DBRS Confirms City of Ottawa at AA (high), Trends Still Neg.

DBRS is confirming the long-term ratings of the City of Ottawa (the “City” or “Ottawa”) at AA (high). However, the Negative trend is being maintained to reflect lingering uncertainty over the City’s ability to meet medium-term capital requirements without placing undue pressure on its tax-supported debt burden.

While financial statements for 2003 were unavailable at the time of this press release, limited revenue growth in tandem with relatively high capital expenditures likely culminated in a moderate DBRS-adjusted core deficit (after capital expenditures). Net tax-supported debt is expected to have moderately increased for the fourth consecutive year, as principal repayments and growth in sinking fund assets were likely overcompensated by $55 million in new tax-supported borrowing to finance the rehabilitation of roads.

Despite a sharp rise in spending pressures, the City managed to adopt a balanced operating budget of
$1.8 billion this year, with the help of improved operating efficiency, scaled-back capital expenditures, higher user fees, and a 2.92% increase in property taxes. Net tax-supported debt is expected to remain fairly stable, with principal repayments and growth in sinking fund assets roughly offsetting $34 million in new tax-supported borrowing mainly to finance road construction.

The City’s financial profile is expected to remain solid over the medium term, however, rising spending requirements, primarily fuelled by infrastructure needs, may result in further moderate core deficits in the absence of significant new revenue sources. Similar to most other mature urban municipalities in Canada, Ottawa is confronted with significant infrastructure needs. To help finance these needs, the City expects to grow net tax-supported debt to $417 million or $460 per capita by 2006, an amount that is on the upper boundary of what is considered to be appropriate for the AA (high) rating. Projections could change over the coming months, however, as the City is currently in the process of developing its medium-term capital spending plan, with final results expected later this year. Should the revised capital spending plan adequately meet the City’s capital needs while keeping net tax-supported debt at or below $460 per capita, the Negative trend may be removed. Otherwise, a rating action would likely be warranted.

Dominion Bond Rating Service (DBRS) will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, please contact us at: info@dbrs.com.

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