                           OFFICE OF THE ATTORNEY GENERAL

                                     State of California


                                    JOHN K. VAN DE KAMP

                                       Attorney General


                         ______________________________________

                  OPINION            :
                                     :          No. 89-404
                   of                :
                                     :          OCTOBER 12, 1989
       JOHN K. VAN DE KAMP           :
            Attorney General         :
                                     :
          JACK R. WINKLER            :
       Assistant Attorney General    :
                                     :
______________________________________________________________________________

               THE CALIFORNIA STATE LOTTERY COMMISSION has requested an opinion
on the following question:

                Are unredeemed "3 of 6" Lotto prizes of California residents required to be
transferred to the California State Lottery Education Fund?

                                          CONCLUSION

                Unredeemed "3 of 6" Lotto prizes of California residents are not required to be
transferred to the California State Lottery Education Fund.

                                            ANALYSIS

                 In the November 6, 1984 general election California voters adopted an initiative
measure creating the state lottery. The initiative amended article IV, section 19 of the California
Constitution to authorize a state lottery and adopted the California State Lottery Act of 1984 (The
"Act"; Gov. Code, §§ 8880-8880.711). The Act fixes limits on the kinds of games which may be
established for the state lottery and regulates the disposition of the proceeds of all games. The Act
creates the California State Lottery Commission ("Commission," § 8880.15) to govern the operation
of the state lottery with the authority to promulgate rules and regulations specifying the types of
games to be conducted. (§ 8880.28.)

                One of the games authorized by the Commission is known as "California Lotto
(6/49)". In this game a player selects six numbers (from 1 through 49) which are imprinted on the
Lotto ticket which he or she purchases for one dollar from a "Retailer" who has contracted with the
Commission to sell the tickets. A "drawing" is held periodically at which six numbers (from 1
through 49) are selected at random and announced to the public.


   1
    Section references are to the Government Code unless otherwise indicated.

                                                 1.                                          89-404

                The Commission regulations provide that if a person has a Lotto ticket which has "3
of 6" numbers which are selected at the drawing the holder is entitled to a prize of $5.00.2 The
holder collects the prize by presenting the ticket to any Lotto Retailer. The Retailer verifies that the
ticket is a winner through a computer terminal and pays the $5.00 to the person who presented the
ticket. The Retailer is credited with the $5.00 prizes so paid out by a deduction from the money paid
for Lotto tickets due the state lottery from the Retailer. A ticket holder must collect the prize within
180 days after the drawing or lose it. (See § 8880.32(e).) Many holders of winning "3 of 6" Lotto
tickets do not collect their prizes within the 180 days allowed. Experience has shown that the
amount of unredeemed "3 of 6" $5 prizes approximates $5 million a year. We are asked whether
these unredeemed "3 of 6" prizes must be paid into the State Lottery Education Fund.3

                 The basic requirements for the distribution of proceeds of all games in the state
lottery are set forth in section 8880.4 of the Act which provides:

                  "Section 8880.4 Allocation of revenues

                   "Not less than 84% of the total annual revenues from the sale of state lottery
           tickets or shares shall be returned to the public in the form of prizes and net revenues
           to benefit public education. 50% of the total annual revenues shall be returned to the
           public in the form of prizes as described in this Chapter and at least 34% shall be
           allocated to the benefit of public education as specified in section 8880.5. In
           addition, all unclaimed prize money shall revert to the benefit of public education as
           provided for in section 8880.32(e). No more than 16% of the total annual revenues
           shall be allocated for payment of expenses of the Lottery as described in this
           Chapter. To the extent that expenses of the Lottery are less than 16% of the total
           annual revenues, any surplus funds shall also be allocated to the benefit of public
           education as specified in section 8880.5."

               Section 8880.4 requires a three way split of lottery revenues. The requirement that
50 percent of the total annual revenues be returned to the public in the form of prizes is clear and
unambiguous. Equally clear is the requirement that at least 34 percent of the total annual revenues
be allocated to the benefit of public education and that no more than 16 percent be allocated for
lottery expenses.

       2
     Half the money paid for Lotto tickets is placed in the prize pool. The Commission Lotto
regulations apportions 17.65 percent of the prize pool to the payment of "3 of 6" winners and other
fixed percentages to other categories of winners. Those regulations provide that the amounts so
allocated to the other categories is divided equally among the winners of the category. Thus "4 of
6" winners may expect prizes in the order of $50; "5 of 6" winners $3,000; "5 of 6 with bonus
number" winners $250,000; and "6 of 6" winners $2.8 million. If there are no winners in the
category the percentage allocated to that category "rolls over", i.e. is added to the allocation for the
"6 of 6" category in the next Lotto game. (See Rule 5 of California Lotto (6/49) Rules and
Regulations.)
   3
    Section 8880.5 provides in part:

                  "Allocation for education:

                  "The California State Lottery Education Fund is created within the State
           Treasury, and is continuously appropriated for carrying out the purposes of this
           chapter. . . ."

