P.O. BOX 2067CHARLESTON, WV 25327

Earl Ray Tomblin. Governor

MEMORANDUM

PHONE: 304-558-0500FAX: 304-558-3321

John C. MusgraveDirector

TO: Joint Committee on Government

FROM:...-,.....'"

RE: Monthly Report on Lottery perationsMonth Ending February 28,2011

DATE: March 18,2011

This report ofthe Lottery operations is provided pursuant to the State Lottery Act.

Financial statements of the Lottery for the month ending February 28, 2011 are attached. Lottery revenue, whichincludes on-line, instant, video lottery sales, table games, and historic resort, was $119,666,846 for the month ofFebruary.

Transfers of lottery revenue totaling $42,264,480 made for the month ofFebruary to the designated state agenciesper Senate Bill 213, Veterans Instant Ticket Fund, Racetrack Video Lottery Act (§29-22A-I0), and the RacetrackTable Games Act(§29-22C-27). The amount transferred to each agency is shown in Note 10 on pages 18 and 19ofthe attached financial statements.

The number of traditional and limited retailers active as ofFebruary 28,2011 was 1,594 and 1,588 respectively.

A listing ?f the names and amounts of prize winners has been provided to the Clerk of the Senate, the Clerk ofthe House and Legislative Services.

Ifany member of the Committee has questions concerning the Lottery, please call me. Also ifany members oftheLegislature wish to visit the Lottery offices, I would be pleased to show them our facilities and discuss theLottery with them.

JCM/rdAttachment

pc: Honorable Earl Ray Tomblin, GovernorCharles O. Lorensen, Cabinet Secretary - Dept. ofRevenueJohn Perdue, TreasurerGlen B. Gainer ill, AuditorMembers ofthe West Virginia Lottery Commission

www.wvlottery.com

•L07TERJ

WEST VIRGINIA LOTTERY

STATE OF WEST VIRGINIA

FINANCIAL STATEMENTS-UNAUDITED-

February 28, 2011

WEST VIRGINIA LOTTERY

TABLE OF CONTENTS

Page

BALANCE SHEETS nn nn nn , 3

STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS 4

STATEMENTS OF CASH FLOWS 5

NOTES TO FINANCIAL STATEMENTS 6 - 23

· '1

WEST VIRGlNIA LOTTERY

BALANCE SHEETS

(In Thousands)-Unaudited-

February 28, June 30,ASSETS 2011 2010

Current Assets:,Cash and cash equivalents $ 178,566 $ 256,355Accounts receivable 47,366 26,986Inventcry 1,006 683Other assets 2,015 2,273

Total Current Assets 228,953 286,297

Noncurrent Assets:Restricted cash and cash equivalents 8,355 8,355

Capital assets 31,394 39,524Less accumulated depreciation and amortization (8,468) (16,175)Net Capital Assets 22,926 23,349

Total Noncurrent Assets 31,281 31,704

Total Assets $ 260,234 $ 318,001

LIABILITIES AND NET ASSETS

Current Liabilities:

Accrued nonoperating distributions to the

State ofWest Virginia $ 172,593 $ 241,039

Deferred LVL permit fees 9,549

Estimated prize claims 14,868 13,128

Accounts payable 2,672 3,050Other accrued liabilities 24,169 24,401

Total Current Liabilities 223,851 281,618

Total Liabilities 223,851 281,618Net Assets:

Invested in capital assets 22,926 23,349

Unrestricted 5,102 4,679

Restricted assets (see note 12) 8,355 8,355

Total Net Assets 36,383 36,383

Total Liabilities and Net Assets $ 260,234 $ 318,001

The accompanying notes are an integral part ofthese fmancial statements.3

WEST VIRGINIA LOTTERYSTATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS

FOR THE EIGHT MONTH PERIOD ENDED FEBRUARY 28, 2011(In Thousands)

·Unaudited·

CURRENT MONTH YEAR TO DATE

2011 2010 2011 2010Lottery revenues

On-line games $ 6,398 $ 5,883 $ 50,756 $ 54,267Instant games 11,743 8,152 75,917 61,928Racetrack video lottery 59,981 51,078 480,615 488,579Limited video lottery 35,379 33,425 261,563 260,494Tahlegames 5,481 2,540 42,558 21,213Historic resort 686 196 4,205 740

119,668 101,274 915,614 887,221Less commissions

On-line games 448 411 3,554 3,799Instant games 822 571 5,314 4,335Racetrack video lottery 32,873 28,118 273,728 279,045Limited video lottery 17;336 16,378 128,166 127,642

Tahlegames 2,356 998 18,289 8,339Historic resort 313 103 2,126 368

54,148 46,579 431,177 423;528

Less on-line prizes 3,463 2,914 26,540 26,977Less instant prizes 8,338 5,551 52,638 42,000Less ticket costs 185 115 1,485 915Less vendor fees and costs 771 457 5,426 5,020

12,757 9,037 86,089 74,912

Gross profit 52,763 45,658 398,348 388,781Administrative expenses

Advertising and promotions 911 823 6,031 4,973Wages and related benefits 977 888 7,782 7,201Telecommunications 48 54 423 449Contractual and professional 452 633 2,787 3,227Rental 43 46 423 454Depreciation and amortization 147 143 1,174 1,267Other administrative expenses 83 63 939 697

2,661 2,650 19,559 18,268Other Operatiog Income 158 107 3,210 2,030

Operating Income 50,260 43,115 381,999 372,543Nonoperating income (expense)

Investment income 24 25 210 244Distributions to municipalities and counties (693) (655) (5,127) (5,106)Distributions -capital reinvestroent (1,323) (1,087) (5,169) (4,991)Distributions to the State ofWest Virginia (48,268) (41,391) (371,913) (362,632)

(50,260) (43,108) (381,999) (372,485)

Net income 7 58

Net assets, beginning ofperiod 36,383 83,239 36,383 83,188Net assets, end ofperiod $ 36,383 $ 83,246 $ 36,383 $ 83,246

The accompanying notes are an integral part ofthese financial statements.4

WEST VIRGINIA LOTTERYSTATEMENTS OF CASH FLOWS

FOR THE EIGHT MONTH PERIOD ENDED FEBRUARY 28, 2011

(In Thousands)-Unaudited-

2011 2010Cash flows from operating activities:

Ca$h r«eived from customers and other sources $ 907,993 $ 885,165Cash paymellts for:

Personnel costs (6,942) (7,201)Suppliers (11,758) (8,628)Other oPerating costs (506,427) (4~,980)

