DBRS Confirms the City of Hamilton at AA

Dominion Bond Rating Service (“DBRS”) has confirmed the long-term rating on the City of Hamilton (the “City”) at AA. The trend remains Stable. Supported by a moderate increase to the property tax rate, reduced discretionary spending, and savings from a corporate restructuring exercise, the City managed to significantly trim its DBRS-adjusted core deficit (after capital expenditures) to Cdn$16 million in 2003, from Cdn$72 million the prior year. An improvement was also seen on the debt side, where growth in sinking funds lowered the City’s net tax-supported debt 14% to Cdn$156 million or Cdn$302 per capita at December 31, 2003.

The City is expected to achieve a near breakeven fiscal position in 2004, helped by interest savings due to the deferral of Cdn$125 million in planned borrowing, as well as a boost in tax revenues caused by a significant increase to the property tax rate and a new federally-leased office building in downtown Hamilton. However, net tax-supported debt is expected to increase for the first time in three years, as Cdn$50 million was borrowed in March mostly to fund waste management and road rehabilitation projects.

DBRS expects the City’s financial profile to remain sound over the next several years. However, its capital plan is expected to bring about a significant increase in debt and related servicing charges, which together with rising social service costs, salary adjustments, and little natural revenue growth, should lead to a continued tight operating environment. Comprised of the Red Hill Valley Expressway Project, the Solid Waste Management Master Plan, and various rehabilitation initiatives, the City’s ten-year, Cdn$1.5 billion capital spending plan is projected to send net tax-supported debt up to a peak of roughly Cdn$500 per capita by 2007. The higher debt burden was previously anticipated and has been factored into the rating.

To help relieve mounting capital needs at the municipal level, the federal government is expected to transfer a portion of its gas tax revenues to all municipalities over the next few years. Depending on the size, timing, and potential spending restrictions, the City could use its share of the windfall to alleviate unfunded capital requirements, modestly reduce the current debt projection, and ultimately, foster a stable credit profile. Details on the funding should be unveiled in the upcoming federal budget.

In addition to the task of managing significant capital pressures that are commonplace to all urban municipalities in Canada, the City is exposed to economic and financial risks related to Stelco Inc.’s (“Stelco”) entry into bankruptcy protection in early 2004. Liquidation or substantial job losses at the Hamilton-based Stelco could lead to a material weakening in local economic fundamentals, possibly prompting DBRS to reassess its position regarding the City’s credit profile.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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