TEXT-S&P raises City of Kingston, Ontario rating to 'AA'

Tue Nov 6, 2012 2:46pm EST
 
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Overview
     -- We are raising our long-term issuer credit rating on the City of 
Kingston to 'AA' from 'AA-'.
     -- The upgrade reflects our view of the city's relatively stable and 
resilient economy, strong budgetary flexibility, robust operating balance, and 
solid liquidity levels.
     -- The stable outlook reflects our expectations that Kingston's economy 
will remain relatively stable, its operating balance will continue to exceed 
10% of operating revenue, tax-supported debt will not increase more than 100% 
of operating revenue, and the after-capital deficit will not be greater than 
10% of total revenue.

Rating Action
On Nov. 6, 2012, Standard & Poor's Ratings Services raised its long-term 
issuer credit rating on the City of Kingston , in the Province of Ontario 
(AA-/Negative/A-1+), to 'AA' from 'AA-'. The outlook is stable.

The upgrade reflects our view of Kingston's stable and resilient economy, 
strong budgetary flexibility, robust operating balance, and solid liquidity 
levels. We believe the city's persistent after-capital deficit and rising debt 
burden partially offset these strengths.

Rationale 
The rating on Kingston reflects Standard & Poor's opinion of the following 
strengths:
     -- A relatively stable economy. In the past few years, Kingston's economy 
has benefited from a strong and relatively large public sector presence as it 
is home to the Canadian Forces Base, Queen's University (AA+/Negative/--), 
Correctional Services Canada, and Kingston General Hospital. These public 
institutions have provided stable employment, especially during the financial 
crisis. However, with the expectation that the federal government will seek to 
achieve fiscal balance by fiscal 2016 by streamlining its operations, we could 
see a modest rise in Kingston's unemployment rate during our two-year outlook 
horizon;
     -- Strong budgetary flexibility. Kingston's modifiable revenue has 
consistently been above 80% of operating revenue in the past few years, 
although the city's flexibility is somewhat constrained by its relatively high 
tax rates compared to household income levels;
     -- Robust operating balance. As of December 2011, Kingston had an 
operating balance of 15% of operating revenue (Standard & Poor's-adjusted). 
The city has a lengthy history of solid operating balance, averaging about 14% 
of operating revenues in the past eight years. However, Kingston could face 
operating pressures starting in 2013 as it considers strategies to limit tax 
rate increases to 2.5% in the 2013 and 2014 budgets. Nevertheless, in our 
opinion, the city's operating balance should still remain above 10% of 
operating revenue at fiscal year-end 2012; and
     -- Solid liquidity levels. As at July 2012, Kingston's free cash and 
liquid assets was estimated to be at C$228 million (Standard & 
Poor's-adjusted) or more than 9.0x its estimated debt service for 2013. We 
believe unrestricted cash in the next 12 months will average more than C$200 
million.

We believe the following factors constrain the ratings:
     -- A persistent after-capital deficit. From 2008-2011, Kingston's 
after-capital deficit averaged about 4% of total revenues (Standard & 
Poor's-adjusted). In 2011, the city had an after-capital deficit of nearly 6%. 
Although its after-capital deficit in 2012 and 2013 could decrease to about 3% 
as a result of lower capital spending, the deficit could rise above 5% in 
2014-2016 because of higher capital spending; and
     -- A rising debt burden. Kingston's tax-supported debt increased to C$265 
million in 2011 from C$237 million in 2010. The city's tax-supported debt 
could reach nearly C$400 million or 100% of operating revenue by the end of 
2015. Although the level of debt continues to rise, we believe it remains 
manageable and interest payment should remain below 5% of operating revenue in 
the next two years.

Outlook
The stable outlook reflects Standard & Poor's expectations that Kingston's 
economy will remain relatively stable and resilient, its operating balance 
will continue to exceed 10% of operating revenue, tax-supported debt will not 
increase more than 100% of operating revenue, and the after-capital deficit 
will not be greater than 10% of total revenue. We could revise the outlook to 
negative or lower the rating if economic indicators deteriorate significantly, 
tax-supported debt increases above 120% of operating revenue, and budgetary 
performance weakens substantially. We could revise the outlook to positive if 
the economy remains resilient and the budgetary performance improves 
significantly.

Related Criteria And Research
Methodology For Rating International Local And Regional Governments, Sept. 20, 
2010

Ratings List
Rating Raised

                                 To                 From
Kingston (City of)
 Issuer credit rating            AA/Stable/--       AA-/Positive/--


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.