Morningstar DBRS Confirms the City of Toronto's Issuer Rating and Long-Term Debt at AA With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the City of Toronto's (Toronto or the City) Issuer Rating and Long-Term Debt credit rating at AA. All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
Morningstar DBRS notes that concerns around rising tax-supported debt (as measured by Morningstar DBRS) and financial headwinds from a soft economic outlook remain. However, recent operating and capital funding agreements with the Province of Ontario (Ontario; rated AA with a Stable trend) suggest renewed cooperation between the two levels of government, which should ease some of the City's operating pressures.

Toronto is required by law to maintain a balanced budget position. The City's 2024 operating budget is balanced at $17.1 billion (+5.1% relative to the prior budget). The City continues to face rising financial pressures from inflationary cost increases, service needs (particularly transit and shelters) of a growing population, and sustained impacts from the COVID-19 pandemic (now transitioned to ongoing costs to be funded through the tax base). Over the medium term, the City will look to offset operating pressures through cost savings/reduction, revenue growth (particularly taxes and user fees/levies, etc.), and financial supports from higher levels of government. Morningstar DBRS believes that recently arranged funding commitments from Ontario could alleviate some financial challenges through the medium term.

In F2023, Morningstar DBRS-adjusted results weakened, with a post-capital expenditure (capex) deficit of $1.3 billion compared with the post-capex deficit of $0.3 billion in the prior year, as increased program spending outpaced revenue growth.

Morningstar DBRS estimates net tax-supported debt to be around $2,780 per capita (or 1.1% of taxable assessment) in 2024, rising to slightly more than $3,637 per capita (or 1.3% of taxable assessment) by 2028. Morningstar DBRS remains cautious that rising debt (on a per capita basis) could limit financial flexibility if population growth slows down notably.

CREDIT RATING DRIVERS
A positive credit rating action is unlikely in the absence of sustained improvement in operating performance and as debt continues to rise. Over the medium to longer term, material deterioration in key financial metrics from current expectations could present downside risks.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

CRITICAL RISK FACTORS (CRFs) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of CRFs
In the analysis of Toronto, the CRFs were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Toronto, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the CRFs and the FRA
In the analysis of Toronto, the CRFs carry greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Rating Canadian Municipal Governments (April 15, 2024), https://dbrs.morningstar.com/research/431207

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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