Cash provided by operatirig activities 382,866 369,356

Cash floWS frol11 noncapital financing activities:Nonoperating distributions to the State of West Virginia (440,359) (355,040)Distributions to municipalities and counties (5,059) (5,085)Distributions from racetrack cap. reinv. fund (14,696) (15,822)

Cash used in noncapital financing activities (460,114) (375,947)

Cash flows from capital and related financing acitivities:Purchases ofcapital assets (751) (274)

Cash flows from investing activities:Investment earnings received 210 243

Increase (decrease) in cash and cash equiValents (77,789) (6,622)

Cash and cash equivalents - beginning ofperiod 264,710 295,225Cash and cash equivalents - end ofperiod $ 186,921 $ 288,603

Reconciliation ofoperating income to net cash provided by operating activities:Operating income $ 381,999 372,543Adjustments to reconcile operating income to

ca$h provided by operating activities:Depreciation and amortization 1,174 1,267Changes iJ! operating assets and liabilities:

(20,380) (4,086)(Increase) ~e~e in accounts receivable(Increase) liecrease in inventory (323) 121(Increase) 4eciease in other assets 258 176Increase (decrease) in estimated prize claims 1,740 (309)Increase (decrease) in accounts payable (378) 625Increase (decrease) in deferred revenue 9,549Increase (decrease) in other accrued liabilities 9,227 (981)

Cash provided by operating activities $ 382,866 $ 369,356

The accompanying notes are an integral part of these fmancial statements.

5

WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

-Unaudited-

NOTE 1 - LEGISLATIVE ENACTMENT

The West Virginia Lottery (Lottery) was established by the State Lottery Act (Act) passed April 13, 1985,which created a special fund in the State Treasury designated as the "State Lottery Fund." The purpose of theAct was to establish and implement a state-operated lottery under.the supeJ;Vision ofa state lotterycotnmission(Commission) and a director. The Commission, consisting of seven members and the Directorare appointedby the Governor. Under the Act, the Commission has certain powers and the duty to establish ruleS forconducting games, to select the type and number of gaming systems or games and to enter into COlltracts and.agreements, and to do all acts necessary or incidental to the performance of its duties and exercise onts powerand duty to operate the Lottery ina highly efficient manner. The Act provides that a minilllum lIllIlual averageof 45% of the gross amount received from each lottery shall be allocated for prizes and also provides furcertain limitations on expenses necessary for operation and administration of the l:,ottery. To the extentavailable'J:elllaining net profits .are to be distributed to the State of West Virginia. As the State is able toimpose its will over the Lottery, the Lottery is considered a component unit of the State and its financialstatements are presented in the comprehensive annual financial report of the State as a blended proprietaryfund component unit. . .

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICmS

A summary ofthe significant accounting policies ofthe Lottery is presented below.

BASIS OF PRESENTATION - The West Virginia Lottery is a component unit of the Suite of West Virginia,and is accounted for as a proprietary fund special purpose govemment engaged in business type activities. Inaccordance with Govemmental Accounting Standards Board (GASB) Statement No. 34, "Basic FinancialStatements and Management's Discussion and Analysis for State and Local Goveroments," and withaccounting principles generally accepted in the United States ofAmerica, the financial statements are preparedon the accrual basis of accounting which requires recognition of revenue when earoed and expenses whenincurred. As permitted by Goveromental A,ccounting Standards Board (GASB) .Statement No. 20,"Accounting and Financial Reportifig for Proprietary Funds and Other Governmental Entities That UseProprietary Fund Accounting," the Lottery has elected not to adopt Financial Accounting Standards Board(FASB) statements and interpretations issued after November 30, 1989 unless the GASB specifically adoptssuch FASB statements or interpretations.

The Lottery is included in the State's basic fmancial statements as a proprietary fund and business typeactivity using the accrual basic of accounting. Because of the Lottery's presentation in these financialstatements as a special purpose government engaged in business type activities, there may be differences inpresentation ofamounts reported in these financial statements and the basic financial statements ofthe State asa result ofmajor fund determination.

USE OF ESTIMATES - The preparatiOli of the financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to make. certain estimates anddevelop assumptions that affect the amounts reported in the financial statements and related notes to financialstatements. Actual results could differ from management's estimates.

6

WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

-Unaudited-

NOTE 2 - SUMMARY OFSI(jNIFICANT ACCOUNTING POLICmS (continued)

LOTTERY GAME OPERATIONS - The West Virginia Lottery derives its revenues from four basic types oflottery games: instant, on-line, video tyJlegames, and table gatnes. The Lottery develops multiple gamethemes and prize structures to comply with its enabling legislation, including aggregate annual minimum prizeprovisions. AII bonded retailers and agents comprised principally of grocery and convenience stores serve asthe primary distribution channel for instant and on-line lottery sales to the general public. .

The Lottery has contracted with. a private vendor. to manufacture, distribute, and provide dllta processingsupport for instant and on-line games. Under the terms of the a~ents, the Lottery pays a percentage ofgross revenues or gross profits for the processing and manufacture oftill' games.

Revenl1e from instant games is recognized when game tickets are sold to the retailers; and the related prizeexpense is recorded based on the specific glUlle prize structure. Instant ticket sales and related prizes do notinclude the value ofme plays issued fqr the purpose ofincreasing the odds ofwinning a prize.

Bales of on-line lottery tickets are macle by licensed agents to the public with the use of computerizedterminals. On-line games include POWERBAtLlg>, a multi-state. 'jackpot" game; HOT LOTTO®, a multi­state "lotto" game; Mega Millionslg>, a multi-state "jackpot". game; CaSh25. "latto" game; •Daily 3 and 4"numbers" games; and Travel, a daily "keno" game. Revenue is recognizedwhen the agent sells the tickets tothe public. Prize expense is recognized on the basis ofactual drawing results.

CommissionS are paid to instant game retaiJers and on-line agents at the rate of seven percent of gross sales. Aportion of the commission not to exceed one llUd one quarter percent of gross sales may be paid fromunclaimed prize moneys. The amoum: Pllid froIll unclaimed prize moneys is credited llgainst prize costs. Inaddition, retailers and agents are paid limited bonus incentives that include prize shares on winning ticketsthey sold and a ticket cashing bonus on winning tickets they cash. On a weekly basis, retailers and agentsmust remit amounts due to the Lottery. Retailers may not he able.to order additional instant tickets ifpaymenthas not been made for the previous billing period, while an agent's on-line terminal may he rendered inactiveif payment is not received each week. No 0lle retailer or agent accounts for a significant amount of theLottery's sales or accounts receivable. Historically credit losses have heen nominal and no allowance fordoubtful accounts receivable is considered necessary.

