Agency Focus: DEP - Budget Analysis
The New York City Department of Environmental Protection (DEP) operates an extensive infrastructure system that provides water and sewer services to New Yorkers. Unlike other city agencies, DEP is financed entirely by user charges. The challenges for DEP’s leaders include:
• Containing the rate increases necessary to finance the agency. Since 2002 water and sewer rates have more than doubled.
• Achieving lower rate increases by setting new priorities for capital investments and through better managing capital projects. Debt service for capital investments is the largest item in the DEP’s budget, and its growth is also driving another expense: its rental payment to the city.
Escalating Water and Sewer Rates
The DEP is one of three entities governing the city’s water and sewer system. The leaders of all three are accountable to the mayor, but each agency has distinct responsibilities. The DEP operates and maintains the system; the New York City Municipal Water Finance Authority (WFA) borrows to finance capital investments; and the Water Board sets rates for customers to meet financing needs. This arrangement was established in 1984, when the Water Board and the WFA were created to help the city enter capital markets after its fiscal crisis. User fees replaced property-tax-based charges.
Between fiscal years 2002 and 2015, water rates grew from $1.44 per 100 cubic feet (Ccf) to $3.70 Ccf, an increase of 157 percent. Rate hikes have averaged 7.7 percent annually since 2002, with double-digit increases from 2008 to 2011.
The rate increases have been driven by growing debt service required for WFA bonds. Debt service grew 225 percent since 2002 to $1.6 billion, or 45 percent of the system’s operating costs. Debt service is now a greater expense than operations and maintenance. The third largest budget item is a “rental payment” to the city for infrastructure made from user fees. In recent years this payment has been set at 15 percent of debt service.
The shifting cost structure underlines the tremendous increase in the DEP’s capital program, which was financed entirely by debt. Debt outstanding rose from $12.1 billion in fiscal year 2002 to $30.4 billion at the end of fiscal year 2014, a 151 percent increase. The DEP’s $25 billion capital program included infrastructure upgrades such as the extension of the third water tunnel and the expansion and replacement of water mains and sewers, but most capital dollars were devoted to completing large federally mandated projects to address combined sewer overflows and to avoid additional filtration of water.
Strategies for Constraining Future Rate Increases
To keep future rate hikes low, the DEP should set new capital priorities and improve its capacity to deliver capital projects on time and on budget. In addition, city leaders should re-examine the basis for the agency’s rental payment.
The opportunity to contain and alter capital investments stems from the completion of expensive mandated projects required to meet water quality standards set by the federal government. These include a filtration plant, facilities to handle combined sewer overflows and the upgrading of sewage treatment plants. As these projects have been completed, the pressure on rates has eased: This year the Water Board approved a 3.35 percent rate increase, the lowest since fiscal year 2006. Mandated projects are anticipated to require less than $200 million annually beginning in 2016, assuming the city will successfully fend off additional mandates. As part of the strategy to limit new “gray” infrastructure investments, the DEP is undertaking a Green Infrastructure Plan to save $1.4 billion over the next 20 years. Limiting mandated investments will allow the DEP to target other infrastructure needs, such as expanding sewers in underserved areas in Queens and Staten Island, and upgrading sewers and water mains, most of which are more than 50 years old and in need of replacement.
While less driven by federal mandates, future capital investments and the associated debt service will still be expensive. Limiting future rate increases will require the DEP to improve the management of projects to keep the agency on budget. Several mandated projects were plagued by delays and cost overruns. For example, an Independent Budget Office analysis of the Croton Water Filtration Plant found the project was poorly scoped, underestimating expenses and leaving out project components. The plant was completed at a cost of $3.2 billion, $2 billion more than initial estimates. Similarly, the Catskill Ultraviolet Filtration Plant, initially budgeted at $597 million, was completed for $1.6 billion in 2013, four years behind schedule.
High and growing debt service increases affect the organization’s rental payment. As debt service has grown, so has the rental payment, reaching $233 million in fiscal year 2015—7 percent of all expenses. The basis for calculating this payment, and its size, have been sources of controversy. The city should consider other options for setting the rental payment.
Rahul Jain is a senior research associate at the Citizens Budget Commission.