DBRS Confirms the City of Toronto at AA

DBRS has today confirmed the rating of the Debentures issued by the City of Toronto (the City) at AA. The trend remains Stable. The City maintains a sound credit profile underpinned by its ability to levy property taxes over the large and well-diversified Toronto economy, as well as its healthy liquidity position, which amounted to $2 billion at 2006 year-end. DBRS notes, however, that the City has limited room to maneuver within the current rating as it plans to raise total tax-supported debt by 50% over the next five years.

The City continues to record healthy operating surpluses, including a $728 million surplus in 2006 driven by a moderate property-tax increase, a special provincial transit subsidy and general cost containment initiatives. When factoring in capital activities, however, the overall fiscal balance remained in a modest deficit position last year, reflecting the City’s practice of debt-financing a large portion of its capital budget. New borrowings led to a 15% increase in total tax-supported debt last year to $2 billion or $750 per capita, which was consistent with expectations.

DBRS expects the City to remain on a firm financial footing, although sustained spending pressures should result in a tight operating environment, as evidenced by this year’s challenging budget exercise. In an effort to balance the budget, the City considered establishing taxes on land transfers and vehicle registrations, but ultimately chose to defer the approval vote until after the provincial election this fall. If approved, the new taxes would reduce the City’s reliance on ad hoc provincial grants to maintain budget equilibrium. On the other hand, the taxes would introduce some cyclicality in revenues and, more importantly, raise the total tax burden on residents without materially enhancing the current service offering. As a result, the potential introduction of the new taxes is viewed as credit neutral by DBRS, which takes greater comfort in the fact that the City is required under provincial legislation to operate on a balanced budget basis. Accordingly, it will be up to Council over the coming months to select the combination of tax increases and cost reductions necessary to reach budget equilibrium.

To address capital pressures, the City plans to undertake $6.7 billion worth of infrastructure projects over the next five years. Approximately 40% of this plan is expected to be debt-financed, raising the City’s tax-supported debt burden 50% to $3 billion or an estimated $1,150 per capita by 2011. On top of the capital plan, the City recently released a 15-year, $6.1 billion Transit City plan for which funding has yet to be determined. While comfortable with the debt outlook, DBRS cautions that a material upward revision to the forecast or heavy borrowing beyond the current five-year horizon could test the rating.

Note:
All figures are in Canadian dollars unless otherwise noted.

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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