DBRS Confirms Ontario School Boards Financing Corporation at AA (low), Stable Trend

DBRS has today confirmed the ratings of the Ontario School Boards Financing Corporation (OSBFC) at AA (low), all with Stable trends. The OSBFC’s rating is closely linked to that of the Province of Ontario (the Province; rated AA (low)) given the importance of provincial funding as the primary source of revenues and debt servicing, and the strong provincial oversight, which requires school boards to maintain balanced operating budgets and to seek provincial approval for capital projects. DBRS also notes that OSBFC has a policy that requires boards to pre-pay debt servicing to the custodian ten days ahead of schedule, which gives OSBFC the ability to cover for school boards in the event of a missed payment and avoid default.

School board funding in Ontario is largely enrolment based. Over time, the funding formula has been adjusted to account for key structural changes, the most pressing of which has been the persistent decline in the school-age population over the past decade. In 2010-11, the Province initiated a process to essentially remove enrolment sensitivity from the capital component of the funding formula. The Province now provides dedicated debt service grants for debt charges that were previously supported by now defunct capital grants. Most importantly, much of the enrolment risk pertaining to capital funding used by school boards to service OSBFC debt has effectively been uploaded to the Province, with only the school renewal (SR) funding allocation, used by some boards to service a small portion of debt, still based on enrolment.

There has been no new OSBFC debt issue since June 2007. All financing for capital projects is obtained through the Ontario Financing Authority , unless a school board can demonstrate to the Province that it can obtain a more favourable loan from a regulated financial institution or a municipality. As such, the financial autonomy of school boards has been constrained considerably and decision making, particularly with respect to capital projects, is centralized at the provincial level, thereby providing meaningful protection to OSBFC bondholders.

That said, DBRS continues to monitor the few school boards that still rely on enrolment-sensitive SR funding for the servicing of debt not supported by prior capital grants. Particular attention is paid to school boards that exhibit a debt service coverage ratio (DSCR) below 1.0 times . As in the previous year, eleven OSBFC participants had some unsupported debt in 2011-12, and of these, two school boards posted a DSCR that demonstrated notable weakness. DBRS has obtained assurances from the Province that all these school boards have credible plans to cover their unsupported debt charges, and in most cases have accumulated surpluses sufficient to cover the unsupported debt. This provides comfort that these boards, like the other OSBFC members, will be able to meet their financial obligations. DBRS notes that in September 2012, the Province appointed a supervisor to oversee the operations of Windsor-Essex Catholic District School Board (WECDSB). DBRS views this move as indicative of the Province’s strong oversight of the sector, and the adequacy of the mechanisms in place to ensure the financial integrity of school boards in Ontario. A report released by the supervisor in April 2013 identified several issues that, once rectified, are expected to put the WECDSB on more sustainable footing. Further, due to progress already made, the supervisor has recommended that the Province relax the terms of the supervision.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Base General Methodology for Corporate Companies (Appendix 1: Credit-Specific Considerations), which can be found on our website under Methodologies.