Colorado metro district technical defaults accelerate

A flurry of first time and repeated technical bond defaults by Colorado metropolitan districts in December is raising concerns about the debt, which finances public infrastructure such as roads, sewers, parks, and recreation centers for housing developments through property taxes levied on new tracts.

Seven districts tapped a debt service reserve or surplus fund for the first time to pay debt service due Dec. 1, while 13 others incurred repeated technical defaults, according to a Dec. 10 Municipal Market Analytics report.

Metro districts' reliance on contingent liquidity for debt service payments surged in the first half of 2020 and has accelerated since the second half of 2022, MMA said.

"The sharply upward trend in troubled districts should offset at least some of the confidence (metropolitan) district bondholders would otherwise have from these impairments being 'only' technical defaults, roughly half of which are not even proper debt service reserve fund draws," the report said.

"Even without a bunch of ongoing payment defaults, a sector so challenged will reasonably be less able to survive incremental threats (wildfires, insurance, trade wars, immigration reform) and related underwritings should be treated with extra care by both buyers and sellers over the next year," it added.

Most of the credits with first-time impairments "are not likely to be troubled long-term," said Zach Bishop, who heads Piper Sandler's (PIPR) special district group.

"Tapping a surplus fund or reserve fund is generally a sign of slower than expected development, but these seven credits are a small fraction of what is a very large market," he said in an email. "We see a stable homebuilding environment in Colorado with new homes taking a disproportionate share of overall home sales and a stable pricing environment given the shortage of homes available in desirable locations. These factors generally coincide with positive trends for metro district bonds, whose credit is driven by the pace of homebuilding and the price of homes built."

A recent analysis of about $7 billion of metro district bonds issued between 2000 and 2008 found the vast majority weathered the Global Financial Crisis without being distressed despite going through "one of the worst real estate and credit cycles in American history," Bishop said.

The state has 2,254 functioning metro districts, which are subject to state and local government regulations and provide a cost-efficient way to meet the demand for housing development in the state, according to the Metro District Education Coalition.
The financing structure places the burden of paying for necessary infrastructure on the property owners in the districts, without taxing people outside the districts.

In some cases, metro districts are launched with "eligible voters" authorizing billions of dollars of bonds backed by property taxes. In the early stages of a project, those voters typically include only the developer.

In September, Moody's Ratings, which rates 69 metro districts with $1.7 billion in combined outstanding debt, said they face constrained revenue growth due to flat or slightly falling property values although their creditworthiness is likely to remain stable through 2025.

Supply of Colorado metro district debt grew with a blast of year-end, high-yield issuance that included $64 million of unrated general obligation and special revenue term bonds due in 2054 by the Independence Metropolitan District No. 3 in Elbert County, which were priced by Piper Sandler (PIPR) at 5.375% for senior bonds and 7.125% for subordinate bonds.

"Developers and homebuilders in Colorado began to tune into the improved market conditions in the high-yield space early in 2024, but it took time for them to determine the path forward and then for the financings to make their way to the market," Bishop said. "It is also typical that issuance is stronger in the second half of the year as clients work to get financings in a particular calendar or fiscal year."

The districts have been targeted for reform. A 2023 Colorado law requires district service plans to list maximum property tax levies and debt issuance and limits the interest rate on bond issues purchased by district developers.

Coloradans for Metro District Reform unsuccessfully pushed for a measure last year that would have prevented developers from buying bonds issued by districts they created.

John Henderson, a member of the group, said reform efforts have been blocked by the metro district industry's "power over the political leadership."

He cited a long list of problems, including developers' "outrageously large profits through government taxation," resistance to resident taxpayer representation on district boards, and inadequate oversight.

The state's metro districts dodged potential trouble this year posed by a proposed constitutional amendment approved for the Nov. 5 ballot that aimed to impose a 4% cap on statewide property tax revenue growth. The measure sparked concerns over its implementation and fears it would raise borrowing costs and lead to litigation, particularly for metro districts.

Under a deal with amendment backers that led to the initiative's removal from the ballot, the Democratic-controlled Colorado 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.

An attempt to introduce similar bond-issuing public infrastructure districts in Oklahoma failed. A constitutional amendment placed on the state-wide Nov. 5 ballot by the Republican-controlled legislature was rejected by 61.6% of voters.

State question 833 would have allowed property owners to petition their municipality to create a PID as a way to finance roads, sidewalks, parks, and water and sewer services through the issuance of bonds backed by a property tax assessment applied only within the district.

Other Southwest states have authorized infrastructure districts.

In Utah this month, the MIDA Mountain Village Public Infrastructure District sold $300 million of unrated, tax-exempt subordinate tax allocation revenue bonds to finance projects, including ski lifts and worker housing for the upscale Deer Valley Resort in Park City.

A lawsuit filed in a Utah court in September by environmental groups claims the Utah Inland Port Authority unconstitutionally formed 10 project areas that could harm ecosystems. The areas could evolve into bond-issuing public infrastructure districts. The authority filed a motion in November to dismiss the case.

Infrastructure districts have proliferated in Texas. Districts that finance water-related projects and in some cases other infrastructure like roads and parks, issued $3.83 billion of tax-supported and nearly $3.35 billion of revenue-supported debt in fiscal 2024, according to the state's Bond Review Board. Outstanding debt for municipal utility and other districts totaled $50.2 billion.