New York City Council Committees on Environmental Protection & Finance
Fiscal Year 2011 Executive Budget
May 13, 2010
Testimony of Caswell F. Holloway,
Commissioner, New York City Department of Environmental Protection (DEP)
Good afternoon Chairs Gennaro and Recchia and members of the committees. I am Cas Holloway, Commissioner of the Department of Environmental Protection.
Thank you for the opportunity to testify today about DEP's Fiscal Year 2011 Executive Budget. This hearing coincides with a series of six public hearings hosted by the New York City Water Board in each of the 5 boroughs (2 hearings were held in Manhattan) on the water rate proposal for fiscal year 2011 that I presented to the Board on April 9, 2010. I have attended each of the hearings thus far to make a brief presentation on the proposal and to hear people's testimony.
At those hearings and half a dozen meetings I hosted earlier this year in all five boroughs, I have tried to explain the tremendous amount of work that nearly 6,000 DEP employees do to supply, distribute and treat more than a billion gallons of water a day; to show examples of the $14 billion of capital work we currently have in design and under construction; and to explain our operating and capital costs and how they form the basis for DEP's water rate proposal every year.
The main concern I am hearing, which has also been expressed by Council members, is that water rates are too high, and that any increase is especially difficult to bear in the current economic climate, particularly in light of the recent water rate increases that have been necessary to operate, maintain, and build the water system. At the same time, I have been gratified to hear that customers are generally pleased with the service they are getting from DEP through our employees on matters large and small. New Yorkers also understand that water and sewer services cost money, and that we need to continually invest in the system to ensure that we continue to deliver some of the best drinking water in the nation. In fact a couple of speakers have pointed out that the cost of water here is quite low compared to other major cities in the country and around the world, and the quality is among the best.
Nonetheless, the 12.9% increase proposed for this year is unwelcome, and I have been asked to do everything I can to mitigate the impact of future increases. At DEP we are committed to doing that, and I'll talk about the steps we're taking internally, and how the City Council can assist in the effort.
My testimony today will cover 3 subjects: (i) a summary of DEP's expense and capital budgets and their connection to the water rate proposal for fiscal year 2011; (ii) DEP's unprecedented capital program and the debt-service increases that have been required to fund it; and (iii) the tools DEP needs to ensure that everyone who can afford to pay their water bill pays, so that all New Yorkers contribute their fair share to maintain one of the City's critical capital assets and precious resources – and water rates can be kept as low as possible.
I. The Fiscal 2011 Executive Budget and Water Rate Proposal
As I noted at the outset, DEP has proposed a 12.9% water rate increase for fiscal year 2011. Why are water rates projected to increase? The basic reason is that projections for next year show revenues declining and costs increasing, creating a gap that we need to fill by increasing the water rate. The two largest components of DEP's budget are operations and maintenance, and the debt service we pay to fund our enormous capital program.
The good news is that we expect operations and maintenance costs to decrease by $170 million next year from $1.35 billion to $1.18 billion. The first thing I did as Commissioner was ask my senior management team to implement an across-the-board, 8% expense budget reduction for Fiscal Year 2011 and beyonds – and I'm happy to report that we will achieve that. We expect to reduce headcount by more than 200, and we'll make some operational changes that, taken together, will generate approximately $87 million in recurring savingss – some of which we've already started to see this year. These cuts, combined with changes in chemical pricing and conservative budgeting, add-up to a combined $170 million in operations and maintenance savings next year.
While we have made cuts to reduce the system's expenses, these savings are partially offset by other critical needs such as settling long-outstanding labor agreements; beginning to hire the staff that will be needed to operate the $2.8 billion water filtration plan we are building for the Croton Watershed in the Bronx and the $1.6 billion Ultraviolet disinfection plant under construction for the Catskill-Delaware Watersheds; and uncontrollable expenses such as recent increases in the price of oil and gas.
While operations and maintenance costs are expected to drop, we project that our debt service costs will increase from an estimated $837 million this year, to $1.2 billion next year. That's a 47% increase, much of it necessary to fund ongoing work at massive, legally mandated capital projects. This, along with other components to run the system, requires us to raise $2.95 billion for fiscal year 2011.
