Fitch Rates School Building Authority of West Virginia's $48MM Excess Lottery Revs 'A'

The bonds are being issued as taxable qualified school construction bonds and are structured with one bullet maturity. Investors will receive a tax credit against their federal income tax liability at a rate determined by the U.S. Treasury in lieu of current interest payments. The authority will make mandatory sinking fund payments, which will accumulate to pay principal when due.

The 'A' rating considers the discretionary nature of lottery revenues, which are sensitive to population, personal income, and employment factors, as well as to existing and future competition. Offsetting these inherent uncertainties is the ample coverage of debt service by lottery excess revenues, the essentiality of the authority's projects, and the success of the lottery commission to-date in adapting to an increasingly competitive environment.

The bonds are limited obligations of the authority, payable solely from the trust estate which receives a statutory allocation of a portion of the profits from limited video lottery and the racetrack video lottery. The authority is a state-created political subdivision charged with implementing the state's school construction and improvement program. Racetrack video lottery is offered at the four state racing tracks and accounted for approximately 58% of total lottery sales in fiscal 2009. Limited video lottery is offered at nearly 1,615 venues in 54 of the state's 55 counties and accounted for another 28% of total lottery sales in fiscal 2009. Both lotteries are regulated by the West Virginia Lottery Commission.

A statutory allocation of $19 million is made to the excess lottery school building debt service fund from the state's excess lottery revenue fund to secure debt service on the current and outstanding parity bonds. The revenue fund is funded from revenues of two of the state's five lottery games: the limited video lottery and racetrack video lottery games, from which $385 million was credited to the excess lottery revenue fund in fiscal year 2009, a 5% decrease from the prior year. The state is projecting a continued revenue reduction over the next three years, primarily reflecting increasing gaming competition. The $19 million allocation is subject to prior statutory allocations consisting of a homestead credit, estimated to be $10 million annually, and a similar $19 million for the economic development authority bonds (also rated 'A' by Fitch; no rating distinction is made due to the ample debt service coverage for both; fiscal 2009 available revenues provide 7.9 times [x] coverage of statutorily allowed debt service). In addition, a parity allocation of $10 million is made to the higher education improvement fund. Debt service for the authority's school construction program is expected to ultimately approximate the statutory allocation. Although further subordination of debt service on the bonds is possible, there are currently no plans to do so.

West Virginia's state lottery revenue fund, which receives the state's share of net profits from instant and online games (for example, scratch-off and POWERBALL multi-state lotto) and from a portion of net terminal income derived from racetrack video lottery, provides additional statutory security to the extent that revenues are available.

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