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New York City Council Committees on Finance and Community Development
Intro. 26 Regarding the Sale of Water Liens
250 Broadway, 14th Floor

May 6, 2010

Testimony of Caswell F. Holloway
Commissioner, Environmental Protection (DEP)

Good afternoon, 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 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.  As you may recall, the authority to sell liens based on water charges was immediately successful in averting a mid-year water rate increase that would have been needed because of poor collections in the first months of fiscal year 2008.  Since then, this authority has continued to be a critical tool in collecting revenue from delinquent customers - revenue essential to meeting the expense and capital needs of one of the City's most important physical assets.
There are certain elements of Intro 26 that DEP can support, for example, the exemption for 2 and 3 family homes in the Enhanced STAR program that partially exempts from school property taxes the primary residences of senior citizens age 65 and older beneath a certain income threshold.

But a key provision of the bill - that multi-family homeowners would become eligible for the lien sale after 3 years, rather than the 1 year eligibility period now in effect - would dramatically lower revenue collections, and shift even more of the cost to operate, maintain, and build the water system from those who don't pay their water bills, to the vast majority of responsible New Yorkers who do.

To illustrate, if the 3-year eligibility threshold was in effect this year, it would reduce the number of lien sale-eligible accounts in Tax Class 1 from 11,553 to 1,090, and the amount of underlying lien-sale-eligible debt would drop from $55.8 million to just $14 million.  That translates to an additional rate increase of 1.6% for everyone else, 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.

Moreover, while the intention of this legislation is apparently to decrease the pressure that unpaid water and sewer bills can add to a homeowner facing financial difficulties, ultimately, it will have the opposite effect.  Under the proposed legislation, we estimate that the average water and sewer debt of a property owner eligible for the lien sale would jump dramatically - from $4,800 for Tax Class 1 property owners today, to nearly $13,000.  At that point, the size of the debt and the interest would be overwhelming, and extremely threatening to a property owner's economic wellbeing.  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 $10,000, and true financial distress becomes all but inevitable.

Addressing water debt sooner rather than later does not mean that we cannot or should not help property owners in financial distress - particularly in these extremely difficult economic times.  Mayor Bloomberg pledged in his State of the City Address to enact the most ambitious foreclosure prevention effort in the country, and DEP has led the way in this effort with the Water Debt Assistance Program (WDAP), that DEP reminded New Yorkers about just yesterday. 

Before I describe the status of the WDAP program - which has been quite successful - I want to review some facts about DEP's current water-lien-sale authority that are critically important.

I'm sure that you agree with the proposition that people who can afford to pay their water bills should pay.  New York City has some of the highest-quality water in the nation. The infrastructure to supply, distribute, and treat it is ingenious and complex, and everyone who benefits from the system should pay their fair share.    

As the members of these committees know, the bulk of the revenue generated by DEP's lien sale comes well before any “sale” actually takes place.  Whether due to quarterly billing or the old frontage billing method, New Yorkers have historically not treated water bills with the same urgency as other obligations.  The lien sale authority granted in 2008 has changed that by providing a critical, timely reminder to delinquent property owners to pay their water bill.  As with liens based on other City charges, most water-based liens are never sold, because property owners recognize and respond to their delinquency by paying what they owe, or entering into a payment agreement with a down payment.
The numbers bear this out.  Approximately 89% of the properties that are placed on the lien sale list resolve their delinquency before a sale occurs - which means that the vast majority of property owners can pay their bill, or put down a deposit and enter into a payment agreement, once they decide to confront the problem.

In 2008 and 2009, DEP received $185 million from customers on the 90-day lien-sale list, and another $81.6 million in Payment Agreements.  To put that in perspective, every percentage increase in the water rate equated to $23 million during this period, so lien sale authority saved the equivalent of an additional 7.9% of rate increases that otherwise would have been necessary during these two years.
And since the City Council granted DEP lien sale authority in 2007, the amount of delinquency associated with lien-sale-eligible properties has declined.  In 2008, the average property on the 90-day list had $6,787 of delinquent charges; in 2009, $5,575 of delinquent charges; and this year $4,846.   This is a welcome trend that we hope continues - and would almost certainly be reversed of the lien-sale eligibility period was extended to 3 years.

