DBRS Confirms the City of Montréal at A (high)

DBRS has today confirmed the Long-Term Debt rating of the City of Montréal (Montréal or the City) at A (high), with a Stable trend. The City maintains a healthy risk profile, underpinned by its track record of sound fiscal management, its focus on cost reduction evidenced by the success of its three-year program to cut base budget expenses, and its ability to levy taxes over a large and diverse economy. While continuing to have solid credit fundamentals, Montréal’s financial flexibility remains constrained by its tax-supported debt burden, which is heavy compared with other large Canadian municipalities.

In 2008, the City’s operating surplus remained sizeable at $478 million, although down from the previous year due primarily to transportation-related expenses. However, the City demonstrated impressive fiscal prudence and kept general government expenses $100 million under budget. Net capital expenditures of $808 million led to a post-capex deficit of $330 million as the City continued its extensive capital investment in the road, water and sewage systems. The sizeable investments pushed net tax-supported debt (DBRS-adjusted) up moderately to $1,854 per capita at year-end, the highest level among DBRS-rated Canadian municipalities.

Despite the onset of a global recession in 2008, Montréal’s economy fared relatively well and posted real growth of 1.1%. The economy is forecast to contract by 1% in 2009, primarily on weak manufacturing results, although it should demonstrate good resilience, with a return to growth of 2.4% expected in 2010.

The City has maintained a balanced operating budget in 2009 and left the general tax level unchanged for a fourth consecutive year. The budget displays continued focus on cost reduction, with 188 jobs scheduled for elimination as part of the final step in the City’s three-year plan to cut $300 million from recurring annual expenditures. While budget forecasts are prudent, spending may come under pressure in the near and medium term as Montréal continues labour negotiations with a majority of its unions. Moreover, the extensive capital program, set at $3.5 billion over three years and focused on rehabilitating the City’s mature asset base, will likely continue to exert upward pressure on debt and squeeze the budget going forward. However, recent increases in the water levy and the ongoing capital grants from the Gas Tax Fund should provide some relief and help keep debt manageable for the rating. In addition, the City’s successful implementation of its three-year cost-reduction initiatives, combined with the objective of the newly re-elected government to re-examine its cost structure, should lead to increased financial flexibility and contribute to sound performances in the coming years.

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

The applicable methodology is Rating Canadian Municipal Governments, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.