An international credit rating agency ramped up the Yukon’s borrowing power thanks, in large part, to Ottawa’s generous cash transfers.
Standard and Poor’s gave the Yukon an AA rating on Tuesday. Anyone with an AA rating - the agency’s second-highest rank - is considered to have a “very strong capacity to meet financial commitments.”
“The rating reflects our assessment of significant revenue support from the Canadian federal system, extremely low debt, and a solid economy compared with that of similarly rated domestic and international peers,” Bhavini Patel, one of two credit analysts who evaluated the Yukon, said in a news release.
Government by far takes up the bulk of the Yukon’s economy, therefore the certainty that Ottawa will keep paying the tab ensures that the territory won’t skimp out on its bills.
“Public administration, health care and social programs and educational services are the foundations of the territory’s economy,” said the release.
Standard and Poor’s, which rates stocks, bonds and both private and public corporations, likely saw the federal transfers as certain because it’s a legislated program, said Clarke LaPrairie, assistant deputy minister for the Yukon’s Finance Department.
The territorial financing grant, as well as the Canada Health and Canada Social transfers, will remain in place until 2014, he said.
There is no mention of mining, often touted as the Yukon’s bread-and-butter, in the news release.
“While a primarily service-based economy bolsters its economic profile and provides some stability, we believe that, compared with its domestic and international peers, a lack of depth and scale limits the territory’s economy,” says the credit-rating agency.
A strong exploration sector isn’t what goes into a credit rating for a territory, said LaPrairie.
Public administration takes up such a large part of the Yukon’s GDP that mining doesn’t figure highly in a credit rating, he said.
Standard and Poor’s also heaped praise on the territory’s low debt position.
“Despite an upcoming $100-million issuance from Yukon Development Corporation to finance two energy infrastructure projects, the territory will remain a net creditor (tax-supported debt less cash balances) at the end of fiscal 2011,” says the release.
That had Yukon Energy Corporation president David Morrison excited about the bond issue.
In a news release he said that means that the corporation “will be able to negotiate a very good interest rate for the bond.”
But Standard and Poor’s didn’t do its homework when it came to the Yukon’s public finances.
At one point, the release states that the current fiscal year is stronger than the last.
“Despite a notable deterioration in its operating results in fiscal 2010, it will remain committed to achieving a near-balanced budget in the medium term, starting with some improvement in fiscal 2011,” said the release.
That’s because in the last fiscal year, Fentie predicted a $19-million surplus but ended up with a $23-million deficit, said LaPrairie. This year, Fentie predicts a surplus of $2.9 million, and that’s where Standard and Poor’s sees “improvement,” he said.
But a quick glance at items not included in the budget demonstrates that a meagre surplus likely won’t happen.
The budget doesn’t include $2 million for repairs at the Thomson Health Centre, which the Health Department hasn’t budgeted.
Nor does it include a collective agreement negotiated with the Yukon Employees’ Union, reported to be a two per cent increase in 2010, which could cost the government an extra $7.2 million if this year’s payroll estimates are used.
Fentie’s surplus also excludes the $100-million bond being secured by the Yukon Development Corporation and $117 million being spent on new hospitals in Dawson City and Watson Lake, the expansion of the Whitehorse General Hospital and its new residence.
The government also only has $175,000 in its fire contingency fund after drawing it down $7 million last year.
Standard and Poor’s oversight might be due to the way the Yukon calculates its finances.
Last month, the C.D. Howe Institute put the territory in last place amongst all provincial and territorial governments for using two different accounting techniques at the beginning and end of each fiscal year.
The budget, put out at the beginning of the fiscal year, doesn’t include Crown corporations in the government’s finances, while its end-of-year statements must include those figures when they get audited by the auditor general.
The practice allows the government to convince people it has a surplus when it doesn’t, said Colin Busby, one of C.D. Howe’s analysts.
The Yukon should change its accounting methods to make the books more transparent, he said.
Both of Standard and Poor’s analysts were not available for comment by press time. Fentie, who is also finance minister, did not return a request for comment.
Contact James Munson at
jamesm@yukon-news.com