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CO Proposition HH: Considerations from a Muni Bond Investor

In the wake of the COVID-19 pandemic, Colorado's real estate market has seen property values soar resulting in a staggering 40% spike in median assessed values since June 2020. Some areas have witnessed property valuations nearly triple, heralding a substantial increase in property tax assessments due in 2024.

Proposition HH, currently up for vote on the November Ballot, aims to ‘Reduce Property Taxes and Retain State Revenue’, effectively shifting resources and control from local districts to the State. This ballot initiative proposes a modest reduction in the assessment rate (6.765% to 6.70%) with limits on property tax growth for approximately 10 years. Notably, the State intends to employ surplus revenues that, as per TABOR, would otherwise be returned to taxpayers, to partially compensate local taxing districts for the dip in property tax revenues.

At the state level, most revenue comes in the form of income and sales tax. Local taxing districts such as school districts, library districts and fire districts, among others, predominately benefit from property taxes.

From the Perspective of Municipal Bond Investors:

For municipal bond investors, the surge in property tax revenues represents a credit-positive scenario for local taxing authorities regardless of whether Proposition HH passes. This surge elevates revenues, enhancing coverage ratios and providing additional resources that bolster the fundamentals of local taxing districts. Any reduction and/or future limitation in potential revenues, therefore, would diminish these benefits.

In Colorado, taxing districts are the lifeline for essential services such as education, healthcare, water and sewer, libraries, parks and recreation, and various community benefits for their local tax base. Property taxes stand as the primary revenue source for many local government authorities. Consequently, significant alterations to the assessment rate and/or the mill levy can have varying degrees of implications for local taxing authorities and their bonds outstanding.


The Reimbursement rates from the State under Prop HH are expected to range from 65% to 100% of lost revenue and vary depending on the taxing authority, local population, and property value appreciation. Smaller counties with slower property value growth generally would receive higher reimbursements. While school districts are expected to be fully reimbursed, most counties, cities, towns, and other special districts are expected to lose the reimbursement opportunity within the next 7 to 10 years as property values rise. Furthermore, reimbursements depend on available funds, and may be reduced in years when state revenue collections fall below the Prop HH revenue cap.

To grasp the implications on individual municipal issuers, investors should differentiate between various types of districts and their distinct bond structures.

  1. Unlimited General Obligation (GO) Debt: School districts and other Unlimited GOs have the flexibility to adjust the mill levy to generate sufficient revenue to pay debt service, making them relatively insulated from assessment rate fluctuations. School districts are also expected to be fully reimbursed by the State for reduction in property tax revenues.

  2. Limited GO’s: Conversely, some districts operate with a fixed mill levy, resulting in reduced property tax revenues when the assessment rate drops. Metro Districts with mechanisms to adjust the mill levy are less affected by shifts in the assessment rate, but uncertainty around state reimbursement is worth considering.

  3. Certificates of Participation (COP’s): Certain taxing authorities, like park and recreation districts and library districts have issued COP’s which don’t have the same investor protections as general obligation bonds. They can rely heavily on property tax revenues with fixed mill levies creating a potential challenge if tax revenues decline and state reimbursements are insufficient.

The Property Tax Exemption Factor:

It's worth noting that residential homeowners would receive a $50,000 property value exemption (up from $15,000 currently) that drops to $40,000 next year and stays there until 2032. Metro Districts with lower home values may be negatively impacted as the exemption makes up a larger percentage of assessed values than districts with higher home values showcasing the intricacies of this proposition's reach.

In conclusion, Proposition HH stands at the intersection of a surging real estate market, taxpayer relief, and the intricate financial tapestry of Colorado's state & local governments. While it seeks to provide relief to property owners, the broader statewide budget implication and power shift to State government underlines the need for careful consideration.



Proposition HH: Reduce Property Taxes and Retain State Revenues; Colorado General Assembly, 2023 []



This content has been prepared for informational purposes only and should not be considered as investment, tax, or legal advice. Opinions and forward-looking statements expressed are subject to change without notice. We recommend all investors to consult with a financial and/or tax advisor regarding their individual circumstances before taking investment decisions.

Investing in bonds exposes the investor to the risk of loss of principal. Lower and non-rated securities are more volatile and less liquid than investment grade bonds. Liquidity risk relates to the timing of converting a security into cash without affecting the market price. Municipal bonds and preferred stocks tend to be less liquid than government or corporate bonds. Higher-yielding, longer-maturity, lower-rated, non-rated, or certain bond restrictions (minimum denomination requirements) limit or reduce the liquidity of bond holdings.

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