Muskoka, District Municipality of Bracebridge, Ontario, Canada

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1 DECEMBER 15, 2011 CREDIT ANALYSIS Bracebridge, Ontario, Canada Table of Contents: RATINGS 1 SUMMARY RATING RATIONALE 1 RATING OUTLOOK 1 WHAT COULD CHANGE THE RATING - UP 1 WHAT COULD CHANGE THE RATING - DOWN 1 KEY RATING CONSIDERATIONS 2 RATING HISTORY 4 ANNUAL STATISTICS 5 MOODY S RELATED RESEARCH 9 Analyst Contacts: TORONTO Jennifer A. Wong Assistant Vice President - Analyst jennifer.wong2@moodys.com Ratings Category Outlook Issuer Rating Bonds Summary Rating Rationale Moody's Rating Stable The District Municipality of Muskoka s Aa2 issuer rating is supported by a consistent positive operating performance which generates surpluses to fund infrastructure needs. The rating also reflects a moderate debt burden as well as modest, but increasing, levels of net cash and investments. The maturity and stability inherent in the institutional framework governing how Ontario municipalities operate also supports the Aa2 issuer rating. Rating Outlook The outlook is stable. Aa2 Aa2 What Could Change the Rating - Up A decline in the debt burden, or an increase in the reserve position relative to debt could produce upward pressure on the rating. What Could Change the Rating - Down An increase in debt or a substantial deterioration in liquidity would place downward pressure on the rating. This Credit Analysis provides an in-depth discussion of credit rating(s) for Muskoka, District Municipality of and should be read in conjunction with Moody s most recent Credit Opinion and rating information available on Moody's website.

2 Key Rating Considerations Financial Position and Performance The District Municipality of Muskoka relies on prudent and forward-looking fiscal policies such as the accumulation of reserve funds in advance of capital projects or anticipated future pressures. The district also relies on multi-year capital budgeting updated annually to guide its long-term approach to capital planning and address future infrastructure needs. With these forward-looking practices, the District is able to align prudent fiscal policies with long-term planning, which in turn helps to generate consistent, positive operating results. Stable Operations Support Credit Strength Muskoka benefits from a wealthy tax base consisting of a mix of seasonal and year-round residents. Property tax receipts and user charges typically account for two-thirds of the district s operating revenue (69.5% in 2010) and are relatively uncorrelated with the economic cycle, providing stable and predictable revenue flows across periods of both economic expansion and slowdown. Government grants contributed 26.5% of operating revenues, in line with recent trends. While the growth of provincial grants to Ontario municipalities could slow down in light of the current fiscal challenges faced by the province, we do not believe that grants would be cut dramatically as there has been no indication of this by the province. Overall, operating revenues increased 7.3% between 2009 and 2010, reflecting growth in property tax receipts and increasing water and sewer utility rates. This annual growth was in line with the 5-year compound annual growth rate (CAGR) of 8.6% recorded between 2002 and After recording deficits for several years prior to 2006, Muskoka began to reign in expenses and limit their growth. This has helped the district to record surpluses in the past four years. Expenses are managed closely and increased by 2.7% between 2009 and 2010, compared to the 5-year 5.9% CAGR for expenses between 2002 and The unemployment rate for the region was higher throughout 2010 than it was in 2009, which led to a greater number of Ontario Works (welfare) cases in 2010, although costs associated with this program came in at the level anticipated in the 2010 budget. As this program continues to be transferred to the province (through 2018), costs attributed to the district will diminish, providing greater fiscal flexibility. Overall, Muskoka generated a surplus of C$32 million, or 18.5% of revenues. Debt Profile Muskoka s net direct and indirect debt is little changed from December 31, 2009 to December 31, 2010, decreasing marginally from C$127.8 million (89.6% of revenues) to C$127.0 million (83.1% of revenues). This is down from C$141.0 million (109.8% of revenues) on December 31, Interest payments consumed 3.2% of operating revenues and debt service (including both principal and interest payments) measured 7.3% of total revenues, reflecting Muskoka s adequate fiscal flexibility. Formal Plan to Reduce Debt Burden Muskoka s debt burden has improved in recent years alongside the implementation of the District s Debt Reduction Initiative (DRI), which was created to help correct the district s historically lowerthan-average reserve position and slightly higher-than-average debt burden compared to other Ontario municipalities. As part of the DRI, a Debt Reduction Reserve Fund was established in 2008, which is 1 Accounting changes introduced in 2009, with 2008 figures restated, make direct comparisons to prior years difficult. 2 DECEMBER 15, 2011 CREDIT ANALYSIS: MUSKOKA, DISTRICT MUNICIPALITY OF

