Tourism potential mentioned as city’s credit rating gets a boost

Taking note of Sault Ste. Marie's ongoing efforts to develop its tourism sector, credit analyst S&P Global Ratings has raised the city's credit rating from AA (stable) to AA+ (stable).

"A strong credit rating will assist the city's ability to obtain long-term debt at competitive rates," says Shelley Schell, the city's treasurer and chief financial officer.

"The rating outlook as 'stable' means that the rating is not likely to change in the next two years," Schell says in a report prepared for Tuesday's city council meeting.

One major reason for the improved rating cited by S&P is a general institutional reassessment of Canadian municipalities, which are now viewed as "extremely predictable and supportive."

"Sault Ste. Marie is the third-largest city in northern Ontario and relies mainly on steel manufacturing and forestry," says S&P's latest rating reported, dated Sept. 14.

"We believe the city’s main industries... will support the city’s ongoing economic growth. However, the city continues to face socioeconomic and geographic hurdles that may stymie potential economic growth.”

But S&P also notes: "the city continues to gradually diversify from its traditional resource-based economy to other sectors such as tourism."

The credit analyst nonetheless predicts that "medium-term economic and related GDP [gross domestic product] growth will remain muted relative to that of Canada."

"While GDP per capita is not available at the local level, we estimate it to be somewhat below the national level of about US$56,000 based on the city's income data."

"Sault Ste. Marie's challenging demographic profile limits the city's growth prospects, in our view," S&P says.

"According to the 2021 Canadian Census, the local population declined by about 1.8 per cent over a five-year period, and approximately a quarter of the local population is over the age of 65 (compared with the national level of 19 per cent). We continue to monitor the success of the Rural and Northern Immigration Pilot program, a federal government project to help smaller rural and northern communities attract and retain foreign skilled workers to meet their economic development and labour market needs."

The report's authors opined that the city has "satisfactory" financial management.

"Disclosure and transparency are what we characterize as good, and the city prepares one-year operating and capital budgets annually, with a four-year capital forecast."

"Senior staff is experienced, and we believe that debt and liquidity management is prudent. The city updated its investment policy as well as its debt management and capital financing policies in September 2020 and is looking to develop further long-term plans over the medium term."

The rating service expressed confidence in Sault Ste. Marie's ability to control its debt levels.

"Due to the stability of the city’s primary revenue source, property taxes, we believe Sault Ste. Marie will be able to weather economic headwinds during the outlook horizon."

"On average, we expect operating balances will remain above 14.5 per cent of operating revenues in our base-case scenario for 2020-2024."

"We expect after-capital balances will narrow to a modest surplus of about one per cent of total revenues on average in 2020-2024, despite near-term capital requirements, which include sanitation sewer projects and recreation.facilities."

"The city’s five-year capital plan over 2020-2024 totals C$250 million, with annual spending averaging about C$50 million. We believe Sault Ste. Marie has average budgetary flexibility."

"Sault Ste. Marie maintains a robust liquidity position and satisfactory access to external liquidity for refinancing needs, in our view. We estimate that its free cash will average more than C$95 million in the next 12 months and cover more than 37 times estimated debt service for the period."

The credit analyst expects the city's relationship with the Province of Ontario will remain "extremely predictable and supportive."

"Despite additional borrowings, Sault Ste. Marie's debt burden will remain very low, and the city's robust liquidity will continue to support its creditworthiness."

The credit report is on the agenda for next week's meeting of city council.

That meeting will be live-streamed on SooToday starting at 4:30 p.m. on Tuesday.