotteryenteredintoafive‐yearcontractwithG‐TechServices,Inc.
forcomputerprocessingservicesatabasecontractrateof3.7%ofon‐linesalesinSeptember2009.
The Lottery entered a commercial rental agreement effective December 1, 2014 to lease a facility in
Tucson, Arizona for approximately $5,947 per month, and payment of certain additional expenses
relatingtotheleasedpremisestoNovember30,2019.Rentexpenseforthefacilitieswasapproximately
$77,304fortheyearendedJune30,2016.
In2015,theLotteryenteredintoathreeyearleaseagreementforretailspaceatthePhoenixSkyHarbor
Airport for approximately $4,417 per month. The lease agreement commenced on May 16, 2016 and
thereforetherewasnoleaseexpenseforthisfacilityinfiscalyear2016.
Futureminimumrentalpaymentsdueundertheleaseagreementsareasfollow:
YearendingJune30,
2017
2018
2019
2020
Total
$124,364
124,364
124,364
82,735
$ 455,827
Note7–LossContingencies
Annuities are purchased for all prizes over $400,000 for which winners will receive the jackpot in
annualinstallmentsforThePickon‐linegame.Theannuitiesarepurchased fromqualifyinginsurance
companies,whichhavethehighestratingsfromamongA.M.BestCompany,Standard&Poor's,Moody's,
Duff&Phelps,orWeiss.Purchasesofannuitiestransferliabilitiesforprizestotheinsurancecompany.
However,theLotterymayincurliabilitiesforprizesintheeventofadefaultofaninsurancecompany.
Aggregatefuturepaymentstoprizewinnersonexistingannuitiestotaled$47,222,253atJune30,2016.
Approximately$44,816,363ofthetotalaggregatefuturepaymentsatJune30,2016,relatetoannuities
purchasedfromfiveseparateinsurancecompanies,ofwhich$20,934,780relatestoasingleinsurance
company.
18
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note7–LossContingencies(continued)
Tort claims against the Lottery, its agents, officers, and employees who are acting in the scope and
course of their employment with the Lottery are covered pursuant to the State Risk Management
statute, A.R.S. § 41‐621. There is no limit to that coverage. Therefore, as to any claims based on tort,
there is no contingent liability to the budget of the Lottery. The Lottery is involved in various legal
proceedings,whicharoseinthenormalcourseofbusiness.ManagementoftheLotterydoesnotbelieve
thattheultimateresolutionofthesematterswillhaveamaterialeffectonthefinancialposition,results
ofoperations,orcashflowsoftheLottery.
Note8–PensionsandOtherPostemploymentBenefits
The Lottery contributes to the Arizona State Retirement Plan (the "Plan"), a retirement plan
administeredbytheArizonaStateRetirementSystem(ASRS).ThePlanisacomponentoftheStateof
Arizona.TheLotteryreported$237,325ofpensionexpenditurerelatedtothepensionplantowhichit
contributes.
ArizonaStateRetirementPlan
Plandescription–TheASRSadministersacost‐sharingmulti‐employerdefinedbenefitpensionplan,a
cost‐sharing multiple‐employer definedbenefithealthinsurancepremiumbenefit(OPEB) plan,and a
cost‐sharing multiple‐employer defined benefit long‐term disability (OBEP) plan. The Arizona State
Retirement System Board governs the ASRS according to the provisions of A.R.S. Title 38, Chapter 5,
Articles 2 and 2.1. The ASRS issues a publicly available financial report that includes its financial
statements and required supplementary information. The report is available on its website at
www.azasrs.gov.
19
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note8–PensionsandOtherPostemploymentBenefits(continued)
Benefitsprovided–TheASRSprovidesretirement,healthinsurancepremiumsupplement,long‐term
disability, and survivor benefits. State statue establishes benefits terms. Retirement benefits are
calculatedonthebasisofage,averagemonthlycompensation,andservicecreditasfollows:
Retirement
Initialmembershipdate:
Yearsofservice
andagerequired
toachievebenefit
BeforeJuly1,2011
Sumofyearsandageequals80
10years,age62
5years,age50+
anyyears,age65+
Finalaverage
salaryisbasedon
Highest36months
oflast120months
Benefitpercent
peryearofservice
2.1%to2.3%
OnorAfterJuly1,2011
30years,age55
25years,age60
10years,age62
5years,age50*
anyyears,age65+
Highest60months
oflast120months
2.1%to2.3%
*withactuariallyreducedbenefits
Retirement benefits for members who joined the ASRS prior to September 13, 2013, are subject to
automaticcost‐of‐livingadjustmentsbasedonexcessinvestmentearnings.Memberswithamembership
dateonorafterSeptember13,2013,arenoteligibleforcost‐of‐livingadjustments.Survivorbenefitsare
payable upon a member's death. For retired members, the survivor benefit is determined by the
retirement benefit option chosen. For all other members, the beneficiary is entitled to the member's
account balance that includes the member's contributions and employer's contributions, plus interest
earned.
