Red to Black – Institutional and Legal Reforms of New York Water

Red to Black – Institutional and Legal Reforms of New York Water By Manohar Patole LLM, Water Governance and Conflict Resolution Candidate, Master's in Urban Planning, International Development 2016 Robert F. Wagner School of Public Service New York University [email protected] www.linkedin.com/in/manoharpatole https://wagner-nyu.academia.edu/MannyPatole New York University 14 East 4th Street New York, NY, 10012 ABSTRACT: Water Supply and sanitation services are an essential requirement for the economic and social development of urban areas but are often constrained due to antiquated assets, laws and institutions. The current structure of New York Water sector was not always in existence but as a result of reforms that began in 1983 in response to new federal mandates, a citywide fiscal crisis, infrastructure health and water quality. This paper analyzes the legal and institutional reform strategy using New Public Management theory. Highlights: • • • • • Primary legal and institutional analysis of promulgated laws of New York water reforms was conducted Research found issues behind reforms of 1980’s are similar to issues that impact water utilities in developed and developing regions today The current state of public infrastructure, particularly water, is extremely underfunded world-wide The necessity of improved water governance is necessary in light of increased urbanization in developing regions, static or reduced resource availability, and stress on current infrastructure Innovative financing and planning will be needed to address the need of expanding water infrastructure to keep up with demand for the next century Keywords: Governance, Reforms, Infrastructure, Water Abbreviations: CWA - Clean Water Act; DEP - Department of Environmental Protection; NPM - New Public Management; NYS - New York State; SDWA - Safe Drinking Water Act; WATSAN –Water Supply and Sanitation Acknowledgements: I would like to thank Shayne Figueroa for proofreading and language assistance during this process 1 Introduction In October 2012, the aftermath of Superstorm Sandy left some areas of New York City decimated while others escaped relatively unscathed. My neighborhood – Sheepshead Bay in Brooklyn – was thrown back in time as the modern conveniences of power and running water disappeared. The days and weeks that followed Sandy brought back memories for me of my graduate research on water and sanitation for urban slums in subSaharan Africa: I was now living through a similar situation, granted for a much shorter time. New York City eventually recovered, some areas slower than others, but the superstorm prompted citizens, academics, policy-makers and politicians to re-evaluate the resiliency of New York City’s. What would happen if another catastrophic event struck the city? In order to answer this question, we need to look at the city’s history, its unprecedented rise to becoming not only the largest city in the United States of America, but also the “world’s most economically powerful city” (Florida 2015). Throughout the narrative, the governance and provision of water and sanitation services dominated the physical, economic and conceptual development of New York City. New York City is home to the world’s oldest continuously running urban water supply, beginning with a public well dug at Bowling Green in Manhattan in 1677 (Koeppel 2000). Although the well served the private citizens of residents of New Amsterdam, it’s primary purpose was to provide clean water for local breweries and businesses. Over the next century the over-pumping of groundwater by private businesses, poor sanitation, increased pollution, pandemics such as yellow fever all put immense strain on the city’s quasi-private water distribution systems. In 1744, Christopher Colles proposed the first public water system for New York City to make it competitive with the prominent colonial cities of Boston and Philadelphia, as well as European world capitals London and Paris. Today, 19 reservoirs 3 controlled lakes, 22 wastewater treatment plants (14 servicing just New York City), 6,500 miles (10,459km) of water mains, and 6,300 miles (10,137km) of sewers.(DEP 2015) make up New York City’s water supply and sanitation system. The entire supply chain (defined as water abstraction, delivery, distribution, and collection and treatment of wastewater) is publically owned and operated, with full coverage of all the residents of NYC.(World Bank 2006) The current system reflects a 200-year evolution of water engineering due to governance of the sector and responses to system failures and external shocks. Schwartz (2009) characterizes these phenomena as punctuated equilibrium, similar to evolutionary biology, where an established institution will maintain status quo until a disruption of significant magnitude occurs to change it. In the case of New York City, the population boom of the 1840s prompted the first wave of reforms.(Koeppel 2000) However, reform approaches were largely technocratic and supply oriented, focused on expanding the network to accommodate the growing population until the 1980’s.