New York City's water supply provides more than one billion gallons of water each day to more than eight million residents. For the last five years, the city's annual water rate increase has been in the double digits, and likewise this year's rate was originally projected at 11.5 percent. Now that's been scaled back to an increase of 7.5 percent—but advocates worried about struggling homeowners say that's still too high.

New York City water rates are set to cover the system's operating expenses each year, as well as its capital expenses. Operating costs include the expense of treatment, repair, and distribution. Capital expenses are the cost of servicing debt that was taken on to finance construction projects. Department of Environmental Protection (DEP) Commissioner Cas Holloway, whose agency operates the water and sewage system, said recently that unfunded construction projects mandated by the state and federal governments have accounted for 72 percent of DEP's capital costs since 2002, driving up annual debt service cost by $700 million.

Among these projects are the $3 billion Croton Water Filtration plan and the $1.6 billion Catskill and Delaware Ultraviolet Disinfection Facility, which are being constructed simultaneously. These structures allow the City to comply with the Clean Water Act, which creates a national standard for water systems, and other guidelines set forth by the United States Environmental Protection Agency—without taking the incredibly expensive step of filtering Catskill/Delware water, which makes up 90 percent of the city's supply.

Holloway conceded these projects not always wholly necessary, pointing to the ultraviolet plant, which is designed to treat a chemical that is not a problem in New York City's water system. "So, we might say, 'Why are we building this ultraviolet plant right now?' " he said. "And the answer is because the rules require us to."

Holloway added that despite the cost of these projects, the DEP was able to lower this year's rate increase by eliminating unnecessary positions and inefficiencies. He also said that the DEP has reduced the number of costs due to unpaid bills or "deadbeats," a problem in the past, by installing wireless meter readers, reducing bill disputes.

DEP has also proposed a 2.1 percent discount for subscribers who sign up for paperless billing, reducing the increase for these users to 5.4 percent. And the agency points out that the average water rate increase among other major cities nationwide in the past year is 6.9 percent. The lowest, in Chicago, is at 5.9. The highest is in Atlanta, at 12.9.

Rental payment is a concern

Despite these revisions, some experts and citizens still feel that the increase is still too high. "We're pleased that the proposed increase is better than last year's projection," says University Neighborhood Housing Program director Jim Buckley. "However, 7.5 percent is still going to hurt. If rental payment to the city were reduced, the increase could be even lower."

Indeed, many claim the real issue is that rental payment that the water board pays to the city, which accounts for 7 percent of the yearly increase.

In the early 1980's the financial crisis left New York City government in need of a new way to finance required water and sewage maintenance projects. Rather than using general obligation bonds, as had been the case in the past, officials moved to relieve the burden from the city by borrowing money through a newly created Municipal Water Finance Authority (MWFA), which was given the power to issue its own bonds to finance these projects.

This effectively took new water-system debt off the city's books. But what about all the outstanding bonds for older infrastructure projects? To cover the debt service on those older bonds, the water authority began paying a rental fee to the city. It was called a rental fee because the authority was, in a sense, paying to use water infrastructure that the city had built and paid for. But its real purpose was to cover the cost of old debt.

In a recent report entitled "Liquid Assets," Citizens Housing and Planning Council Senior Fellow Harold Schulz explains the problem with this system. According to Schulz, before 2005, the rental payment was equal to the debt generated by pre-1984 water structures. As that debt diminished, the number was changed to an amount equal to 15 percent of the interest and principal paid by the Water Board on all MWFA outstanding bonds. Schulz explains that this payment is increasing as the amount of bonds increases, and is no longer related to the cost of the leased infrastructure.

Schulz says that the rental payment has evolved into an easy source of revenue for the city's general fund, one that the administration can increase without going to the City Council or the New York State Legislature for a tax increase and that is not necessarily in proportion to services provided by the city.

Little public outcry

Schulz commented that if this rent was eliminated, the yearly water rate increase could be even lower. "We think Commissioner Holloway has taken the rate issue seriously and started to implement cost-cutting that's appropriate under the circumstances, so that's good," he said. "But while 7.5 percent is a much better increase than we have experienced, the real increase should be in the range of one or two percent."

Corey Bearak, a lobbyist and an advisor for the Queens Chamber of Commerce, passionately agrees with Schulz. He said the revenue from the rental payment should be found elsewhere to maintain the current city budget. "The city should stop requesting the rental payment," he said. "The bottom line remains that the rate height is totally unjustified."

Bearak spoke last Tuesday at the fifth and final borough hearing that the water board conducted on this year's proposed increase, which was later approved by the water board. All of fourteen citizens gathered in an auditorium that seated 300.

"So many people don't understand what's going on, that it's hard to get them to object," Bearak said. "And that's why you see the turnout like the one we saw."