Video lottery is a self·activated video version of lottery games which is operated by an authorized licensee.The board-operated games allCIW a player to place bets for the chance to be awarded credits which can eitherbe redeemed for cash or be replayed as additional bets. The coin Operated games allow a player to use coins,currency, or tokens to place bets for the chance to receive coin or. token awards which may be redeemed forcash or used for replay in the coin operated games. The video lottery games' prize structures are designed toaward prizes, or credits, at a stipulated rate oftota! bets played, and prize expense is netted against totll1 videocredits played. The Lottery recognizes as video lottery revenue "gross tenninal income" equivalent to allwagers, net of related prizes. Amounts required by statute to be paid to the private and local governmententities are reported as commissions. WV Lottery statutes have established specific requirements for videolottery and imposed certain restrictions limiting the licensing for operation of video lottery games tohorse and dog racetracks in West Virginia (subject to local county elections permitting the same), limitedlicensed retailer areas restricted for adult amusement, and licensed historic resort hotels as defined by WVCode.

7

WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

-Unaudited-

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The legislation further stipulates the distribution ofrevenues from video lottery games, and requires any videolottery licensee to be responsible for acquiring the necessary equipment and bearing the risk associated withthe costs ofoperating and marketing the games.

Table games are lotteries as each game involves consideration, the possibility ofa prize, and their outcome isdetermined predominantly by chance, which the. common law of West Virginia has long held are the threeesSential elements of a lottery, Table gI1Illes are the exclusive· intangible intellectual property of the state ofWest Virginia. Table games legislation has established SPecific reqllirements for table gI1Illes and imposedcertain restrictions limiting the licensing for operation of table games to horse and dog racetrllcks inWest Virginia (subject to local county elel:tion~ permitting the same),. and licensed historic resort hotels asdefined by WV Code. Each licensee as an agent of tite Lottery C(lmmisSion to operate West Virginia tablegames shall have written rules of play for ~ach table gmne it operates which must be approved by theConnnission. All wagers and pay-offs of winning wagers shall be made according to those rules of play. Forthe privilege of holding a table games Iicensli:~. there is levied a privilege tax of thirty-five percent ofeachlicensee's adjusted gross receipts for the operation of WestVirginill: Lottery table games. Amounts required bystatute to be paid to private and local govermnentelltities are reported as commissions. The legislation furtherstipulates the distribution (If revenues from West Virginia table. games, and reqlliresany licensee to beresponsible for acqlliring the necessary equipment arid bearing the risk associated with the costs of operatingand marlreting the games.

CASH AND CASH EQUIV~NTS - Cash and cash equivalents primarily consist ofinterest-earning deposits inan external investment pool maintained by the West Virginia Board of Treasury Investments (aTl). The BTlpool is a 2a-7like pool carried at atnorti:/:ed cost which approximates fair value of the underlying securities.

INVENTORY - Inventory consists ofinstant gI1Ille tickets available for sale to approved Lottery retailers and iscarried at cost as determined by the specific identification method.

OTHER ASSETS - Other assets consist of deposits restricted for payment of certain Multi-State LotteryAssociation activities and prepaid expenses.

CAPITAL ASSETS - The Lottery has adopted a policy of capitalizing assets with individual amountsexceeding $25,000. These assets include leasehold improvements and purchased equipment, comprisedprincipally of technology property, office furnishings and equipment necessary to adtninister lottery games,are carried at cost. Depreciation is computed by the straight-line method using three to ten year lives.

AVERTISING AND PROMOTIONS - The Lottery expenses the costs of advertising and promotions as they areincurred.

COMPENSATED ABSENCES..,. The Lottery has lIccrued $500,740 and $467,815 ofat June 30, 2010 and 2009,respectively, for estimated obligations that may arise in connection with compensated absences for vacation atthe current rate of employee pay. Employees fully vest in all eatned but Ilnused vacation. To the extent thataccumulated sick leave is expected to be COnverted to benefits on termination or retirement, the Lotteryparticipates in an other postemployment benefits plan (see Note 16).

8

WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

-Unaudited-

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

NET ASSETS - Net assets are presented as restricted, unrestricted and invested in capital assets whichrepresent the net book value of all property and equipment of the Lottery. When an expense is incurred forpurposes for which both restricted and unrestricted net assets are available, restricted resources are appliedfirst.

OPERATING REVENUES AND EXPENSES - Operating revenues and expenses for proprietary funds such asthe Lottery are revenues and expenses that result from providing services and producing and delivering goodsand/or services. Operating revenues for the Lottery are derived from providing various types of lottery games.Operating expenses include commissions, prize costs, other direct costs of providing lottery games, andadministrative expenses. Ali revenues and expenses not meeting this definition are reported as nonoperatingrevenues and expenses.

NOTE 3 - CASH AND CASH EQUIVALENTS

At February 28, 2011 the carrying amounts of deposits (overdraft) with financial institutions were $(78)thousand with a bank balance (overdraft) of $37 thousand. Of this balance $250 thousand was covered byfederal depository insurance with the remaining balance collateralized with securities held by the State ofWest Virginia's agent in the State's name.

A sununary of the amount on deposit with the West Virginia Board of Treasury Investments (BTl) is asfollows (in thousands):

Deposits with financial institutionsCash on hand at the Treasurer's OfficeInvestments with BTI reported as cash equivalents

February 28, 2011

$ (78)

31,747

155,252

$ 186,921

.June 30, 2010

$ (60)

40,006

224,764

$264,710

The deposits with the BTl are part of the State of West Virginia's consolidated investment cash liquidity pool.Investment income is pro-rated to the Lottery at rates specified by the BTl based on the balance ofthe depositsmaintained in relatiQn to the total deposits of all state agencies participating in the pool. Such funds areavailable to the Lottery with overnight notice.