(Gandy 1997) A confluence of three factors changed this pattern in the 1980s. First, NYC's modern water supply and sanitation system, which has been around since the turn of the 20th century, had chronic break-downs and needed constant repairs to the nearly 100-year old infrastructure.(DEP 2015) Second, promulgation of the Safe Drinking Water Act (SDWA) and Clean Water Act (CWA) passed by the United States Environmental Protection Agency (USEPA) in 1974 and 1977 respectively, required extra attention and money for the water systems. Third, the fiscal crisis of 1975 made New York City agencies and utilities, including water and sanitation, a financial risk for many public and private lenders. (McMahon 2005) Taken together, the large-scale investment required rehabilitating its aging infrastructure and implementing new technologies for treatment of water supply and wastewater, compliance with the new federal mandates, and a fiscal crisis exposed an array of issues facing water management for the city. Those of particular interest include the financial health, water quality, infrastructure rehabilitation and autonomy of the system. What strategies were employed to transform the water and sanitation sector into its present incarnation, one that was able to respond to Superstorm Sandy in a relatively short period of time? How are the problems of the NYC water supply in 1980 different than those faced by public water and sanitation utilities across developed and developing cities today? In order to answer these questions, the underlying issues impacting sector will be reviewed. I will analyze the reform strategy implemented in New York City during the 1980’s and the outcomes of the reforms discussed by utilizing New Public Management theory. In doing so, potential strategies will be identified for developed and developing cities facing similar governance and infrastructure problems with water utilities. 2 The Underlying Issues The three items mentioned earlier - national environmental regulatory mandates, aging infrastructure and a city in fiscal crisis - brought several underlying issues of the New York Water system to the attention of the public. The system’s fiscal health, aging and poorly maintained infrastructure, water quality and autonomy all had to be addressed. Similar to issues facing water utilities across the world in the early 21st century, these interrelated factors impacted the water sector in various ways. The following is a brief overview of underlying issues and the reform strategies applied. 2.1 Financial Health Due in part to poor accounting practices, bloated city payrolls, over-extension of social welfare programs, and a looming national oil crisis, New York City government faced bankruptcy in 1975. (Brustein 2005) As Felix Rohatyn stated during the M. Moran Weston II Distinguished Lecture in Urban and Public Policy on February 26, 2003, "The banks lent too much and checked too little; the unions took more than the city could afford; the city cooked the books, and borrowed, and the state encouraged this whole exercise." At the time of the fiscal crisis in 1975, the sector was operated and maintained by the Board of Water Supply (established by the Water Supply Act of 1905), part of New York City government. Because of this relationship, the possibility of raising capital to invest in the necessary infrastructure rehabilitation projects as well as comply with the new federal mandates either through the issuance of bonds or lending, was no longer an option. Regarding the sector itself, drinking water and sanitation services were billed based on a frontage system, with rates based on the amount of fixtures on the property (such as faucet taps and toilets), not volumetric consumption because metering systems were not widely implemented. This led to commercial losses and had poor collection rates because frontage did not reflect the actual consumption. (Paolicelli 2009) 2.2 Infrastructure New York City’s current system dates back to 1842, with the completion of the Old Croton Aqueduct delivery system and the NYC distribution network. Water supply is impounded in three upstate reservoir systems which include 19 reservoirs and three controlled lakes with a total storage capacity of approximately 580 billion gallons.(DEP 2015) The collection systems were designed and built to mitigate periods of droughts and floods. 1842 to 1900, the population of NYC grew nearly 900% and another 130% from 1900 to 1970. (Forestall 1996) The constant need to expand coverage left little time to maintain and/or replace the aging infrastructure, leading to high physical losses. (Galusha 1999) To compound the problem, the new federal mandates of the Safe Water Drinking Act and Clean Water Act also required infrastructure to comply with more rigorous standards of treatment for drinking water supply and wastewater, furthering the issue of infrastructure rehabilitation higher on the NYC agenda. 2.3 Water Quality The SDWA and CWA introduced new standards for treatment of drinking water and wastewater respectively nationwide. New York City’s has the largest unfiltered water system in the US. During the 1970’s and 1980’s, development around the watershed by residents and governments outside of New York City threatened the quality, which created a conflict between the downstream New York City and upstate municipalities. The 1986 Surface Water Treatment Rule additionally required the filtration of all surface water supplies, adding another burden to the system. Until that time, treatment of drinking water supply for NYC is mainly done through chlorination, not water filtration plants.