Kansas Lottery (A Component Unit of the State of Kansas) Notes to Financial Statements June 30, 2010 and 2009 The Hot Lotto prize reserve monies are refundable to MUSL members if MUSL disbands or if a member withdraws from MUSL. Members leaving MUSL must wait one year before receiving their refund. At June 30, 2010 and 2009, the prize reserve account had a balanceof $6,491,541 and $5,443,110, respectively, of which the Lottery's contribution was $834,959 and $714,742, respectively. The Lottery has contributed to an account with MUSL which is used to pay certain operating expenses incurred by member lotteries for the Powerball game. With certain restrictions, the balances in this account are refundable to the member lotteries upon termination of the member's agreement with MUSL or upon the disbanding of MUSL. At June 30, 2010 and 2009, the Lottery's portion of the balanceof this account was $153,378 and $212,576, respectively, and is reported as a receivable. Win for Life Guarantee The Lottery purchases annuity contracts from insurance companies in the name of the Win for Life game jackpot prize winners. In the event an insurance company defaults on its payments, the Kansas Life and Health Insurance Guarantee Association (KLHIGA) will make the payments. The KLHIGA was statutorily created, as set forth in K.S.A. 40-3008, subsection (0), to provide coverage in the event an insurance company defaults. The Lottery remains contingently liable for the payment of the lifetime prizes in the event the insurance companies and the KLHIGA fail to meet their obligation. Annuity contracts have been purchased for lifetime prize payments. At June 30, 2010 and 2009, the approximate remaining prize payments are $481,500 and $499,500, respectively. Prize payments are due in varying amounts through September 2048 or the life of the individuals. Litigation There may, at times, be claims or lawsuits to which the Lottery is a party. The Lottery management and legal counsel anticipate that the potential claims against the Lottery would not materially affect the financial position of the Lottery. 6 - Risk Management The Lottery's risk management activities for workers' compensation and unemployment are recorded in the State Workers' Compensation Self-Insurance Fund and the Employment Security Fund, funds of the State of Kansas. The Lottery contributes to these funds based upon annual assessed rates. Employees are offered various health insurance coverage programs of the State. The Lottery's contribution toward single member coverage ranges from 85 percent to 97 percent, based on salary level and tobacco usage of the employee. State agencies are not allowed to purchase or carry insurance on any property owned by the State or its agencies, except as expressly and specifically authorized by statute. Currently, none of the exceptions apply to property of the Lottery. The State has had no problem in resolving losses in the past through utilization of resources available at the time the loss occurred. The Lottery retains liability for property and equipment damage. 22 This is trial version www.adultpdf.com Kansas Lottery (A Component Unit of the State of Kansas) Notes to Financial Statements June 30, 2010 and 2009 Tort claims involving Lottery employees are subject to the Kansas Tort Claims Act (K.SA 75- 6101, etseq.). Employees' faithful performance is covered by commercial insurance. There has been no significant reduction in insurance coverage. Settlements have not exceeded insurance coverage in the past three years. 7 - Required Payments Pursuant to the Act, the Director of Accounts and Reports of the State of Kansas shall transfer monies in the Lottery Operating Fund to the State Gaming Revenue Fund (the Fund), at least monthly, in an amount equal to the monies in such fund in excess of those needed for payment of Lottery expenses, payment of compensation to retailers and transfers to the Prize Payment Fund as certified by the Executive Director of the Lottery. For the years ended June 30, 2010 and 2009, the State Legislature set a minimum amount of transfers to the Fund of $67,750,000 and $68,000,000, respectively. Included in the minimum transfer