DBRS Confirms City of Toronto at AA with Stable Trends

DBRS has today confirmed the ratings of the City of Toronto (the City or Toronto) at AA. All trends remain Stable, reflective of the City’s ability to levy taxes on a large, well-diversified economy, and its demonstrated fiscal prudence in recent years. Nevertheless, capex and borrowing requirements remain considerable and could potentially erode some of the flexibility within the current ratings.

The City posted a $1.3 billion operating surplus in 2012, on better-than-expected revenue growth and lower spending. On a post-capex basis, a manageable $166 million deficit was realized, or 1.4% of revenues. Sustained capital pressures led net tax-supported debt, as calculated by DBRS, to climb by 14.3% to $3.5 billion, or $1,251 per capita, in 2012. A balanced budget was approved in 2013, and for the first time since amalgamation did not require the use of prior year surpluses. Based on preliminary information, the City is expected to have finished 2013 with another operating surplus, owing to revenue growth and continued departmental spending restraint, though two extreme weather events in 2013 will likely dampen year-end results somewhat. Driven by sustained public transit and transportation infrastructure pressures, Toronto’s net tax-supported debt burden is expected to have risen modestly in 2013, as debt issuances were partially offset by maturities and sinking fund payments.

The 2014 operating budget passed in January 2014 was also balanced, supported by a 2.23% residential property tax increase and flat departmental spending for a second consecutive year. DBRS notes that fiscal resolve has improved notably in recent years. The City estimates that the ongoing Service Review Program and other restraint measures have led to over $900 million in operating budget savings and generated an additional $30 million in user fee revenues between 2011 and 2014.
Labour contracts with the City’s transit workers, police and firefighters are set to expire in 2014. DBRS believes that a repeat of current agreements for police and firefighters contracts, which include very generous compensation increases, is unsustainable, and could erode much of the flexibility that has been built into the operating budget. Furthermore, in October 2013, Toronto city council approved a $3.6 billion Scarborough Subway Extension (SSE) project. The City’s share of $910 million will require additional debt financing, to be repaid with dedicated development charges and property tax increases. DBRS notes that in approving the SSE, the City rejected a light rail transit (LRT) option that was fully funded by the provincial transportation agency, Metrolinx. Unlike with the LRT option, the City will be the owner/operator of the new subway extension, and thus solely responsible for any cost overruns and other incremental project costs, which have not been factored into the current SSE cost estimate, and as such, present additional project risks.

DBRS expects the City’s net tax-supported debt burden to peak at roughly $5.0 billion, or $1,700 per capita, by 2018, and will remain elevated for some time as the City intends to delay SSE debt issuances until after 2018. Given the improvement in the fiscal performance, healthy level of liquid assets and continued growth in the tax base, DBRS believes that the projected debt increase remains manageable. However, in light of the City’s sizable employee benefit liabilities and increasing debt appetite, DBRS is of the opinion that further increases in the debt burden, pushing the net tax-supported debt above 1.0% of the taxable assessment, could put downward pressure on the rating. An upcoming election scheduled for October 27 2014, adds some uncertainty with respect to the fiscal outlook.

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 Rating Canadian Municipal Governments, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.