the truth about montreal's credit rating: a fact check
9 minute read
illustration by sara mizannojehdehi
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montreal gazette
even the city’s credit rating is fodder in a municipal election campaign.
“the city of montreal is proud to announce that it has maintained its excellent credit ratings,” outgoing mayor valérie plante declared in a press release on sept. 22, just as the campaign got underway. the statement said the three major international credit rating agencies — s&p global ratings, moody’s investors service and morningstar dbrs — had each maintained its rating for montreal and had “confirmed their confidence in the city’s financial strength.”
“i welcome this news, which constitutes significant recognition and an undeniable gesture of confidence in the financial rigour exercised by our administration,” plante said in the release. “over the past few years, we have been able to present responsible budgets, aligned with the financial capacity of montrealers, while meeting their priorities, despite a difficult economic climate. we can proudly conclude that we are leaving the house in order.”
the press release also stated that s&p had raised the city’s credit rating in 2022, during plante’s time in office.
here is a fact check of the outgoing mayor’s statement.
did the agencies just announce their credit ratings for montreal as the election campaign began?
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no. for regulatory reasons, each agency is required to report its outlook on the city at least once a year. moody’s made public its latest annual update on montreal in early september, s&p in mid-august and morningstar dbrs in july.
was s&p’s rating change for montreal in 2022 due to the plante administration’s financial acumen?
not according to s&p.
louis favreau, primary analyst on montreal’s credit at s&p, told the gazette that in 2022 the agency reviewed and elevated the “institutional framework” it uses to evaluate all canadian municipalities — basically, it raised the value of the yardstick it uses to measure all the municipalities.
that “influenced multiple rating actions on multiple municipalities,” including montreal, he said. it was the yardstick that raised montreal’s credit rating and not its individual credit profile.
montreal’s latest 10-year capital works plan is $24.8 billion, averaging $2.48 billion a year for expenditures such as roadwork, public transit, water infrastructure repair and bike paths.
dave sidaway, pierre obendrauf, dave sidaway, allen mcinnis
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the gazette
is the credit rating a report card on city hall’s financial management?
not exactly. credit rating agencies use various financial metrics to monitor the ability of the entities they follow to pay their obligations. so the credit rating of montreal is an assessment of its debt risk. it is not an agency’s opinion on city hall’s spending priorities or its latest tax increases.
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as well, “we take a long-term view,” favreau noted.
the rating matters because it influences the interest rate that lenders will charge the city on loans. a change can cost or save montreal millions of dollars in interest on the long-term borrowing it does to finance billions of dollars in capital projects.
is montreal’s credit rating really excellent?
yes. montreal has a very high credit rating, though other canadian municipalities have higher ratings. also, montreal’s rating has always been very high and rarely changes. morningstar dbrs hasn’t altered montreal’s credit rating since it began rating the city in 2005. moody’s hasn’t adjusted it since an upgrade in 2006. and before 2022, s&p only touched montreal’s credit rating in 2015 and 1984, raising it both times.
so the fact that each agency maintained its credit rating for montreal this year is not remarkable.
montreal is “at the lower end of what we see for the rated canadian municipalities, but it’s still a very strong, highly rated entity,” said michael yake, an associate managing director at moody’s.
moody’s rates the quebec government at “aa2” and gives the same rating to montreal. the province’s rating pulls montreal’s rating up to aa2, he said. otherwise, the city’s standalone baseline credit quality — without the province’s aid — is the equivalent “a1,” which is a notch lower. the agency’s top rating is “aaa.”
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“we do have a number of municipalities, primarily in ontario, that have a triple a (aaa) baseline credit assessment,” yake said. “so there are municipalities that on a standalone basis are five notches better than montreal.”
morningstar dbrs gives montreal a credit rating of “a (high),” whereas toronto is rated higher than montreal at “aa,” and calgary is even higher at “aa (high).”
meanwhile, s&p raised its credit rating for toronto last october from “aa” to “aa+,” a notch above montreal.
did the agencies credit montreal with presenting “responsible budgets” despite weathering a “difficult economic climate”?
that plante statement is misleading. provincial legislation requires municipalities like montreal to pass a balanced budget. so municipal budgets are legally required to be “responsible.” unlike the provincial and federal governments, the city is prohibited from carrying a deficit.
moreover, most of montreal’s revenue is from property taxes, which the agencies like. property tax revenue withstands turbulence better than provincial and federal taxes on income, goods and services and payroll, which are tethered to economic activity.
“in the case of municipalities, we see the (institutional) framework being extremely predictable and supportive,” s&p’s favreau said.
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this year, s&p downgraded the quebec government’s credit rating to an “a+” from “aa-,” whereas montreal’s rating from s&p remains higher, at “aa.”
quebec was downgraded for having persistent budget deficits, s&p reported. that’s not an issue for montreal since municipalities can’t run deficits, favreau said.
travis shaw, senior vice-president for global sovereign ratings at morningstar dbrs, said the legal requirement to pass a balanced budget “gives us a fairly high degree of comfort.” as well, municipal property taxes “are insulated a little bit more” from economic fluctuations than the tax sources of the higher levels of government.
the agencies also cite the financial support montreal gets from the provincial government, such as $263 million in aid to the city during the pandemic. so montreal’s main credit strengths aren’t in its control.
one strength that is in montreal’s control is liquidity. that’s cash from year-end surpluses that the plante administration and previous administrations have stashed in rainy-day reserves.
s&p notes that “montreal typically maintains robust liquidity.”
so the plante administration’s announcement in september that it’s projecting a $228-million year-end shortfall doesn’t faze the agencies. s&p’s favreau pointed out that montreal was projecting a $311-million shortfall at this time during the 2021 municipal election campaign. the city typically absorbs its shortfall by year’s end. if not, it has reserves to cover it.
