Moody’s affirms Riverhead’s credit rating, citing downtown growth, strong local economy and town’s conservative budgeting

Riverhead Town’s credit rating has been affirmed at Aa2 by Moody’s Investors Service, and bond anticipation notes issued by the town this month were given Moody’s top rating for short-term obligations, Municipal Investment Grade-1 (MIG-1).

Moody’s action came Feb. 16, in advance of the town’s renewal of $20 million in bond anticipation notes issued a year ago to fund the acquisition of property for the new Town Hall campus on West Second Street.

The ratings mean favorable credit terms for the town when it offers the notes for sale to investors, which it did on Wednesday, the day before the 2023 notes’ maturity date. The BAN renewals have a coupon rate (annual interest rate due bondholders) of 4%.

In its ratings action statement, Moody’s said the MIG-1 rating for the notes “reflects the town’s strong underlying credit quality” as is also reflected in Riverhead’s Aa2 issuer rating and Riverhead’s healthy liquidity and demonstrated history of market access.

“The Aa2 issuer rating reflects a strong local economy, ample reserves and liquidity, and modest long-term liabilities,” Moody’s said in the statement. 

“Downtown revitalization and agritourism have driven significant investment in the area including new apartments and over 30,000 square feet of commercial space,” the statement said. Moody’s said it expects to see continued improvement in reserves and liquidity through the end of fiscal year 2023, “given conservative budgeting and strong fiscal oversight.”

Supervisor Tim Hubbard announced Moody’s affirmation of Riverhead Town’s Aa2 rating in a press release late Thursday afternoon. 

“Moody’s recognition confirms the Town’s plan for the revitalization of downtown is headed in the right direction and I look forward to the day when the Riverhead Town Square is fully activated and a destination for all to enjoy,” Hubbard said in the press release.

Riverhead Financial Administrator Bill Rothaar said he is very pleased with the affirmed Aa2 rating, which he said “confirms that the Town Board’s “conservative fiscal budgeting is leading us down the right path.”

In its credit opinion accompanying the action, Moody’s called the town’s credit profile “strong, benefiting from a strong reserve position, modest long-term liability profile and stable local economy with substantial growth prospects.”

The town’s reserves and liquidity over the past two years are much improved over the previous three years, Moody’s said in the opinion, attributing the improvement to conservative budgeting.  Available fund balance grew from $21.5 million in 2019 to $42.4 million in 2022, according to a schedule of key indicators included in Moody’s credit analysis.  Its liquidity ratio grew from 38.6% in 2019 to 59.7% in 2022, putting Riverhead right at the median of all Aa-rated municipal issuers. 

Riverhead’s long-term liabilities are “modest” at $12.6 million in FY 2022, Moody said. 

Moody’s cited the town’s “conservative budgeting” practices and “ample land for development” as “credit strengths.”

“The town’s local economy is stable but is primed for future growth. A renewed focus on improving the downtown has driven expansion, particularly in apartment complexes and commercial space,” Moody’s credit opinion document states.

“Despite pressures facing the commercial real-estate sector nationally, the local commercial real estate sector remains strong as evidenced by the future expansion of the Tanger Outlet Mall. 

“The town continues to explore its options for developing a former US Navy testing facility called the Enterprise Park at Calverton (EPCAL). Development at EPCAL has long been discussed and debated but to date a sizable portion of the property remains vacant.

“Management reports that while the books are not yet closed on fiscal 2023, revenues will likely outpace expenditures across all governmental funds,” the opinion states. 

The town’s total debt was $56.3 million in FY 2022, according to Moody’s credit analysis. That does not include pension liabilities or other post-employment benefit (OPEB) liabilities, such as health insurance, life insurance and deferred compensation due to employees after they retire.

Riverhead, like many other municipalities on Long Island and across the state, is “heavily exposed” to post-employment liabilities other than pensions, Moody’s noted. 

The agency cited OPEB liabilities and the local economy’s reliance on tourism as “credit challenges.”

Moody’s raised Riverhead Town’s issuer rating from Aa3 to AA2 in 2021, an action taken because of the town’s “much-improved reserve position over the past several years along with the expectation that these levels will be maintained in the future,” as well as “the town’s sizable tax base, declining debt burden, but elevated OPEB liability,” Moody’s said.

Riverhead Town’s issuer rating was downgraded from an Aa2 to an Aa3 rating in 2015. At the time of the downgrade, Moody’s cited the town’s use of reserve funds in prior years to offset property tax increases. At that point, the town’s reserves had dwindled to $5 million — representing 8% of the town’s annual revenues.

After former Supervisor Sean Walter took office in 2010, he set out to fix what he called a “structural deficit” in the town’s annual operating budget due to the use of reserves to pay current expenses.

Rothaar said in a July 2021 interview that the town had to implement some difficult measures to get back to the Aa2 rating, including staff layoffs and piercing the property tax levy cap.

Municipal bonds with both Aa2 and Aa3 ratings are considered “high quality.” Moody’s rates bond issues “Aaa” (best quality, strongest creditworthiness relative to other municipal or tax-exempt issuers), “Aa” (high quality, very strong creditworthiness), “A” (above-average creditworthiness) or “Baa”(average creditworthiness). Bonds in the Aa, A and Baa categories are also assigned 1, 2 and 3 ratings within the ratings category, with 1 being the strongest in each category.