Does the Sault have too many old people?

The City of Sault Ste. Marie’s credit rating agency is worried our unusually large population of elders may limit our growth prospects.

“Sault Ste. Marie’s challenging demographic profile limits the city’s growth prospects, in our view,” S&P Global Ratings says in its latest city-commissioned rating.

“Per the 2021 Canadian Census, the local population fell by about 1.8 per cent and approximately a quarter of the local population is above the age of 65 (compared with the national level of 19 per cent),” S&P cautions.

The credit analyst nevertheless commends local officials for trying to keep the Sault young.

“The city is taking steps to mitigate this, participating in the Rural and Northern Immigration Pilot. This program is supporting the city’s goal of attracting skilled foreign workers to meet economic and labor market needs.”

S&P’s latest annual credit rating, to be presented to city council on Tuesday, pegs the City of Sault Ste Marie at AA+(stable) for 2024.

That’s the same rating we’ve held for the last several years.

“A credit rating is a neutral third-party assessment of the financial health of the city and reflects how well an organization is managed financially, the current state of the local economy and the local government framework,” says Shelley Schell, the city’s chief financial officer and treasurer

Factors taken into account for a ratings score include:

• institutional framework
• financial management
• economy
• budgetary performance
• liquidity
• debt burden

“A strong credit rating will assist the city’s ability to obtain long-term debt at competitive rates,” Schell says.

“The rating outlook as ‘stable’ means that the rating is not likely to change in the next two years.”

Here are some excerpts from S&P Global’s latest rating of the City of Sault Ste. Mary:

We expect Sault Ste Marie’s local economy — including manufacturing and forestry — to support ongoing growth and local revenue generation, despite socioeconomic and geographic hurdles.

We expect that, to support key maintenance and growth-related projects, the city will issue some debt in the coming years while maintaining a modest debt burden.

However, the city intends to fund the majority of its capital plan internally, which we expect will drive small capital deficits throughout the forecast horizon. We expect its liquidity position will remain robust and more than sufficient to cover debt service needs.

The stable outlook reflects S&P Global Ratings’ expectation that, in the next two years, Sault Ste. Marie will continue recording operating surpluses and small after-capital deficits, on average.

We also expect tax-supported debt will remain below 30 per cent of operating revenues through 2026 while the city preserves a healthy liquidity position.

We could lower the rating in the next two years if larger-than-expected capital spending requirements cause budgetary results to deteriorate, leading to average after-capital deficits of more than five per cent of total revenues and higher reliance on debt funding for capital, increasing the city’s debt burden above 30 per cent of operating revenues.

Although unlikely within the next two years, we could take a positive rating action if the local economy expands with growth prospects notably picking up and management demonstrates a sustained commitment to developing robust financial practices and policies.

Sault Ste. Marie is the third-largest city in northern Ontario and its economy is traditionally resource-based, specifically in steel manufacturing and forestry.

Although the economy continues to diversify into other sectors (including tourism), we believe that medium-term economic and related GDP 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$54,300 based on the city’s income data.

In our view, Sault Ste. Marie demonstrates 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.

Starting with the 2023 budget cycle, the city prepares separate tax-supported and rate-supported budgets, and management is looking to develop further long-term planning capabilities in the medium term.

Senior staff is experienced, and we believe that debt and liquidity management is prudent.

As do other Canadian municipalities, Sault Ste. Marie benefits from an extremely predictable and supportive local and regional government framework that has demonstrated high institutional stability and evidence of systemic extraordinary support in times of financial distress.

Most recently through the pandemic, senior levels of government provided operating and transit-related grants to municipalities, in addition to direct support to individuals and businesses.

Although provincial governments mandate a significant proportion of municipal spending, they also provide operating fund transfers and impose fiscal restraint through legislative requirements to pass balanced operating budgets.

Municipalities generally have the ability to match expenditures well with revenues, except for capital spending, which can be intensive.

Any operating surpluses typically fund capital expenditures and future liabilities (such as postemployment obligations) through reserve contributions.

Municipalities have a track record of strong budget results; Debt burdens, on average, are low compared with those of global peers and growth over time has been modest.

Sault Ste. Marie is embarking on a maintenance-focused capital plan, including for increased investment in its West End Treatment Plant and its biosolids facility.

Therefore, we expect that after-capital deficits will average just below one per cent over the five-year base case 2022-2026, averaging an annual capital spend of C$63 million in the years forecast.

We believe that the city has adequate room to defer capital projects as necessary. Given the city’s primary revenue source, property taxes, we believe Sault Ste. Marie’s revenue base will remain stable over the outlook horizon. We expect operating balances will average slightly more than 15 per cent of operating revenues in our base-case scenario.

To support its capital plan, the city plans to issue C$7 million in both tax- and rate-supported debt over the three years forecast 2024-2026, raising its debt burden to approximately 10 per cent by 2026.

Its debt burden also includes approximately C$4.9 million in debt of the Public Utility Commission (PUC) of Sault Ste. Marie, which the city guarantees.

The guarantee supports a loan set to amortize to maturity in 2026 and a draw on the commission’s operating line.

Although future capital projects could increase the city’s interest burden, we expect that interest payments will remain small, below one per cent of operating revenues throughout the forecast horizon.

We do not consider the debt of Sault Ste. Marie’s government-related entities, PUC Inc. and PUC Services Inc., as a contingent liability, because we believe the likelihood of the city providing extraordinary support in a stress scenario is low.

In our view, the city has a robust liquidity position and satisfactory access to external liquidity for financing needs.

We estimate that its free cash will average C$82 million in the next 12 months and cover 48x estimated debt service for the period.

Next week’s city council meeting will be live-streamed on SooToday starting at 5 pm on Tuesday.