DBRS Confirms Ontario School Boards Financing Corporation Ratings at AA (low), Stable

DBRS Limited (DBRS) confirmed the ratings on the Series 2007-A1, 2006-A1, 2005-A1, 2004-A1, 2003-A2, 2002-A2, 2001-A3 and 2000-A1 Pooled Debentures Ownership Interests issued by Ontario School Boards Financing Corporation (OSBFC) at AA (low) with Stable trends. While not guaranteed by the Province of Ontario (Ontario or the Province; rated AA (low) with a Stable trend by DBRS), the ratings reflect (1) the strong linkage to the Province as the primary source of school board revenues used to service OSBFC debt, (2) the importance of education as a public policy priority and (3) the strong oversight and monitoring of school boards by the Ontario Ministry of Education (the Ministry).

While the school board funding formula in Ontario is largely enrolment based, it has been adjusted over time to account for key structural changes, including demographic trends that saw the school-age population in Ontario decline for many years before a recent return to modest growth, driven mostly by increases in the Greater Toronto Area. As a result of these trends, the Province moved to effectively eliminate enrolment sensitivity from capital-related components of the funding formula in 2009–10. Capital grants are now tied directly to actual capital expenditures, while most legacy debt is supported by dedicated debt service grants to maturity.

Notwithstanding these changes, some boards still use the enrolment-sensitive annual School Renewal Allocation grant to service a small portion of debt. As such, DBRS continues to monitor school boards that still rely on this enrolment-sensitive funding and other revenues for the servicing of debt not supported by prior capital grants (i.e., unsupported debt). Particular attention is paid to school boards that have a debt service coverage ratio below 1.0 times. DBRS reviews financial circumstances of these boards and is comfortable that there are credible plans in place to cover unsupported debt charges (including OSBFC obligations), mostly in the form of accumulated surpluses. New capital projects that rely on uncertain future revenue streams or variable grants are not being approved by the Ministry, which will reduce unsupported debt over time.

RATING DRIVERS
The credit profile of OSBFC obligations is stable with no new OSBFC debt issued since 2007. All capital projects are now funded directly through capital grants from the Ministry. Provincial oversight of school boards and mechanisms in place to ensure financial integrity are robust, with requirements for the pre-approval of capital spending and the maintenance of balanced budgets. Given the close link with the government funder, any change to the Province’s credit rating would have an equal impact on all OSBFC obligations. The financial outlook for school boards with outstanding OSBFC obligations has remained stable or improved in recent years, and any future funding restraint is expected to be offset by expenditure management efforts to maintain balanced budgets as required by law.

Notes:
The principal methodology is General Corporate Methodology: Appendix 3 — Ontario School Boards Financing Corporation, 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.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada