DBRS Confirms City of Montréal at A (high)

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt ratings of the City of Montréal (Montréal or the City) at A (high), with Stable trends. The ratings reflect Montréal’s large and diversified economic base, track record of fiscal discipline, prudent financial management framework and stabilization in the growth of DBRS-adjusted tax-supported debt in recent years. The rating is constrained primarily by sizable medium-term debt financing needs associated with the capital plans of the City and consolidated entities such as the Société de transport de Montréal (STM), both faced with major infrastructure renewal requirements, as well as by high and rising labour costs, including pension obligations. The City continues to record sound operating results; however, DBRS expects that Montréal will need to build on recently introduced restraint measures to address the continuous pressure from rising compensation and capital needs, which have grown faster than incremental revenue gains.

The City reported another solid operating surplus of $485.5 million in 2013, a moderate deterioration from the prior year’s surplus. After recognizing net capital expenditures as incurred rather than as amortized, the DBRS-adjusted core deficit deteriorated to $265.5 million, reflecting a lower surplus from operations and higher capital outlays. Operating revenue growth was subdued at 1.5%, supported by a 2.2% property tax increase and higher user fees and quota revenues, but was offset by falling grants and interest revenues. Expenditures grew by 4.8%, as transportation spending and general administration saw marked increases. The City’s 2013 pension expense remained elevated at 13.9% of total expenditures, constraining Montréal’s financial flexibility.

Encouragingly, the $4.89 billion 2014 budget emphasizes cost containment aimed at holding total expense growth to just 0.1%, despite significant baseline inflationary pressure. The property tax rate increase is set at 2.0%, and the City will rely less on prior surpluses to achieve balance. However, despite budget restraint measures, labour costs are still budgeted to rise by 2.3% in 2014.

The financing plan for the City’s $3.8 billion Three-Year Capital Program (TYCP) and STM’s $2.2 billion capital program entail considerable new debt needs over the medium term. DBRS notes that the assumptions related to the portion of debt considered to be self-supporting have been updated with new data provided by the City, resulting in a material increase in net supported debt levels. After this change, net tax-supported debt grew by 4.3% year over year to $4.3 billion, or $2,221 per capita. DBRS estimates that these future debt needs could lead net tax-supported debt to rise by approximately $200 million to $400 million per year for the next several years, above expectations at the time of the last review. While the rating can accommodate additional borrowing and interest charges remain manageable, significant improvement in the credit profile will be limited by the anticipated debt needs.

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

The City of Montréal is one of the guarantors for the long-term debt and commercial paper of Société de transport de Montréal.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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

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