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. All trends are Stable although concerns are mounting as the City continues to leverage the City Building levy to pursue capital priorities, which is now leading to a notable increase in tax-supported debt, as measured by DBRS Morningstar, beyond previous expectations. The planned increase in debt could exhaust flexibility within the current ratings, particularly in light of a softer global economic outlook and ongoing cost and revenue pressures. DBRS Morningstar notes that the City's fiscal performance has been largely insulated throughout the Coronavirus Disease (COVID-19) pandemic because of extraordinary senior government supports and post capital expenditure (capex) results are expected to remain manageable.

Based on the most recent debt forecast provided by the City, DBRS Morningstar estimates net tax-supported debt to be more than $3,000 per capita (1.2% of taxable assessment) by 2023 and to increase steadily thereafter to more than $3,850 per capita (1.2% of taxable assessment) by 2031. Previously, net tax-supported debt was forecast to peak at around $2,700 per capita and remain at or under 1.0% as a share of taxable assessment.

The increase in overall debt includes what the City categorizes as recoverable debt that will be serviced through a dedicated tax levy, namely, the City Building levy. DBRS Morningstar includes this debt in its measure of tax-supported (i.e., not self-supported) debt. Treatment of this levy as tax-supported debt reflects DBRS Morningstar’s opinion that
-- The debt supported by the City Building levy is being utilized to fund routine municipal infrastructure, as opposed to services or assets that have a commercial value and are operated on a commercially sustainable basis (such as electric or water utilities), and
-- The levy is basically another form of property tax that may reduce political flexibility for future tax increases.

The City’s operations have been significantly affected by challenges arising from the pandemic over the past two years. However, significant government supports, cost mitigation, and deferral of capital spending have supported balanced net post-capex results.

Toronto's 2022 operating budget is balanced at $15.0 billion (+6.5% relative to the prior budget), subject to receiving $1.4 billion funding from senior governments to offset the ongoing impacts (including the omicron viral variant) of the pandemic. Budget priorities focus on maintaining existing service levels, sustaining economic recovery, supporting small businesses, and investing in social recovery. 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.

On October 24, 2022, municipal elections in Toronto concluded with the re-election of the existing mayor for a third term. The City council includes some new members, however, DBRS Morningstar does not expect the broader strategic direction to change meaningfully under the new council.

RATING DRIVERS
Should debt per capita and debt as percentage of taxable assessment continue rising as forecast, they could exhaust the remaining flexibility within the ratings over the medium term, potentially warranting a negative rating action. Given the rising debt burden, a positive rating action is highly unlikely.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors that had a significant or relevant effect on the credit analysis.

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/396929.

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

The principal methodology is Rating Canadian Municipal Governments (April 14, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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