2010-09-02 22:04:24 -
Fitch Ratings assigns an 'A+' rating to the following State of Florida State Board of Education lottery revenue bonds.
--$223,415,000 lottery revenue refunding bonds, series 2010E.
The bonds are expected to sell through competitive bid as early as the week of Sept. 6, 2010.
In addition, Fitch affirms the following ratings.
--$3 billion in outstanding lottery revenue bonds at 'A+'.
The Rating Outlook is Stable.
RATING RATIONALE.
--Debt service coverage from the first lien on lottery revenues deposited into the Educational Enhancement Trust Fund (EETF) is comfortable despite a significant pledged revenue decline as a result of the state's severe economic downturn.
--Lottery proceeds are constitutionally dedicated to educational purposes and a non-impairment clause
guards against changes in the percentage allocation to the EETF that would negatively affect pledged revenues.
--An additional bonds test requires 3 times (x) coverage of maximum annual debt service (MADS), limiting leverage of the pledged revenue stream.
--Lottery expenditures are discretionary and sensitive to personal income, employment, and population growth, and the Florida lottery faces current and future competition.
--The Division of Bond Finance, the state's central debt issuing entity, has debt issuance oversight responsibilities for the lottery bonds.
KEY RATING DRIVERS.
--Continued healthy debt service coverage;
--Ability of lottery to maintain solid sales given weakened disposable income and increasingly competitive gaming environment.
SECURITY.
The bonds are secured by a first lien on lottery revenues deposited into the EETF.
CREDIT SUMMARY.
Florida's voter-approved lottery began in 1988. Proceeds are constitutionally dedicated to educational purposes. Total lottery sales grew every year from fiscal years 1999 to 2008 but fell 5.7% in fiscal 2009 and are projected to have dropped a further 1% in fiscal 2010.
Revenues are expected to remain relatively flat in the next two fiscal years. This is consistent with the stress in the Florida economy and highlights the sensitivity of the revenue stream to income, employment, and population trends.
Lottery sales totaled $3.9 billion in fiscal 2010, roughly evenly split between instant and online games. Despite the drop in sales and revenues to the EETF, which were down about 4% in fiscal 2010, coverage of MADS is still at a solid 3.7 times (x). Florida's lottery is mature, but structural adjustments have bolstered ticket sales over time.
While there are definable weaknesses in lottery profits as a source of bond security, including their discretionary nature as well as the potential for changing tastes or the introduction and availability of other forms of gaming either within or outside the state, there are offsets to the inherent uncertainties. Since 1998, annual coverage of projected MADS has ranged from 4.4x to 8.6x, affording comfort. Maximum debt service was covered 3.7x by the $1.2 billion fiscal 2010 transfer to the EETF, and coverage is projected to remain at about this level throughout the forecast period. Prior to 2009, lottery revenues had only declined during three non-consecutive years since inception with gains largely reflecting higher available jackpots, changes to lotto, and increased prizes for instant games that served to substantially stimulate sales.
Security is additionally supported by a 3x additional bonds test. The current offering is for refunding purposes; there currently is no remaining new money issuance authorized under the lottery bond program.
The percentage of lottery revenues deposited into the EETF is governed by state statute. Beginning in fiscal 2003, the percentage of instant game ticket revenues distributed as prizes was changed from a fixed to a variable percentage as a means to stimulate sales. A non-impairment covenant dating from the time of the change requires that the percentage of lottery revenues deposited to the EETF can only be reduced with certification that the deposit with the reduced percentage will not be less than what it would otherwise be. In addition, any reduction in the allocation rate must produce revenues that provide at least 2x coverage of MADS. The pay-out percentage for online game revenues was changed from fixed to variable in fiscal 2006.
While the enabling legislation allows 30-year bonds, issuance of 20-year bonds with level debt service has been legislatively directed. The state has covenanted that any other similar state gaming revenues would be first applied to debt service on lottery revenue bonds. Specifically, the state legislated in 2006 that any revenue derived from the tax on slot machine revenues, although not directly pledged, shall first be available to pay lottery revenue bond debt service in the event that lottery revenues prove insufficient. This provision applies to revenues generated by the slot machines at pari-mutuel sites in Broward County since 2006 as well as revenues from Miami-Dade County, which voted in 2008 to allow slot machines at three pari-mutuel sites, the first two of which have opened. Slot machine revenues to the EETF are expected to total $126 million in fiscal 2010.
The lottery has been a key source of funding for Florida's school building construction. The legislature in 1997 authorized a $2.5 billion lottery bond program for educational facilities to be supported by $180 million annual appropriations from the EETF. That original authorization proved insufficient when the expense of a 2002 constitutional amendment to reduce class size was added to the state's ongoing educational needs.
Thereafter, the state increased the lottery bond program by a total of $1.9 billion, to $4.4 billion. As noted above, this authorization has been exhausted. The Division of Bond Finance, the state's central debt issuing entity, provides debt issuance oversight.
Although most states operate lotteries within their borders, relatively few issue debt against the lottery-generated revenue stream. In its analysis of state lottery-backed revenue obligations, Fitch focuses on.
--The nature of the legal pledge and covenants, including the additional bonds test (ABT);
--The history of the revenue stream;
--Historical and projected debt service coverage levels and amortization; and
--Operating characteristics, including the nature of the games offered and the competitive environment for discretionary gaming spending.
For an 'A+' rating, Fitch expects a clear and strong legal pledge and covenants, an ABT of at least 3x MADS to offset the discretionary nature of the revenue stream, amortization within 20 years, and historically sustained, solid lottery revenues.
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This action was informed by information from the issuer and the public domain.
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Fitch Ratings, New YorkBrian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com : mailto:brian.bertsch@fitchratings.com orPrimary
Analyst:Laura Porter, +1-212-908-0575Managing DirectorOne
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