DBRS Confirms the City of Montréal at A (high) with a Stable trend

DBRS Limited (DBRS) confirmed the Issuer Rating and Long-Term Debt rating of the City of Montréal (the City or Montréal) at A (high) with Stable trends. DBRS is encouraged by the policy and budgetary continuity in the City after the recent municipal election and introduction of the first budget under Mayor Valérie Plante, and by positive economic momentum characterized by low and falling unemployment and solid economic growth. Critical rating factors, including Montréal’s large, diverse economic structure, sound fiscal management framework and prudent financial management practices, suggest upward pressure on the rating; however, the ratings are primarily constrained by a rising debt burden associated with the capital plans of the City and the consolidated transit agency Société de transport de Montréal (STM).

The City’s fiscal performance weakened through 2016 on a DBRS-adjusted basis after accounting for a sharp rise in net capital expenditure (capex) as incurred, with the City posting a post-capex deficit of $581.2 million, or 8.7% of total revenue. In 2017, spending was budgeted to rise by 2.8%, or $140.5 million, supported by an average residential rate increase of 1.7%. Financial results for 2017 have not been released as of the time of writing, but the latest interim projection points to a surplus of $63.5 million for the City administration, similar in magnitude to the prior year. On a fully consolidated accrual basis as presented in financial statements, DBRS anticipates a larger operating surplus consistent with recent experience; however, DBRS expects capital grant revenues from senior governments to rebound, producing a lower post-capex deficit than the prior year.

The inaugural budget of the new municipal administration includes revenue and expense growth of 5.2% for 2018, attributable to the ongoing strategy of allocating additional cash payments for capital, water/wastewater investment and several special expenditure items related to pensions, sales taxes and third-party agreements. Budget growth is supported by tax rate increases slightly above inflation and higher than recent years for a total rate impact of 3.3% for residential and 3.1% for non-residential properties. Despite a somewhat higher expense track, DBRS is encouraged by the continued adherence to a prudent fiscal framework, efforts to reduce compensation as a share of the budget and progress on reaching pension restructuring and new collective agreements.

Montréal’s rolling Three-Year Capital Work Program (2018–2020) includes $6.4 billion in proposed spending, which is essentially stable from the previous iteration of the plan. Combined with planned annual capital spending of $1.0 billion at the City’s transit agency STM, DBRS expects that Montréal’s tax-supported debt burden will continue to rise over the forecast horizon, but that it will remain manageable for the current ratings, as there is flexibility to withstand deterioration in financial risk assessment metrics. DBRS-adjusted tax-supported debt is projected to reach $6.7 billion in 2020, representing roughly 2.4% of taxable assessment, or $3,200 per capita.

RATING DRIVERS:
The trends on the ratings are Stable. Upward pressure on the ratings is not anticipated, as the tax-supported debt burden is expected to continue to rise significantly in the coming years. Although not anticipated, a significant and sustained deterioration in fiscal performance and a debt burden that evolves materially above current projections could lead DBRS to consider a downward rating adjustment.

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

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

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 under Related Documents or by contacting us at info@dbrs.com.

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

This rating was not initiated at the request of the rated entity.

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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