Riverhead Town gets encouraging words from Moody’s but no credit upgrade

Riverhead Town’s credit rating remains unchanged at Aa3, Moody’s Investor Service said in a May 26 report.

While Moody’s did not restore Riverhead Town’s credit rating to Aa2 — its rating from January 2008 to March 2015 — the ratings agency had positive comments about the town’s financial position.

“The credit position for Riverhead is high quality, and its Aa3 rating is equal to the U.S. city median of Aa3. The rating reflects a strong socioeconomic profile and tax base, and a small debt liability with a moderate pension burden. It also takes into account a sound financial position,” Moody’s said in the report.

The report, called an issuer comment, was issued by the ratings agency before the town went forward with the sale of bonds to finance water district improvements — something the town board authorized last month.

Moody’s will likely take another look and possibly change the town’s credit rating before those bonds — totaling more than $5.5 million — are offered for sale to investors, according to Riverhead Supervisor Sean Walter.

The supervisor said he is “extremely happy with Moody’s findings” and said they are “confirmation for the town that the policies I put in place in 2010 to turn the financial ship of the town worked.”

Moody’s said Riverhead’s “ability to generate balanced financial operations demonstrates good financial management,” and noted that the town ran “planned deficits” while the tax base improved modestly.

The report also made note of Riverhead’s depleted fund balances, a factor Moody’s cited when it downgraded the town’s credit rating two years ago. The town’s net cash balance remain “materially lower” than the U.S. median and the available fund balance as a percent of operating revenues — now 6.6 percent — is “far under other Moody’s-rated cities nationwide.”

Until 2015, the town drew down 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 for years. Since fiscal year 2015, the town has balanced its budget without drawing on its reserves and for the last two years has had to exceed the state-mandated property tax levy limit.

The issuer comment did not assign a rating outlook to the town. A rating outlook is an opinion regarding the likely direction of a rating over the medium term.

Since Riverhead will shortly be selling bonds to fund water district improvements, it will soon learn if Moody’s will change its Aa3 credit rating.

Walter expressed confidence that the town is on the right track and its credit rating will be assigned accordingly.

He said for the past two years, the town has had enough Community Preservation Fund revenues to cover its debt service, which the credit ratings agency will see as positive.

The CPF is funded by a 2-percent tax on real estate transfers. Riverhead Town, during the real estate bubble, borrowed against future CPF revenues in order to purchase land for preservation. When the bubble burst and the real estate market crashed in the 2008 economic meltdown, CPF revenues plunged. The town then had to turn to CPF reserves to help pay CPF debt service. If the CPF reserves were exhausted, the town would have had to rely on the general fund to meet is obligations, which would have required a significant property tax increase.

A state law adopted last year allowed the extension of the CPF through 2050 and contained a provision, at the request of Riverhead officials, that allows the town to refinance its CPF debt — avoiding the prospect of carrying the cost with general fund revenues.

But the supervisor said he does not believe the refinance will be necessary, due to the rebounding local real estate market. The town has recently seen CPF revenues of $3.5 million a year and that has covered the CPF debt service. As the principal is reduced, the town will be able to build up its CPF reserves again, which it eventually would be able to utilize for additional preservation efforts.

“I think the CPF issue is half the reason why we received the downgrade last time,” Walter said.

“We’re not as strong as I’d like to be, but we’re definitely moving in the right direction and this report confirms that,” he said.

Walter praised Riverhead financial administrator William Rothaar and his staff for “the hard work they’ve done to keep the town on track.”