DBRS Confirms Ontario School Boards Financing Corporation at AA (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the ratings of the Pooled Debenture Ownership Interests of the Ontario School Boards Financing Corporation (OSBFC) at AA (low) with Stable trends. While not guaranteed by the Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS), the ratings reflect the strong linkage to the Province as the primary source of school board revenues used to service OSBFC debt. There has been little change in the OSBFC credit profile in recent years, with no OSBFC debt issued since 2007, and new financing for board capital projects undertaken through the Ontario Financing Authority (OFA). Provincial oversight and the mechanisms in place to ensure the financial integrity of board finances remain robust, with requirements in place for pre-approval of capital spending plans and the maintenance of balanced operating budgets. Given the close link with the provincial funder, a change to the Province’s credit outlook would have rating implications for OSBFC obligations.

While the school board funding formula in Ontario is largely enrolment based, it has been adjusted over time to account for key structural changes, the most pressing of which has been the persistent decline in the school-age population for over a decade. The Province initiated a process in 2010–11 to essentially remove enrolment sensitivity from capital-related components of the funding formula, providing dedicated debt servicing grants for debt charges that were previously supported by now defunct capital grants. New capital grants are tied directly to actual capital expenditures.

While much of the enrolment risk pertaining to capital funding used to service OSBFC debt has been effectively uploaded to the Province, some boards still utilize annual school renewal (SR) funding allocations tied to enrolment to service a small portion of debt. As such, DBRS continues to monitor the few school boards that still rely on this enrolment-sensitive SR funding for the servicing of debt not supported by prior capital grants. Particular attention is paid to school boards that exhibit a debt service coverage ratio (DSCR) below 1.0 times. DBRS reviews financial performance at these boards and has obtained assurances from the Province that there are credible plans in place to cover unsupported debt charges. In most cases, boards have accumulated surpluses or other grants sufficient to cover the unsupported debt, which provides comfort that they will be able to meet their financial obligations. In 2013–14, the latest year for which data is available, 11 OSBFC participants had some unsupported debt. Most school boards saw their DSCR improve modestly, with only one school board reporting a DSCR exhibiting weakness. However, DBRS notes that this board’s unsupported debt is largely associated with projects that are supported with various operating grants and savings other than the enrolment-sensitive renewal allocation.

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 General Corporate Methodology: Appendix – Credit-Specific Considerations (October 2015), which can be found on our website under Methodologies.