With Oregon lottery revenues back ahead of projections, its Department of Administrative Services heads to market next week to price $214.3 million in lottery revenue bonds it originally planned to sell in 2020.
Leading a 10-bank syndicate, Goldman Sachs & Co and Citi will price on Tuesday $91.3 million in tax-exempt and $123 million in taxable bonds. PFM is the municipal advisor and Hawkins Delafield & Wood is bond counsel.
The state lottery revenue bonds were affirmed at Aa2 by Moody’s Investors Service and AAA by S&P Global Ratings. Both assign stable outlooks.
The state had originally planned to sell $302 million in lottery-backed bonds in 2020, but postponed the sale when revenues tanked in the lockdowns of the early pandemic.
When restaurants and bars shifted to take-out only amid the pandemic, players lost access to slot machine-style video lottery machines inside.
Lottery revenues “fell the day the gaming machines were turned off, and recovered the day the machines were turned back on,” said Joshua Lehner, an Oregon state economist.
Oregon Gov. Kate Brown’s stay-at-home order reduced bars and restaurants to takeout service only for two 10- and 12-week stretches after the pandemic took hold in the state in March 2020, Lehner said.
“The video lottery revenues were zero during those stretches and that had a large impact,” Lehner said. “We lost about $200 million in lottery revenues during each shutdown, so $400 million in lost revenue total.”
The Oregon lottery has video lottery games, traditional paper win and lotto draw games, and sports betting games. But the video games have lower administrative costs and provide about 75% of revenues, Lehner said.
With lottery revenues off, Oregon Treasurer Tobias Read announced in June 2020 that the sale for the lottery bonds the state legislature approved in 2019 to fund 37 projects would be
“Projected 2019-21 lottery revenues are down approximately $364 million, or about 24% compared to the March 2020 forecast, and will remain lower than previously projected for the 2021-23 biennium,” Read wrote in his June 19 letter to Gov. Kate Brown and state lawmakers.
Two years out from the onset of the pandemic, lottery revenues have rebounded enough for the state to move ahead with the planned sale.
Lottery revenues for the current 2021-23 biennium are up $13.5 million, an 8% increase compared to the previous forecast, and are projected to be $1.74 billion for the current biennium, according to a March 23 report from Oregon’s Office of Economic Analysis. Revenues tied to consumer spending including lottery sales and new corporate activity tax are outstripping expectations, according to the report.
The lottery transferred $658.3 million to Oregon’s Economic Development Fund in fiscal year 2021, up from $598.8 million in fiscal year 2020, according to an online investor presentation.
The pandemic still left a mark on state revenues.
“Current revenues this fiscal year are higher,” Lehner said. “But the pandemic blew a big hole in the numbers, so cumulatively revenues are down, because during multiple periods hardly any lottery revenue was coming in the door.”
The state refunded $124.1 million in lottery revenue bonds in April 2021 for present value savings of $15.9 million, according to a
But the upcoming deal will be the first new money issued to fund projects since the 2020 sale was postponed, said Jacqueline Knights, director of Oregon’s debt management division.
In order to sell bonds, the state’s bond covenants in the indenture require a 4-to-1 ratio between forecast lottery revenues and the amount of lottery debt, according to the debt policy commission report. The pandemic slowdown was the first time since the lottery was established in 1984 that the state couldn’t hit the required ratio.
“Some projects were funded from other sources and others were delayed,” Knights said.
Lawmakers have approved $516 million in lottery revenue bond authorization for the 2021-21 biennium. The 2022 bonds will use $214.3 million of that authority, and the remainder is expected to be issued in spring 2023, according to the online investor presentation. After the upcoming sale, there will be $1.2 billion in lottery revenue bond debt, all fixed rate, according to the presentation. Of that, 75% of that debt is scheduled to mature in 20 years, and 95% will mature in 15 years.
Lottery bonds in conjunction with federal America Rescue Plan Act funds will provide $484 million toward wildfire recovery and prevention efforts, provide support to communities impacted by the 2020 Labor Day Fires, and protect against future fires. That includes funding for water infrastructure, housing, fire and public safety infrastructure and hazardous waste and debris removal.
The proceeds of the bonds will finance loans and grants to local governments for various public and non-profit facilities, infrastructure improvements and affordable housing preservation.
The tax-exempt bonds will provide $2 million to $15 million in funding for 15 projects ranging from parks, affordable housing preservation and water infrastructure. The taxable debt will fund five projects from $10 million to $50 million including affordable housing, brownfields redevelopment, and levee improvements.
Under the statue that created the lottery, Lehner said, the first priority is paying debt service on existing bonds. Next come three categories enshrined in the state constitution that receive a percentage of the funds: 34.5% to the educational stability fund, 15% to parks and natural resources and 1% to the veteran services fund. Then statutory categories get a take including the counties, cities and a set-aside for gambling addition treatments, he said.
State officials are not concerned about bringing the bonds into a market that has seen
“The state’s lottery revenue bonds are highly rated and have strong bondholder protections,” Knights said. “In addition, we have a large and experienced syndicate capable of reaching a broad range of prospective investors.”
Though the state has scheduled a pre-marketing and investor outreach day ahead of pricing, as some other issuers have done recently, Knights said that isn’t unusual for the state and that the “pre-marketing timeframe is consistent with prior sales of the state’s bonds.”
The finance team structured the bonds so that the tax-exempt tranche of maturities runs from 2036 to 2042 and the taxable bond maturities run from 2023 to 2035.
The bonds were structured that way because “the state’s financings included many projects with long average lives,” Knights said.
“Some of these projects are taxable and some are tax exempt,” she said. “By issuing the tax-exempt bonds longer, and the taxable shorter, the state is able to achieve a lower overall cost of borrowing and concentrate each series into fewer maturities.”