                                                     2.                                               89-404

                The third sentence of section 8880.4 would appear to answer the question presented.
It provides: "In addition, all unclaimed prize money shall revert to the benefit of public education
as provided in section 8880.32(e)."4 However, the third sentence in section 8880.32(e) states:
               "If a valid claim is not made for a prize directly payable by the Lottery
       Commission within the period applicable for that prize, the unclaimed prize money
       shall revert to the benefit of the public purpose described in this chapter."

The Commission's California Lotto (6/49) Regulations (No. 7.b.) provide in part:

                 "To claim a prize of $99.00 or less, a claimant can either present the winning
       ticket to an authorized California LOTTO 6/49 retailer or submit the claim to the
       CSL [California State Lottery] for payment, except that a prize of $5.00 or less must
       be claimed only from an authorized CSL retailer, unless the claimant resides outside
       California. In presenting the claim to a CSL retailer for payment, the claimant shall
       complete the information required on the back of the ticket. The retailer must pay
       the claimant on a presented ticket for an individual prize of $99.00 or less, provided
       that all the ticket validation criteria as set forth in these rules have been satisfied, that
       the retailer terminal indicates an authorization to pay the prize, and that all other
       procedures required of a retailer by the CSL have been performed. . . ."


   4
    Section 8880.32 provides in part:

       "Section 8880.32 Validation and payment of prizes

              "The Commission shall promulgate rules and regulations to establish a
       system of verifying the validity of prizes and to effect payment of such prizes,
       provided:

              "(a) For convenience of the public, Lottery Game Retailers may be authorized
       by the Commission to pay winners of up to six hundred dollars ($600) after
       performing validation procedures on their premises appropriate to the Lottery Game
       involved.
               ". . . . . . . . . . . . . . . . . . . . . . . . . . . .

               "(d) The Commission may specify that winners of less than twenty-five
       dollars ($25) claim the prizes from either the same Lottery Game Retailer from
       whom it was purchased or from the Lottery itself.

               "(e) Players shall have the right to claim prize money for 180 days after the
       drawing or the end of the Lottery Game or play in which the prize was won. The
       commission may define shorter time periods for eligibility for participation in, and
       entry into, drawings involving entries or finalists. If a valid claim is not made for a
       prize directly payable by the Lottery Commission within the period applicable for
       that prize, the unclaimed prize money shall revert to the benefit of the public purpose
       described in this chapter.

               ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . ."

                                                                  3.                                   89-404

Under this regulation a California resident5 may collect a "3 of 6" Lotto 6/49 prize "only from an
authorized CSL retailer" and may not collect it from the Commission. This means that the "3 of 6"
$5.00 Lotto prizes of California residents are not "directly payable" by the California Lottery
Commission within the meaning of section 8880.32(e). For that reason the requirement of that
section that unclaimed prize money shall revert to public education does not apply to such prizes.
Since the requirement of the third sentence of section 8880.4 is qualified by the provisions of section
8880.32(e) it does not apply to unredeemed "3 of 6" $5 Lotto prizes of California residents either.6

                Since the applicability of the requirements of the third sentence of section of section
8880.4 and section 8880.32(e) depend upon the regulation quoted above we have examined the Act
carefully to ascertain the Commission's authority to promulgate the same. Subdivisions (a) and (d)
of section 8880.32 (footnote 4, supra) authorize the Commission to promulgate rules and regulations
to authorize Retailers to pay lower value prizes. The authority in subdivision (d) is to authorize
winners of prizes of less than $25 to claim the prize "from either the same Lottery Game Retailer
from whom it was purchased or from the Lottery itself." Since the rule in question does not purport
to authorize either of these alternatives it is clear that subdivision (d) does not authorize the rule.
Subdivision (a) of section 8880.32 authorizes the Commission to authorize lottery game Retailers
to pay winners of up to $600 after performing validation procedures appropriate to the lottery game
involved. Unlike subdivision (e), subdivision (a) says nothing about an alternative of payment of
such prizes by the Lottery itself. We believe subdivision (a) does authorize the Commission to adopt
the rule in question, i.e. that winners of a $5 Lotto 6/49 prize may collect the prize only from an
authorized California Lotto 6/49 Retailer and not from the Lottery itself. This means that the
Commission is authorized to determine whether unredeemed prizes up to $600 revert to the
education fund by exercising its statutory authority to adopt regulations providing whether or not
such prizes are "directly payable" by the Commission.

                 Since neither the third sentence of section 8880.4 nor section 8880.32(e) require
unredeemed "3 of 6" Lotto prizes of California residents to be paid into the Lottery Education Fund
we return to the basic requirements of section 8880.4 to determine their appropriate disposition. The
section limits their disposition to three categories, namely education, expenses or prizes. We believe


   5
    Since the question presented is limited to prizes of California residents we do not address the
matter of the disposition of unredeemed "3 of 6" Lotto prizes when the claimant resides out of
California.
   6
    Chapter 917, Statutes of 1989 (SB 906) will amend section 8880.32(e) to read:

               "(e) Players shall have the right to claim prize money for 180 days after the
       drawing or the end of the Lottery Game or play in which the prize was won. The
       Commission may define shorter time periods for eligibility for participation in, and
       entry into, drawings involving entries or finalists. If a valid claim is not made for a
       prize directly payable by the Lottery Commission or for any Lotto prize within the
       period applicable for that prize, the unclaimed prize money shall revert to the benefit
       of the public purpose described in this chapter." (Emphasis added to indicate the
       words added.)

