DBRS Confirms City of Montréal at A (high)

DBRS has today confirmed the Long-Term Debt rating of the City of Montréal (Montréal or the City) at A (high), with a Stable trend. Prudent financial management, a constant focus on spending discipline and a dynamic economy continue to provide support to the credit profile of the City. In particular, the considerable efforts exhibited by the City in recent years to streamline operations and to increase efficiency have helped offset some of the pressure related to rising pension expenses and prevent undue erosion in operating results. However, infrastructure needs continue to grow, which maintains upward pressure on the City’s already heavy debt burden. The student protests underway in Montréal since March also add near-term uncertainty to the outlook. While overall economic conditions remain sound, the protests have created some disruptions in the local economy and both sides are preparing for a long standoff.

The City managed to maintain good spending discipline in 2011. Nonetheless, the operating surplus as measured by DBRS fell sharply, owing to a substantial increase in pension expenses. Net of capital expenditures, a deficit of $61.6 million was posted. The 2012 budget remains balanced, though with considerable effort from all operating units, which were asked to absorb through their base budgets salary increases, the 1% increase in the provincial sales tax and various inflationary pressures. Higher property and water taxes equivalent to a 3% increase in the average tax burden for residential and non-residential properties, increased draws on reserves and prior-year surpluses and the smoothing of adverse changes in pension valuation were also required in order to achieve balance, highlighting the sustained pressures faced by city operations.

In contrast with expectations at the time of the last rating review, net tax-supported debt as measured by DBRS fell slightly in 2011 as new borrowing was more than offset by increased receivables from the Province of Québec (rated A (high), Stable) to repay long-term debt. Slower-than-expected progress in major capital investments also contributed to the trend. Nonetheless, the net tax-supported debt burden remains one of the highest among the major Canadian cities rated by DBRS on a per capita basis and the steady expansion of the City’s capital plan in recent years point to rising debt needs going forward. DBRS estimates that tax-supported debt could grow by $200 million to $300 million per year over the medium term, which is viewed as sustainable but leaves little room for material improvement in the credit profile.

Notes:
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.