20
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note8–PensionsandOtherPostemploymentBenefits(continued)
Contributions–InaccordancewithStatestatues,annualactuarialvaluationsdetermineactivemember
and employer contribution requirements. The combined active member and employer contribution
rates are expected to finance the costs of benefits employees earn during theyear, with an additional
amount to finance any unfunded accrued liability. For the year ended June 30, 2016, active ASRS
members were required by statue to contribute at the actuarially determined rate of 11.47 percent
(11.35percentforretirementand0.12percentforlong‐termdisability)ofthemembers'annualcovered
payroll,andtheLotterywasrequiredbystatutetocontributeattheactuariallydeterminedrateof11.47
percent (10.85 percent for retirement, 0.50 percent for health insurance premium benefit, and 0.12
percentforlong‐termdisability)oftheactivemembers'annualcoveredpayroll.Inaddition,theLottery
wasrequiredbystatutetocontributeattheactuariallydeterminedrateof9.36percent(9.30percentfor
retirementand0.06percentforlong‐termdisability)ofannualcoveredpayrollofretiredmemberswho
workedfortheLotteryinpositionsthatwouldtypicallybefilledbyanemployeewhocontributestothe
ASRS.TheLottery'scontributionstothepensionplanfortheyearendedJune30,2016,were$378,686.
TheLottery'scontributionsforthecurrentand2precedingyearsforOPEB,allofwhichwereequalto
therequiredcontributions,wereasfollows:
YearsendedJune30,
2016
2015
2014
HealthBenefit
SupplementFund
$16,700
22,821
22,565
Long‐Term
DisabilityFund
$4,003
4,641
9,178
Pensionliability–AtJune30,2016,theLotteryreportedaliabilityof$6,538,813foritsproportionate
shareoftheASRS'netpositionliability.ThenetpensionliabilitywasmeasuredasofJune30,2015.The
total pension liability used to calculate the net pension liability was determined using updated
procedurestorollforwardthetotalpensionliabilityfromanactuarialvaluationasofJune30,2014,to
themeasurementdateofJune30,2015.
The Lottery's reported liability at June 30, 2016, increased by $258,857 from the Lottery's prior year
liability of $6,279,956 because of changes in the ASRS' net pension liability and the Lottery's
proportionateshareofthatliability.TheASRS'publiclyavailablefinancialreportprovidesdetailsonthe
changeinthenetpensionliability.
The Lottery's proportion of the net pension liability was based on fiscal year employer contributions.
TheLottery'sproportionmeasuredasofJune30,2015,was0.04198percent,whichwasadecreaseof
0.000462percentfromitsproportionmeasuredasofJune30,2014.
21
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note8–PensionsandOtherPostemploymentBenefits(continued)
Pensionexpenseanddeferred outflows/inflowsof resources–Fortheyear endedJune30,2016,
the Lottery recognized pension expense for ASRS of $237,325. At June 30, 2016, the Lottery reported
deferredoutflowsofresourcesanddeferredinflowsofresourcesrelatedtopensionsfromthefollowing
sources:
Deferred
Deferred
Outflowsof
Inflowsof
Resources
Resources
Differencebetweenexpectedandactualexperience
$178,430
$342,640
Changesofassumptionsorotherinputs
‐
‐
Netdifferencebetweenprojectedandactualearnings
onpensionplaninvestments
‐
209,554
Changesinproportionanddifferencesbetween
Lotterycontributionsandproportionateshare
ofcontributions
‐
171,466
Lotterycontributionssubsequenttothemeasurementdate
362,164
‐
$ 540,594
$ 723,660
Total
The $362,164 reported as deferred outflows of resources related to ASRS pensions resulting from
Lotterycontributionssubsequenttothemeasurementdatewillberecognizedasareductionofthenet
pension liability in the year ended June 30, 2017. Other amounts reported as deferred outflows of
resources and deferred inflows of resources related to ASRS pensions will be recognized in pension
expenseasfollows:
YearendedJune30,
2017
2018
2019
22
$286,372
156,283
(151,273)
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note8–PensionsandOtherPostemploymentBenefits(continued)
Actuarial assumptions – The significant actuarial assumptions used to measure the total pension
liabilityareasfollows:
Actuarialvaluationdate
Actuarialrollforwarddate
Actuarialcostmethod
Amortizationmethod:
Planamendments
Investmentgain/loss
Assumptiongain/loss
Experiencegain/loss
Assetvaluation
Discountrate
Projectsalaryincreases
Inflation
Permanentbenefitincreases
Mortalityrates
June30,2014
June30,2015
Entryagenormal
Immediate
5years
Averagefutureservicelives
Averagefutureservicelives
FairValue
8.00%
3.00‐6.57%
3.00%
Included
1994GAMScaleBB
Actuarial assumptions used in the June 30, 2014 valuation were based on the results of an actuarial
experience study for the 5‐year period ended June 20, 2012. The ASRS Board adopted the experience
studywhichrecommendedchangesandthosechangeswereeffectiveasoftheJune30,2013actuarial
valuation.
