Real estate professionals and homeowners in New York City are abuzz over the 11.5% increase in DEP water and sewage rates officially confirmed on May 14, 2007 and scheduled to go into effect on July 1, 2007. The increase – NYC’s highest since the whopping 18.4% hike of 1992 – applies to both metered and frontage-based charges. With Mayor Bloomberg’s full support, additional 11.5% DEP rate hikes are also planned for 2008 and 2009.

At this cadence the compounded three-year increase will be a stratospheric 38%, an upward trajectory that dwarfs the 800% rise in DEP rates since 1980; in fact, annual rate hikes of 11.5% over another 27-year stretch would result in a compounded rate increase north of 2100%!

Given the serious water and sewage challenges currently facing the City, there’s little reason to expect the upward spiral to stop anytime soon. NYC real estate operators and homeowners would do well to ask themselves a few questions:

• How does the City justify these rate increases?
• Is my DEP rate plan the most appropriate and economical for my property?
• What can I do to conserve water and ensure against DEP overcharges?

The NYC Water Board’s most recent public information report states that the city’s water system operations and maintenance costs will increase by $105 million over the upcoming fiscal year (2008). This increase budgets $72 million in “non-discretionary” spending that includes $58 million for employee wage and benefit increases and $14 million for wastewater treatment cost increases. The remaining $33 million is earmarked for DEP initiatives called “discretionary,” for which the city has specified no precise cash allocations.

Strangely, some of the discretionary increases (“filtration avoidance determination,” maintenance contracts and revenue enhancement programs) already have sizeable budget allocations within the DEP’s New Current Capital Program (“NCCP”). With Mayor Bloomberg’s support, the NCCP foresees new DEP spending of $23.3 billion over the eleven years from current fiscal 2007 through fiscal 2017.

The Water Board’s report explains that $23.3 billion is needed to “ensure delivery of high quality drinking water throughout the city” and treat sewage to “ensure the quality of New York City’s harbor waters.” Of the $23.3 billion, about $12.3 billion is earmarked for projects specified in the report. That leaves over $10 billion of the NCCP funds unallocated or deemed unfit for public disclosure. Hopefully the mayor will soon deem that New Yorkers have the right to know what will be done with that $10 billion.

Of the $12.3 billion in specific projects described in the Water Board’s report, the following projects, which are not necessarily the most expensive ones, seem most likely to raise eyebrows:

• $3.0 billion to protect upstate NYC watersheds, including $600 million to buy land surrounding watershed property, in return for a 10-year moratorium on federal requirements to construct new filtration facilities (at an undisclosed cost). This begs the question of why “filtration avoidance determination” should get any of next year’s $33 million in new DEP discretionary financing.
• $772 million for a Dependability/Alternative Sources Program (“DASP”) targeting maintenance and repair of the Catskill and Delaware water tunnels which transport 90% of DEP water to NYC from the upstate watershed. The Delaware water tunnel must be repaired soon because it’s leaking. It is hoped that $239 million in exploratory construction work and all the other DASP activities will enable specification of an adequate fix. If so, the tunnel, which delivers about 45% of DEP water to NYC, will be shut for repairs in accordance with a Master Plan of which a draft is due this year. It is a critical DASP goal to determine how the DEP will meet NYC needs with 45% of its current capacity offline. Though the $772 million will provide no tangible solution, it will hopefully provide a sound basis on which to implement one. Meanwhile, let’s hope the Catskill tunnel remains functional while the Delaware tunnel is shut down.

In addition to enlightening the public about the $10 billion in unallocated NCCP funds, Mayor Bloomberg should clarify another issue related to ongoing DEP rate hikes: The variable annual rent that NYC charges the DEP for use of its property. The rental amount is independent of real estate value fluctuations, but proportional to the value of the bonds issued each year by the NYC Water Board. As the DEP’s rent will go up 13.9% ($18.9 million) in fiscal 2008, the 11.5% rate hike will more than offset the added expense. It would still be good to clarify why NYC determines the DEP’s rent in such a strange way, and it’s also the public’s right to know how NYC intends to use the extra $18.9 million.

As Mayor Bloomberg recently observed in defense of the DEP rate hikes on John Gambling’s radio show, about 12% of NYC property owners consistently fail to pay their DEP bills. Others illegally leech DEP services and receive no DEP bills at all. But it’s unthinkable that the DEP would randomly whack certain property owners with humongous “compensatory” overcharges, isn’t it? The mayor could do well to consider the impact that notorious DEP bill inaccuracies have on people’s willingness to pay. Though DEP bill accuracy has improved in recent years, nearly 10% of today’s DEP bills are still inaccurate, and Ashokan’s records show it’s hardly uncommon for large NYC buildings to get hit repeatedly year after year with substantial DEP overcharges.

In sum, NYC real estate operators and homeowners would benefit from more transparency in DEP financial affairs, and should take some simple precautions to protect their interests in the face of rampant DEP bill inaccuracies and rising rates:

• Conservation: avoid wastage, promptly repair leaks, and install low-consumption plumbing fixtures, thereby minimizing DEP charges and helping to maintain water reserves and protect the environment.
• Make sure your DEP rate plan is the most economical one that your property qualifies for (metered vs. commercial frontage vs. multi-family frontage).
• Verify the accuracy of all DEP bills, and get them audited when in doubt.