DBRS Morningstar Confirms the City of Toronto at AA with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of the City of Toronto (Toronto or the City) and the rating on its Long-Term Debt at AA. The trends on all ratings are Stable. The ratings are supported by the City’s large and diversified economy, capacity to raise taxes, and requirement to present balanced budgets. The Stable trends reflect DBRS Morningstar's expectation that the City's fiscal outlook will gradually stabilize as a majority of the population is vaccinated and as global and local economies reopen. This view is further supported by the significant amount of Coronavirus Disease (COVID-19) pandemic-related relief funding that has been provided to Ontario municipalities.

The City's operations were significantly affected through 2020 by challenges arising from the pandemic. However, significant government supports (more than $1 billion) and cost mitigation ($559 million) supported balanced operating results before net capital expenditures.

Operating pressures caused by the pandemic, including health restrictions and a gradual resumption of services, in addition to significant longer-term capital commitments (and related incremental operating costs and debt servicing needs), continue to pressure Toronto’s fiscal outlook. Toronto's 2021 operating budget is balanced at $14.0 billion (+2.6% relative to the prior year’s budget), with budget priorities centred on economic recovery, tax affordability, equity, and maintenance of existing service levels. Toronto is required by law to maintain a balanced budget position. The City will seek to offset any future budget pressures/shortfalls through cost savings/reduction and potential financial supports from higher levels of government.

Ongoing capital investment will contribute to growth in Toronto’s tax-supported debt burden over the medium term, materially reducing flexibility within the current rating category. On a per capita basis, DBRS Morningstar projects adjusted net tax-supported debt to peak in 2022 to around $2,700, or 1.0% as a share of taxable assessment. Although manageable for the current ratings, the rising debt burden will reduce flexibility within the ratings.

RATING DRIVERS
Should pro forma debt per capita rise above $3,000 on a sustained basis, this could result in a negative rating action. A positive rating action is highly unlikely in the near to medium term.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Canadian Municipal Governments (May 3, 2021; https://www.dbrsmorningstar.com/research/377882), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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