DBRS Confirms City of Montréal at A (high), Stable Trend

DBRS has today confirmed the rating of the City of Montréal’s (Montréal or the City) Long-Term Debt at A (high) with a Stable trend. The credit profile of the City remains sound and adequate for the rating, supported by the continuation of proactive and prudent fiscal and financial management as well as taxing powers over a large, diverse and relatively resilient regional economy. However, capital spending needs remain high, which will maintain upward pressure on Montréal’s already large debt burden and limit the chances of material improvement in financial flexibility.

Helped in part by a rebound in economic activity and investment returns, the City closed 2010 with a stronger-than-expected consolidated operating surplus of $1.3 billion as calculated by DBRS. Operating revenues came in above budget and 8.4% higher than the prior year, fuelled by average tax increases of 5.3% and 6% for the residential and non-residential sectors, respectively, while discipline was maintained on the spending, as reflected in the two rounds of cost reduction initiatives implemented during the year. Capital spending came in sharply below budget due to delays in certain transportation and transit projects, which contributed to a post-capex surplus of $802 million for the year, the strongest performance on record.

Consistent with the Cities and Towns Act, the budget remains balanced in 2011, though with the help of a draw on prior-year surpluses and other reserves, which points to the continuation of tight operating conditions. Managers were instructed to generate recurring savings of $250 million by 2012, including $125 million in 2011. Business units were also asked to cover wage adjustments and general inflation of 2.5% through their allotments. Nonetheless, expenditures are still set to increase by a notable 5% in 2011, which will be offset mainly by an average increase of 2.5% in residential and non-residential tax burdens, continued expansion of the tax base, as well as the re-introduction of the special road tax and higher contributions to the Water Fund.

Total net debt rose by 11.3% to nearly $5.7 billion in 2010. A large portion of the increase was related to self-supporting initiatives, although tax-supported debt as calculated by DBRS also increased notably, reaching nearly $3.9 billion or a new high of $1,996 per capita by year-end. The three-year capital program calls for investments totalling $3.9 billion for the 2011-2013 period, up 26% from last year’s plan. The City intends to pay a greater portion of capital expenditures upfront going forward. Senior government grants will also cover nearly 80% of Société de transport de Montréal’s three-year $1.9 billion capital plan, providing further relief to financing needs. Nonetheless, tax-supported debt is expected to remain on a slow upward trend over the years to come.

Note:
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 rating did not include issuer participation and is based solely on publicly available information.