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Should the city be paying $20,000+ for a credit rating?

Pretty much all municipalities pay to have their creditworthiness evaluated, finance committee members were told. Except for Timmins
2019-08-29 Pizza
For the first time in SooToday’s memory, members of the city's finance committee were offered pineapple pizza during their noon-hour discussion of credit ratings on Wednesday. Based on slices consumed, we concluded that our community’s top financial wizards prefer pepperoni over pineapple pizza almost three-to-one. David Helwig/SooToday

It's only an itsy-bitsy, teeny-weeny sliver in Sault Ste. Marie's $115-million budget pie.

But members of the city's finance committee got into a discussion this week about the thousands of tax dollars we hand over each year to S&P Global Ratings to evaluate our creditworthiness.

Should we be paying for municipal credit ratings?

"They are fairly expensive," says Shelley Schell, city treasurer and chief financial officer. "Ours is more than $20,000."

"In our area, Peterborough, Sault Ste. Marie, Thunder Bay, Sudbury they all do them. There's a lot of smaller municipalities that do credit ratings..." Schell told the committee.

"Excuse me for a second. This is do – as in pay – to have a credit rating done?" interrupted Ward 3 Coun. Donna Hilsinger.

"Yes, everybody pays for them," Schell replied. "Timmins does not do it. That was the only one I found that did not."

Do cities really need expensive credit ratings?

Schell says an authoritative credit report can increase a borrower's access to new financial markets.

"It improves your terms with banks, suppliers, counterparts, It's basically a report card on how well the municipality as a corporation is doing."

"I think a lot of municipalities do it so that council can say to the public, yes, we're financially responsible, we're stable. Things are looking good. We don't have to worry," Schell said.

Do we need to get a credit rating every year? Could we get by with one rating every three years?

Malcolm White, the city's chief administrative officer, suspects that skipping a year or two probably wouldn't save much money.

"If you go more than a year.... the quantum of work they would have to do to re-develop it two years down the road means you wouldn't really get a savings," White said.

Treasurer Schell suggested the Sault might want to look at other providers of municipal credit ratings.

"It goes up every year," Schell said. "I don't suspect that one is less [expensive] than the other."

Ward 2 Coun. Lisa Vezeau-Allen recommended issuing a request for proposals for the annual contract, for purposes of transparency and "just because of the amount."

Her fellow Ward 2 Coun. Luke Dufour agreed that credit evaluations can be useful, pointing out that last year's S&P "actually noted our low level of debt as a reason for a depressed credit rating."

"It specifically said that we were an excellent candidate to borrow to update infrastructure. It's kind of funny. Everybody always thinks about the credit report in terms of how much debt do you have?"

"It works on both edges. The same thing as your consumer credit rating. If you've never had a credit card, you have a terrible consumer credit rating," Dufour said.

Schell added: "If you are letting your infrastructure go, but you're not borrowing, that's why it goes down."

At least, we're pretty sure she said something close to that.

Schell's actual words were indecipherable because of grinding and other cacophony from construction workers on the other side of the third-floor Civic Centre windows, toiling on a $6.9-million window and cladding replacement infrastructure project intended to protect an important capital asset.

Committee members agreed to continue paying for annual credit ratings but decided to issue a request for proposals to explore alternative providers.

Last year, S&P gave the city an AA+(stable) credit rating, unchanged from the previous year.

"The stable outlook reflects our expectation that, in the next two years, Sault Ste. Marie will post after-capital deficits of about 1.3 per cent of total revenues on average in 2018-2020," analyst Siddharth Maniyar said.

"We also expect the city will maintain tax-supported debt well below 30 per cent of operating revenues through 2020 while preserving a healthy liquidity position."

"Although we believe it unlikely in the next two years, we could lower the ratings if deteriorating financial management practices lead to aggressive capital spending that pushed Sault Ste. Marie's tax-supported debt to more than 30 per cent of operating revenues, and combined with weaker operating performance that will result in sustained after-capital deficits of over 10 per cent of total revenues,” Maniyar said.

Schell said she met recently with S&P about this year's rating, which is due to be made public sometime in September or October.

"I don't expect any huge changes," she said.