3 to be funded through the savings the District realizes through the uploading of both the Ontario Disability Support Program (ODSP) and Ontario Works to the province during its first phase. The projected year-end balance of the Debt Reduction Reserve Fund for 2011 is C$3.1 million, after a C$10.5 million payment from the fund. Future obligations of this fund have been forecasted to total C$35.3 million. As savings from the ODSP will begin to be phased out over a five year period, starting in 2017, it is expected that annual repayments of internal loans combined with interest earned on the fund balance will sustain the fund beyond the ODSP cutoff in Muskoka s commitment to the Debt Reduction Initiative is expected to generate benefits to the district s credit quality over the long run and, as such, is viewed as a credit positive. Capital Plans Based on Pay-as-you-go The district s current ten-year tax-supported capital plan ( ) includes projects valued at C$217.3 million, with road-network infrastructure projects valued at over C$150 million. The taxsupported capital plan is to be financed primarily by drawing down reserves accumulated in anticipation of capital projects and through development charges. Debt issuance is expected to be minimal as the district continues to focus on the reduction of its debt burden. Muskoka s capital plan for rate-supported expenditures (water and sewer) totals C$128.6 million, a level that follows a downward trend seen over the past few years. This plan is also weighted more heavily on the short-term, as the district anticipates building four new sewage plants in the next 5 years. As with the tax-supported capital plan, no debt issuance is currently planned for these projects. Water and sewer rates have risen in the recent past at double-digit rates. With increases expected to stabilize over the medium-term, revenues should continue to provide adequate funding to service Muskoka s stock of rate-supported debt. Debt service (including principal and interest) is expected to peak over the medium-term and decline gradually thereafter. Governance and Management Factors Similar to other highly rated municipalities in Ontario, the District Municipality of Muskoka displays strong governance and management characteristics. In addition to multi-year capital planning, based on a ten-year capital plan, and a record of generating operating surpluses, management adheres to conservative debt and investment practices, thus limiting exposure to market-related risks and helping to ensure smooth debt servicing costs. These fiscal management measures are also supported by transparent and timely financial reporting. Economic Fundamentals The District Municipality of Muskoka comprises a vast and sparsely populated geographical area located approximately 200km north of the City of Toronto. The towns of Bracebridge, Gravenhurst, Huntsville, Georgian Bay, Lake of Bays and Muskoka Lakes constitute Muskoka s municipalities. The district is home to a growing population of about 60,000 permanent residents and to approximately 76,000 seasonal residents. The area s scenic natural setting and abundance of lakes favour a dynamic tourism industry, attracting vacationers from the Greater Toronto Area, and has also benefited from the expansion of Highway 400. Tourism has been a key industry for the District, and is increasingly becoming year-round as seasonal properties are being converted into permanent homes. Retail trade and personal and business services account for the largest portions of total employment. The economy also benefits from light manufacturing and growing services, including airplane refurbishing. 3 DECEMBER 15, 2011 CREDIT ANALYSIS: MUSKOKA, DISTRICT MUNICIPALITY OF