9

WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

-Unaudited-

NOTE 4 - CAPITAL ASSETS

A summary ofcapital asset activity for the month ended February28, 2011 is as follows (in thousands):

Capital Assets:

Construction inProgressBuildingsLandImprovementsEquipment

AccumulatedDepreciation:

ImprovementsEquipntent

Historical CostAt June 30, 2010

$20,1741,4341,170

16,746

$ 39,524

Historical CostAt June 30, 2010

$ 1,13115,044

$ 16,175

Historical CostAdditions Deletions At FebrulU'Y 28,2011

$ 622 $ $ 62220;174

1,4341,170

129 (8,881) 7,994$ 751 $ (8,881) $ 31,394

Historical CostAdditions Deletions At February 28, 2011

$ 8 $ $ 1,1391,166 (8,881) 7,329

$ 1,174 $ (8,8SI) $ S,468

NOTE 5-PARTICIPATIONINTBE MULTI-STATE LOTTERY

The Lottery is a member of the Multi-State Lottery (MUSL), which operates the semi-weeklyPOWERBALL®jackpot lotto game, the HOT LOTTO® game, and the MEGA M1LLIONS® jackpot gameon behalfofparticipating state lotteries. MUSL is currently comprised of 33 member state lotteries, includingthe District of Columbia and the United States Virgin Islands. MUSL is managed by a Board of Directors,which is comprised of the lottery directors or their designee from each of the party states. The Board ofDirectors' responsibilities to administer the Multi-State Lottery Powerball, Hot Lotto, and Mega Millionsgames are performed by advisory committees or panels staffed by officers ll11d independent contractorsappointed by the board. These officers and consultants serve at the pleasure of the board and the boardprescribes their powers, duties and qualifications. The Executive Committee carries out the budgeting andfinancing of MUSL, while the. board contracts the annual independent audit. A copy of the audit may beobtained by writing to the Multi-State Lottery Association, 1701-48th Street, Suite 210, West Des Moines,Iowa 50266-6723.

Each MUSL member sells game tickets through its agents and makes weekly wire transfers to the MUSL in anamount equivalent to the total prize pool less the amount of prizes won in each state. Lesser prizes are paiddirectly to the winners by each member lottery. The prize pool for POWERBALL®, HOT LOTTO® andMEGA MILLIONS® is 50% of each drawing period's sales, with minimum jackpot levels. The Lottery'srevenues and expenses from MUSL games participation for the month ended February 28, 2011 and fiscalyear-to-date is as follows:

10

WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

-U:naudited-

NOTE 5 - PARTICIPATION IN THE MULTI-STATE LOTTERY (continued)

Revenues Month Y-T-D

Powerball $ 3,185,571 $ 23,347,393Hot Lotto 424,960 4,025;249Mega Millions 714,478 6,601,559

Total $ 4,325,009 $ 33,974,201

Expenses (Prizes) Month Y-T-D

Powerball $ 1,596,756 $ 11,651,285Hot Lotto 213,750 2,007,196Mega Millions 384,774 3,434,315

Total $ 2,195,280 $ 17,092,796

MUSL places a percentage of game sales from each. game in separate prize reserve funds that serve as acontingency reserve to protect the respective MUSL Product Groups from unforeseen prize liabilities. Thesefunds can only be used at the discretion of the respective MUSL Product Group. Once the prize reserve fundsexceed the designated limit, the excess becOmes part of that particular prize pool. Prize reserve ftmdmoniesare reftmdable toMUSL Product Group members if the MUSL disbapds or, after one year, if a member leavesthe MUSL. The applicable sales percentage contribution as wel1 as the reserve fund limit for the MUSLgames is as follows:

Required Contribution (% ofsales)Reserve Fund Cap

PowerBall2%

$125,000,000

Hot Lotto3%

$9,000,000

Mega Millions1%

N/A

At February 28, 2011, the Lotteries share ofthe prize reserve fund balances were as fol1ows:

Game Total Prize Reserve Lottery Share

Powerball $ 119,378,824 $ 2,389,260Hot Lotto 7,312,990 464,084Mega Millions 2,940,992 76,416

Total $ 129,632,806 $ 2,929,760

Lottery prize reserves held by the MUSL are invested according to a Trust agreement the Lottery has withI\1USL outlining investment policies. The policies restrict investments to direct obligations of the UnitedStates Government, perfected repurchase agreements, and obligations issued or guaranteed as to payment ofprincipal and interest by agencies or instrumentalities of the United States Government, and mutual ftmds ofapproved investments. The average portfolio maturity is never more than one year, except that up to one thirdof the portfolio may have an average maturity of up to two years. The maximum maturity for anyone securitydoes not exceed five years.

11

WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

-Unaudited-

NOTE 5 - PARTICIPATION IN THE MULTI-STATE LOTTERY (continued)

The interest eamed on prize reserve fund monies is used to pay MUSL operating expenses and any amountsover and above that are credited to an unreserved fund. The Lottery records this as interestwhen earned. Thisfund had a balance of$14,531,136 at February 28,2011, ofwhich the Lottery's share was $1,666,727.

NOTE 6 - RACETRACK VIDEO LOTTERY

The Racetrack Video Lottery legislation stipulates the distribution of racetrack video lottery revenues. Thislegislation has been amended since inception to restate revenue distribution based 011 revenue benchmarks.

. Initially, four percent (4%) of gross terminal revenue is allocated for lottery administrative costs. Sixty-sixpercent (66%) of net terminal revenue (gross less 4%) is allocated in lieu of cOmlIlissions to: the racetracks(47%); other private entities a.ssociated with the racing industry (17%); and the local county and municipalgovernments (2%). The remaining revenues (34%) ofnet terminal revenue is allocated for distribution to Stateas specified in the Racetrack Video Lottery Act or subsequent State budget, as described in the Note 10 titled"Nonoperating Distributions to the State ofWest Virginia."

The first penchrnark occurs when tile currentyear net terminal revenue meets the fiscal year 1999 net terminalrevenue.. The counties and incorporated mllnicipalities split 50/50 the two percent (2%) net terminal revenue.

The second benchmark occurs When the current year gross tem1inal revenlle meets the fiscal year 2001 grossterminal revenue.. The four percent (4%) is no longer allocated for lottery administrative costs; inStead theState receives this for distribution as specified by legislation or the State budget.

The final benchmark occurs when the current year netterminal revenue meets the fiscal year 2001 net terminalrevenue. At this point a 10% surcharge is applied to net terminal revenue, with 58% ofthe surcharge allocatedfor distribution to the State as specified by legislation or the State budget, and 42% ofthe surcharge allocatedto separate capital reinvestment fundS for each licensed racetrack.

After deduction of the surcharge, 55% of net terminal revenue is allocated in lieu of commissicms to: theracetracks (42%); other private entities associated with the racing industry (11%); and the local county andincorporated municipality governments (2%). The remaining net terminal revenue (45%) is allocated fordistribution to the State as specified in the Racetrack Video Lottery Act or subsequent State budget, asdescribed in Note 10. Amounts from the capital reinvestment fund may be distributed to each racetrack ifqualifYing expenditures are made within the statutory timeframe; otherwise amounts accumulated in the fundrevert to the state excess lottery revenue fund.

