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 Toronto continues to leverage the City Building levy to pursue capital priorities, which is leading to a notable increase in tax-supported debt, as measured by DBRS Morningstar. In addition to renewed budgetary pressures, the planned increase in debt could exhaust flexibility within the current ratings, particularly in light of the softer global economic outlook.

Toronto is required by law to maintain a balanced budget position. The City's 2023 operating budget is balanced at $16.2 billion (+7.8% relative to the prior budget), after including $1.1 billion in requested funding from senior governments to offset around $1.9 billion in operating pressures arising from the lingering effects of the pandemic, inflation, and an increased demand for services. The City noted that it will need to use one-time emergency funds (likely to be exhausted in 2023) and defer some planned capital spending to future years to achieve a balanced budget in the absence of increased senior government support. Preliminary discussions between the City and the provincial government are underway and DBRS Morningstar believes that some additional financial support will be forthcoming.

In F2022, DBRS Morningstar-adjusted results weakened, with a post-capital expenditure (capex) deficit of $221 million compared with the post-capex surplus of $129 million in the prior year, as higher spending related to increased costs of operation and pandemic-related expenses outpaced revenue growth.

DBRS Morningstar estimates net tax-supported debt to be around $2,920 per capita (or 1.2% of taxable assessment) in 2023, rising to slightly more than $3,200 per capita (or 1.2% of taxable assessment) by 2026. The planned increase in debt (on a per capita basis) will likely reduce financial flexibility, particularly in light of the softer global economic outlook and ongoing cost and revenue pressures.

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

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance 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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Rating Canadian Municipal Governments (April 28, 2023; https://www.dbrsmorningstar.com/research/413266)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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 credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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