23
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note8–PensionsandOtherPostemploymentBenefits(continued)
The long‐term expected rate of return on ASRS pension plan investments was determined to be 8.79
percent using a building‐block method in which best‐estimate ranges of expected future real rates of
return(expectedreturns,netofpensionplaninvestmentexpenseandinflation)aredevelopedforeach
major asset class. These ranges are combined to produce the long‐term expected rate of return by
weighting the expected future real rates of return by the target asset allocation percentage and by
addingexpectedinflation.Thetargetallocationandbestestimatesofarithmeticrealratesofreturnfor
eachmajorassetclassaresummarizedinthefollowingtable:
Target
Allocation
Long‐Term
ExpectedReal
RateofReturn
AssetClass
Equity
Fixedincome
Realestate
Multi‐assetclass
Commodities
Total
Inflation
Expectedarithmeticnominalreturn
58%
25%
10%
5%
2%
100%
3.94%
0.93%
0.42%
0.17%
0.08%
5.54%
3.25%
8.79%
Discountrate–ThediscountrateusedtomeasuretheASRStotalpensionliabilitywas8percent,which
islessthanthelong‐termexpectedrateofreturnof8.79percent.Theprojectionofcashflowusedto
determine the discount rate assumed that contributions from participating employers will be made
basedontheactuariallydeterminedratesbasedontheASRSBoard'sfundingpolicy,whichestablishes
thecontractuallyrequiredrateunderArizonastatute.Basedonthoseassumptions,thepensionplan's
fiduciary net position was projected to be available to make all projected future benefit payments of
current plan members. Therefore, the long‐term expected rate of return on pension plan investments
wasappliedtoallperiodsofprojectedbenefitpaymentstodeterminethetotalpensionliability.
24
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOBASICFINANCIALSTATEMENTS
Note8–PensionsandOtherPostemploymentBenefits(continued)
SensitivityoftheLottery'sproportionateshareoftheASRSnetpensionliabilitytochangesinthe
discount rate – The following table presents the Lottery's proportionate share of the net pension
liabilitycalculatedusingthediscountrateof8percent,aswellaswhattheLottery'sproportionateshare
ofthenetpensionliabilitywouldbeifitwerecalculatedusingadiscountratethatis1percentagepoint
lower(7percent)or1percentagepointhigher(9percent)thanthecurrentrate:
1%Decrease
Current
1%Increase
(7%DiscountRate)
(8%DiscountRate)
(9%DiscountRate)
Lottery'sproportionateshare
ofthenetpensionliability
$ 8,568,080
$ 6,538,813
$5,148,101
Pension plan fiduciary net position – Detailed information about the pension plan's fiduciary net
positionisavailableintheseparatelyissuedASRSfinancialreport.
Pensionliability –AtJune30,2016,theLotteryreportedaliabilityof$6,538,813foritsproportionate
shareoftheASRS'netpensionliability.
Note9–MajorVendors
TheLotteryhasthreevendorsthatrepresentapproximately82%ofitspurchasesfortheyearsended
June30,2016,respectively.
Note10–RiskManagement
TheLotteryisexposedtovariousrisksoflossrelatedtotorts;theftof,damageto,andthedestructionof
assets; errors and omissions; injuries to employees; and natural disasters. The Lottery purchases
commercialinsurancetocovertheserisks.Theamountofcoveragehasnotbeenexceededbyclaimsin
thelastfouryears.
25
REQUIREDSUPPLEMENTARYINFORMATION
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
SCHEDULEOFPROPORTIONATESHAREOFTHENETPENSIONLIABILITY
FiscalYear
2016
(2015)
Lottery'sproportionofthenetpensionliability
Lottery'sproportionateshareofthenetpensionliability
Lottery'scovered‐employeepayroll
Lottery'sproportionateshareofthenetpensionliability
asapercentageofitscoveredemployeespayroll
Planfiduciarynetpositionasapercentageofthetotal
pensionliability
0.041980%
$6,538,813
$3,039,467
2015
through
2017
Information
notavailable
215.13%
68.35%
26
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
SCHEDULEOFPENSIONCONTRIBUTIONS
FiscalYear
2016
2015
Statutorilyrequiredcontribution
Lottery'scontributionsinrelationtothe
statutorilyrequiredcontribution
$382,689
$444,044
382,689
444,044
Lottery'scontributiondeficiency(excess)
$‐
$‐
Lottery'scovered‐employeepayroll
$3,039,467
$3,962,274
Lottery'scontributionasapercentageof
covered‐employeepayroll
27
12.59%
11.21%
2014
through
2017
Information
notavailable
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
NOTESTOREQUIREDSUPPLEMENTARYINFORMATION
Note1–ChangesofAssumptions
The Arizona State Retirement System (ASRS) annual actuarial valuation as of June 30, 2015 report is
availableathttps://www.azasrs.gov/sites/default/files/pdf/2015%20CAFR.pdf.