The WV Lottery, along with the Rhode Island and Delaware lotteries, participate in Multi-Jurisdictional WideArea Progressive (MWAP) video games. This allows each of the lotteries to offer a higher progressive jackPotthan they could generate alone. MUSL manages the progressive games and charges each participant a MWAPcontribution fee of 4% of the amount wagered. A summary of racetrack video lottery revenues for the monthended February 28, 2011 and fiscal year~to-date follows (in thousandS):

12

. I

WEST VIRGINIA LOTTERY .NOTES TO FINANCIAL STATEMENTS

-Unaudited-

NOTE 6 - RACETRACK VIDEO LOTTERY (continued)

Current Month Year-to-Date2011 2010 2011 2010

Total credits played $ 649,550 $ 555,998 $ 5,266,632 $ 5,285,292Credits (prizes) won (583,049) (500,024) (4,730,351) (4,760,114)Promotional credits played (6,247) (4,643) (53,457) (34,016)MWAP Contributions (273) (253) (2,209) (2,583)Gross terIlIinai income 59,981 51,078 480,615 488,579Administrative costs (1,104) (971) (14,060) (14,446)Net Terminal Income 511,877 50,107 466,555 414,133Less distribution to agents (32,873) (28,118) (273,728) (279,045)Raceb:ack video lottery revenues $ 26,004 $ 21,989 $ 192,827 $ 195,088

A summary of video lottery revenues paid or accrued for certain state funds to confonn with the legislationfollows (in thousands): .

State Lottery FundState Excess Lottery Revenue FundCapital Reinvestment FundTourism Promotion Fund 1.375%Development Qffice Promotion Fund .375 %Research ChaIIenge Fund .5 %Oipitol Renovation & Improvement Fund .6875 %Parking Garage Fund .0625 %Parking Garage Fund I %Cultural Facilities & Capitol Resources Fund .5 %CapitolDome & Capitol Improvements Fund 5 %Worker's Compensation Debt Reduction Fund 7%

Total nonoperating distributions

NOTE 7 - LIMITED VIDEO LOTTERY

FebruaIy 28, 2011$ 7,947

14,5721,306

749204272375

34

545

$ 26.004

Year-to-Date$ 102,437

56,3775,0376,1791,6852,2473,090

281500

1,5002,494

11,000$ 192,827

Limited video lottery legislation passed in 200I has established specific requirements imposing certainrestrictions limiting the licensing for the operation of limited video lottery games to 9,000 terminals placed inlicensed retailers, These licensed retailers must hold a qualifying pennit for the sale and consumption onpremises of alcohol or non-intoxicating beer. The Lottery has been charged With the administration,monitoring and regulation of these machines. The legislation further stipulates the distribution of revenuesfrom the limited video lottery games, and requires any licensees to comply witil all related rules andregulations of ,the Lottery in order to continue its retailer status. The Limited Video Lottery legislationstipulates that 2% of gross terminal income be deposited into the state lottery fund for administrative costs.Then, the state share percentage ofgross profit is to be transferred to the State Excess Lottery Revenue Fund.Such percentage is between 30 and 50 percent and is subject to change on a quarterly basis. Two percent isdistributed to counties and incorporated municipalities in the manner prescribed by the statute. The remainingamount of gross profit is paid to retailers andlor operators as prescribed in the Act, and is recorded as limited

13

WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

-Unaudited-

NOTE"7 - LIMITED VIDEO LOTTERY (continued)

video lottery commissions in the financial statements. Municipal and county distributions are accounted for asnonoperating expenses. A summary of limited video lottery revenues for the month ended February 28, 2011and fiscal year-to-date follows (in thousands):

CwTent Month Year-to-Date2011 2010 2011 2010

Total credits played $ 414,745 $ 389,977 $ 3,074,578 $ 3,056,540Credits (prizes) won (379,366) (356,552) (2,813,015) (2,796,046)Gross tennina1 income $ 35,379 $ 33,425 $ 261,563 $ 260,494

Administrative costs ('708) (669) (5,231) (5,210)Gross'Profit 34,671 32,756 256,332 255,284Commissions (17,336) (16,378) (128,166) (127,642)

Municipalities and Counties (693) (655) (5,127) (5,106)Limited video lottery revenues $ 16,642 $ 15,723 $ 123,039 $ 122,536

NOTE 8 - TABLE GAMES

Table Games legislation passed in 2007 per House Bill 2718. Table games include blackjack, roulette, craps,and various types of poker. Each racetrack licensee is subject to a privilege tax of thirty five percent (35%) ofadjusted gross receipts which will be deposited weekly into the Racetrack Table Garrles Fund.

From the gross amounts deposited into the Racetrack Table Games Fund, the Commission, on a monthly basisshall:

Retain 3% of the adjusted gross receipts for administrative expenses of which at least $100,000 and .not morethan $5QO,OOQ annually will be transferred to the CompulsiVe Gambling Treatment Fund. Transfer two andone-half percent'of adjusted gross receipts from all thoroughbred racetracks with West Virginia :Lottery tablegames to the special funds established by each thoroughbred racetrack table games licensee for the payment ofregular racetrack purses to be divided equally among each licensee and transfer two and one-half percent ofadjusted gross receipts from all greyhound racetracks with West Virginia Lottery table games to the specialfunds established by each greyhound racetrack table games licensee for the payment of regular racetrackpurses to be divided equally among each licensee. Transfer two percent of the adjusted grOSS receipts.from alllicensed racetracks to the Thoroughbred Development Fund and the Greyhound Breed~DevelOJ'meIlt Fundto be divided pro rata among the development funds. Transfer one percent of the adjusted gross receipts fromeach licensed racetrack to the county commissions of the counties where racetracks with West. VirginiaLottery table games are located to be divided pro rata among the counties. Transfer two percent of theadjusted gross receipts from each licensed racetrack to the governing bodies of municipalities within c?untieswhere racetracks with West Virginia Lottery table games are located as prescribed by statute. And transferone-half of one percent of the adjusted gross receipts to the governing bodies of municipalities ill Which aracetrack table games licensee is located to be divided equally among the municipalities. The Commissionwill distribute the remaining amounts, hereinafter referred to as the net amounts in the Racetrack Table GamesFunds as follows:

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WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

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NOTE 8 - TABLE GAMES (continued)

1) Transfer four percent into a special fund to be esjablished by the Racing Commission to be used forpayment into the pension plan for al1 employees ofeach licensed racing association;2) Transfer ten percent, to be divided and paid in equal shares, to each colinty commission in thestate where table games are not located;3) Transfer ten percent, to be divided and paid in equal shares, to the governing bodies of each

municipality in the state where table games are not located; and4) Transfer seventy-six percent to the State Debt Reduction Fund.

