Colorado metropolitan districts face challenges, Moody’s says

Colorado’s metropolitan districts face constrained revenue growth due to flat or slightly falling property values, but their creditworthiness is likely to remain stable through 2025, according to Moody’s Ratings.

The districts, which finance public infrastructure for housing developments through property taxes levied on the new tracts, enjoyed strong gains in their taxing headroom from the prior 2022 property reassessment cycle, boosting their financial performance and credit quality, the rating agency said in a report last week. 

“However, strong gains in taxing headroom are unlikely to continue,” the report said. “Instead, management’s ability to maintain or improve financial profiles will be key to districts’ credit quality.”

Of the 2,423 metro districts in Colorado, Moody’s rates 69, which have more than $1.7 billion in combined outstanding debt.

Moody’s defined headroom as the ratio of incremental revenue permitted by a taxing limitation relative to maximum annual debt service that is typically considered meaningful when it exceeds 50%. It noted headroom improves when the valuation increases and the property tax millage required to generate sufficient debt service declines.

Another challenge for metro districts is ongoing pressure on Colorado lawmakers to lower property taxes. 

“Property-tax related measures and special sessions that aim to cap reassessments limit the ability to raise revenue,” Moody’s said. “Positively, most metropolitan district service plans permit adjustment of the maximum mill levy when legislative changes adjust the value of residential and commercial property.” 

A proposed constitutional amendment on the Nov. 5 ballot posed potential problems for metro districts that troubled the state’s municipal bond market. Under a deal with amendment backers that led to the initiative’s removal from the ballot, the Democrat-controlled legislature passed House Bill 1001 during an August special session called by Gov. Jared Polis. The legislation, which Polis signed into law Sept. 4, expands on the enactment earlier this year of $1.3 billion in tax relief through lower assessments rates and a cap on property tax revenue growth for 2024 and 2025.

The initiative, which called for a 4% cap on statewide property tax revenue growth, raised concerns over its implementation and fears it would raise borrowing costs and spark litigation, particularly against metro districts.

Another initiative to lower residential and nonresidential assessment rates was also pulled from the ballot under the deal.