Fordetailsaboutactuarialassumptions,seesectionIV.ActuarialSection.
28
REPORT OF INDEPENDENT AUDITORS ON INTERNAL CONTROL OVER FINANCIAL
REPORTINGANDONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDIT
OFFINANCIALSTATEMENTSPERFORMEDINACCORDANCEWITH
GOVERNMENTAUDITINGSTANDARDS
TotheCommissionersof
ArizonaStateLottery
Phoenix,Arizona
Wehaveaudited,inaccordancewiththeauditingstandardsgenerallyacceptedintheUnitedStatesof
America and the standards applicable to financial audits contained in Government Auditing Standards
issued by the Comptroller General of the United States, the financial statements of the business‐type
activitiesoftheArizonaStateLottery(the“Lottery”)asofandfortheyearendedJune30,2016,andthe
related notes to the financial statements, which collectively comprise the Lottery’s basic financial
statements,andhaveissuedourreportthereondatedJanuary24,2017.
InternalControlOverFinancialReporting
Inplanningandperformingourauditofthefinancialstatements,weconsideredtheLottery’sinternal
control over financial reporting (internal control) to determine the audit procedures that are
appropriateinthecircumstancesforthepurposeofexpressingouropiniononthefinancialstatements,
butnotforthepurposeofexpressinganopinionontheeffectivenessoftheLottery’sinternalcontrol.
Accordingly,wedonotexpressanopinionontheeffectivenessoftheLottery’sinternalcontrol.
A deficiency in internal control exists when the design or operation of a control does not allow
managementoremployees,inthenormalcourseofperformingtheirassignedfunctions,toprevent,or
detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a
combinationofdeficiencies,ininternalcontrolsuchthatthereisareasonablepossibilitythatamaterial
misstatementoftheentity'sfinancialstatementswillnotbeprevented,ordetectedandcorrectedona
timelybasis.Asignificantdeficiencyisadeficiency,oracombinationofdeficiencies,ininternalcontrol
thatislessseverethanamaterialweakness,yetimportantenoughtomeritattentionbythosecharged
withgovernance.
29
Ourconsiderationofinternalcontrolwasforthelimitedpurposedescribedinthefirstparagraphofthis
section and was not designed to identify all deficiencies in internal control that might be material
weaknessesorsignificantdeficiencies.Giventheselimitations,duringourauditwedidnotidentifyany
deficiencies in internal control that we consider to be material weaknesses. However, material
weaknessesmayexistthathavenotbeenidentified.
ComplianceandOtherMatters
AspartofobtainingreasonableassuranceaboutwhethertheLottery’sfinancialstatementsarefreeof
material misstatement, we performed tests of its compliance with certain provisions of laws,
regulations, contracts, and grant agreements, noncompliance with which could have a direct and
materialeffectonthedeterminationoffinancialstatementamounts.However,providinganopinionon
compliancewiththoseprovisionswasnotanobjectiveofouraudit,andaccordingly,wedonotexpress
suchanopinion.Theresultsofourtestsdisclosednoinstancesofnoncomplianceorothermattersthat
arerequiredtobereportedunderGovernmentAuditingStandards.
PurposeofthisReport
The purpose of this report is solely to describe the scope of our testing of internal control and
complianceandtheresultsofthattesting,nottoprovideanopinionontheLottery’sinternalcontrolor
compliance. This report is an integral part of an audit performed in accordance with Government
Auditing Standards in considering an entity’s internal control and compliance. Accordingly, this
communicationisnotsuitableforanyotherpurposes.
Thisreportisintendedsolelyfortheinformationanduseofmanagement,CommissionersoftheArizona
StateLottery,andotherswithintheentityandisnotintendedtobe,andshouldnotbe,usedbyanyone
otherthanthesespecifiedparties.
Scottsdale,Arizona
January24,2017
30
ARIZONASTATELOTTERY
APROPRIETARYFUNDOFTHESTATEOFARIZONA
SCHEDULEOFPRIORYEARAUDITFINDINGS
YEARENDEDJUNE30,2016
2015‐001–AccountingandReportingComponentsofNetPosition(SignificantDeficiency)
StatusatJune30,2016–Thisfindingwasclearedinthecurrentyear.
2015‐002–RegularlyReviewThird‐PartyServiceReports(SignificantDeficiency)
StatusatJune30,2016–Thisfindingwasclearedinthecurrentyear.
31