DBRS Confirms City of Toronto at AA, Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and long-term foreign and local currency Debentures of the City of Toronto (the City or Toronto) at AA, all with Stable trends. The ratings are supported by Toronto’s large and well-diversified economy, manageable debt burden and track record of fiscal prudence in recent years that has helped to build a considerable base of liquidity to manage unforeseen events. The ratings are constrained by heavy and growing capital investment requirements that will see DBRS-adjusted net tax-supported debt rise steadily in the coming years, above the path anticipated at the time of the last review. The potential for additional borrowing for major transit and infrastructure needs not currently articulated in the capital plan could erode remaining flexibility and lead to downward pressure on the ratings.

Toronto posted a $788 million operating surplus in 2014, down from $1.0 billion recorded the prior year. Moderate growth in property tax revenue, user fees and other sources only partially offset a more significant decline in senior government grants, while expense growth was driven primarily by police and fire services, mitigated somewhat by a decline in social housing and social services outlays. On a post-capex basis, an $827 million deficit was realized, or 7.4% of revenues, a notable increase over the prior year and the largest after-capital deficit recorded since rating coverage began. DBRS notes that the City’s operating fiscal discipline has improved notably in recent years, with nearly $1.0 billion in ongoing operational savings or efficiencies achieved from 2011 to 2014 through a comprehensive service review process and through negotiated provisions in collective agreements.

The 2015 operating budget was balanced with a residential tax rate increase of 2.25%, although the average impact to homeowners totalled 3.2% after a dedicated rate increase to fund the Scarborough Subway Extension and other policy and assessment shifts. A number of significant revenue and expense measures were required, along with modest reserve draws. The loss of a social housing compensation grant from the Province of Ontario (the Province; rated AA (low) by DBRS) also resulted in a plan to reduce capital funding from operations and to borrow on a short-term basis from the City’s investment portfolio to produce a balanced result. While the reliance on prior-year surpluses has largely been eliminated, modest reserve draws and one-time balancing strategies have been necessary in recent years, as property tax increases have failed to keep pace with municipal cost inflation.

Despite significant fiscal realignment in recent years, capital financing needs for the state of good repair backlog and new infrastructure investment remain a critical challenge. DBRS-adjusted net tax-supported debt rose by 8.1% to $3.9 billion in 2014, or $1,399 per capita. Based on current projections, DBRS expects net tax-supported debt to peak at approximately $5.6 billion or $1,900 per capita in 2019, with tax-supported debt as a share of taxable assessment approaching 1.0%, still manageable for the ratings; however, current capital budgets do not include potentially significant incremental debt needs associated with major projects such as the SmartTrack transit proposal, or sizable additional funding for the eastern portion of the Gardiner Expressway. DBRS will continue to monitor these and other projects for potential impact on the City’s debt burden and credit profile over the medium term.

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

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 (June 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.