(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).)
Key Takeaways
- Canadian municipalities have the fiscal tools and a record of prudent management and government support to maintain budgetary stability through temporary weakening in the local economy.
- Along with the fluid tariff landscape, rising capital needs will necessitate continued healthy own-source revenues, with higher borrowings possible.
- We will continue to assess each municipality on a case-by-case basis, with consideration for management response to economic vulnerabilities and evolving needs.
Growing Infrastructure Requirements Overshadow Potential Near-Term Budgetary Impact Of Trade Uncertainty
Unlike how it affects Canadian provinces, the impact of local economic performance on municipal finances is less direct. A hit to local revenue performance tends to follow from material and persistent deterioration in both the local labor market and the local assessment base. Aside from a select few municipalities we rate where employment is concentrated in a single or very volatile industry, municipal economies are typically well diversified. In addition, the public sector generally represents a solid base for the local economies, on average 20% of employment, adding a moderate level of stability. Nevertheless, amid ongoing trade and investment uncertainty, among rated municipalities, we believe those with a higher concentration of employment in tariff-exposed industries could face the most hurdles.
S&P Global Ratings doesn't expect tariffs to be a key driver of municipal creditworthiness in the near term. In our view, a temporary downturn in the local economy can be largely accommodated within the current credit profiles of rated Canadian municipalities (see Windsor and Calgary case studies). However, persistent tariff-related stress that leads to a long-lasting pronounced shift in local economic fundamentals could weaken revenue-expenditure dynamics for those municipalities with trade-sensitive industry concentration.
In these cases, governments would likely need to take more proactive revenue-raising and/or cost containment steps to maintain stable budgetary performance. As there are some limitations to adjusting operating costs, especially given the mandated nature and, at times the regulatory requirements, of the services provided by local governments, many municipal governments respond to budgetary stress by raising taxes above inflation. We believe this could become harder to implement in the future, following a period of elevated tax hikes that have occurred in recent years.
Many municipalities are also contending with rising infrastructure requirements, both maintenance on existing and undertaking new infrastructure projects, given historically strong population growth. We expect focus will remain on expanding affordable housing development across Canada. Of note, despite the projected slowing in the pace of population growth following changes to federal policies related to reduced immigration targets, most municipalities have a backlog of capital deferrals that they need to address.
S&P Global Ratings Economics' Canadian economic forecast has shifted with changing tariff scenarios along with our U.S. economic growth outlook. We believe that the global trade environment will continue to weigh on credit conditions and possible impacts remain uneven across sectors and countries.
A strong intergovernmental framework bolsters municipal finances
A prudent fiscal policy framework, track record of extraordinary support, and infrequent reforms support our extremely predictable and supportive institutional framework assessment for all Canadian municipalities. In addition, Canadian municipalities continue to demonstrate predictable and prudent financial management practices and robust liquidity positions compared with those of global peers. These factors, together with moderate debt burdens and generally healthy budgetary results, support our high investment-grade ratings on Canadian municipalities. At 13, Canada has the largest number of municipalities rated 'AAA' by S&P Global Ratings outside of the U.S. Of the 34 Canadian municipalities we rate, 26 are in Ontario.
In the face of ongoing trade and investment uncertainty, we expect municipal governments will remain cautious in their financial planning. Meanwhile the federal and provincial governments have been taking steps to mitigate the potential macroeconomic knock-on effects from tariffs. Since early March, when U.S. tariffs first went into effect, the Canadian federal government has announced a number of measures, such as relief from surtaxes on goods imported from the U.S. for essential inputs and financing support, to incentivize continued production and investment in Canada and help tariff-affected businesses strengthen operations and diversify markets. Ontario announced tax credits to the manufacturing sector, temporary deferral of provincially administered taxes, and a fund for emergency liquidity relief.
We expect property tax collections, which typically account for at least half of a local government's total revenues, will remain largely steady for rated municipalities. The local population's ability to make property tax payments through periods of economic uncertainty is an important consideration, and with support from senior levels of government, the municipal sector has demonstrated stability in receipt of payments over time. As seen most recently during the COVID-19 pandemic, when employment, particularly in service-based industries, was severely disrupted, direct support from the federal and provincial governments to employers and individuals helped stabilize incomes. During that time, in combination with additional grants to municipalities and cost-cutting measures, municipal finances improved relative to typical performance.
Persistent trade tensions could affect credit stability of exposed municipalities
The strong credit profiles of Canadian municipalities, bolstered by prudent management and the supportive institutional framework in which they operate, indicate a level of expected stability in ratings through economic cycles. We will continue to evaluate each municipality individually, considering management response to fiscal pressures, such as willingness and flexibility to adjust revenues and/or expenditures, as well as support provided by senior levels of government in this complex and fluid environment. Although a single shock to a local economy could be endured with corrective action, exposure to repetitive shocks or layering of additional priorities, such as capital investment, could weaken our base cases for budgetary performance and increase reliance on debt for capital.
Related Research
- Global Credit Conditions Special Update: U.S.-China Tariff De-Escalation Brings Some Temporary Relief, May 15, 2025
- Global Macro Update: Seismic Shift In U.S. Trade Policy Will Slow World Growth, May 1, 2025
- For Canadian Provinces, The Current Credit Complexities Are Not Just About Tariffs, March 5, 2025
This report does not constitute a rating action.
| Primary Credit Analyst: | Dina Shillis, CFA, Toronto + 1 (416) 507 3214; dina.shillis@spglobal.com |
| Secondary Contacts: | Bhavini Patel, CFA, Toronto + 1 (416) 507 2558; bhavini.patel@spglobal.com |
| Lisa M Schineller, PhD, New York + 1 (212) 438 7352; lisa.schineller@spglobal.com | |
| Daniela Brandazza, Toronto 1 (437) 833- 0581; daniela.brandazza@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.