Since there is no urgency clause this statute will go into effect January 1, 1990. (See art. IV, § 8(c)
of the Cal. Const.) The addition of the words underlined above will require an affirmative response
to the question presented for any unredeemed Lotto prizes which accrue after the amendment
becomes effective.

                                                  4.                                             89-404

the Commission has the discretion to pay lottery revenues to any of those three categories so long
as the requirements of section 8880.4 and other provisions of the Act are met.

               To reiterate, section 8880.4 requires a three way split of lottery revenues in the
following words: "50% of the total annual revenue shall be returned to the public in the form of
prizes." "At least 34% shall be allocated to public education" and "no more than 16% shall be
allocated for payment of expenses of the Lottery."

                We note that the 50 percent for prizes requirement uses the words "shall be returned"
while the other two requirements use the words "shall be allocated." This makes clear the voters'
intent that 50 percent of the annual revenues were to be paid to the public as prizes and not just
allocated for that purpose. The requirement of section 8880.637 that 50 percent of projected
revenues from each lottery game "shall be apportioned" for payment of prizes is not inconsistent
with and does not qualify the requirement of section 8880.4 that 50 percent of the total annual
revenues be "returned" as prizes. These two statutes are harmonized readily as requiring both that
50 percent of projected revenues be apportioned for prizes (as nearly as practical) and that 50
percent of the total annual revenue be "returned" to the public in the form of prizes. While the
wording of section 8880.63 equivocates in some degree by using such words as "projected" revenue
and "as nearly as practical" there is no such equivocation in section 8880.4's requirement that "50%
of the total annual revenues shall be returned to the public in the form of prizes."

                In contrast to the requirement that a fixed percentage of the total annual revenue be
returned to the public in the form of prizes, the required allocations for education and lottery
expenses are not fixed. The 34 percent for education is a minimum ("at least") and the 16 percent
for lottery expenses is a maximum ("not more than"). Since the amount for prizes is immutable at
50 percent it follows that to the extent that the amount allocated to education exceeds 34 percent the
amount allocated to lottery expenses must be reduced by an equivalent amount.

                 We recognize that the requirements for the three way split of lottery revenues are
expressed as percentages of the "total annual revenue." This means that the allocations and
payments may vary somewhat from month to month within the fiscal year but the percentage
requirements must be satisfied for the total annual revenue for the fiscal year. The reason for such
flexibility is apparent. The allocations are based upon estimated expenditures and estimates are not
always accurate. By making the statutory percentage requirements apply to total annual revenues,
opportunity is afforded to the Commission to adjust allocations and payments of revenues from time
to time within the year so the percentage requirements for allocating total annual revenue for the
fiscal year may be satisfied.

               Applying the statutory requirements for allocation of lottery revenues to the question
presented we start with section 8880.63's requirement that as near as practical, 50 percent of the total
projected revenue from the sale of Lotto 6/49 tickets is apportioned for payment of prizes. The
question informs us that some of the money so apportioned for prizes will not be paid out because
many winners of "3 of 6" prizes simply do not claim their prizes within the 180 days allowed. We

   7
    Section 8880.63 provides:

               "Section 8880.63 Prize payments

               "As nearly as practical, 50% of the total projected revenue, computed on a
       year-round basis for each lottery game, accruing from the sales of all lottery tickets
       or shares from that lottery game shall be apportioned for payment of prizes."

                                                  5.                                            89-404

have already concluded that the statutory requirements to transfer these unclaimed prizes to the
education fund are not applicable. However, the requirements for allocation of total annual
revenues, including the requirement that 50 percent must be "returned" to the public in the form of
prizes, do remain applicable. The 50 percent requirement would be satisfied by adding the
unredeemed "3 of 6" Lotto prizes to the prize pools of other Lotto games. Should the amount
allocated for prizes be reduced by the amount of unredeemed "3 of 6" prizes by a transfer to
something other than the payment of prizes, the amount returned to the people as prizes in the game
will fall below 50 percent of the game's revenue by the amount so transferred. This means that at
some time within the fiscal year the Commission must increase the prizes paid to the public by a like
amount in other games so the requirement that 50 percent of total annual revenue be returned to the
public in the form of prizes is satisfied. Since the 34 percent allocation for education is a minimum
it cannot be reduced to make up the deficiency for prizes. Thus the only source available to restore
the deficiency for prizes would be the allocation for expenses of the lottery.

              We conclude that until chapter 917, Statutes of 1989, becomes effective the
Commission may lawfully transfer funds allocated for the payment of "3 of 6" Lotto prizes which
are unredeemed to pay other prizes or lottery expenses or to the California State Lottery Education
Fund provided the requirements of section 8880.4 and other provision of the Act are satisfied.

                                             *****




                                                 6.                                          89-404