$144 million of that need will come from upstate and other non-city revenues, and the remaining $2.8 billion must come from New York City water ratepayers. If we applied the FY 2010 rate next year, we would generate approximately $2.49 billion?$320 million short of what we need to cover the costs of running the water system next year. That translates to a 12.9% water rate increase. That increase is 1.4% lower than the 14.3% increase that we thought would be necessary last year, and we were able to both reduce the water rate increase and settle two long-standing labor disputes that affected more than 1,000 essential employees. Our water rate proposal also offers a 1% discount to customers who sign up to pay their bills through direct debit, which you can do through our website: www.nyc.gov/dep. We've also proposed a stormwater pilot for stand-alone parking lots that are not receiving any water or sewer charges. These parking lots are generating a tremendous amount of stormwater, which severely taxes our sewer infrastructure, and can contribute to combined sewer overflows when it rains. However, because these lots receive no water service and are not paying a sewer charge, they are not paying their share of the costs DEP incurs to capture and treat stormwater.
II. Unfunded Mandates & Debt Service
It should be clear from my testimony so far that the primary driver of the rate increases New Yorkers have seen in the past several years is debt service to fund our capital program. And the spectacular growth in capital work is largely attributable to projects that the City is obligated to build on a specific timeline, because of state and federal rules and laws. In fact, of the over $19 billion in capital commitments that DEP has made in the last ten years, $13 billion or 68% has gone to fund mandated projects imposed by federal and state regulatorss – with negligible federal or state funding for DEP to do the required design and construction work. Between FY 2002 and FY 2010, DEP's debt service obligations rose by 65%, from $500 million to $837 million. In the last four years alone, debt service has grown 27%, from $658 million to $837 million
To give you an example of how mandated projects drive debt service, consider two of our largest capital projects: the construction of a filtration facility in the Bronx for the Croton Watershed, and an ultraviolet disinfection facility in Westchester for the Catskill-Delaware Watershed. While these investments will further enhance the quality of water delivered, the quality changes will be largely transparent to our consumers. However, the City was required to build both of them at the same time, regardless of relative risk, and we'll be required to pay more than $61 million per year to operate the plants by the time both are operational in 2013.
Put simply, these
projects are being built now to be in compliance with federal and state
regulations, without regard for local need, competing water infrastructure
demands, or the cumulative cost of building and operating massive
In the years between FY 2002 and FY 2011, these two projects alone cost over $4.4 billion in design and construction, and annual debt service costs ratepayers $134 million. On a household basis, those projects, plus other unfunded mandates, have increased the price of water and sewer service for the average homeowner by $177 per year. This is not to say that legally mandated projects are categorically unnecessary; we would likely choose to make some of the same investments, at some point based on our own assessment of public health and environmental impact. For
example, this year we announced that the City's 14 Wastewater Treatment Plants
are meeting monthly Clean Water Act standards for the first time ever – and
that's due in large part to the $5 billion reconstruction of the Newtown Creek
Treatment Plant that is currently under way.
But federal and state mandates, and the consent orders that come with them, dictate when and how investments get made, and they are too-often applied in a one-size-fits-all manner that can result in unnecessary cumulative burdens. Going forward, the largest components of our current mandated projects have already been bid out and budgeted and, barring any unexpected new unfunded mandates, the capital budget will return to more manageable levels this year. DEP's capital plan for Fiscal Years 2011 to 2014 is $5.7 billion, as compared with $12.2 billion for the fiscal years 2007 to 2010. Not only does the size of our capital budget decrease over the next four years, the percentage of the budget attributable to mandated projects declines as well. That means more of our capital dollars can go to discretionary projects such as building sewers and water mains, and keeping our dams and wastewater infrastructure in good repair. And we must address long-standing issues, like the leak in the Delaware Aqueduct that we want to be sure is not indicative of larger structural problems.
Note, however, that even as our annual capital commitments normalize, the bonds that were sold to pay for mandated projects that are in construction or recently completed will be paid off for the next 30 years – and so will continue to exert pressure on the water rate for many years to come.
