DBRS Confirms the City of Toronto at AA with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Canadian Currency Debentures and Foreign Currency Debentures ratings of the City of Toronto (Toronto or the City) at AA with Stable trends. The ratings are supported by the City’s large and diversified economy, capacity to raise taxes and requirement to present balanced budgets. Significant capital investment will contribute to growth in Toronto’s tax-supported debt burden over the medium to longer term, reducing flexibility within the current rating category.

In 2018, the City reported a surplus of $1.4 billion. This equates to a DBRS-adjusted post-capex deficit of $493 million — a slight improvement over the $658 million deficit in the prior year, owing to a modest reduction in capital investment. Total revenue improved (+9.4% year over year (YOY)), led by higher municipal property tax collections, rising fee and user charges and higher operating grants. Meanwhile, total expense was up by 8.8% YOY, fuelled by higher spending on transportation and social and family services.

The City’s 2019 tax-supported operating budget is balanced and projects 3% growth in both expenses and revenues. The budget anticipates higher spending on services and programs, as well as toward police and transit. The budget also provides modest funding for new investments in infrastructure and mobility initiatives, environmental sustainability and poverty reduction. Revenue growth is supported by a total City tax rate increase of 2.64%. The City is required by legislation to balance its budgets, though it faces long-term fiscal challenges, including limited revenue flexibility, various long-term service plans and unfunded capital needs. An updated long-term plan is being prepared, which will be focused on financial sustainability.

DBRS-adjusted net tax-supported debt rose to $6.4 billion in 2018, or $2,139 per capita and 1.0% as a share of taxable assessment. Based on the current capital plan, DBRS estimates that net tax-supported debt per capita will peak in 2021 at approximately $2,630 per capita, or 1.2% as a share of taxable assessment in 2020. This is higher than what was expected at the time of DBRS’s last review. DBRS views the current outlook as manageable for the ratings, although the rising debt burden will reduce flexibility within the ratings.

The Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS) government announced a series of minor funding changes in its spring 2019 budget, which are expected to have a modest impact on the City’s operating budget. The Province and City are also in discussions regarding the ownership and responsibility of Toronto’s subway network, though few details are available at this time.

RATING DRIVERS
A negative rating action is highly unlikely in the near term but could arise over the medium to longer term from a material and sustained deterioration in financial risk metrics beyond what is already anticipated by DBRS. Upward pressure on the ratings is unlikely given the scale of capital spending and unfunded projects that may cause the outlook for future borrowing to rise beyond current projections.

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

The principal methodology is Rating Canadian Municipal Governments, which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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