amount were mandated transfers of $1,030,443 and $1,628,958 for the years ended June 30, 2010 and 2009, respectively, from proceeds of special veterans' games. In addition, mandated transfers of $26,898 and $937,612, respectively, were made to the State General Fund. Total transfers to the State of Kansas of $67,776,898 and $68,187,612 were made for the years ended June 30, 2010 and 2009, respectively, of which $4,500,000 and $5,750,000 were unpaid as of June 30, 2010 and 2009, respectively. Expanded Lottery All expanded lottery revenue is forwarded to the Lottery's account each business day. Gaming revenue collected is then distributed in accordance with governing legislation. The following is a summaryof revenues collected and distributions made for the year ended June 30,2010: Gaming Facility Revenue: Online games $ 17,692,234 Table games 2,971,753 Total $ 20,663,987 Distributions: State General Fund - 22% $ 4,546,077 Problem Gaming Fund - 2% 413,280 Dodge City - 1.5% 309,960 Ford County - 1.5% 309,960 Casino operator management fees -73% 15,084,710 Total $ 20,663,987 At June 30, 2010, $81,341 was receivable from the casino manager for online and table game revenue. At June 30, 2010, $732,823 was payable to the casino operator, Dodge City, and Ford County for revenues collected but not yet distributed, and is included in accounts payable and accrued liabilities. $67,697 was payable to the State of Kansas for amounts due to the State General Fund and Problem Gaming Fund for revenues collected but not yet distributed. 23 This is trial version www.adultpdf.com 8 - Schedule of Gross Margin - Lottery Gross margin by game Is as follows: Pull Power- Instant Tabs ball Sales, net $ 114,565,603 $ 9,550,612 $ 40,984,298 Prizes, net (68,582,240) (5,717,269) (20,684,057) Retailer '" commissions 1 6 ,978, 128 1 (581,723) F,250,320) Gross margin 39,005,235 $ 3,251,620 17,849,921 Pull Power- Instant Tabs ball Sales, net $ 115,719,258 $ 8,753,280 $ 39,999,151 Prizes. net (68,074,447) (5,149,555) (21,059,843) Retailer commissions (6,977,618) 1615,5571 F,208,0511 Gross margin 40,667,193 $ 2,988,168 16,731,257 Kansas Lottery (A Component Unit of the State of Kansas) Notes to Financial Statements June 30, 2010 and 2009 Year Ended June 30, 2010 Kansas Mega- 2b~2 Cash Keno Millions 1,698,311 $ 14,843,528 $ 26,633,476 $ 3,917,722 (864,323) (7,554,332) (14,774,516) (2,073,604) (93,249) (815,0121 p,462,361) (215,110) 740,739 6,474.184 10,396,599 1,629,008 Year Ended June 30, 2009 Kansas Mega- 2b~2 cash Keno Millions 1,696,039 $ 14,823,955 $ 28,420,377 (892,976) (7,804,919) (16,384,553) 193,6261 (818, 319 1 p,568,877) 709,437 6,200,717 10,466,947 Hot Kansas Holiday Pick 3 Lotto Hold 'Em Raffle Total $ 6,082,931 10,688,074 $ 3,451,413 $ 2,998,200 $ 235,414,168 (3,095,792) (5,439,492) (2,124,349) (1,600,000) (132,609,974) (333, 995 1 1 586 ,849) P89,506) 1 164 , 622 1 (13,670, 875 1 $ 2,653,144 4,681,733 1,137,558 1,333,578 89,133,319 Hot Kansas Holiday Pick 3 Lotto Hold 'Em Raffle Total $ 5,974,132 10,730,148 $ 4,389,328 $ 230,505,688 (3,145,424) (5,649,501 ) (2,749,947) (130,911,165) (329,787) 1592,3311 (242,302) 1 13 ,446,468) $ 2,498,921 4,468,316 1,397,079 86,148.035 This is trial version www.adultpdf.com 9 - Pension Plan Plan description Kansas Lottery (A Component Unit of the State of Kansas) Notes to Financial Statements June 30, 2010 and 2009 The Lottery participates in the Kansas Public Employees Retirement System (KPERS), a cost-sharing, multiple-employer defined benefit pension plan as provided by K.SA 74-4901, et seq. KPERS provides retirement benefits, life insurance, disability income benefits, and death benefits. Kansas law establishes and amends benefit provisions. KPERS issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing to KPERS (611 South Kansas Avenue, Suite 100; Topeka, Kansas 66603-3803) or by calling 1-800-228-0366. Funding policy K.SA 74-4919 establishes the KPERS member-employee contribution rate at four percent of covered salary. Eligible employees are considered full-time with one year of service. The employer collects and remits member-employee contributions according to the provisions of Section 414(h) of the Internal