III. Capital Work Throughout the Five Boroughs
In addition to mandated projects, we are making critical investments to ensure that the water system is viable for the next 100 years. Mayor Bloomberg has made the city's infrastructure a top priority, and investments such as City Water Tunnel No. 3, the Staten Island Bluebelt and Siphon, and the Avenue V Pump Station in Brooklyn, are essential to achieving DEP's core mission: to supply, distribute and treat the more than 1 billion gallons of water that 9 million New Yorkers need every day. And we are continuing to fund critical projects in each of the five boroughs to maintain and improve the 6,600 miles of water mains and 7,400 miles of sewer mains that make the system work.
In Queens, we have budgeted an additional $1.7 billion for Fiscal Years 2010 through 2014, including $330 million for new sewers, $200 million for water mains and over $800 million for upgrades to Queens wastewater treatment plants and CSO facilities.
In the Bronx, we project $592 million in capital spending from FY 2010 through FY 2014, including $382 million to continue the Croton Filtration Project, a $28.4 million, seven-mile force main from the Mosholu site to the Hunts Point Wastewater Treatment plant, and $57 million in funding at the Hunts Point Wastewater Treatment Plant to complete upgrades.
In Brooklyn, we have budgeted $1.54 billion from FY 2010 through 2014, including $142 million for new sewers, $153 million for the Gowanus Pumping Station upgrade, as well as $548 million in additional costs at the Newtown Creek Wastewater Treatment Plant.
We have budgeted $425 million in additional capital spending in Manhattan. $252 million of that will go for water supply purposes, including the funding to complete ten Manhattan shaft connections from City Tunnel No. 3 to the under-the-street distribution network.
In Staten Island, to improve the reliability of its water supply, this year we will begin a $294 million project for construction of a new water tunnel to provide redundancy for the Staten Island water supply system. Because Staten Island lacks storm and even sanitary sewers in some areas, an additional $361 million is budgeted from FY 2010 through FY 2014 for sewers. The budget also includes $258 million for remediation of the closed Brookfield Avenue landfill, a joint City/State project. (Note that the City's share is paid for using general obligation debt proceeds, because the remediation is not connected to the water system.)
We're also funding important capital improvements to the upstate parts of our water supply system. The reconstruction of the Gilboa Dam is funded for $347 million in the FY 2010-2014 Plan. The planned reconstruction work is intended to repair long-term deterioration of the concrete spillway and side channel, upgrade the dam to all current New York State dam safety standards, and improve operational capabilities.
What are our options for reducing debt service costs going forward? Our first obligation is to do what is necessary to supply, distribute, and treat more than 1 billion gallons of water every day. But we must also be prudent in our capital investments, and we are in the midst of a detailed review of the capital plan to ensure that we have set the right priorities.
And we have to engage our regulators – the EPA and State DEC and the State Department of Health – to ensure that the rules governing water quality, and the investments needed to comply with the rules, will achieve meaningful improvements on a timeline and in a manner that New Yorkers can afford. There must also be a willingness to look at existing mandates and make adjustments considering science-based assessments of public health risks and environmental benefits.
I have already begun to engage our State and Federal partners to build the kind of relationship that will, I hope, enable more agreements like the one Mayor Bloomberg and I announced on February 25th with State DEC Commissioner Pete Grannis and Chairman Gennaro. Rather than spending time and money in a legal battle with environmental stakeholders and regulators over nitrogen discharges into Jamaica Bay, the City and the State - with federal EPA support – joined environmental stakeholders to develop a plan to dramatically improve water quality by reducing nitrogen discharges through $115 million of investments over ten years, giving the City much more flexibility in managing contracts and costs than we would expect from litigation.
This is an approach I hope to replicate, and with the cooperation of our regulators, and your help, I am confident that it can lead to more manageable capital budgets, and lower water rates.
IV. Collections and Enforcement
I've talked about the expense and capital budgets, and the rate proposal for Fiscal Year 2011. For DEP, providing adequate funding for the water and wastewater systems, while keeping water rates as low as possible, requires that we have the tools necessary to ensure that people who can afford to pay their bills actually pay.
