S&P Global Ratings put certain Iowa school district issues' priority-lien ratings on CreditWatch with negative implications after the Iowa General Assembly passed a property tax reform bill.
The General Assembly's property tax reform legislation,
The legislation redirects state sales tax revenues from the 1% statewide sales tax, also known as the Secure an Advanced Vision for Education sales tax, into a Property Tax Equity Relief Fund. The SAVE sales tax secures certain Iowa school district bond issuances.
Gov. Kim Reynolds praised the bill in a May 3 statement that listed SF 2472 as her top 2026 legislative priority.
"We kept our promise by passing meaningful property tax relief and reform, estimating nearly $4 billion in savings over the next six years," Reynolds said in the statement. "By capping local government revenue growth at 2% with clear and responsible guardrails, this plan brings certainty and discipline to a system that needed both."
The rating agency said it expects the legislation "will cause a material decline in debt service coverage for issuances secured by a 1% statewide sales tax," and there is at least a one-in-two chance of downward rating actions.
S&P said it plans to resolve the CreditWatch within 90 days after individual reviews of the affected issuers.
"Tucked into the property tax reform was an adjustment to the SAVE program, which is the school infrastructure sales tax," said Blake Yocom, managing director and head of local governments, Midwest region at S&P.
"What they did as part of the property tax reform was, in order to lower other levies and to provide property tax relief, they adjusted the amount the state will siphon off from the retail sales that originally had gone to school districts," he said.
"They're siphoning off a larger amount and on a more aggressive scale," Yocom added.
The SAVE fund revenue diversion rate will rise from 7.1% to 25% by fiscal 2031, S&P said.
Yocom pointed to an April 30 report from S&P, which said the property tax revenue stream "is a major factor to the overall creditworthiness of U.S. local governments," and property tax reform measures can "call into question how essential government services would be funded."
The report also noted the housing market is outpacing growth in property taxes as a share of total revenues.
Under the SAVE program, there's currently a per-pupil average for each district based on local school district enrollment, Yocom said — "essentially, the statewide retail sales divided by the statewide enrollment, and then each district gets that revenue per pupil based on their local enrollment."
With the SAVE fund revenue shrinking up to 25% over the five-year phase-in, it will translate to lower per-pupil amounts and therefore lower pledged revenue, Yocom said.
S&P said the legislation "reduces maximum annual debt service coverage on SAVE-secured bonds in a way that might be inconsistent with current ratings."
Districts "might be considering restructuring options or other measures to maintain coverage," S&P noted, so it will evaluate credits on a case-by-case basis.
Yocom stressed S&P doesn't advise on restructuring, though it is listening to the market and to stakeholders. However, he said, "We've heard different scenarios of using cash on hand to pay down existing principal, which in turn could bolster coverage or attempt to maintain coverage at current levels.
"We've also heard proposals to extend the debt service schedule," he said.
Depending on how districts originally structured the debt, they may be in a better or worse position following passage of the legislation.
"If they structured it close to their additional bonds test or thin coverage to begin with, there might not be sufficient head room for many districts," Yocom said.
Generally, he said, districts with growing enrollment will be in a better situation. "But we are seeing most districts in the state with declining enrollment, particularly the smaller rural school districts, given demographic issues, etc."
A spokesperson for Reynolds did not respond to requests for comment.
