Citing the restrictions of Colorado's tax and spending limits, Moody's Investors Service this week downgraded more than $12 million of tax-backed debt issued by three special districts.

In a report Tuesday, Moody's said it had reviewed nine districts and plans to study the effects of the limits, known as Amendment 1, on the rest of the state's 33 special districts it rates.

The three districts downgraded were: Castlewood Water District, from A to Baa; North Jeffco Park and Recreation District, from Al to A; and Valley Metropolitan District, from Baa to B. All three serve Denver suburbs.

The other six ratings were affirmed.

Ditmar Kopf, an assistant vice president at Moody's, said the districts' face decreased financial flexibility because of Amendment 1. a constitutional provision that limits increases in both taxes and spending to a formula tied to local population and consumer price index growth. Voters must approve taxes higher than those based on the formula.

Moody's has previously said that because of legal uncertainties over Amendment 1, it will consider all general obligation debt as limited tax bonds even though debt were issued as unlimited tax obligations.

Despite that position, Moody's has so far affirmed the general obligation ratings of the cities it rates. Kopf expects the remaining 24 special districts to be reviewed shortly.

"We are increasing our coverage and do plan on getting to all the special districts in the next several months. We're focusing on districts that have general obligation debt," Kopf said.

"If the ability to increase the property tax rate is lost under Amendment 1 and assessed value drops, the district has no expense flexibility and it's unclear how the districts would repay bondholders,"

The analyst stressed that the state's other local governments would be considered individually. "The point we're trying to get across is we're looking at everything on a case-by-case basis."

For example, other districts escaped downgrades for different reasons. Poudre Valley Hospital District in North-central Colorado constitutes an exempted enterprise and Amendment I constraints do not apply. The district kept its Aa rating.

Districts with little debt, or with bonds maturing soon, were unaffected.

Denver's transit agency, the Regional Transportation District, and its A1 rating depend on revenue to support bond payments; the district does not levy a property tax. Because gross sales are remitted monthly to the bond trustee before being routed to the district, it is insulated" from Amendment 1's annual revenue and expenditure constraints, Kopf said.

The Fremont Sanitation District's monthly sewer charges can be adjusted without voter approval.

Conversely, 90% of Castlewood Water District's revenues come from property taxes and one-time development tap fees for water hookup, a common arrangement among Colorado's special taxing districts.

Moody's said Castlewood "has minimal operating flexibility," despite high cash reserves and a covenant to add a water surcharge if reserves dip below $600,000.

In the case of North Jeffco Park and Recreation District, growth has been steady, but not enough to swamp current services, according to district director James Fisher. Last month before the downgrade, the district refinanced its 1.5 million debt in a move that will generate some savings.

Jeffco's condition has not been adversely affected at this point," Fisher said. "We think the long-term effects of Amendment I will cause some tightenin of our belts. It'll cause us to look at our budgeting and financing in a different way."

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