Just as it is important to ensure that people who can afford to pay their water bill actually pay, we must do everything we can to help those in financial distress, or who are most vulnerable to financial difficulty when the economy takes a turn for the worse.

In crafting Local Law 68 of 2007, the Council and the Administration took pains to incorporate features that protect our most vulnerable citizens and preserve home ownership. For liens based on property taxes, the legislation excludes from sale all Tax Class 1 properties owned by senior-citizen, disabled and low-income homeowners who meet the criteria for the Senior Citizen Homeowners' Exemption (SCHE), the Disabled Homeowners' Exemption (DHE), and the New York State Personal Income Tax (PIT) circuit-breaker credit.  For liens based on water and sewer charges, the legislation also excludes Tax Class 1 properties that are receiving the SCHE and DHE exemptions, or the PIT circuit-breaker credit. 

As the members of this committee know, since lien sale authority was granted, the national financial crisis erupted, home values declined, and many homeowners were faced with the prospect of foreclosure.  The Administration understands that with many New Yorkers struggling in these difficult financial times, we must do everything we can to help those who are under the greatest financial burden.

That's why Mayor Bloomberg and I, with the support by Council Members White, Vann and Comrie, announced the Water Debt Assistance Program (WDAP) in February of this year, a new initiative that will temporarily relieve homeowners at risk of mortgage foreclosure of past-due water and sewer debt.   DEP appreciates the Council's support for this program, which we expanded to single-family homes in March.

WDAP was created to give homeowners at risk of foreclosure some breathing room by taking their properties off the lien sale list and deferring collection of unpaid water and sewer charges until the property is sold, refinanced, or the owner has the ability to pay the debt.  As of May 2nd, 533 properties have been accepted into the program.

Programs like WDAP, in addition to the exemptions from the lien sale that already exist for homeowners receiving disability-related or age-related property tax exemptions, provide meaningful relief and protection for those experiencing financial hardship, or who may be particularly vulnerable to an economic downturn.  And as I noted at the outset, DEP can support the additional exemption in Intro 26 for those eligible for the Enhanced Star exemption.
In addition to WDAP and the exemptions I've described, DEP will administratively remove from the lien sale any property that has been the subject of formal foreclosure filing by the mortgage-holder.   That filing is referred to as a lis pendens and we are working with the Center for New York Neighborhoods and HPD to reach that population.  In 2010 the lis pendens exemption led to 1300 properties being removed from the lien sale.

Renewing the current lien sale authority - with its one-year eligibility period - along with the additional exemptions proposed in Intro 26 would strike the right balance between protecting the most vulnerable, and ensuring that DEP has the tools necessary to collect from property owners who can afford to pay.  I would also like to offer a suggestion that would substantially strengthen those tools, while maintaining appropriate protections for the vulnerable:  extending lien sale authority to single-family homes.

Local Law 68 of 2007 exempted single-family homes from the sale of water-only liens, because we have the authority to terminate water service to delinquent single-family accounts.  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 98% 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.  DEP must post a 15-day notice on each home, paint the sidewalk and mark out in the street the location of the connection between the water main and the delinquent homeowner's service line, a process that costs $400 per home.   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, 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 BWSO 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.

This hearing is particularly timely.  Tonight I will speak at the second of six public hearings on the water rate proposal that I made to the New York City Water Board on April 9.  As I'm sure the committees know, DEP has proposed a 12.9% water rate increase to meet the needs of the water system for next year.  I have already held meetings in each of the five boroughs and explained that. At each meeting I've held, residents who pay their water bills have asked me to use every method possible to ensure that they are not bearing the burden of paying for the water of those who are not.  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. 
We have been working to reduce costs in order to keep next year’s rate as low as possible. We have cut the FY 2011 expense budget by 8%, and we are in the midst of an intensive review of our capital program. But future rate increases are also driven by the failure of customers to pay for the water they use. That is why we need every tool available, including keeping the current lien sale authority intact, and extending it, to obtain payment and ensure a fair distribution of the cost of our water system.

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

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NYC Department of Environmental Protection
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