City of Saskatoon Ratings Affirmed At 'AAA'; Outlook Remains Stable


OVERVIEW
  • We expect the City of Saskatoon's track record of robust fiscal performance to continue, allowing the city to proceed with its capital agenda while maintaining healthy liquidity and minimal debt.
  • As a result, we are affirming our 'AAA' long-term issuer credit and senior unsecured debt ratings on the city.
  • The stable outlook reflects our expectations that, throughout the next two years, Saskatoon will continue to benefit from a diverse economy, maintain healthy liquidity, hold its tax-supported debt below 60% of operating revenues, and post robust budgetary results.
RATING ACTION
On Jan. 10, 2019, S&P Global Ratings affirmed its 'AAA' long-term issuer 
credit and senior unsecured debt ratings on the City of Saskatoon, in the 
Province of Saskatchewan. The outlook is stable.

OUTLOOK
The stable outlook reflects our expectation that Saskatoon will continue to 
benefit from a diverse economy, maintain healthy liquidity, hold its 
tax-supported debt below 60% of operating revenues, and post robust budgetary 
results in the next two years.  

Although unlikely, we could take a negative rating action in the next two 
years if Saskatoon's revenue growth persistently lags that of expenditures, 
resulting in consistent after-capital deficits over 5% of operating revenues, 
and the city's tax-supported debt exceeds 60% of operating revenue.

RATIONALE
We have updated our base-case scenario for Saskatoon and extended our forecast 
horizon through 2021. The city, which is the economic engine of Saskatchewan, 
has a diverse economy and prudent management. This will assist Saskatoon to 
maintain robust budgetary performance and healthy liquidity, allowing it to 
manage its capital plan with limited additional debt issuance. We also believe 
that Saskatoon will continue to benefit from a supportive institutional 
framework.

  • A diverse economy and prudent financial management support the ratings
In our opinion, Saskatoon benefits from a strong and diversified economy, 
given its status as Saskatchewan's largest Census metropolitan area. We 
estimate that the city's GDP per capita would be in line with the provincial 
average in 2016-2018 (forecast) of about US$52,141, given Saskatoon's fairly 
high median household income. Saskatoon's population is forecast to reach 
about 280,000 in 2019, a 2.6% increase since 2017. The city's largest 
industries are agriculture, the public sector, and natural resources, most 
notably potash mining. 

We believe that Saskatoon's creditworthiness reflects strong financial 
management. In our view, the city's management team is experienced and 
qualified to effectively enact fiscal policies, and effectively respond to 
external risks. Saskatoon demonstrates what we view as good political and 
managerial strength with its lengthy track record of passing budgets before 
the start of fiscal year and meeting goals. We also believe that management 
accountability is strong and financial policies are prudent. Disclosure and 
transparency are what we believe to be good, annual financial statements are 
audited and unqualified, and the city prepares robust annual operating and 
capital budget documents. It also prepares long-term capital and borrowing 
plans.

We believe Canadian municipalities benefit from a very predictable and 
well-balanced local and regional government framework that has demonstrated a 
high degree of institutional stability. 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 and landfill closure costs) through reserve contributions.

  • Operating balances are healthy, but an expanding capital plan will require debt to fund some projects
We expect modifiable revenues and operating balances will be stable and 
average about 86% and 23% of operating revenues, respectively, in 2017-2021. 
We also estimate that Saskatoon will post slight after-capital surpluses, 
despite fairly high capital expenditures of about C$311 million, or 31% of 
total expenditures, on average in 2017-2021.

In 2019-2021, Saskatoon plans to issue about C$142 million of debt to fund 
some capital projects. We expect tax-supported debt (including the costs 
related to the two public-private partnership projects) to remain minimal, at 
about 43% of operating revenues at year-end 2021. In addition, tax-supported 
debt is less than three years' operating surpluses, which, together with very 
low interest costs, supports our assessment of the minimal debt burden.

In our view, the city's liquidity is healthy. We estimate free cash and liquid 
assets will total C$422 million in the next 12 months and cover more than 10x 
estimated debt service for the period. We expect this ratio to remain well 
above 100% during the forecast outlook horizon. In addition, the city benefits 
from strong internal cash flow generation, which boosts our assessment of its 
liquidity profile. We believe that Saskatoon has satisfactory access to 
external liquidity, given its proven ability to issue into public debt markets 
and the presence of a secondary market for Canadian municipal debt 
instruments.

Saskatoon's contingent liabilities are what we consider very low, totaling 
about 6% of 2017 operating revenues. They relate mainly to standard future 
employee benefits and landfill postclosure.

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