Sault Ste. Marie's capital plan shows increased medium-term spending because of the wastewater treatment plant

Sault Ste. Marie's budgetary performance has historically been stable and 
strong. We expect the city will generate operating balances averaging about 
6.7% of operating revenue from 2015-2019. Sault Ste. Marie's capital plan 
shows increased medium-term spending because of the wastewater treatment 
plant, the bio-solids treatment plant, and other aging infrastructure 
projects. Therefore, we estimate the city will have after-capital deficits of 
4%-6% of total revenues in both 2018 and 2019.

We expect Sault Ste. Marie will maintain a very low debt burden in the outlook 
horizon. We include the loan payable by the public utilities commission in our 
debt calculation, because the city guarantees its payments. At Dec. 31, 2019, 
we forecast tax-supported debt will be C$13.1 million, equal 6.3% of operating 
revenues of which C$5.2 million is for the commission. Planned borrowing is 
very modest, with only $5 million scheduled for 2018. Sault Ste. Marie's 
forecast debt is less than three years of operating surpluses, which helps to 
offset the debt burden in our opinion. In addition, we believe the city's 
interest costs will account for less than 1% of operating revenues, keeping 
the debt load very manageable.

Sault Ste. Marie's performance reflects the city's high degree of budgetary 
flexibility, which we expect to be largely stable within our outlook horizon. 
High modifiable revenues, primarily from taxes, fees, and user charges, 
typically account for more than 86% of operating revenues. We expect them to 
remain at this level in our base-case scenario. We also expect capital 
expenditures to average close to 15% of total expenditures for 2015-2019. 
While Sault Ste. Marie's significant capital spending suggests some ability to 
defer nonessential capital projects, we believe that the city's operating 
expenditure flexibility is somewhat limited, similar to that of many Canadian 
municipalities, primarily due to provincially mandated service levels and 
collective agreements with employees.

In our view, Sault Ste. Marie's liquidity bolsters the rating. We estimate 
free cash and liquid assets will total C$56 million in in the next 12 months 
and cover more than 26x estimated debt service for the period. While some of 
the city's cash and investment is used to fund Essar Steel's C$25 million of 
unpaid taxes, we expect cash and investments will rise on repayment. We expect 
this ratio to remain well above 100% and that Sault Ste. Marie will maintain 
its healthy liquidity position during our outlook horizon. Similar to that of 
its domestic peers, the city's access to external liquidity is satisfactory, 
in our view.

In our opinion, Sault Ste. Marie's contingent liabilities are low. They 
include debt of self-supporting city-owned public utility companies PUC Inc. 
and PUC Services Inc. (equal to about 40% of operating revenue in 2016), 
standard employee benefits, and landfill postclosure liabilities (which, net 
of reserves, totaled about 15.6% of operating revenues). We believe these 
liabilities do not have a significant impact on the city's credit profile.

Institutions remain broadly supportive while the economic profile is average.
We view Sault Ste. Marie's economic profile as average. High unemployment, a 
declining population, and a larger proportionate number of elderly residents 
constrain the city's economy and could affect revenue growth and expenditure 
needs. Sault Ste. Marie's population was 73,400 in 2016, down 2.1% since 2011. 
The city's proportion of residents aged 65 and over was about 25%, compared 
with 16.7% in Ontario, reflecting Sault Ste. Marie's growing popularity as a 
retirement destination. We estimate that the city's GDP per capita would be 
well below with the provincial average in 2014-2016 of about US$44,200, based 
on the most recent median household income data, as reported by Statistics 
Canada. Although Sault Ste. Marie continues to gradually diversify away from 
its traditional resource-based economy, we believe that medium-term economic 
and related GDP growth will remain muted relative to that of some peers.