Refunding boosts size of upcoming Oregon lottery revenue bond deal

Oregon Lottery

The Oregon Department of Administrative Services plans to price up to $550 million in lottery revenue bonds the week of April 7.

The deal will be more than twice the size of any of the state's lottery revenue bond sales over the past eight years.

The bulk of the increase comes from a significant refunding component — approximately $250 million of the total $465 million in tax-exempt bonds are refundings, said Eric Engelson, a spokesman for the Oregon State Treasury.

The deal also includes an $85 million taxable component.

Oregon has averaged issuance of $185 million in lottery revenue bonds in each transaction over the past eight years. It sold $221 million in April 2024, $217 million in April 2022, $124 million in April 2021, $156 million in March 2019 and $230 million in March 2017.

The bonds planned for April will be priced by an eight-bank syndicate led by Jefferies and Loop Capital Markets.

This refunding is focused on outstanding 2015 bonds that have reached their 10-year-call date, allowing the treasurer's office to take advantage of current market conditions to secure a lower cost of financing, Engelson said. 

"This strategy will generate savings that directly benefit state agencies by reducing debt service costs," Engelson said.

"In turn, these savings increase the state's debt capacity, enabling further investment in critical infrastructure and community projects across Oregon, while maintaining fiscal responsibility," he said.

"We are projecting present value savings of about $13.5 million, which could fluctuate depending on market conditions," he said.

Refundings returned to favor in 2024 with issuers in the Bond Buyer's nine-state Far West region nearly doubling the volume of refunding deals to $25.3 billion from $13.9 billion, according to LSEG.

The state's outstanding lottery revenue bonds hold ratings of Aa2 from Moody's Ratings and AAA from both S&P Global Ratings and Kroll Bond Rating Agency. All assigned stable outlooks. The ratings were affirmed ahead of last year's lottery bond sale. None of the rating agencies have updated the ratings ahead of next month's sale.

Moody's cited the state's economic strength, robust legal protections, ample debt service coverage and very strong management of the lottery system for its rating. It also said Oregon's legal protections are "above average for the peer group, including a constitutional requirement that lottery revenues pay debt service first, a four times additional bonds test, and a well-funded debt service reserve fund that is backed by the state's statutory moral obligation commitment to replenish it."

Oregon launched its lottery through the voter initiative process in November 1984 to fund economic development, but voters have expanded what the funding can be used for over the years to include such items as education, parks and salmon restoration, according to the lottery's annual comprehensive financial report for fiscal year 2024. 

Michael Wells, who was appointed lottery director by the governor on August 23, 2023, after serving as interim director since December 2022, declined to be interviewed for this story, deferring to the treasurer's office.

The profits from the lottery are transferred to the Oregon Economic Development Fund and then distributed to the state to fund other purposes as allowed under state law.

"Over 38 years, the lottery has provided $16 billion in statewide funding for economic and job development, public education, environmental protection, and other legislatively adopted programs," KBRA analysts wrote in the April 2024 report. "The lottery transferred $899 million to the State's Economic Development Fund in FY 2023."

Kroll analysts said its rating is underpinned by consistently ample debt service coverage from unobligated net lottery proceeds. DSC has improved from 4.4 times in fiscal year 2020, when pandemic-related closures led to periods with virtually no video lottery sales, to 6.2 times in fiscal year 2023.

Oregon's economy is demonstrating "moderate health," but is highly vulnerable to changing national policies, according to the Oregon Office of Economic Analysis economic and revenue forecast released on Feb. 26.

The revenue picture for the current 2023-25 biennium was revised down $90.3 million from the December forecast, the OEA said. The projected ending balance now stands at $2.59 billion. The personal kicker rebate on 2025 taxes is expected to total $1.7 million. The state has a trigger mechanism that returns money to taxpayers every two years through the kicker rebate as a credit on their income taxes if personal income taxes come in at least 2% higher than initial forecasts.

"As conditions currently stand, firm growth and elevated inflation indicate a higher level of nominal activity, which is typically supportive of general revenue trends," the OEA said. "However, measures relating to tax reform, tariffs, immigration and the federal budget could dramatically alter the economic outlook–with significant revenue implications."

Projected general fund resources for the current biennium increased by $350.1 million to $38.2 billion, but the forecast for consumption based tax collections including the corporate activity tax, the lottery and recreational marijuana was decreased by a combined $53.1 million for the 2023-25 biennium, while total revenues across the three sources are revised downward $75.4 million for the upcoming 2025-27 biennium, said the OEA report.

The lottery was expected to bring in $1.86 billion in the current 2023-25 biennium and to raise $1.9 billion during the 2025-27 biennium. The figures for the current biennium were off by $0.6 million compared to initial forecasts and projections for the 2025-27 were lowered by $15.2 million, according to Oregon Lottery's ACFR for fiscal 2023-25.

Expected lottery sales were decreased mainly due to slower video lottery sales, according to the ACFR, which saw a decline following the post-pandemic surge as consumers returned to other entertainment options. 

During fiscal year 2024, U.S. lottery sales totaled over $113.3 billion, contributing $30.6 billion to state governments after paying prizes and covering operational costs, according to the North American Association of State and Provincial Lotteries. 

Florida led the U.S. with traditional game sales of $9.4 billion in fiscal 2024, followed by California with $9.3 billion, according to NASPL.

The biggest prize for a single ticket was the $2.04 billion Powerball jackpot in California drawn on Nov. 7, 2022, according to the trade organization.

In some states, lottery profits are combined with other revenues in a government's general fund, but many have dedicated their lottery revenues to a specific purpose.

Forty-five states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands have government-operated lotteries, according to the NASPL.

The states of Florida and West Virginia also issue bonds backed by their lottery revenue. The Maryland Stadium Authority uses lottery revenue to repay bonds issued to finance school construction and subsidize professional sports stadiums.

In California, all of the money is used for education. The state received nearly $2.3 billion for lottery sales to fund education and its education fund in fiscal 2024, according to NASPL.

Oregon put $950 million toward economic development, parks and natural resource programs, education, veteran services and gambling addiction prevention and treatment programs in fiscal 2024, according to NASPL.

Since the New Hampshire Lottery, the first in the U.S., was founded in 1964, lotteries have raised more than $644.6 billion for government programs in the U.S., according to NASPL.