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“we’re not necessarily concerned with pressure of one year, especially with the magnitude that we’re talking about,” moody’s yake said, noting that montreal’s 2025 operating budget is $7.28 billion.
most of montreal’s revenue is from property taxes, which the credit rating agencies like. property tax revenue is stable and withstands economic turbulence.
allen mcinnis
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montreal gazette
did the agencies really laud the plante administration’s “financial rigour”?
that’s exaggerated. the agencies haven’t given plante and her team any gold stars.
in fact, they took note a few years ago when the city breached a longstanding internal policy to cap net debt at no more than 100 per cent of the city’s annual revenue.
montreal established the policy in 2004 as a benchmark for sound financial management.
the plante administration allowed debt to surpass 100 per cent of revenue for the first time in 2019, when the city’s net debt grew to $6.1 billion from $5.5 billion the previous year. the administration asked city council to temporarily suspend the policy and allow net debt to rise to as much as 120 per cent of revenue for a spell. the administration pledged to return the city to a 100 per cent net debt-to-revenue ratio in 2027.
the city’s net debt-to-revenue ratio has fluctuated between 106 and 108 per cent of revenue since peaking at 114 per cent in 2021, in the midst of the pandemic. montreal is forecasting to end 2025 with a net debt of $6.86 billion, representing 107 per cent of revenue.
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the agencies take note of montreal’s recent efforts to slow the growth of debt, for example by using more cash from its operating budget to fund capital projects and relying less on borrowing.
“we acknowledged that there has been somewhat weaker (fiscal) performance … but at the same time, we’re seeing slower debt growth,” shaw, of morningstar dbrs, said of his agency’s latest update on montreal.
“so that’s a bit of a favourable offset.”
four years ago, “we were more concerned about the debt burden than we are today,” moody’s yake said.
however, the stain of the plante administration’s decision to break the debt limit policy remains.
“we’ve already noted that the management of montreal is a little bit weaker — not much, but a little bit weaker — than other highly rated municipalities because of the fact it has already breached internal policy,” he said.
“they had that 100 per cent debt burden as an internal policy for a number of years and when they saw they were going to breach it, instead of adjusting their plans to maintain that, they said ‘we’ll allow ourselves to breach that for a few years, but we’ll make a new policy to say that we have to get back to that 100 per cent by 2027.”
if an internal policy is too flexible, yake said, “then it’s not much of a policy to begin with.”
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s&p, for one, scores five components that make up an entity’s rating, and it gives montreal a top score of 1 out of 5 for the institutional framework, the economy and the city’s liquidity. but montreal gets a mediocre 3 out of 5 for financial management and for budgetary performance, and a low 4 out of 5 for its debt burden.
is plante leaving “the house in order” for the next occupant of city hall?
yes, but with caveats.
the next administration faces the challenge of controlling the city’s debt, which includes the debt of the société de transport de montréal, and of respecting the commitment made by plante to lower the net debt-to-revenue ratio back to 100 per cent in 2027.
“if they fail to do that, it highlights again a lack of management, that they can’t adhere to their own policies, essentially,” moody’s yake said.
plante had said her administration’s plan to bring the net debt-to-revenue ratio back to 100 per cent in 2027 would involve capping capital investment at $2 billion a year, he noted. yet the latest 10-year capital works plan is $24.8 billion, averaging $2.48 billion a year.
“they still have a very ambitious capital plan,” yake said. “where we find comfort that we believe the city is going to achieve its objective (to return to 100 per cent) is that we have seen the city has put more money aside to avoid debt. so they are finding more funds in the operating budget to support the capital plan as well.”
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the agencies also note budgetary pressures in the offing since most of montreal’s municipal unions have collective agreements that are expired or expiring, meaning that pay raises will be negotiated.
s&p anticipates montreal will maintain its “exceptional liquidity.” that said, the agency has a clear downside scenario involving montreal’s debt and labour costs in its latest report, favreau said.
“we see the large capital plan,” he said.
“we think it will remain manageable. we think the city will be able to maintain a stable budgetary performance. we do see some inflationary pressure on wages and some operating costs.”
the bottom line: the agencies have given montreal’s credit rating a stable outlook, largely because they’re confident that the framework that has kept montreal’s credit rating high for so long will keep the city on course regardless of who’s elected mayor on nov. 2 and what they’ve promised.
“we always take campaigns with a bit of a grain of salt because what matters is what gets enacted thereafter,” morningstar dbrs’s shaw said.
“because at the end of the day, whatever government is in power at the municipal level, they do need to balance the budget.”
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an earlier version of this story contained the incorrect last name for travis shaw, senior vice-president for global sovereign ratings at morningstar dbrs. the gazette regrets the error.
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