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

New York City water rates are set to cover the systems 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 DEPs capital costs since 2002, driving up annual debt service cost by $700 million.

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This effectively took new water-system debt off the citys 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 citys 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.

Read the full article in City Limits.