1999 Credit Rating for Essex County

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COUNTY OF ESSEX January 14, 1999 Volume I - Ontario Current Ratings Long Term Debt A Rating Outlook Rating Status Positive Reaffirmed Filing iusf~uctions: Replaces all previous reports. RATING OPINION CBRS has reaffirmed the County of Essex's long-term debentures at A following a review of its overall credit profile, including both economic and financial considerations. The rating outlook remains positive. The rating is supported by the County's stable tax collection rates, commitment to internal funding of capital projects, history of prudent fiscal management, growing assessment base and a stable and relatively diverse economic base. The consolidated municipality also carries appropriate credit ratios that reflect CBRS's rating level and attest to the County's degree of financial flexibility. Essex County will face challenges common to all Ontario municipalities as well as pressures unique to its local service area during the next several years; however, CBRS is confident that upper and lower-tier municipalities are well positioned to manage those exposures such that the current rating level should be maintained. The positive rating outlook reflects a directional opinion that the municipality's future credit profile may improve upwards and the County's forward looking credit quality will be determined by its ability to manage the following challenges over the medium term: I. Management of labour relations, skill-set vacancies and collective bargaining cost pressures. 2. Ability to generate cost savings and operational efficiencies from County amalgamations. 3. Maintenance of high internal capital funding. 4. Replacement of temporary Special Transition Assistance funding. 5. Management of provincial reforms, downloaded services and funding of growing municipal infrastructure gap as capital grants from senior government declines. 6. Ability to maintain employment levels and assessment base to support income generation and tax collection activities. RAllNG ANALYSIS Structure, Amalgamation and Legal Responsibility Effective January 1, 1998, the County of Essex consolidated the number of lower-tier municipalities from twenty-one to eighteen as part of a re-structuring exercise. Consistent with the Province's ambitions to further reduce and consolidate municipalities to achieve operational efficiencies and reduce duplication of service, Essex pro-actively undertook a further re-structuring process. The County will be comprised of only seven lower-tier municipalities effective January !, 1999 with elections for representative positions in the new municipalities recently completed. Following the latest consolidation initiative, Essex County's lower tier-members will be comprised of LaSalle, Tecumseh, Lakeshore, Leamington. Essex, Kingsville and Amherstburg. The tax assessment base and geographic boundaries of the former Essex County structure are unchanged and ali assets and liabilities of the eighteen former municipal entities will become assets and liabilities of the seven amalgamated Towns, effective January 1, 1999. In general, Essex County lower-tier municipalities may procure financing at the upper-tier government because of the cheaper f'mancing available from its high rating as well as economies of scale in transaction costs if debenture requirements for several municipalities are pooled within one upper-tier debenture issue. It is important to note that upper-tier debentures issued on behalf of lower-tier members do not carry a joint and several obligation between upper and lower-tier governments. The fact that only a several obligation exists means that debt issued 'by the upper-tier government for lower-tier purposes is expected to be serviced by the lower-tier municipality for whom the debt was issued and neighbouring Essex County lower-tier municipalities are not jointly responsible for those upper-tier debt obligations. The same severality principle described above applies to debt issued in the name of lower-tier municipalities so that debt issued in Leamington's own name, for example, is supported solely by its local taxable assessment base. In addition, since the upper-tier has no tax collection powers, incremental debt for upper-tier (County government) purposes must be serviced by higher upper-tier tax levies applied to, and collected by, lower-tier municipalities and remitted to the County government. The foregoing discussion is important to CBRS in its analysis of Essex County because, [n the absence of a joint and several status, we must assess the likelihood that the County would impose an effective joint and severability upon lower-tier members in the event that a lower-tier municipality could not meet its upper-tier debt obligations. CBRS is of the opinion that if sucti a circumstance existed, the County would take action to levy, via upper, -tier tax requisition, all lower-tier members to meet any debt service shortfall. That expectation and willingness to maintain its debtor standing provides credit support and enhances our position in assessing the County credlt profile. In the context of the above discussion respecting lower- tier peer support to provide an effective joint and several status, it should be noted that the City of Windsor resides within the geographic borders of Essex County but is a separated municipality that issues debt in its own name. As a separated City it provides no upper-tier tax requisitions to the County government. Provincial Change 1998 has been a year of fundamental reform in municipal government as the Province of Ontario implemented a current value property assessment and downloaded service responsibilities, and their associated costs, as part of a purported revenue neutral exchange to establish control over education funding. In general, the County Government supports the province's intention to disentangle service delivery and improve local accountability; however, implementation of that process has created some exposures and risks to municipalities. CBRS will continue to review and monitor Essex County's credit profile over time to ensure that the positive credit features and risk mitigants that support the rating are not materially coml~romised. 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