DBRS Confirms City of Toronto at AA with Stable Trend

DBRS has today confirmed the ratings of the City of Toronto (the City or Toronto) at AA. The trends remain Stable, supported by the City’s ability to levy taxes on a large, well-diversified economy, and the strong resolve it has demonstrated in restraining spending and finding permanent solutions to eliminate the budget gap. Nonetheless, its credit profile continues to be pressured by considerable capital needs, which are driving borrowing requirements and will continue to limit material improvements in financial flexibility.

Toronto produced sound results in 2011, posting an operating surplus of $696 million, driven primarily by continued cost-containment initiatives and better than expected revenue growth. On a post-capex basis, however, the City recorded a deficit of $621 million as calculated by DBRS, a slight improvement year-over-year. For 2012, a balanced operating budget was presented, relying on property tax hikes, transit fare increases and prior year surpluses (though this reliance is down markedly year-over-year), as well as renewed departmental and service reductions. The City has worked to contain the rate of spending growth in recent years, with the 2012 budget marking the first decline in gross expenditures since the City’s amalgamation, largely supported by the service review program initiated in 2010. In the coming years, operations will benefit from the uploading of social service program costs, user fee rate adjustments, service review program-generated efficiencies and labour cost certainty and stability as a result of recently concluded contract negotiations.

The rise in net tax-supported debt burden, which stood at $1,113 per capita by year-end 2011, up from $983 in the prior year remains a concern. However, DBRS notes that debt service costs remain contained, at 2.5% of operating expenditure in 2011, one of the lowest levels among major Canadian municipalities.

DBRS notes that the City has initiated a strategy to raise $700 million over five years to offset transit-related debt needs, including apportioning 75% of prior year operating surpluses to fund capital, monetization of specific assets and potential new senior government capital grants. The City is tracking well towards its target and will likely reach the target before its set timeframe. This strategy will help the City manage within its internal debt policy and limit any impact on the operating budget over the medium term. The provincial government has stepped in to assist in the preparations for the upcoming 2015 Pan Am Games, which the City will be hosting, and to expand light rail transit infrastructure. However, capital rehabilitation and growth requirements are sizable and will drive net tax-supported debt up at a fairly steady pace over the years to come. The City’s extensive ten-year Capital Plan will be financed by senior government grants, debt, pay-as-you-go financing, development charges and reserves. Based on updated projections, DBRS now expects net tax-supported debt to peak in 2018 at $4.2 billion, which translates to approximately $1,500 per capita. This level is considered manageable for the current rating, given the City’s improving financial position, healthy liquidity, growing population and positive economic outlook, although the increase, together with sizeable employee benefit liabilities, will erode much of the remaining flexibility.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Municipal Governments, which can be found on our website under Methodologies.