LISC New York City Water Rate Testimony

Testimony of the Local Initiatives Support Corporation (LISC)
and the National Equity Fund at the NYC Water Board Hearing

Wednesday, May 7, 2008

Good evening.  My name is Lisa Deller; I am Director of Asset Management for the New York Equity Fund.  I am presenting testimony on behalf of both LISC and the National Equity Fund.  LISC is a national community development intermediary organization that helps community-based groups to transform distressed communities and neighborhoods into healthy ones by providing capital, technical expertise, training and information.  The National Equity Fund is one of the nation’s largest syndicators of low income housing tax credits (LIHTCs) with a portfolio of 1,400 projects and 550 developer partners nationwide.

In my testimony I want to focus primarily on the impact of rising water/sewer rates – and of the proposed 14.5`% rate increase for FY09 in particular – for one subset of New York City’s affordable housing stock: the New York Equity Fund (NYEF) portfolio of rental housing financed through the Low Income Housing Tax Credit.  But I also want to address broader problems with rate-setting, and how the water/sewer system is financed.  It is our belief that the current system is unsustainable and detrimental to the housing stock in the city’s low-income neighborhoods; and that there are concrete and immediate steps that the City could take to begin to remedy this situation. 

Established by the 1986 Tax Reform Act, the LIHTC program has resulted in the construction and rehabilitation of over 64,000 units in New York City and over 1.2 million nationally.  Over 25,000 units of the City’s tax credit housing have been developed by LISC and the New York Equity Fund through the NYC Dept of Housing Preservation and Development (HPD)’s tax credit sub-allocation authority.

The New York Equity Fund (NYEF) portfolio is located in Brooklyn, the Bronx, and Manhattan neighborhoods.  Approximately 13% of these units are reserved for formerly homeless families.  More than 80% are LIHTC units, affordable to families earning up to 50% and 60% of area median income (AMI).  The remaining units are rented with no income cap, though they are typically rented at below-market rates to low- and moderate-income residents.

The NYEF portfolio consists primarily of small projects, ranging in size from 22-154 units.  On average, the projects consist of approximately seven scattered-site buildings and 12 units per building.  Typically, 64% of projects are comprised of two- and three-bedroom apartments.  This project profile of small scattered-site buildings with large apartments and multiple family members results in a higher than typical water/sewer consumption rate – as is clearly demonstrated by the buildings’ actual water/sewer costs.  In 2006, the average water/sewer expense in the NYEF portfolio was $629 per unit. In 2007 the cost of water increased by 11% to $699.  This is considerably higher than the $595 per unit average in a typical metered multifamily building for FY2008, as reported by the Water Board in its latest Blue Book. 

Over the last several years, both water/sewer rates and actual costs for our portfolio have risen faster than the rate at which they were originally under-written.  While underwritten to increase at 3% per year, actual costs rose 24% between 2004 and 2007, as the attached graph and chart show.  To make matters worse, other utility costs – for gas, heating oil and electricity – have also risen rapidly during this period. 

The ability of the NYEF portfolio to provide quality affordable housing while at the same time meeting financial obligations is being severely strained by these large increases in operating costs.  As costs continue to rise without the means by which to increase revenue proportionately, managers will be challenged to maintain projects to the highest standards of safety.  While some of these projects have reserves, many of the older projects have exhausted their reserves.  Deficits will be passed along to the projects’ nonprofit sponsors – which in turn will threaten sponsors’ own fiscal health and their ability to continue to provide services to New York’s low-income communities.

At the minimum, these projects must be maintained as affordable to low-income families over the 15-year tax credit period, and nearly all the projects also have extended use provisions that require rents to be kept low for at least 30 years.  If the projects build up enormous operating deficits over the restricted-use period, it may be impossible to preserve the units as affordable once the restriction is terminated.  If this happens, the City will lose valuable units that were intended to be a long-term resource to low-income New Yorkers.

LISC and NEF support the overall goals of the Mayors 2030 Sustainability Plan, and recognize the need for capital expenditures to ensure the integrity of the City’s water supply infrastructure.  But housing is an equally important element of the City’s infrastructure, and its viability – particularly the viability of the affordable stock – is being strained to the breaking point by rising water/sewer rates and other operating costs. 

As currently structured, the cost of the water/sewer system falls entirely on the rate-payers, who are disproportionately owners of residential housing.  Rates will likely continue to increase sharply over the next few years, driven largely by increased capital spending and the growing debt service associated with it.  Rate-payers are bearing the cost even of those parts of the water/sewer system that have nothing to do with either water consumption or the generation of sewage – like Combined Sewer Overflows (CSOs) that must be built to prevent sewage discharge into the waterways during heavy storms.  Since CSO construction is necessitated by storm water runoff, it should arguably be supported by a broader city tax base than the current water/sewer rate-payers. 

Rate-payers are also bearing the cost of the “excess” rental payment made by the Water Board to the City – to the tune of $77 million this year and an estimated $122 million in FY09 – which goes into the City’s general fund. Since lower income parts of the City pay more for water than higher income neighborhoods, this excess rental payment constitutes a back-door, deeply regressive tax. The “excess rent” amount will keep growing as the Water Authority's debt service keeps growing.  Ending the excess rental payment to the City now will result in immediate short term relief for rate payers.

Finally, greater oversight of DEP and monitoring of its capital spending is needed.  Cost over-runs on construction projects are common, and costs for large projects like the Croton filtration plant have more than doubled since original estimates.  Because higher costs are simply passed on to the rate-payers through higher rates, there is insufficient incentive to be efficient and hold costs down.

We urge the Water Board, DEP, the Mayor’s Office, HPD and the Office of Management and Budget to look at these issues and work with the City Council to come up with workable solutions.

Thank you for the opportunity to testify. 

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