DBRS Confirms City of Toronto Although Concerns about Rising Debt Remain

DBRS has today confirmed the ratings of the debentures issued by the City of Toronto (the City) at AA. The trends remain Stable, supported by the City’s relatively wealthy tax base and strong resolve in restraining spending and finding permanent solutions to eliminate the budget gap. However, debt remains under considerable pressure as a result of heavy capital spending, which is eroding financial flexibility and could affect the City’s rating if increases are not contained.

Helped by spending discipline and unexpected revenue improvement, the City ended 2010 with an operating surplus of $554 million, notably above budget. However, elevated levels of capital investments led to a sizeable post-capex deficit of $685 million as calculated by DBRS, more than twice last year’s level. Despite a considerable imbalance contemplated at the onset of its 2011 budget process, the City still managed to balance this year’s fiscal plan (excluding capex) with the help of renewed cost-containment efforts and the use of prior-year surpluses. The budget maintains service levels and leaves property taxes unchanged for the first time since 2000. Spending increases will be scarce, mostly for transit and police services, while City operations will see spending reductions, owing in part to the extensive service review launched last year and aimed at reducing net expenditures by 5% in 2011 and an additional 10% in 2012. Expected to be completed this fall, the review will play a significant role in closing the $774 million preliminary gap besetting the 2012 budget process.

DBRS commends management for the thorough review underway, which is probably the most extensive cost-containment effort undertaken by the City in recent memory. However, it remains unclear whether Council will approve the full range of measures necessary to protect fiscal sustainability. Significant concerns also remain with respect to the rising tax-supported debt burden, which stood at a moderate $964 per capita at December 31, 2010, but is set to grow by more than 50% to approximately $1,550 per capita by 2014 due to capital investments. While still manageable, the projected debt peak is up notably from the forecasts available at the time of last year’s rating review and is expected to consume a significant portion of the remaining flexibility within the current rating category. Since the capital plan excludes more than $8 billion in transit needs, the risk of further sizeable revisions to debt projections and their potentially adverse effect on the rating remains material.

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.