4 Operating Environment The operating environment in which Muskoka operates is typical of advanced industrial economies, characterized by high GDP per capita, low GDP volatility and high ranking on the World Bank s Government Effectiveness Index, all of which suggest a low level of systemic economic, financial and political risk. As evidenced by Canada s record of continued economic expansion and political stability, the macroeconomic environment is robust and federal government institutions responsive. Accordingly, the conditions that have historically preceded national crises associated with widespread defaults of regional and local governments are not present in Canada. Institutional Framework The institutional framework governing municipalities in Ontario is mature and highly developed. The division of roles and responsibilities between the province and municipalities is clearly articulated. Historically, changes to the institutional framework have occurred at a measured, evolutionary pace, following discussions between both parties. Nevertheless, in certain cases, changes have occurred more rapidly. Muskoka s creditworthiness benefits from the stability inherent in the provincial institutional framework. Provincial legislation dictates a high degree of oversight, including limits on debt servicing costs, while policy flexibility, on both the revenue and expenditure sides of the ledger, helps Muskoka manage pressures as they arise. Application of Joint-Default Analysis The Aa2 rating assigned to Muskoka also reflects the application of Moody s joint-default analysis rating methodology for regional and local governments. The District s rating is composed to two principal inputs: a baseline credit assessment (BCA) of 4 on a scale of 1 to 21, which 1 represents the lowest level of credit risk, and a very high likelihood that the Province of Ontario(Aa1, stable) would act to prevent a default by the District. To complete the analysis, Moody s assigns a very high likelihood of extraordinary support from the provincial government, reflecting Moody s assessment of the risk to Ontario s reputation as a regulator of municipalities and the incentive for the provincial government to minimize the risk of potential disruptions to capital markets if Muskoka, or any other municipality, were to default. Rating History Date November 2006 June 2006 Rating Aa2 Aa3 4 DECEMBER 15, 2011 CREDIT ANALYSIS: MUSKOKA, DISTRICT MUNICIPALITY OF

5 Annual Statistics Debt Statement (C$000, as at 12/31) Debt Issued for Regional Municipality 55, , , ,074 91,922 Member Cities 25,772 29,657 28,415 27,708 35,094 School Boards Short-Term Bank Debt 10,000 5, Ontario Infrastructure Projects Corp. 20, Total Direct and Indirect Debt 111, , , , ,016 Less: School Board Debt Net Direct and Indirect Debt 111, , , , ,016 Debt Trends (as at 12/31) Total Direct and Indirect Debt (C$000) 111, , , , ,016 As % of Total Direct and Indirect Debt District Municipality Member Cities School Boards Net Direct and Indirect Debt 111, , , , ,016 As a % of Operating Revenue As a % of Total Revenue Debt Burden (%) [1] Debt per Capita (C$) 1,937 2,413 2,118 2,057 2,015 Net Debt Issuances (C$000) 11,300 53, ,000 0 Own Purposes 5,800 48,301 0 X 0 Member Municipality/School Boards/Other 5,500 4,940 0 X 0 [1] Net direct and indirect debt as a percent of full value of taxable assessment. 5 DECEMBER 15, 2011 CREDIT ANALYSIS: MUSKOKA, DISTRICT MUNICIPALITY OF

6 Statement of Revenue and Expenses Current Operations (C$000, as of 12/31) [1] Revenues Property Taxes 64,385 69,635 74,367 78,066 81,191 Government Grants [2] 34,308 33,665 33,684 36,218 40,513 User charges [3] 9,657 11,369 24,723 24,258 25,119 Investment income 1,955 1,111 1,710 Other Revenues 16,636 22,820 2,637 2,946 4,406 Government Capital Grants 5,016 9,574 17,111 Gains/Losses on Sale of Tangible Capital Assets (224) (267) (640) Development Charges 4,565 2,545 3,609 Total Revenues 124, , , , ,019 Expenses General Government 7,226 7,357 8,437 Protection to Persons and Property 8,385 9,497 9,681 10,145 10,268 Transportation Services 8,500 8,858 19,150 18,956 18,619 Environmental Services 20,729 22,050 41,869 43,412 45,277 Social and family Services 33,326 36,546 42,230 44,126 46,891 Principal Payments 3,818 4,358 Interest Payments 3,030 4,003 Other Expenses 64,316 45,783 11,602 13,227 11,503 Total Expenses 142, , , , ,994 Surplus (Deficit) (17,118) 6,395 14,966 17,229 32,024 Cash Financing Surplus/(Requirement) (19,066) 7,783 18,041 7,376 4,409 Cash Financing Surplus/(Requirement) net of CAPEX 29,042 38,563 43,793 42,968 55,046 Capital Expenditures 48,108 30,780 25,752 35,592 50,637 Principal Payments 5,037 6,014 7,652 Amortization [4] 24,814 24,911 24,794 Interest Payments [4] 5,372 5,054 4,929 [1] Accounting changes were introduced in 2009; 2009 and restated 2008 figures are not directly comparable to prior years. Accounting changes in 2009 include the adoption of PSAB section 3150 Tangible Capital Assets and changes in the presentation of financial statements, including the elimination of fund accounting. [2] Prior to 2008, includes only provincial grants. [3] Prior to 2008, includes only water and sewer charges. [4] Subsumed in other expenditure categories beginning in DECEMBER 15, 2011 CREDIT ANALYSIS: MUSKOKA, DISTRICT MUNICIPALITY OF

