Canadian Municipal Governments: Releases Industry Study

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

 

DBRS has released its annual review of the Canadian municipal governments currently rated by DBRS.  The study provides an overview of the strengths and challenges facing the Canadian municipalities included in the study, and highlights the risks for this sector over the medium term.  In addition, it also compares the fiscal and economic indicators that influence the credit ratings of the municipal governments.

 

Despite two negative rating actions by DBRS in 2003, the municipalities covered by this study retained solid financial profiles, as evidenced by their relatively high credit ratings.  Buoyed by the healthy growth of property tax revenues, fiscal results have remained sound for most municipalities.  However, additional net tax-supported debt was assumed by most municipalities in order to finance expanded capital spending budgets.

 

The fiscal outlook for the municipalities included in this study remains solid, supported by the nature of property tax revenues, which tend to be much less sensitive to the business cycle than most other revenue sources relied upon by more senior levels of government.  However, ongoing growth in spending fuelled by labour and capital maintenance will most likely start cutting into fiscal results over the coming years.

 

Large capital expenditure requirements continue to be the key challenge for the majority of municipalities covered by this study, as infrastructure needs have been building up steadily due to aging infrastructure and population growth.  In its February 2, 2004, Speech from the Throne, the federal government offered a helping hand to municipalities by granting a full exemption from the goods and services tax (GST), translating into a projected $7 billion in relief for Canadian municipal governments over the next ten years.  While this gesture is a step in the right direction and could help to alleviate infrastructure pressures, it constitutes a fairly small share of total municipal spending, and is not perceived as a solution to long-term capital pressures.

 

In the near-term, it will likely be difficult for senior governments to substantially increase their financial support to municipalities on a sustainable basis, given the challenging fiscal environment faced by most provinces and the federal government.  Consequently, without new and material revenue sources from senior governments, most municipalities will have to find the political determination to notably raise property taxes and user fees in order to address capital requirements, or else rely on use of debt or depletion of reserve funds, which would likely weaken credit profiles.

 

 

Dominion Bond Rating Service Limited (DBRS) has published a study that provides additional analytical detail.  To see this study, please click on http://www.dbrs.com/web/sentry?COMP=2900&DocId=135440.  If you do not have access to this study, please contact us at info@dbrs.com.