DBRS Confirms the City of Toronto at AA

DBRS has today confirmed the long-term ratings of the City of Toronto (the City) at AA with a Stable trend. The City maintains a solid risk profile buttressed by a healthy liquidity position amounting to $2.5 billion and the ability to levy taxes over a large and diverse economy. Debt is forecast to climb significantly by 2012, although expected capital inflows should keep the burden affordable.

Results remained relatively sound in 2007 as the City posted a $446 million operating surplus driven by increases in taxes and user fees. After capex, however, the City experienced a net deficit of $543 million, reflecting continued significant increases in capital expenditures. This raised net tax-supported debt by 25% to $2.5 billion, or $949 per capita, by year-end 2007.

The City maintained a balanced operating budget for 2008. A moderate increase of 3.75% in residential property taxes and an average increase of 1.25% for multiple-residential, commercial, and industrial property taxes – along with implementation of the Municipal Land Transfer Tax and the Personal Vehicle Tax – will provide funding for wage increases, debt servicing and social programs. DBRS notes that the City faces heavy collective bargaining this year, with the contracts of the Toronto Police Association and the Canadian Union of Public Employees up for negotiation, creating an element of uncertainty on spending.

DBRS expects the City will remain fiscally healthy over the medium term, although significant operating and capital spending pressures will most likely create a tight operating environment. The new taxation measures provide much-needed revenue sources, helping to reduce the City’s reliance on ad hoc provincial grants. DBRS also takes comfort in the government’s continued focus on cost containment and the recent openness of the Province of Ontario (the Province) toward providing relief to municipalities, including a possible uploading of certain social services. The City’s 2008 Capital Budget and 2009-2012 Capital Plan (the Capital Plan) total $8.4 billion, of which $4.3 billion is accounted for by the Toronto Transit Commission (TTC) capital plan. It must be noted that the TTC capital plan is funded by substantial provincial and federal support and is allocated a sizeable portion of the monetization of Toronto Hydro Corporation’s (rated “A” by DBRS) promissory note. However, the remainder of the Capital Plan will be funded through debt, which is forecast to rise 16% to $2.9 billion by 2012. While comfortable with the debt outlook of the City, DBRS cautions that prudence will be needed to keep capital costs under control and to manage public infrastructure needs.

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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