The cash transferred to the State Debt Reduction Fund in the current month is included in Note 10­Nonoperating Distributions to the State of West Virginia. The table games adjusted gross receipts for themonth ended February 28, 2011 and fiscal year-to-date were $15,658,765 and $121,594,195, respectively. ThefolIowing table shows the month and year totals of the privilege tax and the accrued distributions (inthousands) to be transferred in the subsequent month:

Current Month Year-to-Date2011 2010 2011 2010

Table Games Privilege Tax $ 5,481 $ 2,540 $ 42,558 $ 21,213Interest on Table Games Fund 1 .5 2Administrative costs (626) (218) (4,864) (1,819)

Total Available for Distribution 4,856 2,322 37,699 19,396Less Distributions:Racetrack Purse Funds 392 181 3,040 1,515Thoroughbred & Greyhound Development Funds 313 145 2,432 1,212Racing Association Pension Plan 132 70 1,021 582Municipalities! Counties 1,519 602 11,796 5,031 .

Total Distributions 2,356 998 18,289 8,340

State Debt Reduction Fund $ 2,500 $ 1,324 $ 19,410 $ il,056

NOTE 9 - mSTORIC RESORT HOTEL

In 2009, the Legislature passed Senate Bill 575 which permits video lottery and table games at a licensedhistoric resort hotel which is defined as "a resort hotel registered with the United States Depanment of theInterior as a national historic landmark in its National Registry of Historic Places having not fewer than fivehundred guest rooms under common ownership and having substantial recreational guest amenities in additionto the gaming facility."

Historic Resort Video Lottery

According to Senate Bill 575, thirty six percent (36%) of gross terminal income is al10cated to Historic ResortHotel Fund and seventeen percent (I 7%) of gross terminal income is allocated to the Human Resource BenefitFund. The remaining forty-seven percent (47%) of gross terminal income is then subject to a ten percent(10%) surcharge which is al10cated to separate capital reinvestment funds for each licensed historic resorthotel. The remaining forty-two and three-tenths percent (42.3%) ofgross terminal income is retained by the

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WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

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NOTE 9 - mSTORIC RESORT HOTEL (continued)

historic resort hotel. A summary of historic resort hotel video lottery revenues for the month ended February28,201 I and fiscal year-to-date folIows (in thousands):

Current Month Yll8r_to-Date2011 2010 2011 2010

Total credits played S 4,560 $ 1,347 S 32,912 S 4,650

Credits (prizes) won (4,154) (1,207) (29,956) (4,172)

Promotional credits played (35) (151)

Gross terminal income 371 140 2,805 478

Capital reinvestinent (17) (7) (132) (23)

Administrative costs (20) (7) (151) (26)

Hotel commissions (157) (59) (1,186) (202)

N'et tenninal income 177 67 1,336 227

H"lS1Oric Resort Hotel Fund 114 43 859 146

Human Resource Benefit Fund 63 24 477 81

Historic Resort Table Games

Each historic resort hotel licensee is subject to a privilege tax of thirty fiye percent (35%) of adjusted grossreceipts, of which thirty percent (30%) is deposited directly into the Historic Resort Hotel Fund and fivepercent (5%) is deposi~ directly into the Human Resource Benefit Fund. The historic resort hotel tablegames adjusted gross receipts for the month ended February 28, 201 I and fiscal year-to-date were $899,240and $3,998,810, respectively.

ThefoIlowing table shows the month and fiscal year -to- date totals of the privilege tax and the accrueddistributions (in thousands) to be transferred in the subsequent month:

Current Month2011 2010

Year-to-Date2011 2010

Table games privilege tax

Administrative CostsTotal Available for DistributionHistoric Resort Hotel fundHuman Resource Benefit Fund

Historic Resort Hotel Fund

$ 315

(40)

275

230

45

$ 56

(7)

49

41

8

S 1,400

(180)

1,220

1,020

200

S 262

(34)

228

191

37

Of the monies deposited into the Historic Resort Hotel Fund, fifteen percent (15%) is allocated for lotteryadministrative costs. The remaining Historic Resort Hotel Fund net income (gross deposits less 15%) isdistributed as rolIows:

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WEST VJR(;INJA LOTTEIWNOTES TO FINANCIAL STATEMENTS

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NOTE 9 - mSToRIC RESORT HOTEL (continued)

I) Sixty-four percent (64%) is paid to the State ofWest Virginia General Revenue Fund;2) Nineteen percent (19%) is paid to the State Debt Reduction Fund;3) Three percent (3%) is paid to the State ofWest Virginia Tourism Promotion Fund;4) Four percent (4%) is paid to the county where the gaming facility is located;5) Two an(i one-halfpercent (2.5%) is paid to the municipality where the gaming facility is located as

prescribed by statute;6) Two and one-half percent (2.5%) is divided and paid in equal shares to the remaining

municipalities in the county where. the gaming facility is located;7) Two and one-half percent (2.5%) is divided and paid in equal shares, to each county commission

in the state wheN the ganling facility is not located;8) Two and one-half percent (2.5%) is divided and paid in equal shares, to each municipality in the

state not already receiving a distribution as described in itetn. five (5) or item six (6) above.

A summary ofHistoric Resort Hotel Fund revenues and related distributions is as follows (in thousands):

Current Month Year-to-Date

Historic Resort Hotel Video Lottery $ 114 $ 859Historic Resort Table Games 230 1,020Interest on Historic Resort Hotel FundHistoric Resort Hotel Fund Net Income 344 1,879Municipalities! Counties 48 263State General Revenue Fund 219 1,202State Debt Reduction Fund 65 357State Tourism Promotion Fund 12 57Total Distributions $ 344 $ 1,879

NOTE 10- NONOPERATING DISTRIBUTIONS TO THE STATE OF WEST VIRGINIA

The Lottery periodicl,llly distributes surplus funds, exclusive of amounts incurred and derived from limitedvideo lottery and a portion of racetrack video lottery funds, to the State of West Virginia in accordance withthe legislation. For the year ending June 30, 2011 the State Legislature bu<lgeted $166,121,854 of estimatedprofits of the Lottery for distributions to designated special revenue accounts of the State of West Virginia.With regard to the State Lottery Fund, legislation stipulates that debt service payments be given a priority overall other transfers in instances where estimated profits are not -sufficient to provide for payment of allappropriated distributions. Debt service payments of $1,800,000, $1,000,000, and $500,000 per month for thefirst ten months of each fiscal year currently have such priority. Transfers made pursuant to the State ExcessLottery Revenue Fund have similar requirements; currently payments-are $4,800,000 per month for the firstten months of each fiscal year. In addition, Legislation provides that, if in any month, there is a shortage offunds in the State Excess Lottery Revenue Fund to make debt service payments, the necessary amount shall betransferred from the State Lottery Fund to cover such shortfall, after the State Lottery Fund debt servicepayments have been made. Repayments to the State Lottery Fund are required to be made in subsequentmonths as funds become available. During the month ended February 28, 2011 the Lottery made suchdistributions and accrued additional distributions of$43,294,66I. The Lottery is a non-appropriated state

