Ontario Debt Woes

In its 2019-20 budget released on April 11th, the Province of Ontario announced an expected budget deficit of $10.3 billion and a change to certain transfers and funding structures for services provided by municipalities. The changes aim to reduce the province’s multi-year spending commitments – the estimate of which has a shortfall of more than $2 billion over the next decade – by transferring a share to the municipalities. Importantly, the current 75%/25% sharing of public health service costs between the province and municipalities will change to a 70/30 split for municipalities with populations under one million. The changes will either directly reduce expected funds for programs or will require municipalities to increase their share of funding commitments to programs such as Public Health and Child Care Services programs. Ontario municipalities will need to address these shortfalls through a combination of administrative efficiencies, tax hikes, non-essential service cuts and drawing on reserves. 

For a decade now, the Government of Quebec has also been reducing its transfers to municipalities in order to balance its budget.  The impact on citizens was a reduction in services offered and an increase in the property tax rate.  While we saw widening credit spreads on municipal bonds as a result, we think it is a bit to soon to speculate on what could happen to Ontario’s municipal bonds. What’s sure is that we can expect an increase in borrowing needs in the years to come. To put this all in context, Ontario has seen a wave of credit rating downgrades in the last few years, namely by S&P in 2015 and Moody’s in December 2018. Moreover, Ontario long bond yields surpassed those of Quebec for the first time in 2017 and have traded that way since then, reflecting the market’s fears surrounding the former’s growing debt burden.

 

Jean-Guy Mérette

Vice President and Portfolio Manager
Active and Strategic Fixed Income Team