In 2007, thanks to the leadership of Speaker Quinn and the entire Council, DEP was authorized to sell water liens for customers who have had $1,000 or more of water debt for more than one year. The lien sale has proven to be a powerful tool to collect unpaid water and sewer bills from those customers who can afford to pay, but for some reason have not.
In short, the lien sale works. Very few liens are actually sold, because 89% of those eligible for the lien sale in 2008 and 2009 either paid their bill or entered into a payment plan well before any "sale" took place. In fact, in 2008 and 2009, DEP received $185 million from customers noticed in the 90-day list, and another $81.6 million in Payment Agreements. That translates to an additional 7.9% of water rate increases that responsible New Yorkers who pay their bills otherwise would have had to bear without the lien sale.
As you very likely know, DEP's lien sale authority will expire at the end of this year, and we strongly encourage the Council to authorize and expand it before end of the year. Just last week, I testified before the Finance and Community Development Committees on Intro 26, which would severely limit the pool of delinquent accounts eligible for the lien sale and with that, the revenues we can expect to collect for water and sewer service. I will not repeat today all of the reasons why this proposal would be bad for rate payers and DEP (my testimony is available at www.nyc.gov/dep).
But I will make two general points. First, Mayor Bloomberg and DEP understand that, particularly in these difficult economic times, we must do everything we can to help New Yorkers who face the greatest financial burden. There are a number of exemptions to the lien sale designed to do this, and DEP's Water Debt Assistance Program – with more than 500 participants now – is an example of new initiatives for these extraordinary times. But limiting lien-sale eligibility is not a way to help those in financial difficulty – in fact, it exacerbates the problem. DEP's experience is that including accounts in the lien sale is much more effective way to incentivize New Yorkers to work with us to pay their bill – rather than let it accumulate; and it is far less costly than other measures, like water-service termination.
We think the best course of action is to re-authorize the lien sale as it is currently structured, and expand it to single-family homes. In 2008, concurrent with the first sale of water-only liens on multi-family homes, DEP began to enforce against seriously delinquent single-family homes by terminating water service pursuant to a long-standing authority to do so. While most of those single-family owners who received a termination notice have paid in full or signed payment agreements, terminating service is a very labor intensive and inefficient means of enforcing payment of water bills. The actual termination of service requires a crew to excavate the street, turn off the water, and restore the street to a safe condition, at an average cost of $2,700 per home.
In 2009, we served 15-day notices on 3,547 single-family homes. We terminated service at 65 of them. We collected $2.75 million from this group, but we spent $1.6 million to collect it, and tied up the equivalent of 10 full-time field staff, who could otherwise have been performing work that would have benefited many more New Yorkers, such as repairing water mains, maintaining fire hydrants, or cleaning catch basins and sewers.
Currently, there are 8,500 single-family homes that would meet the eligibility criteria for a lien sale. If all 8,500 single-family homes that would be eligible for lien sale had their service terminated, it would take the equivalent of 24 full-time DEP employees and cost $3.8 million in order to collect $18.2 million in one year, for a net revenue increase to the water system of $14.4 million.
If the 8,500 single-family homes were instead eligible for the lien sale, we would expect to collect $25 million with virtually no operational expense. That $25 million is equivalent to a full point reduction of the water rate. The bottom line is that extending the lien sale authority to single-family homes would eliminate the threat and substantial cost of water service termination, and significantly increase revenue collection, at substantially no cost. It is difficult to think of a more efficient way to lighten the burden on the ratepayers and increase service in the field.
In closing, DEP will continue to find ways to reduce operating expenses, and we're taking a hard look at the capital program to find savings. I'd ask the members of this Committee and the rest of the Council to work with DEP to encourage our federal and state regulators to embrace a new paradigm that focuses on cost-effective investments that increase water quality, and are built at a pace and scope that New Yorkers can afford. I also strongly encourage the Council to re-authorize and expand the tools DEP needs to ensure that those who can afford to pay their water bills actually pay.
That concludes my prepared statement. Thank you for the opportunity to present testimony and I look forward to any questions you may have.