DBRS Confirms the City of Toronto at AA with Stable Trends

DBRS Limited (DBRS) 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 confirmation reflects Critical Rating Factors and Financial Risk Assessment Factors that remain well positioned in the AA rating category. The City’s large and diversified economy, competitive tax burden and robust liquidity position are important credit strengths. Credit challenges include substantial capital investment plans (particularly for public transit) that will place material upward pressure on tax-supported debt, a widening gap between long-term revenues and service commitments and a modest but growing reliance on uncertain and volatile revenue streams.

The operating surplus before capital activities was $1.6 billion for the year (excluding capital revenues/amortization expense), the result of good expense control and healthy revenue gains. Recognizing net capital expenditure (capex) as incurred rather than as amortized, the City recorded a DBRS-adjusted post-capex deficit of $658 million amid an increase in net capital spending. Revenue growth of 2.8% was attributable to gains on property taxation, operating grants and exceptional growth (+25%) in Municipal Land Transfer Tax (MLTT) revenue. MLTT now represents roughly 7% of operating revenue and exposes a share of the budget to housing market dynamics.

DBRS-adjusted tax supported debt reached $5.7 billion (+19.3%), or $1,950 per capita, and 1.0% as a share of taxable assessment value. The City’s base of liquidity, defined as total cash and investments net of sinking fund investments, remains substantial at 75.4% of DBRS-adjusted tax-supported debt and 38.1% of operating expenditure in 2017. Toronto’s debt burden is expected to continue to rise as the City undertakes an ambitious ten-year, $39.8 billion capital plan focused on transit and the state of good repair for existing assets.

The City’s relationship with the Province of Ontario (Ontario or the Province; rated AA (low), Stable by DBRS) has deteriorated and has become considerably less cooperative since the election of a new provincial Progressive Conservative government in June 2018. DBRS does not believe that the unilateral change in the City’s governance structure to 25 wards for the October 2018 election will have material financial implications, positively or negatively. However, the dispute over the size of City Council indicates that relations with the Province are likely to remain challenging, which may affect the ability to secure funding or agreement in other policy areas (e.g., transit, housing).

RATING DRIVERS
The trends on the ratings remain Stable. DBRS expects Toronto’s Critical Rating Factors to remain firmly in the AA rating category, while Financial Risk Assessment Factors are expected to weaken moderately as debt rises over the course of the ten-year capital plan. DBRS-adjusted tax-supported debt is estimated to reach $7.3 billion in 2020, or an estimated $2,450 per capita and 1.1% as a share of taxable assessment, which appears manageable but will reduce flexibility within the ratings. Upward pressure on the ratings is unlikely given the scale of capital spending and unfunded projects that may cause the outlook for future borrowing to rise beyond current projections.

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.

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.