Special purpose districts came out of a Moody's Ratings review of mostly Texas and Colorado bond issuers with more upgrades and confirmations than downgrades.
Launched in December under new methodology, the review resulted in 158 rating upgrades, 57 downgrades, and 60 confirmations, the rating agency reported. Texas municipal utility districts accounted for 164 of the rating actions and Colorado metropolitan districts had 39, with the remaining 72 spread across 22 other states, including Arizona and California.
The special district bond financing structure places the burden of paying for necessary infrastructure such as water, sewers, and roads on the property owners within the districts, without taxing people outside the districts. Many special district bonds are unrated at a time their use is increasing in high-growth areas.
The majority of rating upgrades or downgrades in Moody's review involved a one-notch move with upgrades commonly driven by a small tax base no longer being a primary rating factor, strong financial ratios, and low leverage ratios, according to Nicholas Lehman, vice president of Public Project and Infrastructure Finance at Moody's.
Downgrades were largely driven by high leverage, weaker financial ratios, and limited scale of operations, with weak governance structure mostly applying to Colorado metro districts, he added.
In a Dec. 9 rating methodology explainer, Moody's said the districts are assessed "in their totality and include their governmental and business-type financial results, assets and liabilities in our analysis of the fundamental credit strength of the entity."
The methodology has a scorecard measuring a district's economic strength, financial performance, institutional framework, and leverage. Scoring percentage rates differ in some cases for operating versus capital special purpose districts, with Texas MUDs, and Colorado metro districts falling into the capital category because their primary purpose is typically to finance infrastructure construction.
Some rating actions exceeded a one-notch move. The rating for Flying Horse Metropolitan District 2 in Colorado Springs fell six notches to the junk level of Ba3 from A3 affecting about $56 million of outstanding general obligation bonds.
Moody's cited "very thin reserves" totaling roughly $111,000 or about 2.2% of revenue.
"The fiscal 2026 budget projects that financial levels will remain weak, with debt service fund revenues sufficient only to cover total debt service requirements," the rating report said.
Leyden Rock Metropolitan District in Arvada, Colorado, which has about $49.7 million of outstanding GO bonds, was cut four notches to the junk level of Ba1 from A3.
Moody's said the lower rating reflects the district's very narrow available fund balance-to-liabilities ratio of 1.5% "that will remain extremely limited."
"It also reflects the inherent weaker governance structure for all metropolitan districts given limited managerial resources available to react quickly to unexpected revenue declines or event risks," it added.
Zach Bishop, who heads Piper Sandler's Special District Group, said most of the downgrades involved governance or operating fund balance concerns, "which are generally minor factors in the overall credit analysis for capital-focused issuers."
"Debt service coverage has increased for most investment grade-rated limited-tax metro districts the past several years because of property value appreciation (including the districts that were the subject of these downgrades)," he said in an email. "I do not see a negative trend in the ability of investment grade Metro Districts to pay their debt at this time."
A Colorado state auditor
"We recommend that (the Colorado Department of Local Affairs) consider possible further investigation of these 17 districts to determine if they are experiencing difficulties meeting their financial obligations," the analysis said.
Municipal Market Analytics has 59 Colorado metro district issues in its Default and Impairment Database with 11 classified as defaults and 48 as impairments, according to Managing Director Lisa Washburn, who said 58 of the deals are unrated and one is insured. She estimated that less than 50% of special district bonds overall are rated.
Bishop said the number of distressed metro district issues identified by MMA is relatively small given the roughly 1,400 issues that are outstanding, and that some early-stage issuers that came to market before mortgage rates increased in mid-2022 have fallen behind the expected pace of homebuilding.
"If history is any guide, the relative housing shortage and scarcity of developable property along the Front Range of Colorado will ultimately create the conditions where the vast majority of outstanding non-rated bonds will be paid in full," he said.
Some MUDs and 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.
The Colorado auditor's analysis showed a massive amount of yet-to-be tapped, voter-approved debt authorization as of the end of 2023. Ten metro districts had authorized but unissued debt ranging from nearly $52 billion to $103.6 billion, while 66 had $10 billion to $49.9 billion, and 152 had $2.5 billion to $9.9 billion.
The analysis fails to acknowledge that each district's service plan limits the amount of debt that can be incurred, according to Kristi Pollard, executive director of the
"Rather, it extrapolates voter-approved debt as the total, which is incorrect," she said in an email.
In Texas, MUDs and other water districts, which are created by the Texas Commission on Environmental Quality, a county commissioner's court, or the legislature, also have an enormous stockpile of debt authorization.
In the Nov. 3 election, these districts asked voters for an eye-popping $80.88 billion of GO bonds in 336 issues with most passing, the Texas Bond Review Board's local election database showed.
In contrast, voters approved $20.14 billion of the $34.9 billion of GO bonds on May 3 ballots, according to the bond review board's fiscal 2025
Boulder, Colorado, announced this month it
Colorado's more than 2,200 metro districts, which are subject to state and local regulation, have been the target of reform efforts. A 2023 Colorado law
