DENVER -- Moody's Investors Service says the general obligation bond ratings of some Colorado cities may suffer if the municipalities' tax increment district bonds are troubled.

In a recent report, Moody's said that because the urban renewal or downtown development authorities that issue the special revenue bonds are created and partially controlled by cities, there are often financial ties linking the bond ratings of the authority and the city.

"These districts are totally passive entities. They have no revenue-raising powers on their own," said Ditmar Kopf, senior analyst for Rocky Mountain ratings for Moody's.

The agency has already cut the GO ratings of Englewood and Arvada because of tax increment district problems, according to a Moody's report. But Mr. Kopf said not every city will suffer a downgrade, adding, "The message is that we look at each one individually."

He and others say that while troubles for such authorities are expected to heighten through 1993, they do not predict a repeat of the highly publicized defaults with Colorado special district debt in the wake of an economic downturn in the 1980s.

"It's not a pervasive kind of problem," said Saranne Maxwell, senior vice president and assistant general counsel at Kemper Securities Group in Denver. "The reason the tax increment district bonds have held up is because they were more protected with security features that the special district bonds didn't have."

For instance, the tax increment districts often had more capitalized interest built into the issue with a more graduated debt service.

"If the local economic base gets worse, then more of these districts may have problems," said a Denver investment banker. "So far, it is limited."

Mr. Kopf agreed. "For the ones that have gotten into trouble, the revenues just never materialized," he said.

Unlike special districts, the tax increment bonds were used for projects that ranged from small infrastructure work to plans that required tens of millions of dollars in debt for ambitious economic development efforts. Not surprisingly, the large projects are the most troubled.

Consider the case of Englewood. A city-created urban renewal authority has defaulted on $30.2 million of property and sales tax revenue bonds issued in 1985 to pay for improvements on a downtown shopping area.

Authority officials have blamed the default on the economic downturn that distressed the state and local economy. In November 1990, Moody's cut Englewood's GO rating from A1 to A, while downgrading its revenue bonds from A to Baa1.

"Englewood's own static revenue base, in addition to its inextricable ties to the tax increment district's unfavorable growth trend, led to diminished overall credit quality," Moody's wrote.

While Mr. Kopf said other downgrades will be based on individual criteria, the agency noted: "When rating a city's general obligation debt, Moody's takes into account not only the city's ability to call forth and manage available resources, but also its willingness to follow through on major capital projects regardless of how the bonds that financed the project are ultimately secured."

The bonds are not traditionally secured by a pledge of general city revenues. In fact, Moody's said that given the substantial economic and financial overlap between the city and its authority, the performance of the tax increment district "may become an important factor in the municipality's rating."

Once exception is the Fort Collins Downtown Development Authority, which has secured its bonds with a contingent pledge of the city's sales tax to cover any deficiencies from other revenues.

Even though incremental property taxes -- the main security for the 1988 bonds -- alone have not covered debt service, other funds have not made it necessary for Fort Collins to use any sales tax from its general fund. Moody's has assigned a double-A rating since May 1954 for the city's GO bonds, and an A1 on the tax increment bonds.

Others are less fortunate. The Arvada Urban Renewal Authority has $51 million of outstanding tax increment debt that has been downgraded to B as the bonds are expected to default by 1993. Because of the authority's problem, Moody's cut the Arvada GO rating from A1 to A in March 1989. While that rating was recently affirmed, the agency said the fate of the tax increment debt will continue to be a rating factor.

"A default, or impending default, of TID debt will not automatically have a deleterious effect on a city's outstanding debt ratings," Moody's concluded in its special report. "In some cases, however, ratings actions on city debt have been taken when relationships between [authorities] and cities were close and patterns of economic and financial strain were evident."

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