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New York City Council Committees on Finance and Community Development

February 18, 2011

Testimony of Caswell F. Holloway
Commissioner, New York City Department of Environmental Protection

concerning Intro. 26-A:
In Relation to the Sale of Water Liens

Good morning, Chairs Vann and Recchia and Members of the Committees. I am Cas Holloway, Commissioner of the New York City Department of Environmental Protection (DEP). Thank you for the opportunity to testify on Intro 26-A, a bill that would amend Local Law 68, the water and sewer debt lien-sale authority created in 2007 through the leadership of Mayor Bloomberg, Council Speaker Quinn, and this entire body. Local Law 68 re-authorized the sale of tax-based liens and, for the first time, authorized the sale of liens based solely on delinquent water charges.

I want to start by expressing my gratitude to Chairman Vann and Chairman Recchia and their staffs for the time they have taken to meet with me over the past year to discuss water rates, revenue collection, and the importance of lien sale reauthorization. I have heard from you, and from every community that I've presented to throughout the five boroughs, that recent water rate increases have been too steep, and that that trend cannot continue. I agree, and re-authorizing — and as I will explain shortly, expanding — lien sale authority is absolutely essential to keeping water rates as low as possible.

I also understand that the authority to initiate a lien sale is a powerful tool, and has to be administered carefully, and with adequate protections for the most vulnerable New Yorkers, who truly may not be able to keep up with their bills — particularly in these tough financial times. Recognizing this, last year, Mayor Bloomberg introduced the Water Debt Assistance program, which provides relief for homeowners facing foreclosure by temporarily relieving them of their outstanding water and sewer debt. This successful program alone excluded 533 homeowners from the lien sale process. In addition to the Water Debt Assistance Program, DEP also exempts seniors, disabled and low-income homeowners who meet the criteria for DHE, SCHE, and the New York State Personal Income Tax circuit breaker credit, and properties with significant mortgage arrears (lispendens). Taken together, these exemptions excluded more than 3,200 homeowners from the lien sale process, even though they would have qualified based on the amount and duration of their unpaid water bills. That is a significant number of our most vulnerable customers.

Some members of the public and the Council may have the impression that the authority to conduct a lien sale means that the City will take away someone's home. That is not the case. The vast majority of properties that start on the lien sale list pay their bill or enter a payment plan with DEP, which means their liens are never sold. For example, in 2010, 18,359 properties were lien-sale eligible at the start of the process. After three months of outreach, 87% of these properties were removed from the lien sale because their owners either paid their bill or entered into a payment agreement, or their property was removed based on one of the exemptions I just listed. Only 13% of liens that started the process were sold, and in terms of foreclosure, since 1997, only 396 occupied Tax Class 1 properties have been foreclosed, and that total includes all liens — for property taxes and water charges.

These numbers show that lien sale authority is not a meaningful step towards foreclosure — it's a necessary tool to collect unpaid water bills from New Yorkers who can afford to pay, but don't do so unless compelled. For reasons that may have to do with the history of how the City used to bill for water and sewer service, a small but persistent group of people do not pay their water bills until they are threatened with the prospect of a lien sale. Since 2008, DEP has recovered $285 million in delinquent water and sewer payments through the lien sale process.  Without lien sale authority, this revenue would have gone uncollected — which would have necessitated higher water rates for everyone else. In fact, we estimate that without lien sale authority, water rates would have been increased by an additional 2.2% or $51 each year. That's a tremendous burden for good, bill-paying customers to bear on behalf of those who can afford to pay but refuse to do so.

Turning to the specifics of Intro 26-A, the fact that the Council is considering this legislation means that we agree on a fundamental point — those who can afford to pay their water bill should pay, and lien sale authority is necessary to achieve that result. But there are elements of the draft bill that undercut that goal, and will drive up water rates for the majority of New Yorkers who pay their bills.

My colleagues at OMB, Finance and HPD have already expressed their concerns regarding variable down payments; notification via return receipt certified mail; and the difficulty of determining a property owner's "eligibility" for a program in which they are not actually enrolled.

A significant concern is that the current bill raises the eligibility thresholds for selling liens on two- and three-family homes in Tax Class I from a delinquency of one year and $1,000, to a delinquency of two years and $2,000. This change would have dramatic consequences, not just for the vast majority of responsible New Yorkers who pay their bills and who would be stuck with higher water rates because of decreased revenues. It will also harm the distressed homeowners that we all agree need help.

If the two-year eligibility threshold were in effect this year, it would reduce the number of lien-sale eligible accounts in Tax Class 1 from 16,791 to 2,091, and the amount of underlying lien-sale eligible debt would drop from $94 million to just $27 million. The reduction in collections we project from the change in eligibility criteria translates to an additional rate increase of more than 1% for everyone who pays their bills, and would go a long way to restoring the status quo prior to Local Law 68, when a small, but persistent segment of New Yorkers regarded water and sewer charges as something that simply did not have to be paid.

