DBRS Confirms the City of Hamilton at AA

DBRS has confirmed the Long-Term Debt rating of the City of Hamilton (the City) at AA with a Stable trend. The City continues to exhibit prudent financial management practices, as evidenced by its growing track record of positive operating results and its moderate debt burden. As with other mature municipalities, however, the City faces the expensive task of maintaining an aging infrastructure base. Nonetheless, the City plans to increase its emphasis on pay-as-you-go financing of capital expenditures and hold the line on debt, which should foster stability in its credit profile over the medium term.

The City recorded a healthy $38 million post-capex surplus in 2006, its third straight, fuelled by a moderate increase to the property tax levy, higher senior government transfers and strict cost containment. In addition to its sound operating profile, the City maintains a modest net tax-supported debt burden, which stood at $265 million or $514 per capita at year-end 2006. Tax-supported debt has grown by three-quarters over the past four years, largely driven by the City’s new 8 km Red Hill Valley Parkway and Solid Waste Management Master Plan.

Looking ahead, the City should remain on sound financial footing, although its operating environment is expected to steadily tighten due to growing social service costs together with contractual compensation adjustments. This year should mark the end of the recent upward trend in debt, with tax-supported debt reaching a projected peak of $285 million or $550 per capita, which is in line with DBRS’s prior expectations and is well manageable within the confines of the current rating. Management’s objective is to limit debt to the current peak projection going forward, which is likely to be challenging given the significant spending requirements related to maintaining the municipal infrastructure base. However, the City is planning to raise the portion of its property tax levy devoted to capital by 0.5% per year until 2016 (roughly a $3 million cumulative increase annually). If carried out, this would ease upward pressure on debt and help address deferred maintenance needs.

Overall economic conditions in Hamilton are expected to remain sound, although DBRS notes that softness in the region’s relatively large manufacturing sector has the potential to constrain further improvement in the credit profile should it persist for a prolonged period of time. However, the City is making efforts to provide an attractive locale for businesses by opening new shovel-ready industrial lands and limiting growth of business property tax rates.

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