Revenue Code. State law provides that the employer contribution rate be determined annually based on the results of an annual actuarial valuation. KPERS is funded on an actuarial reserve basis. State law sets a limitation on annual increases in the contribution rates for KPERS employers. The employer rates established by statute for calendar years 2010 and 2009 are 7.57 and 6.97 percent, respectively. The Lottery contributions to KPERS for the years ending June 30, 2010, 2009 and 2008, were approximately $284,000, $277,000, and $260,000, respectively, equal to 100% of the statutorily required contributions for each year. 10 -Other Postemployment Healthcare Benefits Description Kansas statutes provide that postemployment healthcare benefits be extended to retired employees who have met age and/or service eligibility requirements. The health insurance benefit generally provides the same coverage for retirees and their dependants as for active employees and their dependents. The health insurance benefit plan is a single employer defined benefit plan administered by Kansas Health Policy Authority. The benefit is available for selection at retirement and is extended to retirees and their dependents for life. Non- Medicare participants are subsidized by the State, thus resulting in a liability to the State. The accounting for the health insurance for retirees is included in the State's Self-Insurance Health fund, with the subsidy provided from the Self-Insurance Health fund. The Plan does not issue a stand-alone financial report. Funding Policy The State provides health insurance benefits to retirees and their dependents in accordance with Kansas law (K.S.A. 75-6511). Kansas statutes, which may be amended by the state legislature, established that partiCipating retirees contribute to the employee group health fund benefits plan, including administrative costs. The State appropriates funds annually for the costs associated with this retirement benefit and provides funding for the expenditure on a pay-as-you-go basis through the Self Insurance Fund. In fiscal years 2010 and 2009, the Lottery did not contribute to the plan. 25 This is trial version www.adultpdf.com Kansas Lottery (A Component Unit of the State of Kansas) Notes to Financial Statements June 30, 2010 and 2009 Annual OPEB Cost and Net OPEB Obligation The Lottery's annual OPEB (Other Post Employment Benefits) cost is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities over a period of not to exceed thirty years. The following table presents the components of the Lottery's annual OPEB cost for the year, the contributions to the plan, and changes in the Lottery's net OPEB obligation. Annual required contribution (ARC) Interest in the net OPEB obligation Adjustment to the ARC Annual OPEB cost (expense) Net employer contributions Increase in net OPEB obligation Net OPEB obligation July 1, 2009 Net OPEB obligation June 30, 2010 Kansas Lottery Kansas Lottery Kansas Lottery Fiscal Year 2008 $ 2009 2010 Funded Status and Funding Progress Annual OPEB Cost Net Employer Contributions 80,037 $ 60,595 63,338 $ 65,909 5,414 (7,985) 63,338 63,338 140,632 $ 203,970 Percentage Contributed End of Year Net OPEB Obligation - $ 80,037 140,632 203,970 As of June 30, 2010, the most recent actuarial valuation date, the actuarial accrued liability for benefits was $652,394. The Lottery's policy is to fund the benefits on a pay as you go basis, resulting in an unfunded actuarial accrued liability (UAAL) of $652,394. The covered payroll (annual payroll of active employees covered by the plan) was $3,745,917, and the ratio of the UAAL to the covered payroll was 17.42 percent. 26 This is trial version www.adultpdf.com Kansas Lottery (A Component Unit of the State of Kansas) Notes to Financial Statements June 30, 2010 and 2009 Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. The valuation includes, for example, assumptions about future employment, mortality and the healthcare cost trends. