Hamilton, City of: Confirms at AA (high), Trend Now Negative

Paul Judson; Eric Beauchemin, CFA/ 416-593-5577 ext. 2261, ext. 2252 / pjudson@dbrs.com

 

DBRS confirms the City of Hamilton’s (the “City”) long-term rating as indicated above, but changes the trend from Stable to Negative.  The rating action reflects a deterioration in the City’s net tax-supported debt outlook resulting from an increase in the medium-term capital spending plan.

 

While final results for 2002 were not available at the time of this report, estimates point to a modest budget deficit at year-end.  Since the City is legislatively prevented from recording a budget deficit, a transfer from the tax stabilization reserve will be used to offset any shortfall.  For the second consecutive year, net tax-supported debt is expected to have increased notably due to $60 million in new debt to finance various tax-supported capital projects.

 

The 2003 tax-supported budget should come in at, or near, balanced levels.  However, the outlook for tax-supported debt is troublesome.  In the proposed 2003 budget, the City increased its ten-year net tax-supported debt projections to reflect additional borrowing related to the new waste management strategy and construction of the Red Hill Valley Expressway.  Under current projections, net tax-supported debt is expected to rise 145% over 2001 levels to $373 million by 2006, resulting in a gradual weakening in the City’s financial profile.  On a per capita basis, net tax-supported debt would likely exceed $700, which is relatively high compared to other large Canadian municipalities.  Any further increase to the tax-supported debt outlook as presented would likely warrant further rating action.

 

The City is confronted with several other challenges going forward.  First, a heavy business tax burden restrains financial flexibility and acts as a drag on economic growth.  Second, high tax arrears continue to hinder cash flows.  Finally, the City’s responsibility for funding social welfare and social housing increases the volatility of spending requirements due to the economic sensitivity of the programs.

 

 

Dominion Bond Rating Service Limited (DBRS) has published a full report that provides additional analytical detail.  To see this report, please click on http://www.dbrs.com/web/sentry?COMP=2900&DocId=120144.  If you do not have access to this document, please contact us at info@dbrs.com.