DBRS Confirms the City of Toronto at AA

Dominion Bond Rating Service (“DBRS”) has confirmed the ratings on the City of Toronto (the “City”) as indicated above. The trends remain Stable.

The City posted a sizeable DBRS-adjusted core deficit (after capital expenditures) of Cdn$138 million in 2003, down from the Cdn$3 million surplus achieved in 2002. The weaker result reflected growth in accrued employee benefit liabilities as well as unexpected costs tied to the springtime outbreak of severe acute respiratory syndrome (SARS) and the August 14, 2004, electrical blackout. Fuelled by capital requirements related to transit, the City’s net tax-supported debt increased 14% to Cdn$1.3 billion or Cdn$480 per capita, which was in line with expectations.

Faced with salary adjustments, higher-than-expected social service costs, and continued growth in accrued employee benefit liabilities, the City is expected to register another core deficit in 2004. On the debt side, new borrowing mainly for transit will send the City’s net tax-supported debt up to an estimated Cdn$1.4 billion or a moderate Cdn$520 per capita by year-end.

DBRS believes the City’s financial profile will remain adequate over the next few years, although fiscal shortfalls are likely to persist in the absence of significant new revenue sources. While the City’s economy is expected to remain among the most diversified and prosperous in North America, much of its infrastructure base is mature and requires fairly sizeable rehabilitation and maintenance outlays by the City. To help finance these costs, the City intends to steadily grow its net tax-supported debt up to a projected Cdn$1.74 billion or Cdn$630 per capita by 2009.

Despite the new borrowing, the City is faced with a gap between its capital needs and available funding, estimated at an average Cdn$127 million per year over the 2004 to 2009 planning period. While unlikely to materially impair the City’s credit profile over the medium term, a capital funding gap of this magnitude would significantly add to the already sizeable backlog of infrastructure needs, place further upward pressure on debt, and could trigger a rating action if left unaddressed over the long term.

However, DBRS is encouraged by the large and permanent capital funding injections planned by other levels of government, which could alleviate unfunded pressures, modestly reduce the current debt projection, and bring an end to the slow erosion that has been observed in the City’s credit profile in recent years. Specifically, the Provincial Government of Ontario expects to transfer 2¢ per-litre in gas tax revenues to municipalities by 2006 (representing about Cdn$160 million per year for the City), while the federal government plans to provide up to 5¢ per-litre in gas tax revenues over the next few years (estimated at Cdn$5 billion over the first five years, shared among all Canadian municipalities).

DBRS has published a full report providing additional analytical detail on this rating action. Please click on the link below for the report.

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