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with the past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing relative to the actuarial accrued liabilities for benefits. Actuarial Methods and Assumptions Projections of benefits for reporting purposes are based on the substantive plan and include the types of benefits provided at the time of valuation and the historical pattern of sharing of benefit cost between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short- term volatility in actuarial accrued liabilities and actuarial value of assets, consistent with the long-term perspective of the calculations. In the June 30, 2010 actuarial valuation, the projected unit credit cost method was applied. The actuarial assumptions included a 3.85 percent investment rate of return, which is a blended rate of the expected long-term investment returns on the State's pooled funds and investments. The valuation assumed annual healthcare cost trend rates of 5 to 10 percent in the next twenty years. The UAAL is being amortized over a 30 year open period in level dollar amounts. 11 -Subsequent Event Subsequent to year end, two applicants seeking to become an Expanded Lottery gaming facility manager in the South Central Gaming Zone deposited a privilege fee of $25 million each pursuant to the Kansas Expanded Lottery Act. Privilege fees are deposited into the State Treasury and credited to the Lottery's Gaming Facility Manager Fund. Upon approval, which occurred December 15, 2010, the privilege fee from the successful applicant will be deposited into the State's Expanded Lottery Act Revenues Fund. The fee from the unsuccessful applicant will be refunded without interest. The Lottery has evaluated subsequent events through the date of the independent auditors' report which is the date the financial statements are available to be issued. 27 This is trial version www.adultpdf.com REQUIRED SUPPLEMENTARY INFORMATION This is trial version www.adultpdf.com Kansas Lottery (A Component Unit of the State of Kansas) Schedule of Funding Progress Health Insurance Post Employment Benefits Actuarial UAAL as a Actuarial Accrued Percent of Actuarial Value of Liability Unfunded Funded Covered Covered Valuation Assets (AAL) AAL Ratio Payroll Payroll Date (a) (b) (b-a) (alb) (c) (b-a)(c) 6/30/2010 $ $ 652,394 $ 652,394 0% $ 3,745,917 17.42% 6/30/2009 595,029 595,029 0% 3,859,388 15.42% 6/30/2008 727,666 727,666 0% 3,767,344 19.32% 28 This is trial version www.adultpdf.com OTHER SUPPLEMENTARY INFORMATION This is trial version www.adultpdf.com KANSAS LOTTERY (A COMPONENT UNIT OF THE STATE OF KANSAS) COMBINING BALANCE SHEET JUNE 30, 2010 Kansas Lottery Expanded Lottery Lottery ASSETS Current Assets: Cash: Operating fund $ 4,814,317 $ 719,179 Prize payment fund 895,529 Accounts receivable, net of allowance for doubtful accounts of $618,583 3,426,331 81,341 Accounts receivable - unbilled 5,897,136 Other receivable 153,378 Instant ticket game inventory 2,014,378 Total current assets 17,201,069 800,520 Capital assets, net of depreciation: Property and equipment - Lottery 442,494 Property and equipment - Expanded Lottery 7,889,090 Total capital assets 442,494 7,889,090 Total assets $ 17,643,563 $ 8,689,610 LIABILITIES AND NET ASSETS Current liabilities: Accounts payable and accrued liabilities $ 1,748,973 $ 732,823 Due to the State of Kansas 4,500,000 67,697 Prize liability 5,358,996 Total current liabilities 11,607,969 800,520 Net assets: Invested in capital assets 442,494 7,889,090 Unrestricted 5,593,100 Total net assets 6,035,594 7,889,090 Total liabilities and net assets $ 17,643,563 $ 8,689,610 29 Total 2010 $ 5,533,496 895,529 3,507,672 5,897,136 153,378 2,014,378 18,001,589 442,494 7,889,090 8,331,584 $ 26,333,173 $ 2,481,796 4,567,697 5,358,996 12,408,489 8,331,584 5,593,100 13,924,684 $ 26,333,173 This is trial version www.adultpdf.com . (A Component Unit of the State of Kansas) Notes to Financial Statements June 30, 2010 and 2009 Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts. Component Unit of the State of Kansas) Schedule of Funding Progress Health Insurance Post Employment Benefits Actuarial UAAL as a Actuarial Accrued Percent of Actuarial Value of Liability. of special veterans' games. In addition, mandated transfers of $26,898 and $937,612, respectively, were made to the State General Fund. Total transfers to the State of Kansas of