Fitch Rates Florida's $291.9MM Lottery Revenue Bonds 'A'.

NEW YORK -- The State of Florida's $291.94 million lottery revenue bonds, series 2005A, to be issued on behalf of the State Board of Education upon 18 hours' notice as early as Feb. 23, are rated 'A' by Fitch Ratings. The bonds will be due July 1, 2005-24, with bonds due 2016-2024 subject to designation by bidder as terms with mandatory sinking fund redemption; bonds will be optionally callable beginning July 1, 2015 at 101%. The new bonds are composed of the second $200 million installment from a $600 million authorization to fund class size reduction projects in response to a 2002 constitutional amendment, and up to $115 million authorized refunding bonds to refund the $91.1 million outstanding series 2000B bonds due 2011-19.

These bonds, on parity with $1,871 million outstanding lottery revenue bonds, are solely secured from a first lien on the statutory allocation of gross lottery revenues net of the retailers' application fees deposited into the Educational Enhancement Trust Fund (EETF). Beginning in fiscal 2003, the percentage of instant game ticket revenues distributed as prizes is no longer fixed at 38% but now varies as a means to stimulate sales, with the change requiring a lottery consultant's certification that the amount generated will not be less than that produced by the prior 38% rate and coverage of maximum debt service will continue to exceed 2 times (x). The changes had a positive impact, with a doubling of instant ticket sales and an overall 32% increase in lottery sales since fiscal 2002.

Previously, the legislature had appropriated $180 million of such EETF revenues annually for debt service on the outstanding lottery bond program. With the state's considerable education needs and the class size reduction amendment alone estimated at a $4.4-$9.4 billion capital cost over the eight-year phase-in period, borrowing is expected to approach the coverage limits. The governor has proposed an alternative plan that would reduce the capital costs.

Florida's voter-approved lottery began in 1988 and proceeds are constitutionally dedicated to educational purposes. Total lottery sales have approximated $2 billion in each year since inception, nearing $3 billion in fiscal 2003 and exceeding that amount in fiscal 2004. This afforded over $800 million annually to the EETF with levels exceeding $1 billion in each of the past two years. Florida's lottery may be characterized as mature, experiencing slow growth, although the recent structural adjustments, enhanced by rollovers in fiscal 2003, along with game changes, have stimulated ticket sales.

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 for the prior full $2.5 billion capital program, now completed and increased by $600 million for class size reduction, approximated 4.5x-5.5x, affording comfort. With this issue, maximum debt service is covered 5.3x by fiscal 2004's $1.051 billion transfer to the EETF. While lottery revenues declined slightly in two of the past 10 years, gains have been steady since fiscal 1998, up 7.1% in fiscal 2004. With the four hurricanes and fewer rollovers, fiscal 2005 revenues are projected for a 2.1% decline, before recovering to a 4.1% increase in fiscal 2006. In fiscal 2003, the revamped prize structure in the instant games largely contributed to the generation in fiscal 2003 and fiscal 2004 of 90% of the lottery's $832 million revenue increase over the past decade. The recent gains largely reflect the higher prizes, changes to Lotto, and the increased prizes for the instant games that served to substantially stimulate sales. Legislation has also been proposed to allow variable prizes for on-line games, and with the planned annual increase in terminals, is projected to increase lottery sales by some $92 million on an annualized basis.

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 that any other similar state gaming revenues will 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.