7 Financial Trends (Year Ending 12/31) [1] Operating Revenues [2] 120, , , , ,939 Operating Expenses [3] 97, , , , ,200 Gross Operating Balance [4] 27,033 28,469 30,423 30,288 36,739 As a % of Operating Revenues 22.4% 22.2% 22.1% 21.2% 24.0% % Change in Total Revenues As % Operating Revenues Property Taxes Government Grants [5] User Fees [6] Interest Payments Gross Operating Balance As % Total Revenues Surplus/(Deficit) Cash Financing Surplus/(Requirement) Cash Financing Surplus/(Requirement) excl. CAPEX Debt Service [7] % Change in Total Expenses As % Operating Expenses Transportation Services Environmental Services Social and Family Services Debt Service [7] [1] Accounting changes were introduced in 2009; 2009 and restated 2008 figures are not directly comparable to prior years. Accounting changes in 2009 include the adoption of PSAB section 3150 Tangible Capital Assets and changes in the presentation of financial statements, including the elimination of fund accounting. [2] Starting in 2008, total revenues less development charges, government capital grants and gains/losses on sale of land/capital assets is used as a proxy for operating revenue. [3] Starting in 2008, total expenses less amortization and other non-operating expenses is used as a proxy for operating expenses. Prior to 2008, includes principal payments. [4] Revenues less expenses, excluding development charges, government capital grants, gains/losses on sale of land/capital assets and amortization. Prior to 2008, gross operating balance is calculated as operating revenues less operating expenses excluding principal payments. [5] Prior to 2008, includes only provincial grants. [6] Prior to 2008, includes only water and sewer charges. [7] Principal and interest. 7 DECEMBER 15, 2011 CREDIT ANALYSIS: MUSKOKA, DISTRICT MUNICIPALITY OF

8 Consolidated Balance Sheet (C$000, as at 12/31) [1] Cash and Investments 23,434 44,854 57,558 64,567 58,712 As a % of Net Direct and Indirect Debt Payables 19,483 15,114 14,782 19,401 23,569 Receivables 16,094 12,348 11,454 14,140 16,912 Fund Balances Reserves 7,020 7,274 7,020 5,852 5,847 Reserve Funds 20,801 29,571 39,521 41,154 45,500 Deferred Revenues (Development Charges) 1,468 3,880 3,439 3,658 3,538 [1] Accounting changes were introduced in 2009; 2009 and restated 2008 figures are not directly comparable to prior years. Accounting changes in 2009 include the adoption of PSAB section 3150 Tangible Capital Assets and changes in the presentation of financial statements, including the elimination of fund accounting. Economic Trends (Year Ending 12/31) Population [1] 57,563 58,430 61,191 62,109 63,041 Full Value of Taxable Assessments (C$ Millions) 16,329 16,510 16,748 18,262 19,888 % Change [2] Per Capita (C$) 283, , , , ,472 [1] Estimated seasonal population of 75,291 in 2001 and of 76,098 in [2] Periodic re-assessments; not all data points are comparable. 8 DECEMBER 15, 2011 CREDIT ANALYSIS: MUSKOKA, DISTRICT MUNICIPALITY OF

9 Moody s Related Research Credit Opinion:» Ontario, Province of, May 2011 Special Comment:» Outlook for Canadian Provinces 2011, March 2011 (131625) Statistical Handbook:» Non-U.S. Regional and Local Governments, June 2010 (125279) Rating Methodologies:» Regional and Local Governments Outside the US, May 2008 (107844)» The Application of Joint-Default Analysis to Regional and Local Governments, December 2008 (99025) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 9 DECEMBER 15, 2011 CREDIT ANALYSIS: MUSKOKA, DISTRICT MUNICIPALITY OF

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