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Actually, the city’s credit rating has been downgraded before

January 14th, 2009 · 10 Comments

My learned friend Geoff Meggs commented today in the Globe and Mail that the city’s credit rating has never been downgraded before due to council actions.

Actually, I was reminded by someone with a better memory than mine that that’s not true. The credit rating was downgraded in 2003, when Geoff was then assistant to Mayor Larry Campbell, because of concerns about increasing labour costs and rising debt. (That’s where I learned the lesson at the finance director’s knee that a city should not be paying out more than 15 per cent of its operating budget to service debt, otherwise it’s getting into trouble. Or maybe it was in the ’90s that I learned that.) I think Geoff would argue that the downgrading was not a direct result of council decisions, since the debt had been accumulated by previous administrations.

Here’s the Sun story that was published at the time, where you will notice the ghostly re-appearance of finance director Estelle Lo, who was also warning at the time about the problems of taking on too much debt.

Debt, salary pressure topple city’s AAA credit rating

Dec. 5, 2003

For the first time, the city of Vancouver’s credit rating has been downgraded a notch by one of its three bond rating agencies.

Dominion Bond Rating Services announced Thursday it is taking the city from AAA — the highest rating possible — to “AA (high) with a stable trend,” citing concerns about building salary pressures and a rise in tax-supported debt.

The city is currently in negotiations with its unionized employees, whose salaries make up a large part of expenditures.

City financial officials said the rating change may not affect taxpayers, at least in the short term.

City finance director Estelle Lo said it is unlikely the change will affect the city’s ability to borrow or even result in higher borrowing costs, but “the impact of this change won’t be known until we go to the financial markets to borrow funds.”

Theoretically, the difference between AAA and AA could cost about $230,000 on a $100 million bond over 10 years, she said.

“Which is not high at all. But that’s purely theoretical and we may not have to pay that premium. It depends on the timing of the market.”

Mayor Larry Campbell, who likes to call himself a fiscal conservative, said he was not too concerned about the drop.

“We should assure the citizens there won’t be rioting in the streets and we don’t have the ERT [emergency response team] on standby,” he said.

But George Puil, a long-time NPA councillor who was defeated in the last civic election, said: “It’s very unfortunate. There was a certain amount of pride and honour that went along with Vancouver’s situation and we have protected that for years.”

He warned the rating drop could do serious harm to the city’s financial stability and could affect other municipalities in the Lower Mainland, because they borrow funds from an authority that cites Vancouver as a guarantor.

“It could have a sort of domino effect on other municipalities and TransLink and the whole municipal financial authority,” he said.

City financial officials told city council’s budgets committee Thursday that the other two agencies, Moody’s Investors Service and Standard & Poor’s, continue to rate Vancouver AAA.

“This is still, according to DBRS, one of the highest ratings of any municipalities in Canada,” said Ken Bayne, director of financial planning for the city, who also noted that some of Vancouver’s tax- supported debt comes from the regional parks and TransLink projects, which are beyond the city’s direct control.

Finance director Lo said only the federal government and Alberta’s provincial government now have AAA ratings from Dominion because they have greater taxing power and more resources. She said Vancouver, along with all other municipalities, is not likely to get its AAA back.

“They don’t believe the city of Vancouver is in the same league as the government of Canada and the province of Alberta,” she said. “They also have a general concern over the ability of Canadian municipalities to finance their growing infrastructure.”

Lo said this is the first time Vancouver’s rating has gone down and the assessment is based on trends over about the past years, as well as a look at the future.

Bayne, who noted that Standard & Poor’s and Moody’s have rated the city since 1980 and Dominion began rating it about 10 years later, said the city also went to a lower rating because of capital costs incurred by the Greater Vancouver regional district and TransLink.

“A big component of this rating is what happens at the region, so the big question for council is balancing our needs with what is happening at the region,” he said. “Some may tell you it is not worth the effort of maintaining this credit rating if infrastructure suffers.

“Sometimes a triple-A credit rating is just too expensive for a municipality to maintain.”

In a news release explaining the downgrade, Dominion said: “The consistent rise observed in DBRS-adjusted net tax-supported debt over the past several years, in tandem with the expectation of further notable growth over the medium term, have weakened the credit profile of the city to a level no longer consistent with an AAA rating.

“Fiscal performance remained strong in 2002, although building salary pressures were the key driver behind a slight dip in the DBRS- adjusted operating surplus to a still-healthy $131.4 million.”

The city is currently going through a review of next year’s budget of more than $700 million and is in negotiations with its unionized employees.

When it reviewed the preliminary budget last month, council was warned it faces a 5.3-per-cent rise in property taxes if no cuts or adjustments are made.

Lo and Bayne did not comment on labour negotiations, but Lo said council has to be careful to avoid arbitrary increases in property tax.

“Council has been very careful to look at tradeoffs,” she said. “We have to be very careful about balancing the needs of the capital expenditures, because it has an effect on debt.”

Moody’s, which reconfirmed its AAA rating for Vancouver Thursday, said a downgrade was highly unlikely, given the strength of the local economy and “the discipline displayed by the city administration in keeping spending and debt under control.

“Nonetheless, a sustained loss of discipline, leading to a significant increase in debt to fund infrastructure projects, would apply downward pressure to the rating.”

Both it and Standard & Poor’s, which confirmed Vancouver’s AAA rating earlier this year, are scheduled to do another review in 2004.

Bayne’s comment that Dominion’s review was based on the past five years, as well as future trends, was the cue for council members to make political jabs.

Budgets committee chairman Councillor Tim Louis asked if there had been any new debt since the new Coalition of Progressive Electors-council took over a year ago and, when Bayne said no, Louis replied: “Not a dime of debt on our watch.”

He and other COPE councillors were also quick to point the finger at previous Non-Partisan Association councils.

“This is about paying for past problems as they [Dominion] see it,” Councillor Tim Stevenson said.

NPA Councillor Sam Sullivan said: “The thing I love about a bond rating agency is … there’s no political motivation behind it,” he said. “They’re simply telling the truth.”

Puil said despite a warning one year ago that Vancouver was facing several challenges that could “negatively impact its credit profile,” he was “dumbfounded and disappointed” by the city’s new rating.

The warning was published last year in Dominion’s 2001 overview of municipal governments.

Puil said he was aware of the warning, but didn’t think a drop in the bond rating would come so soon.


The Dominion Bond Rating Service dropped Vancouver’s coveted AAA creditworthiness status. Key factors in Thursday’s announcement:


“Building salary pressures” drove down city’s operating surplus to a “still healthy” $131.4 million. These higher labour costs are predicted to mean higher property taxes and fees.

Capital project costs

The city’s tax-supported debt jumped 14 per cent, thanks in part to regional financing needs. Vancouver, owes $400 million — a figure that is “relatively high” when set aside other Canadian cities.

Property taxes, fees

Vancouver “will likely have to rely upon property tax and user- fee increases notably above inflation” in order to cover spending pressures, the most meaningful being salaries and debt-servicing charges.”


Until Thursday, Vancouver’s AAA rating from Dominion gave it the highest bond status available. Now only one city is in that category.

AAA: Peel, Ont., (pop. 960,000). Stable base, diverse economy, “few” negative factors.

AA (high): Vancouver, Edmonton, Ottawa and Hamilton. Finances under control, not much real difference from AAA.

AA: Calgary, Toronto.

AA (low): Winnipeg.


As the City of Vancouver was quick to point out Thursday, other bond-rating agencies retain a more favourable view:

Moody’s: AAA holding firm, despite acknowledgement of long-term issues.

Standard & Poor’s: AAA rating is intact.

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