Fitch Rates Florida's $151.7MM Lottery Revenue Refunding Bonds 'A'.

NEW YORK -- Fitch assigns an 'A' rating to the State of Florida's $151.7 million lottery revenue refunding bonds, series 2006B, to be issued on behalf of the State Board of Education upon 18 hours' notice from as early as October 9, 2006. Fitch also affirms the 'A' rating on $2.2 billion in outstanding lottery revenue bonds.

The bonds are solely secured from a first lien on the statutory allocation of gross lottery revenues deposited into the Educational Enhancement Trust Fund (EETF). Beginning in fiscal 2003, the percentage of instant game ticket revenues distributed as prizes was no longer a fixed rate but now varies as a means to stimulate sales and led, at least in part, to a tripling of instant ticket sales since fiscal 2002, including a 14% increase in fiscal 2006 over fiscal 2005. The state implemented a similar change in March 2006 for the on-line games; however, the same rate of return is not expected as it was for the instant games. On-line ticket sales rose 12.5% in fiscal 2006.

Florida's voter-approved lottery began in 1988 and proceeds are constitutionally dedicated to educational purposes. Total lottery sales approximated $2 billion in each year since inception, surpassed $3 billion in fiscal 2004, and rose to nearly $4 billion by fiscal 2006. In turn, over $1 billion in annual transfers to the EETF has occurred in each of the past four fiscal years. Florida's lottery may be characterized as mature; although, the recent structural adjustments, enhanced by rollovers in fiscal 2003 along with game changes, have stimulated ticket sales.

Previously, the legislature had authorized a $2.5 billion lottery bond program for educational facilities to be supported by $180 million annual appropriations from the EETF. When the expense of a 2002 constitutional amendment to reduced class size, estimated to be $5 billion capital cost over an eight-year phase-in period, was added to the state's ongoing and considerable educational needs, the original $2.5 billion program proved insufficient and the state has increased the bond program by a total of $1.25 billion since fiscal 2003.

While there are definable weaknesses in lottery profits as a source of bond security, including its discretionary nature as well as the potential for changing tastes or the introduction and availability either within or outside the state of other forms of gaming, there are offsets to the inherent uncertainties. Since 1989, annual coverage of projected maximum debt service has ranged from 4.5 times (x) to 8.6x, affording comfort. With this issue, maximum debt service is covered 5.8x by the fiscal 2006 $1.2 billion transfer to the EETF. Lottery revenues have only declined three years since inception and gains have been steady since fiscal 1998, up 13% in fiscal 2006. Recent gains largely reflect the higher available jackpots, changes to Lotto, and the increased prizes for the instant games that served to substantially stimulate sales. Legislation authorized variable prizes for on-line games with implementation in March 2006. The February 2006 lottery estimating conference upwardly revised the lottery's projected income with anticipated growth of 8% in fiscal 2007 and 3.1% in fiscal 2008.

Security is additionally supported by a 3x additional bonds test and a non-impairment clause ensuring that the allocation to the EETF not fall below that generated by the prior 38% allocation and requires a minimum of 2x coverage. The debt service reserve requirement, maximum annual debt service, will continue to be met through purchase of a surety bond. The state has also covenanted any other similar state gaming revenues first be applied to debt service on lottery revenue bonds. While the enabling legislation allows 30-year bonds, issuance of 20-year bonds with level debt service has been legislatively directed and intended, a more appropriate term in light of the long-term uncertainties of the securing revenue stream.

The new bonds will refund lottery revenue bonds, series 1999A, maturing in years 2011 to 2019 and series 2000C maturing in years 2011 to 2020. The bonds will be due July 1, 2007-2020 and optionally callable beginning July 1, 2016 at 101%.

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