DBRS Confirms the City of Toronto at AA with a Stable Trend

DBRS has today confirmed the ratings of the debentures issued by the City of Toronto (the City or Toronto) at AA. The trends remain Stable. The sound credit profile of the City remains supported by the ability to levy taxes on the large and well-diversified Toronto economy and a healthy level of liquid reserves, amounting to $1.8 billion at year-end 2009. DBRS notes, however, that the capital plan is expected to enlarge the tax-supported debt burden by about 50% by 2014 and will likely erode much of the flexibility in the current rating.

Toronto posted an improved operating surplus of $541 million in 2008, largely resulting from the strong revenue growth provided by the Municipal Land Transfer Tax and the Personal Vehicle Tax. On a post-capex basis, however, the City recorded a deficit of $451 million. The 2009 tax-supported operating budget increased spending to $8.7 billion, up 6.5% over the prior year. While consolidated results are not available, a year-end variance report points to a favourable deviation of $355 million from the net 2009 operating budget. In April 2010, the City approved its 2010 operating budget at $9.2 billion. The budget relies predominantly on the previous year’s surplus, which is carried forward into this year’s budget, as well as on an average property tax increase of 1.8%. The budget continues the uploading of certain social service costs to the Province of Ontario, which is expected provide modest relief to the operating budget pressures over the years to come.

The City’s net tax-supported debt burden finished 2008 at $2.5 billion, or $926 per capita, down 2.3% year over year, but is expected to have increased slightly during 2009. In the coming years, growth in the debt burden will be driven by the extensive capital plan, which focuses on new transit infrastructure and investment in roads and bridges. All in, the capital spending pressure is forecast to push debt to a peak of roughly $3.8 billion, or $1,400 per capita, by 2014. This level of debt is viewed as manageable for the current rating given the strength of the economy and healthy level of reserves, but it will materially reduce the City’s room to manoeuvre. DBRS notes, however, that the municipal election this fall may lead to notable changes in the City’s capital and debt outlook.

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.

This is a Public Finance (Provinces and Municipalities) rating.