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.