DBRS Confirms the City of Ottawa at AA (high)

DBRS has today confirmed the rating of the Canadian and foreign currency debentures of the City of Ottawa (Ottawa or the City) at AA (high) with a Stable trend. The rating is supported by the City’s economic stability, good liquidity position and thorough long-term financial planning.

Even though prudent long-term financial planning has helped the City successfully face the challenge of keeping operating expenditures within budget, Ottawa has recorded net (post-capex) deficits over the past four years, including a shortfall of $142 million in 2005. These deficits are typical of municipalities that undertake large expansionary capital programs, and since 2002, the City’s annual level of capex has been on average 50% higher than in the previous decade.

Although Ottawa was under pressure to balance its 2006 operating budget without imposing large tax-rate increases, the City was able to keep property tax growth to an inflationary 3.5%, in part by reclassifying fire-supply and garbage-collection charges, which were formerly part of the property tax bill, as user fees. Hence, the City is expected to have posted a budgetary surplus; however, net of capital expenditure, DBRS projects that Ottawa will have recorded another post-capex deficit in 2006 as a result of significant capital spending.

In December 2006, Ottawa announced the cancellation of the $780 million North-South Light Rail Transit (LRT) construction project. City council voted to cancel the project because of uncertainty surrounding the status of federal and provincial funding following a change in the LRT plan enacted by council. At this time, DBRS is not aware of any pending legal action by the consortium contracted to design, build and maintain the LRT, but will continue to monitor the situation.

The elimination of the project will reduce Ottawa’s projected debt burden by approximately $196 million over the next three years, as the City had previously planned to partially leverage its share of gas-tax funding to finance the project. Currently, there are no concrete plans as to how the funds will be re-allocated, although DBRS is confident that the funding stream will be spent on growth-related projects.

Ottawa recently published its new ten-year capital plan, which highlights $6.75 billion in gross capital expenditures, with 42% of the total to be allocated to growth projects, 40% to renewal and the balance to be spent on strategic initiatives. However, this plan was devised before the cancellation of the LRT, which means that capital spending may be revised downward. Debt is expected to grow less rapidly since gas-tax funds will no longer be leveraged into LRT debt. Given the current state of affairs, DBRS expects that by the end of 2008, net tax-supported debt will peak at $685 million, or $769 per capita, well within reason for Ottawa’s credit rating.

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