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WESTVIRGU«ALOTTERYNOTES TO FINANCIAL STATEMENTS

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NOTE 10- NONOPERATING DISTRIBUTIONS TO THE STATE OF WEST VIRGU«A(continued)

agency and therefore does not have a budget adopted by the Legislature. Since the enactment of the RacetrackVideo Lottery Act, the Lottery is also statutorily required to distribute income from racetrack video lotteryoperations as described in Note 6. For the month ended February 28, 2011, the Lottery accrued additionaldistributions relating to racetrack video lottery, table games, and historic resort operations of $716,687,$2,499;586, and $294,813, respectively.

Note 7 describes the Limited Video Lottery Act and the statutory distributions reqUired to be made fromlimited video lottery operations. Note 8 describes the Table Games Act and the statutory distributions requiredto be made from table games operations. Note 9 describes the Historic Resort Hotel statutory distributions tobe made from historic resort operations.

A summary of the cash distributions made to c$in state agencies to conform to the legislation follows (inthousands):

BUDGETARY DISTRIBUTIONSState Lotterv Fund:

Community and Technical CollegeBureau ofSenior ServicesDepartment ofEducationLibrary CommissionHigher Education-Policy CommissionTourismNatural ResourcesDivision ofCulture & HistoryDepartment ofEducation & ArtsBuilding CommissionSchool Building Authority

Total State Lottery Fund

February 28, 2011

$ 5002,8591,358

48149832614925149

9981,800

$ 9,269

Year-to-Date

$ 4,00060,06928,53510,11010,4736,8553,1275,2781,0257,998

14,400$ 151,870

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:~ I

I

I

1

WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

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NOTE 10- NONOPERATING DISTRIBUTIONS TO THE STATE OF WEST VIRGINIA(continued)

.State Excess Lottery Revenue Fund:Economic Development Fund $ 1,900 $ 15,200Higher Education Improvement Fund 1,000 8,000

General Purpose Account 65,000

Higher Education Improvement Fund 34,000

State Park Improvement Fund 5,000

School Building Authority 1,900 15,200

Refundable Credit 2,409 3,145

WV Racing Commission 2,000Excess Lottery Surplus 21,098 52,216

West Va. Infrastructure Council 40,000

Total State Excess Lottery Revenue Fund $ 28,307 $ 239,761

Total Budgetary distributions: $ 37,576 $ 391,631

Veteranslnstant Ticket Fund $ 41 $ 549

Other Racetrack Video Lottery distributions:Tourism Promotion Fund 1.375% $ 683 $ 6,011

Development Office Promotion Fund .375% 186 1,639Research Challenge Fund .5% 249 2,186

Capitol Renovation & Improvement Fund .6875% 342 3,OO~

Parking Garage Fund .0625 % 31 273

Parking Garage Fund I % 500

Cultural Facilities & Cap. Resources Fund .5% 1,500

Capitol Dome & Cap. Improvements Fund .5% 497 2;372

Workers Compensation Debt Reduction Fund 7% 1I,000

Total $ 1,988 $ 28,487

Table Games State Debt Reduction Fund $ 2,513 $ 18,298

Historic Resort Hotel distributions:State General Revenue Fund $ 109 $ 1,037

State Debt Reduction Fund 32 308

Tourism Promotion Fund 6 49

Total $ 147 $ 1,394

Total nonoperating distributions to theState ofWest Virginia (cash basis) $ 42,265 $ 440,359

Accrued nonoperating distributions, beginning (166,590) (241,039)

Accrued nonoperating distributions, end 172,593 172,593

$ 48,268 $ 371,913

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WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

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NOTE 11- LEASES

The Lottery leases, under a cancelable operating lease, its office and warehouse facilitie$. The Lottery alsoleases various office equipment under agreements considered to be cancelable operating leases. Rentalexpense for the fiscal year-to-date ended February 28, 2011 and February 28, 2010 approximated $423.399and $453,949 respectively.

The Lottery leases office space under the terms ofa non-cancellable operating lease to various tenants. Rentalrevenues fot the month ended February 28, 2011 and year-to-date were $87,688 and $697,188, respectively.Future rental receipts (in thousands) are as follows:

Year EndedJune 30

20112012201320142015

Total

NOTE 12 - RESTRICTED NET ASSETS

RentalReceipts

$ 307939962986248

$ 3,442

On June 14,2006, House Bill 106 was enacted by the West Virginia State Legislature to set aside unexpendedadministrative expenses of the Lottery up to the limits for such expenses established by the enablinglegislation of traditional, racetrack video lottery, and limited video lottery games in an amount not to exceed$20,000,000 beginning in fiscal year 2006 and each year through fiscal year 2012. These assets are to be setaside for the design and construction of a building for the use of the Lottery and certain other State of WestVirginia governmental entities. Contributions to the fund for fiscal years ending June 30, 2010 and June 30,2009 were as follows:

Beginning balanceAdditions

Enabling legislation additionsInterest eamed on restricted net assets

DeductionsAsset acquistionSurplus ofexcess funds

Ending balance

June 30, 2010

$ 69,870

93

(21,608)(40,000)

$ 8,355

June 30, 2009

$ 58,487

10,817566

$ 69,870

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WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

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NOTEI3-CO~TMENTS

For the year ended June 30, 2010, the Lottery Commission has designated $3,031,185 of unexpendedadministrative funds for the acquisition of capital assets. As of June 30, 2010 and 2009, $5,921,057 and$12,817,601, respectively, are included in unrestricted net assets and invested in capital assets for this purpose.

NOTE 14 - RETIREMENT BENEFITS

All full-time Lottery employees ;\re eligible to participate in the State of West Virginia Public Employees'Retirement System (PERS), a cost-sharing multiple-employer defined benefit public employee retirementsystem. The PERS is one of several plans administered by the West Virginia Consolidated Public Retirement(CPRB) under the direction of its ~oard of Trustees, which consists of the Governor, State Auditor, StateTreasurer, Secretary of the Department of Administr;\tlon, and nine metl1bei"s appointed by the Governor.CPRB prepares separately issued fmancial statements covering all retiretl1ent systems it administers, whichcan be obtained from Consolidated Public Retirement Board, 4101 MacCorkle Ave. S.E., Charleston, WestVirginia 25304-1636.

