Riverhead Town Board mulls a 12.5 percent town property tax increase versus borrowing $4M to plug budget gap

The Riverhead Town Board is facing a stark choice this summer: Raise town property taxes by about 12.5 percent in 2015 or take a $4 million loan secured by the town’s 2,324 acres at the Calverton Enterprise Park to plug the town’s operating budget gap.

A 12.5 percent tax increase would increase taxes on the “average” home about $220 per year, according to Riverhead financial administrator William Rothaar.

The loan, which Suffolk County National Bank has agreed to make, would bear interest at the prime rate and cost the town $25,000 at closing, Supervisor Sean Walter told the town board at yesterday’s work session. It would have to be repaid within two years, he said.

Town officials would seek to sell land at EPCAL, which has not yet been subdivided, in order to repay the new loan. Walter has advocated exploring the possibility of a “bridge loan,” which he said he sees as the kind of “leveraging” often required to develop property. The town board voted in February to pursue the financing and hired the law firm of Harris, Beach to pursue the loan with Suffolk County National Bank.

The gap is too big to be plugged by cutting expenses, Walter warned. It would require reducing the town’s 300-person workforce by 20 percent, eliminating 60-72 positions, something Walter called impossible.

Until now, the town has plugged its annual operating budget deficit by drawing down a reserve fund derived mostly from land and option sales at the enterprise park. But the reserve fund is now depleted and can no longer be tapped for “one-shot” relief, Rothaar told board members at yesterday’s work session.

Since taking office, Walter has been warning board members and the public that this day would arrive. The town’s budget, he has said in budget presentations made year after year, has a “structural deficit” because of the town’s “crushing debt burden.”

Riverhead is currently carrying debt service of about $4 million per year on borrowing done to fund its aborted landfill reclamation project and subsequent capping and closing expenses.

“Funny how that’s the same amount we’re short,” Walter observed. “The budget is balanced but for the landfill debt.”

Landfill debt topped out at about $50 million and currently has a principal balance of $29 million, Rothaar said. The principal is reduced each year and will be fully paid off in 2027, he said.

“Our revenues have to meet expenses next year,” Walter said. “I need direction from the board before preparing the budget,” he said. “We either have to cut expenses by $4 million or increase our revenues by $4 million.

But Walter said he does not believe the town can cut its way out of its fiscal distress, because the gap is just too big. The deep staffing cuts required to save $4 million would be “absolutely devastating to this town,” the supervisor said.

Cuts of 60 to 72 positions “would fundamentally alter town government and would mean the elimination of entire departments,” the supervisor said in an interview after the work session, “bringing staff levels to what they were in the 1970s.”

The town’s population increased by 66 percent between 1980 (20,243) and 2010 (33,506) according to the U.S. census.

The supervisor and the board are mulling their options and committed to making a decision in two weeks.

Councilman John Dunleavy said he favors “biting the bullet” and raising town property taxes, rather than borrowing more money to plug the budget deficit.

“I can’t see kicking the can down the road any more,” said Dunleavy, who was first elected in 2005 and is the longest-serving member of the board.

Councilwoman Jodi Giglio said she would only consider the tax increase if the town could have a separate line added to property tax bills that showed the landfill debt service separately. Walter said if the board decides to impose the tax increase, he’d favor that too. But a separate line on the tax bill has to be approved by the county legislature, he said.

“This town board is going to get blamed for this increase no matter what we do,” Dunleavy said at the meeting. “I think if you explain this to voters, they will understand.”

Dunleavy and Giglio were re-elected to four-year terms in 2013 and won’t be running in 2015, when the terms of Councilman George Gabrielsen and Councilman James Wooten are up. The supervisor’s two-year term is also up in 2015.

“I’m not 100 percent sure,” Gabrielsen said after the meeting. He said he is “leaning toward” borrowing the money needed to bridge the budget gap.

“I can’t see why we won’t be able to sell property within two years,” Gabrielsen said.
“We’re so close to the finish line.”

Gabrielsen said EPCAL could well be selected as a site for a new “peaker plant” sought by LIPA/PSEG. The plant would provide supplemental power to the grid at times of peak consumption. PSEG last week put the brakes on the Caithness II power plant proposed in Yaphank, saying the island’s energy needs did not need that new level of production. The peaker plant is still needed, Gabrielsen said. If the EPCAL is chosen, the contract will “bring in $2 million a year,” he said.

“I know they are looking at two of the companies we put in. They keep coming back with questions,” Gabrielsen said.

He said the loan is the “business savvy” approach to the town’s fiscal dilemma.

“I believe in what we’re doing at EPCAL. I don’t want to jump ship now.”

Raising taxes is a bad option, he said, because once they are increased, they will never go back down.

“It’s permanent,” he said. “The town will have to pierce the 2 percent property tax levy cap. Once that’s done, the ceiling is forever higher.”

The supervisor said he hasn’t made up his own mind about what to do. If it were his own money, he said, he’d take the loan without hesitation.

“I know we are sitting on a $100 million asset,” Walter said.

But it’s the taxpayers’ money and that gives him pause, he said.

“Still, I have a hard time getting my mind around that kind of a tax increase,” Walter said, echoing Gabrielsen’s concerns that the increase would be permanent.

“The smart money’s on the tax increase,” he said. It is the “safer” option, despite the almost-certain political fallout for Walter and the other board members.

“If we borrow the money and we’re successful, we’re heroes. If we’re not successful, then we’re than much further behind the eight-ball,” Walter said.

The town is already $750,000 behind in the current year’s budget, due in part to flagging revenues that are not meeting projections, the supervisor said. He cited mortgage tax revenues as an example. The town budgeted $1.5 million in mortgage tax revenues for the current fiscal year, he said. “If we hit $1.2 million, we’re lucky.” Walter said this winter’s “deep freeze” that lingered into springtime kept real estate sales depressed.

A slow real estate market is bad news too for the Community Preservation Fund, which is funded by a 2-percent tax on real estate transfers. Riverhead needs CPF revenues to pick up to avert a second debt crisis.

Borrowing done in the 2000s against anticipated Community Preservation Fund revenues added another approximately $70 million to the town’s total debt burden. But CPF revenues and CPF reserves have been paying the $5.8 million annual debt service on that $70 million and are projected to cover that cost at least through 2015 and 2016, even with the slow recovery in the local real estate market after the 2008 crash. 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.