DBRS Changes City of Ottawa’s Trend to Stable from Negative

Dominion Bond Rating Service (“DBRS”) has today changed the trend on the ratings of the City of Ottawa (the “City”) to Stable from Negative. The City’s ratings have also been confirmed at AA (high).

The trend change reflects the development of a viable long-term capital plan that is expected to adequately address infrastructure needs while avoiding undue pressure on property taxes, reserves, and debt. DBRS kept a Negative trend on the ratings over the past few years due to concerns over the potential erosion in the financial position of the City as a result of the growing disparity observed between capital spending requirements and available revenues. These concerns have been alleviated by the introduction of substantial new revenue sources, the most notable being the permanent transfer of gas tax funds by the Federal government announced earlier this year (Cdn5¢ per-litre), and by the provincial government (the “Province”) in late 2004 (Cdn2¢ per-litre).

The City will use the new funds to help finance its ten-year Cdn$7.7 billion capital plan, which is expected to eliminate deferred infrastructure needs and provide for future population growth. However, the capital plan is projected to cause a doubling in the City’s total net tax-supported debt level to Cdn$820 million, or Cdn$920 per capita, by 2009. Although significantly higher than the forecast put forward in last year’s budget, growth in debt should remain appropriate for the current rating, as it will be fully serviced by an estimated 33% of the new gas tax funds. DBRS will monitor future developments in the capital plan to ensure that a notable portion of the gas tax funds remain uncommitted, and could be redeployed to help service debt in the unlikely event that senior government transfers decline. While DBRS remains comfortable with the debt outlook, a significant increase in projected leveraging of the gas tax funds could place undue pressure on the credit profile.

Operating results improved somewhat in 2004, as increased property tax rates and user fees helped the City narrow its DBRS-adjusted core deficit (after capital expenditures) by 82% to Cdn$29 million. This was complemented by a 4% drop in net tax-supported debt to Cdn$394 million, or Cdn$461 per capita, at December 31, 2004.

With most of its new revenue sources earmarked for capital, the City will likely have to keep moderately raising property taxes and user fees to pay for rising wages and energy prices. Nonetheless, the City is expected to remain in a solid financial position over the medium term, supported by the implementation of a strategy to address its capital needs, the maintenance of a healthy liquidity position, and continued solid growth in Ottawa’s relatively prosperous property tax base.