DBRS Confirms the City of Toronto at AA

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of the City of Toronto (the “City”) at AA with a Stable trend. DBRS expects the recent boost in senior government funding to municipalities, including the transfer of gas tax revenues, will help the City alleviate its sizeable backlog of capital spending needs and, in turn, ease pressure on property tax rates and user fees. However, benefits created by the more favourable funding environment are expected to be largely offset by a marked increase in the City’s tax-supported debt burden over the next four years.

While the City continues to post healthy operating surpluses, its practice of debt-financing a large portion of its capital budget has led to moderate post-capex deficits in recent years. As such, net tax-supported debt is expected to have risen nearly 30% to Cdn$1.8 billion, or Cdn$690 per capita, last year mainly due to borrowing used to fund investment in transit, which has been the main driver of growth in debt since the late 1990s.

DBRS expects the City to maintain a fairly sound credit profile over the next few years, supported by its large and well-diversified local economy, good liquidity position, and increased emphasis of financial planning, as evidenced by the release of a detailed long range financial plan last year and stated intention to adopt a multi-year capital budget framework in 2007. However, further moderate post-capex shortfalls are likely over the medium term, given the expectation of sustained salary pressures, further growth in accrued employee benefit liabilities, and a ramp-up in capital expenditures.

To ensure its physical assets remain in a good state of repair, the City plans to undertake Cdn$3.3 billion in capital projects over five years, raising net tax-supported debt a projected 60% to Cdn$3.2 billion, or Cdn$1,150 per capita, by 2010. While substantial, growth in debt should be offset by up to Cdn$325 million in annual gas tax funding introduced by senior governments over the past few years, enabling the City to redeploy existing financial resources to service the new debt while also leaving some flexibility to protect against unforeseen events. However, the City’s capital plan excludes the recently announced proposal to extend its subway to York Region at an estimated cost of Cdn$2 billion. The Ontario government (the “Province”) has placed Cdn$675 million in a trust to help fund the extension, but it remains to be seen how the remainder of the cost will be split between the City, York Region, and, possibly, the federal government.

Overall, DBRS remains comfortable with the capital plan and the resulting impact on debt, but notes that the subway extension has introduced an element of uncertainty, as it could lead to material new debt and operating costs.

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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