Moody’s has downgraded Riverhead Town’s credit rating to Aa3 from Aa2.
The downgrade gives Riverhead the lowest rating assigned by Moody’s to any town in Suffolk County. The County of Suffolk, which has been downgraded by Moody’s three times in the past three years, has a lower credit rating than any of the towns, an A3.
Moody’s cited the town’s “deterioration of general fund reserves” as the principal factor in the downgrade. Riverhead had an Aa2 rating from Moody’s since January 2008, when it was upgraded from Aa3.
Riverhead Supervisor Sean Walter, who received a copy of the ratings agency’s report Tuesday afternoon, said the downgrade will not have any impact on taxpayers. A municipality’s credit rating comes into play when it looks to borrow money by issuing municipal bonds, something Riverhead has no plans for. It does not affect any of the town’s existing fixed-rate debt, he said.
“While of course I’m disappointed, this is a long-term process,” Walter said. “There are no quick fixes here — other than a huge tax increase which we’ve avoided. That might make Moody’s happy, but it’s not good for our taxpayers.”
“We’ve worked to do everything we can to meet operating expenses with revenue and it has not been easy,” he said.
Until the 2015 fiscal year, the town for years has drawn on its reserves — funds that saw an infusion of cash in land sales and contract option payments associated with the Calverton Enterprise Park — to balance its annual operating budget and offset tax increases. The budget for the current fiscal year does not rely on reserves to meet expenses, after drawing a projected $3.1 million from the fund balance in 2014, Moody’s said.
Riverhead’s reserve position is now “a narrow $5 million,” which represents 8 percent of the town’s annual revenues, Moody’s said in the rating report it sent to the town today. The general fund reserve depletion made the analysts nervous, though the report notes “positively” that the 2015 budget was balanced without dipping into the reserve fund.
“Future ratings reviews will factor management’s ability to balance the budget through revenue enhancements or expense reductions and begin to build reserves to historic levels,” the report states.
The analysts cited the town’s stable residential tax base and ongoing commercial expansion — resulting in a .5 percent increase in assessed valuation — as positive factors.
“New businesses have opened up in the downtown area and along Route 58, including a Costco (A1 stable), Lowe’s (A3 stable) and Wal Mart (Aa2 stable),” the report says.
“There is the potential for substantial economic growth in the town’s Enterprise Park at Calverton (EPCAL),” Moody’s notes, mentioning the town’s “energy park” lease as a positive factor. “The timing for build-out of EPCAL is still unclear,” the report says.
The report discussed in detail the town’s $112 million outstanding general obligation debt, about half of which represents past borrowing against anticipated Community Preservation Fund revenues to pay for land preservation purchases. The CPF is funded by a 2-percent tax on real estate transfers. In the wake of the economic meltdown and real estate market crash in 2008, CPF revenues plunged. Since then, the town has been using a combination of CPF revenues and CPF reserves to pay CPF debt service. After 2016, the CPF reserve will be depleted and the town will have to rely solely on current CPF receipts to pay the CPF debt service. If CPF revenues don’t meet the town’s CPF debt service obligations, the difference will have to be paid out of the general fund.
Walter is hoping to refinance and extend outstanding CPF debt through the state Environmental Facilities Corporation, which will not affect the town’s bond rating. It needs state legislation to do so, but with a proposal to extend the Peconic Bay Region Community Preservation Fund another 20 years now being drafted in Albany, Walter said he is confident legislative authorization for Riverhead’s CPF refinance will be forthcoming.
All of the town’s debt is fixed-rate debt and amortizes over the long term, Moody’s noted.
That’s why, the supervisor said today, this downgrade will not affect taxpayers. The town has no plans for any new bonding. “We’ve operated on a pay-as-you-go basis since I took office,” he said.
Riverhead did issue $22 million in new bonds in November 2011. Of that debt, about $10 million was to pay landfill closing and capping costs, Walter said. The bonds also covered the purchase of the building known as Town Hall West on Pulaski Street, improvements to the Riverhead Water District and road paving work by the highway department. In total, about $8 million was authorized and spent in 2008 and 2009, Walter said. But the bonds could not be issued because the town didn’t have its audited financial statements up to date, Walter said.
Walter said he was relieved the downgrade wasn’t to an A1 rating, the next step below an Aa3. A general obligation scorecard sent to the town by Moody’s in advance of officials’ Feb. 27 meeting with the ratings firm indicated the town had an “unadjusted rating” of A1.
According to that scorecard, Riverhead Town was listed as “weak” in “five-year dollar change in fund balance as a % of revenues” and “poor” in “five-year dollar change in cash balance as a % of revenues.” It was rated “very strong” in “full value per capita” and strong in tax base size, socioeconomic indices, cash balance as a percentage of revenues and three-year average of Moody’s adjusted net pension liability. The town was rated “moderate” in the five other indicators evaluated by the scorecard.
Walter said he and financial administrator Bill Rothaar were able to convince Moody’s analysts during the Feb. 27 meeting that Riverhead has a strong commercial tax base and the potential to realize strong financial gains due to the enterprise park.
Moody’s did not assign an outlook for the the town, stating, “Outlooks are generally not applicable for local government credits of this size.”
Aaa Issuers or issues ratedAaa demonstrate the strongest creditworthiness relative to other US municipal or tax-exempt issuers or issues.
Aa Issuers or issues rated Aa demonstrate very strong creditworthiness relative to other US municipal or tax-exempt issuers or issues.
A Issuers or issues rated A present above-average creditworthiness relative to other US municipal or tax-exempt issuers or issues.
Baa Issuers or issues rated Baa represent average creditworthiness relative to other US municipal or taxexempt issuers or issues.
Ba Issuers or issues rated Ba demonstrate below-average creditworthiness relative to other US municipal or tax-exempt issuers or issues.
B Issuers or issues rated B demonstrate weak creditworthiness relative to other US municipal or taxexempt issuers or issues.
Caa Issuers or issues rated Caa demonstrate very weak creditworthiness relative to other US municipal or tax-exempt issuers or issues.
Ca Issuers or issues rated Ca demonstrate extremely weak creditworthiness relative to other US municipal or tax-exempt issuers or issues.
C Issuers or issues rated C demonstrate the weakest creditworthiness relative to other US municipal or tax-exempt issuers or issues.
Modifiers for Municipal Ratings Moody’s applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a midrange ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
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