DBRS Confirms City of Vancouver at AA and R-1 (middle)

DBRS has today confirmed the Long-Term Debt and Commercial Paper ratings for the City of Vancouver (the City or Vancouver) at AA and R-1 (middle), respectively. The trend on both ratings remains Stable. The City benefits from a relatively affluent property tax base, a lengthy record of healthy operating results and limited direct operating responsibilities. The City’s credit profile continues to stabilize, as its large investments and capital spending related to the 2010 Winter Olympic Games (the Olympics) have concluded, and the ongoing monetization of the investment in the Vancouver Athletes’ Village (the Village) will provide greater financial flexibility.

In 2010, Vancouver produced an operating surplus of $150 million, driven by higher user fees, a 2.08% property tax increase and spending restraint. The City also produced a balanced operating budget for 2011 that relies on prudent cost management and savings from the ongoing service review, which helped limit the property tax increase to just 1.88%, the smallest in recent years. Operating results are expected to remain sound in the years ahead, although pressure will persist from higher debt servicing costs and sustained contractual increases in salary and benefit expenses. The City will be engaging in new contract negotiations for most of its staff in the coming year, as existing agreements expire at the end of 2011.

In the lead-up to the Olympics, the City and regional transportation authority undertook large capital projects to build the infrastructure necessary to host the event. In addition to increased capital spending, the City provided construction financing for the development of the Village, using a combination of working capital and new debt, to keep the project under construction after the original lender ceased financing to the developer. As a result, the DBRS-adjusted net tax-supported debt burden peaked at $1.6 billion in 2009, but has since moderated slightly.

With the Olympics over, capital spending has returned to more sustainable levels. There has also been notable progress in the Village’s market condominium sales and residential rental program in the past year, while interest from commercial tenants has picked up as occupancy continues to improve. Proceeds from the sale of market condominium units, residential rental and commercial properties are committed to pay down the associated debt and replenish working capital, with the remaining condominium units expected to be sold within three and a half years. However, DBRS believes that there is uncertainty as to whether the City will recover the full amount of its investment, as prices were recently discounted in order to stimulate sales, and it is unclear whether further discounts will be necessary. Per capita leverage is expected to fall to around $2,000 within the next three years, a level more manageable for the long-term rating, though the City’s share of the regional transportation authority’s debt burden will continue to be under pressure.

The City will hold municipal elections in November 2011. Recent public opinion polls suggest that the incumbent administration continues to enjoy a sizeable lead in popularity, though this lead is slipping from previous highs, with some support gravitating to the other left-leaning party.

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.