Colorado property tax growth limit is a negative credit factor: Moody’s

Colorado’s action to rein in rising property values are negative credit factors for some local governments, while public schools will benefit from a state funding boost, according to Moody’s Ratings. 

Legislation signed into law May 14 by Gov. Jared Polis will limit annual property tax revenue growth to 5.5% starting in fiscal 2026 and make changes to certain assessment rates through fiscal 2027, according to the rating agency.

It noted the cap, which is based on the previous year’s revenue, uses fiscal 2024 as the base year and does not include property tax revenue from new construction, future changes in property tax classifications, or voter-approved bonds.

“While the effect on residential property tax revenue will be fairly muted, local governments with a high commercial presence will face revenue shortfalls over the next several years” as commercial assessment rates will contract from 27.9% to 27% in fiscal 2026 and then to 25% in fiscal 2027, Moody’s said in a report last week. 

“Without changes in commercial values or new construction, this could decrease local government’s property tax revenue from commercial properties by about 10% through fiscal year 2027,” the report said.

Commercial property accounts for about 47% of the total assessed value in Denver, which Moody’s rates Aaa with a stable outlook and which has seen a significant increase in office vacancy rates. 

“Despite these challenges, Denver’s robust reserves and a relatively low reliance on property taxes – constituting about 20% of governmental revenue – provide the city with a strong position to handle these changes,” Moody’s said. “If commercial values remain flat from fiscal year 2024, Denver’s revenue loss is projected to be about 0.4% of the total fiscal 2022 governmental revenue.” 

A statement from Polis’ office said the property tax cut law provides a permanent solution to protect homeowners from future tax spikes.

School districts, which are excluded from the property tax revenue limit, will not be meaningfully impacted by the assessment changes because they will continue to be funded on an equalization formula, according to the report. The elimination of a so-called budget stabilization factor will increase per-pupil funding.

“These additional revenues are expected to help offset growing expenses related to increased salaries and inflation and allow districts to maintain solid reserve levels,” Moody’s said.