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Ohio Eyes Lease of Booze Biz

CHICAGO — Ohio lawmakers are eying a proposal to lease the state-controlled liquor ­distribution system for $1.2 billion to a newly formed private nonprofit entity.

The 25-year lease of the state liquor system is key to Republican Gov. John Kasich’s ­proposed $54 billion, two-year general fund budget, and to his plans to bring down a deficit that totals more than $8 billion.

Legislators need to approve a final 2012-2013 budget by June 30.

The lease would generate $500 million in up-front cash for the general fund in fiscal 2012.

Ohio has a monopoly on liquor sales, and it is one of the state’s most reliable and growing revenue sources.

The State Liquor Enterprise has been in operation since 1934 and serves as Ohio’s only wholesaler and retailer of hard liquor.

Under the lease proposal, the newly created entity dubbed JobsOhio would float $1.2 billion of 20-year tax-exempt and taxable debt to finance its purchase of the liquor system, putting $500 million into the general fund.

The agency would use the bulk of the remaining proceeds to retire outstanding liquor-backed bonds. Future revenues from the system would be funneled to job creation.

The creation of JobsOhio was one of Kasich’s first proposals when he took office this year.

The entity would become the state’s newest bond issuer, with the authority to issue tax-exempt and taxable bonds to finance economic development, largely by investing in Ohio-based companies.

State officials expect to file the JobsOhio articles of incorporation within the next 60 days and after that will begin to craft a request for proposals to assemble a new bond finance team for the $1.2 billion offering and subsequent borrowings, according to  Kristi Tanner, assistant director of the Ohio Department of Development.

Proponents of the proposal say it would also create a stable revenue stream for creating badly needed jobs across the state.

“This plan to create a funding stream for JobsOhio makes financial sense for our state,” David Goodman, director of the Department of Commerce, which currently controls the liquor system, told lawmakers during budget hearings on Friday.

“Instead of putting liquor profits into discretionary spending in the general revenue fund, we are investing in Ohio’s future by investing in job growth and economic development,” he said.

The lease transaction would cut the Commerce Department’s budget by more than 75% starting in 2013.

Officials from the Ohio Department of Development, which would house the newly created entity, were scheduled to testify as part of House budget hearings Tuesday afternoon.

While it would provide an infusion of cash in the state’s next budget cycle, it would also mean the loss of revenue down the line, according to Democratic opponents like state Rep. Denise Driehaus of Cincinnati, who sits on the subcommittee that will consider the proposal.

“Gov. Kasich’s budget proposal to lease Ohio’s liquor profits is borrowing future liquor revenue for up-front cash,” she said in an e-mailed statement. “The 'lease’ of the Ohio Liquor Enterprise for an untested JobsOhio program is meant to look like a cutting-edge leveraging of a state asset, but essentially it is little more than borrowing to fill the budget gap.”

Republicans control both houses of the General Assembly.

The proposal is among several privatization plans floated by the new governor. Kasich’s spending plan relies on the liquor distribution lease as well as the sale of five state prisons.

His budget also gives the state authority to privatize the Ohio Turnpike — one of the nation’s largest and highest-rated tollways — and the state lottery system.

Like other states, Ohio has increasingly relied on one-time revenue measures to balance budgets during the recession. It is a move that credit analysts generally frown upon, and rating agencies — two of which have Ohio on a negative outlook — have warned that it is one of the state’s challenges.

“The more measures that states use that are one-time or nonrecurring measures are credit negative, and any sort of one-time asset sale would be considered a one-time measure,” said Moody’s Investors Service analyst Lisa Heller, who covers Ohio.

She added that privatization itself is not viewed as a credit negative or positive, and that each proposal is viewed independently.

“We want to see how each one is handled. There can be good or bad execution,” Heller said.

From a bondholder’s perspective, she said, Moody’s initial position on the liquor-lease proposal is neutral, as the ­transaction would pay off current investors.

Moody’s rates Ohio Aa1 with a negative outlook. Standard & Poor’s rates it an equivalent AA-plus, also with a negative outlook, and Fitch Ratings maintains a AA-plus rating with a stable outlook.

It’s not the first time that officials have floated a plan to privatize the liquor system, and bond covenants include a pledge that the state will defease all outstanding debt.

Despite JobsOhio’s status as a nonprofit, it needs to defease outstanding liquor-backed bonds because of the bond pledge as well as a covenant that requires that revenues provide at least 2.5 times maximum annual debt-service coverage.

Simply taking over the outstanding bonds instead of retiring them “would certainly be the preferred route,” said the Development Department’s Tanner. “But we can’t generate enough revenue and still stay within the covenants of the current indenture.”

There are no swaps or insurance on the bonds that would need to be terminated, she said.

The state’s liquor profits have grown annually, from $156.6 million in 2005 to $224.2 million in 2009. Ohio raked in record profits of $228 million in fiscal 2010.

The profits have led to solid debt-service coverage levels, which totaled 7.5 times in fiscal 2009, bond documents show.

Revenue not needed for debt service flows to the general fund except for 1.5%, which is used for alcohol treatment programs and research, according to bond documents.

The state currently has about $410 million of outstanding senior-lien liquor-backed bonds and $165 million of subordinate-lien bonds.

Bonds that feature a senior-lien pledge of the Ohio State Liquor Enterprise’s net profits carry ratings of Aa2 from Moody’s, AA-minus from Fitch and AA from Standard & Poor’s.

The state issues liquor-profit backed bonds under two laws, Chapter 166 and 151. Chapter 166 bonds are used for five economic development programs, including Innovation Ohio, and Chapter 151 bonds are subordinate bonds that finance brownfield revitalization projects.

Ohio issues both senior- and subordinate-lien bonds backed by the system’s revenues.

A piece of taxable senior-lien bonds with a 6.28% coupon and a 2029 maturity traded at 5.5% in November, according to trade data reported by the Municipal Securities Rulemaking Board. Bonds with a 4.5% coupon maturing in 2017 were trading at 4.5% in February.

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