DBRS Confirms the City of Toronto at AA, Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating, Canadian Currency Debentures and Foreign Currency Debentures of the City of Toronto (the City or Toronto) at AA with Stable trends. The ratings are supported by (1) the City’s large and highly dynamic economic structure as the leading commercial centre in Canada, (2) its relatively low current debt burden and (3) considerable base of liquidity and reserves to manage unforeseen events. Constraining the ratings are the longer-term financial challenges associated with renewing an aging infrastructure base and the need for major investment, particularly in public transit, which are expected to place material upward pressure on tax-supported debt over the medium term.

The City recorded a DBRS-adjusted post capital expenditure (capex) deficit of $366 million or 3.0% of revenue in 2016, an improvement over the prior year stemming from strong expense control, moderate revenue gains and lower net capex. Revenues generated from the Municipal Land Transfer Tax (MLTT) was the largest variance from budget, rising 23% year over year to roughly 6.0% of operating revenue. The 2017 budget process addressed $731 million in budget pressure and $25 million in new investments through a 2.0% residential property tax increase as well as other expenditure and revenue changes, including fully budgeting MLTT revenues above all-time highs. While the City is statutorily required to file a balanced budget and has flexibility to address revenue shocks, DBRS notes that reliance on MLTT exposes a modest, but rising share of the operating budget to the dynamics of the local housing market.

At YE2016, the City’s DBRS-adjusted tax-supported debt burden stood at $4.8 billion, or $1,675 per capita and 0.9% of the total taxable assessment base. DBRS notes that the outlook for tax-supported debt has risen materially as previously unfunded projects were added to the updated ten-year capital plan, including Smart Track, a revised Gardiner rehabilitation strategy and Port Lands revitalization. As a result, DBRS-adjusted tax-supported debt is expected to reach $9.1 billion through 2026, translating to an estimated $2,900 per capita or 1.25% of the total taxable assessment base.

RATING DRIVERS
The trends on the ratings remain Stable as Toronto’s critical rating factors and financial risk metrics are expected to remain consistent with the current ratings in the near to medium term. DBRS expects a gradual, but steady deterioration in financial risk assessment metrics over the course of the funded capital plan (2017-2026), which may lead to downward pressure on the ratings over time. Upward pressure on the ratings is unlikely, given the scale of the City’s capital investment plans and projects that remain without a funding source.

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.

The principal methodology is Rating Canadian Municipal Governments, which can be found on dbrs.com under Methodologies.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.