DBRS Confirms City of Montréal at A (high), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt rating of the City of Montréal (the City or Montréal) at A (high) with Stable trends. The ratings are supported by Montréal’s prudent fiscal management framework, large and well-diversified economic base as well as its recent improvement in operating performance. The ratings are primarily constrained by an elevated and rising debt burden associated with major infrastructure renewal and investment, including a significant increase in borrowing within the City’s three-year capital plan.

The City continues to record sound operating results, posting an operating surplus of $889 million in 2014 – more than double that of the prior year – supported by a 9.8% or $530 million year-over-year decline in operating expenses from over $350 million in savings achieved against budget. After recognizing net capital expenditures as incurred, the City generated a DBRS-adjusted after-capital surplus of nearly $300 million. In 2014, legislated changes to employee pension plans and strong investment returns allowed the City to record a notably lower pension expense. At YE2015, projections indicate that a narrower surplus of $86.5 million will be recorded for the municipal and Agglomeration councils, excluding consolidated entities such as Société de transport de Montréal (STM).

The 2016 budget includes moderate revenue and expense growth of 2.4%, with an average tax rate increases of 1.9% for residential properties and 0.9% for non-residential properties. The $5.1 billion budget builds on many initiatives introduced in recent years, including an ongoing Five-Year Workforce Plan and a strategy to significantly increase cash funding from operations to support accelerated capital investments. DBRS is encouraged by recent fiscal improvement; however, reaching affordable collective agreements with major employee groups will be critical to ensure that labour costs remain supportive of a sustainable fiscal trajectory over the next several years. Amid ongoing labour unrest and legal challenges to provincial pension reform, this presents a significant challenge to the City administration.

Montréal’s Three-Year Capital Program entails $5.2 billion in planned investment, an ambitious and materially higher level of spending than was contained in previous plans. Combined with the sizable $2.8 billion capital plan of STM, DBRS expects Montréal’s consolidated debt burden to rise steadily over the forecast horizon. Based on current investment and financing plans, DBRS-adjusted net-tax supported debt is projected to reach $5.8 billion in 2018, or roughly 2.3% as a share of taxable assessment. On a per-capita basis, tax-supported debt is expected to reach just under $2,800 in 2018, assuming modest population growth. While the projected increase in leverage is potentially manageable within the current ratings, the higher debt burden and servicing requirements are likely to exhaust flexibility in the credit profile over the medium term, offsetting the benefits of stronger fiscal performance.

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, 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.