Employees who retire ;\t or after age sixty with fivll or more years of contributory service or who retire at orafter age fifty-five and have completed twenty-five years of credited service with age and credited serviceequal to eighty or greater are eligible for retirement benefits as established by State statute. Retirementbenefits are pay;\ble monthly for life~ in the form of a stmight-line annuity equal to two percent of theemployee's average annual salary .from the highest 36 consecutive months within the last 10 years ofemployment, multiplied by tlie number of years of the employee's credited service at the time of retirement.Covered employees are rIlquired to contribute 4.5% of tIi~ir salary to the PERS. The Lottery is required tocontribute 12.5% of covered employees' salaries to the .PERS. The required employell and employercontribution percentages have been Ilstablished and. changed from time to time by action of the StateLegislature. The required contributions are not actuarially determined; however, actuarial valuations areperformed to assist the Legislature in determining appropriate contributions. The Lottery and employeecontributions, for the month ending February 28, 2011 and fiscal year-to-date are as follows (in thousands):

February 28,2011 Year-to-Date

LotteJy contributions $ 78 $ 626Employee contributions 28 226

Total contributions $ 106 $ 852

NOTE 15 - RISK MANAGEMENT

The Lottery is exposed to various risks of loss related to torts; theft of, or damage to, and destruction ofassets;errors and omissions; injuries to employees; and natural disasters. The Lottery participates in several riskmanagement programs administered by the State of West Virginia. Each of these risk pools has issuedseparate audited financial reports on their operations. Those reports include the required supplementaryinformation concerning the reconciliation of claims liabilities by type of contract and ten-year claimdevelopment information. Complete financial statements of the individual insurance enterprise funds can beobtained directly from their respective administrative offices.

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WEST VIRGINIA LOTTERYNOTES TO FINANCIAL STATEMENTS

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NOTE 15 - RISK MANAGEMENT (continued)

WORKERS' COMPENSATION INSURANCE

The Lottery carries workers compensation insurance coverage through a privatized business entity, BrickStreetMutual Insurance Company (BrickStreet), established January 1,2006, and named the administrator offormerstate workers' compensation fund activities. BrickStreet is paid a monthly administrative fee and ratedpremium to provide compensations for injuries sustained in the course of employment. The monthlyadministrative fee for the Lottery has been set at levels consistent with prior year payments and any rate orpremium increases will be established on an experience rated basis.

The Lottery participates in the ~ri9kStreetexperience rated poo~ which is rate adjuSted on a quarterly basis.The BrickStreet risk pool retains all risk related to the compensation of injured employees under the programin exchange for the premiums paid.

PUBLIC EMPLOYEES' INSURANCE AGENCY (pEIA)

The Lottery participates in the Public Employees' Insurance Agency which provides an employee benefitinsurance program to employee::s. PE;IA was established by the State of West Virginia for State agencies,institutions of higher education, Boards of Education and component units of the State; In addition, localgovernmental entities and certlliJ1 charitable and public service organizations may request to be covered byPEIA. PEIA provides a. base empillyee benefit insllI'lll1ce program which includes hospital, surgical, majormedical, prescription drug and bllsic life I\lld liCcident;lj death. Underwriting and rate setting policies areestablished by PEIA. The cost of all coyerage as. detennined by PEIA shall be paid by the participants.Premiums are established by PEIA and arePai4 monthly, and are dependent upon, among other things,coverage required, number of dependents, state vs. non state employees and active emplllyees vs. retiredemployees .and level ofcompe::psation. Coverage under these programs is linlited to $1 million lifetime forhealth and $10,000 oflifeinsurance coverage::'

The PBIA risk pool retains all risks for the health .and prescription features of its indemnity plan. PEIA hasfully transferred the risks ofcoverage to the Managed Care Organization (MCO) Plan to the plan provider, andhas transferred the risks of the life insurance coverage to a third party insurer. PEIA presently chargesequivalent premiums for participants in either the indemnity plan or the MCO Plan. Altogether, PEIA insuresapproximately 205,000 individuals, including participants and dependents.

BOARD OF RISK AND INSURANCE MANAGEMENT (BRIM)

The Lottery participates in the West Virginia Board of Risk and Insurance Management (BRIM), a commonrisk pool currently operating lIS. a common risk management and insurance program for all State agencies,component units, and other local governmental agencies who wish to participate. The. Lottery pays an annualpremium to BRIM for its general insurance coverage. Fund underwriting and rate setting policies areestablished by BRIM. The cost of all coverage as detennined by BRIM shall be paid by the participants. TheBRIM risk pool retains the risk of the first $1 million per property event and purchases excess insurance onlosses above that level. Excess coverage, through an outside insurer under this program is linlited to $200million per event, subject to linlits on certain property. BRIM has $1 million per occurrence coveragemaximum on all third-party liability claims.

22

WESTVffiGU«ALOTTERYNOTES TO FINANCIAL STATEMENTS

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NOTE 16- OTHER POSTEMPLOYMENT BENEFITS (OPEB)

The Lottery participates in the West Virginia Other Postemployment Benefits Plan (OPEB Plan) of the WestVirginia Retiree Health Benefit Trust Fund (Trust), a cost-sharing multiple-employer defined benefitpostemployment healthcare plan administered by the West Virginia Public Employee Insurance Agency(WVPEIA). The OPEB Plan provides retiree post-employment health care benefits for participating state andlocal government employers. The provisions of the Code of West Virginia, 1931, as amended (the Code),assigns the authority to establish and amend benefit provisions to the WVPEIA board of trustees. TheWVPEIA issues a publicly available financial report that includes financial statements and requiredsupplementary information for the OPEB Plan. That report may be obtained by writing to Public EmployeesInsurance Agency, 601 57th Street, South East, Suite 2, Charleston, West Virginia, or by calling 1-888-680­7342.

Funding Policy

The Code requires the OPEB Plan bill the participating ,employers 100% of the annual required contribution(ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. TheARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost eachyear and amortize any unfunded actuarial liabilities (or funding excess) of the plan over a period not toexceed thirty years. State ofWest Virginia plan employers are billed per active health policy per month.

The ARC rate is $903 and $901 per employee per month for the years ending June 30, 2011 and 2010respectively. Through June 30, 2010 and 2009, the Lottery has paid premiums of $226,212 and $185,563.As of June 30, 2010 and 2009, the Lottery has recorded a liability of$I,484,546 and $251,867 on its balancesheet for OPEB.

23