DALLAS -- Fort Collins this week is expected to become the first city in Colorado to sell bonds backed only by state-shared highway user taxes -- revenues not directly controlled by the issuer.
On Thursday, the city plans to price $4.04 million of the revenue bonds in a negotiated offering to be underwritten by Dain Bosworth Inc. Proceeds will be used to construct offices and a maintenance center for the city's street department.
The deal will carry an A1 rating from Moody's Investors Service, the only agency asked to review the transaction.
"It's a relatively new type of security structure in Colorado," said Ditmar Kopf, assistant vice president at Moody's. "The concern with this type of bond is that this revenue stream is outside the city's direct control."
As state-shared revenues, the money from the taxes is collected by Colorado and distributed monthly to different cities and counties. The primary sources of revenue from the highway user taxes are motor vehicle fuel excise taxes and registration fees.
The money is allocated based on a formula that includes a city's number of registered vehicles and highway miles.
Mr. Kopf said a solid record of tax collections, the modest 20-year debt service requirements, and a strong additional bonds test provide broad protection to bondholders.
The rating is not directly tied to the city's double-A general obligation bond rating, he said. However, he noted that the city's financial history was a factor in rating the first of its kind issue.
In a statement, Moody's said, "Despite the city's lack of direct control over the revenue stream securing the bonds and concerns over potential future revenue fluctuations, debt service requirements on the bonds are amply covered by historical highway-user revenues."
Mike Kavanagh, first vice president at Dain Bosworth, said the coverage is nearly five times debt service requirements, with annual collections by the city totaling $1.8 million and level debt service requirements estimated at $350,000 a year.
According to the preliminary official statement, highway user revenues allocated to Fort Collins nearly tripled in the past decade. In 1982, the city collected $598,600, compared to $1.76 million budgeted this fiscal year.
While market conditions will determine the final structure of the issue, the deal should include serials maturing through 2007 and terms at the back end of the transaction, he said. "We're hoping to be in the low 6s on the long end," Mr. Kavanagh said.
Although securing debt solely with state-allocated highway funds is common in many states, it is relatively untested in Colorado.
Only Douglas and Adams counties have sold small issues backed by the revenues. Mr. Kopf said the issues had shorter maturities and were designated for specific road projects. Fort Collins will be the first issuer to sell long-term debt to build a facility with bonds backed by moneys historically used for street maintenance, Mr. Kopf said.
City officials say they do not plan to sell additional debt with an identical security, though they believe other cities may follow suit.
"So far, this [practice] has been used very sparingly," said Mr. Kavanagh. "I think you're going to see more cities looking at it now that Fort Collins has done one."
Susanne Edminster, a financial policy analyst for Fort Collins, noted that, "Maybe once we pave the way, other cities will want to use it."
The highway user tax revenues appear to be a broad source of financing projects. Statewide, revenues totaled $443.2 million in fiscal 1991, according to the Colorado Department of Revenue.
But at least one investment banker was skeptical that many cities would leverage all or part of their funds to pay debt service.
"Cities use that money for upkeep of their streets, and to use it for bonding wouldn't leave them the ability to maintain what they have," said the Denver investment banker.
