Treacherous waters: aboard the good ship Riverhead during the perfect storm

Municipal budget season is right around the corner and the upcoming 2016 fiscal year will be one of unavoidable tough choices for Riverhead Town officials. Budget decisions will have to be made with some crucial variables remaining unknown — and in the climate of a highly charged local election season.

The current town board has failed to even adopt a budget for four of the last five fiscal years — including the 2015 budget, which was never even publicly discussed by the board after presented by the supervisor last Sept. 30. Based on that track record, the odds of this board rolling up its sleeves to do the hard work necessary this budget season are slim. Two of its members, Supervisor Sean Walter and Councilman James Wooten, are fighting for their political lives and a third, Councilman Jodi Giglio, is looking to unseat the supervisor.

Each year since taking office, the supervisor has hoisted a red flag warning of impending fiscal doom — disingenuously, some critics have argued. Walter’s warnings of “unavoidable” layoffs of dozens of town employees and double-digit tax rate increases, have not materialized. The only layoffs came in 2011, when 13 town employees got pink slips.

Though each year Walter insists his budget is “bare bones,” board members say privately they believe there’s “plenty of money” tucked away in budget funds that can be — and are — transferred into other funds where needed to make ends meet, or even increase spending. Some board members, notably supervisor candidate Jodi Giglio, have called the supervisor’s budgets “phony.”

Such is the state of affairs on the crew steering Riverhead’s ship of state into what is likely to be the perfect storm of fiscal crisis as the budget season approaches. During a local election year, at that.

The CPF debt crisis is real

Fiscal year 2016 is the last year the town will have reserves in its Community Preservation Fund to pay debt service on the $70 million in borrowing done more than a decade ago to finance farmland and open space acquisition.

State law in 1999 authorized the five East End towns to collect a 2-percent tax on real estate transfers, with tax revenues placed in a dedicated fund to finance land preservation.

At the height of the real estate market, Riverhead officials decided to leverage anticipated transfer tax revenues for land acquisition. In other words, Riverhead borrowed against future income — to the tune of $70 million. When the real estate market went bust in 2008, that future income didn’t materialize as anticipated. The town has been using CPF tax revenues socked away when the market was hot to carry the debt service on that borrowing.

But that CPF savings account is running dry and will be depleted next year, according to the town’s independent auditors. In October 2013, the auditors warned Riverhead officials of a looming “catastrophic” tax increase to pay CPF debt service after the CPF reserves were depleted — unless there’s a miraculous recovery in the local real estate market at CPF revenues suddenly soar.

But that’s unlikely to say the least. While the real estate market has improved across the East End, and CPF revenues have jumped up in the region as a result, Riverhead lags behind. In fact, during the first five months of 2015, Riverhead’s CPF revenues fell nearly 23 percent compared to the same period in 2014.

When the CPF reserves run out, the town will have to rely on CPF revenues to pay its CPF debt. If the revenues aren’t sufficient, it will have to pay the debt service from the general fund, resulting in the “catastrophic” tax increases the auditors warned about in 2013.

For example, Riverhead collected $3.4 million in CPF revenues in 2014, but carried CPF debt service of $5.7 million. It plugged the $2.3 million gap with CPF reserves. When those reserves are gone, the difference will have to be made up with property tax revenues.

General fund reserves at rock bottom

CPF reserves are running out just as the town’s general fund reserves have sunk to their lowest level in two decades. At the start of 2014, they were “a narrow $5 million,” which represents 8 percent of the town’s annual revenues, according to a Moody’s municipal bond rating report issued in March of this year. The town had been spending its general reserves to cover operating deficits — the gap between town revenues and expenses.

The town’s “narrow” general fund reserve position and the depletion of its CPF reserves led Moody’s to downgrade Riverhead’s credit rating this spring.

The 2015 budget includes anticipated revenues that aren’t materializing: $750,000 from leases with two energy companies at the Calverton Enterprise Park, for instance; and $600,000 from a county trust fund established under a 1998 law to compensate towns for landfill capping and closing costs. Without the sale of land at EPCAL closing in 2016 and bringing an infusion of cash into town coffers – a speculative prospect since the town’s EPCAL subdivision is still very much a work in progress — only additional financing will help stave off a big property tax increase.

The town board in February 2014 hired a law firm to negotiate with Suffolk County National Bank for financing secured by town-owned real estate at EPCAL. But by September, a majority of the board decided against taking the loan, voting down an authorization to proceed with the financing.

Walter then sought a bill in the State Legislature authorizing the state’s Environmental Facilities Corporation to push Riverhead to the top of its priority list for refinancing its CPF debt. But that didn’t fly with state legislators.

His next strategy was to get a state law passed authorizing Riverhead to extend the term of repayment on its CPF debt in a refinancing to be sought by the town on the municipal bond market. The State Legislature in the 2015 session passed a law extending the Peconic Bay Region Community Preservation Fund transfer tax by another 20 years. The law Walter seeks would allow the town to extend its current CPF debt for the full 20-year period, spreading out and thereby reducing its annual debt service.

A bill to allow that passed the State Senate but passed so late in the session that the bill wasn’t delivered to the Assembly in time for it to be acted on.

“By the time the bill passed the Senate, the Assembly’s local government committee was closed for the year,” Assemblyman Fred Thiele said in an interview last week.

Thiele, who is sponsoring the measure, said he believes the bill stands an excellent chance of being passed by the Assembly in the next legislative session, which begins in January 2016.

“I’m very confident we’ll get it done next year,” Thiele said. He said he’s spoken with the chairman and staff of the local governments committee, which must approve the bill for a vote. “They understand the situation and were supportive,” Thiele said.

If the bill passes and is signed into law by the governor, Riverhead would then have to pursue refinancing on Wall Street bond markets. It remains to be seen whether the town’s credit rating will hold steady or whether it will be downgraded again, making refunding the bonds a more costly endeavor.

And all of that has to happen before the budget is due next fall, or the town will be budgeting on the fiscal brink while wearing a blindfold.

Riverhead taxpayers have their backs against the wall. For real. The town can’t live off its savings accounts any longer. It can skate by for one more year without having to pay CPF debt service out of the general fund, but it hasn’t even been able to pay general fund expenses without drawing down general fund reserves. Now those reserves are gone and the CPF reserves are about to run out — and debt service on more than $120 million indebtedness will have to be paid out of current revenues. That means increasing revenues or cutting expenses to make ends meet.

As if all that weren’t enough, the town’s collective bargaining agreements with its police officers and department heads expire at the end of the current fiscal year. And its contract with the Civil Service Employees Union expired Dec. 31, 2014. With a majority of the current town board jockeying for important union endorsements in this election year, labor contract negotiations will undoubtedly prove interesting — if they occur. If they don’t, expect more demonstrations at town board meetings to ramp up the pressure to settle a contract that isn’t likely to include zero-percent contract increases this time around.