In addition, if the intent of this provision is to relieve the pressure that unpaid water and sewer bills can create for a homeowner facing financial difficulties, I respectfully suggest that it will have the opposite effect. That's because delinquent homeowners will simply accumulate more water debt during the second year that they would not be eligible for the lien sale, rather than come to DEP after a year to pay their bill, or enter a manageable payment plan to do so.

Under the proposed legislation, we estimate that the average water and sewer debt of a Tax Class 1 property owner eligible for the lien sale would jump dramatically — from $5,649 today, to nearly $8,400. At that point, the size of the debt and the interest would be overwhelming, and extremely threatening to a property owner's economic well-being. We want property owners to approach us as soon as possible to discuss their bill, make a down payment, and enter a payment agreement long before their debt approaches $8,400, and true financial distress becomes all but inevitable.

A second serious concern with the bill is the exclusion of single-family homes from lien-sale eligibility. Approximately 9,000 single-family homes would qualify for the lien sale based on the criteria that was in place until this year. Right now, DEP's only recourse to get these funds is to threaten water shut offs. Shutting off water service is a costly measure and a potential public health risk. Last year, we noticed some 18,000 homes that they may be eligible for water shut off, but due to resource constraints, we could only target roughly 3,500 homes for enforcement, meaning that we collect very little from 14,500 homes. To actually terminate 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 FY 2010, we served 15-day notices on 3,590 single-family homes, and terminated service at57 of them. We collected $2.78 million from this group, but we spent $1.99 million to collect it.  That means the water system only got to keep 28 cents on the dollar, and terminating service tied up the equivalent of 10 full-time field staff, who would otherwise have performed work that would have benefited many more New Yorkers, such as repairing water mains, maintaining fire hydrants, or cleaning catch basins and sewers.

This makes no sense — particularly in a time of limited resources. Including single family homes in the lien sale process is a much fairer, and certainly more economical way to collect unpaid water bills from New Yorkers who can afford to pay. Currently, single-family home owners who owe over $1,000 for a year or more total just over 9,000 ratepayers and have accrued over $51 million in debt.  Based on past payment patterns, DEP estimates that it would collect nearly $28.5 million through a single family lien sale process in FY 2011, which equals nearly 1% of the water rate. If lien sale authority is not extended to single-family homes, this lost revenue will have to be made up by raising the water rate for the New Yorkers who are already paying their bills — truly a perverse incentive.

Since becoming DEP Commissioner in January of last year, I have attended more than a dozen meetings in all five boroughs to explain what DEP is doing—how we're using the tremendous resources we have been entrusted with to carry out DEP's vital mission. We held another dozen meetings throughout 2010, solely to make billing representatives and customer service personnel available at the neighborhood level. At these meetings, and all other public meetings I attend — on capital projects, or flooding, or at Mayoral town halls — people ask me to do three things: (1) continue to provide the critical water and sewer services New Yorkers have rightly come to expect from DEP at the lowest possible cost;(2) do everything in our power to make certain that those who can afford to pay their water bill do so, and are not allowed to pass on their debt to the vast majority of New Yorkers who pay their bills; and (3)to help those who truly cannot afford to pay their bill now, and need assistance.

Reauthorizing and expanding DEP's lien sale authority will accomplish all three of these goals. We know the lien sale process incentivizes people to pay their water bill: since 2008 the three lien sales have brought in $285 million, ensuring that we can meet our capital and operating needs and deliver clean, fresh water to over 8 million New York City residents. By expanding lien sale authority to include single-family homes, DEP will have a proven and effective enforcement tool to make sure all homeowners who can afford to pay actually do so. Finally, DEP has done much in the last year and will do more in the future to protect those New Yorkers who are the most vulnerable.

The simplest and strongest argument for reauthorizing the lien sale and including single-family homes in it is that it will mean a lower rate increase for everyone, without endangering the most vulnerable, who can be protected through targeted exemptions and the Water Debt Assistance Program.

Of course, lien sale authority is only part of the answer to keeping water rates as low as possible. Last year, DEP cut its expense budget by 8% for FY 2011, and I am working on similar reductions for the next fiscal year. But every dollar we can't collect because those who can afford to pay won't, is another dollar that we'll have to make up through future rate increases for everyone else. Every tool we have to avert that outcome and ensure a fair distribution of the cost of our water system is critical; keeping the current lien sale authority intact, and extending it as I've suggested, will maintain one of the most important tools available to us.

Chairman Vann, Chairman Recchia, thank you for the opportunity to testify today, and I'll gladly answer any questions you may have.

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