(NRC 2000) Construction cost estimates for such a treatment plant reached $6 billion, a price-tag the city could not afford. (Murphy 1995) NYC had avoided filtration of the supply for many decades as it could by maintaining the pristine quality of the watershed. The increase in land development around the watershed, however, continued to pose a serious threat to the quality of the drinking water supply of NYC. 2.4 Autonomy Managerial and policy autonomy served as a deeply divisive issue for the sector. Although the Bureau of Water Supply (BWS) knew the true costs of operation, the City Council determined rates and prices. In addition, the BWS could not borrow nor issue bonds to fund the necessary projects due to New York City’s tenuous fiscal position in the late 70’s. Managerial autonomy was also subject to political interference when public employment contracts were handed out to gain union support for political election campaigns. (McMahon 2005) Other examples of problems arising from issues of autonomy included the enforcement of non-compliance of payment, and inability to draft mandates necessary for the efficient and effective management of the utility. The issues presented are not new to the water sector in developing countries. However, it was unusual to observe the scale of these problems in a large urban setting such as New York City. These underlying issues influenced the reform strategy discussed in the subsequent section. 3 NYC Reform Strategy Beginning in 1983, the city’s strategy shifted its approach from a technocratic, supply management driven one to one of a legal and institutional in nature. This new approach incorporated demand management and could be classified as New Public Management theory. Mark Page, the deputy director and general counsel of the Office of Management and Budget for NYC from 1982 until 1984 and later Executive Director of NYC Municipal Water Finance Authority, with the support of the Mayor Ed Koch, spearheaded the sector reforms. In accordance with New York Code Title 8A: New York State Local Water and Sewer Authority Act, decentralized water services for the state, and set the duties and obligations of the local governments should follow in the implementation of water services, whether public or private in nature.1 It implemented the necessary legal and institutional reforms to "provide expeditiously, efficiently and effectively, safe and adequate supplies of water and sewerage service." The reforms established a new institutional structure for water services in NYC: the Department of Environmental Protection, the NYC Municipal Water Finance Authority, and the NYC 1 New York State Public Authorities Code, Article 5, Title 8A, Sections 1196A-1196R. Water Board. Each of these entities was entrusted with specific legal duties and obligations regarding the provision of water services for NYC. 3.1 The Department of Environmental Protection (DEP) Chapter 57 of the NYC Charter in 1983 established the Department of Environmental Protection (DEP). It was the first of the three new bodies created, charged with the operation and maintenance of the entire supply chain of water services. The DEP incorporated the former Bureau of Water supply as well as established five additional bureaus, with tasks that included operation and maintenance of the system; planning, designing, engineering and construction of all works for the system; land use planning, environmental impact assessments, and consulting for other agencies. The DEP also handles all aspects regarding customer services, including meter installation and reading, billing, collection of fees, and customer complaints. The Commissioner of Environmental Protection, a political appointment, heads the organization. Under this position are six deputies appointed by the Commissioner, and a staff of over 5,500. (DEP 2015) 3.2 The NYC Municipal Water Finance Authority (Finance Authority) The second main body created from these reforms was the NYC Municipal Water Finance Authority (Finance Authority). It was established in 1984 as a public benefit corporation, under the jurisdiction of New York State Public Authorities Law, which is responsible for raising capital through the issuance of municipal bonds, commercial paper and other obligations for capital improvements of the system. (N.Y. PBA. LAW§1045) Established as a separate legal entity from New York City, it has full legal control over all revenues generated from the operation of the system. (Paolicelli 2009) NYW is governed by a Board of Directors, consisting of four of the ex officio members: the Commissioner of the DEP, the Director of Management and Budget of the City (OMB), the Commissioner of Finance of the City and the Commissioner of Environmental Conservation of the State (NYS DEC). In addition, two other directors are appointed, one by the Mayor and one by the Governor, for a total of seven members. (N.Y. PBA. LAW§1045) 3.3 The NYC Water Board (Water Board) Established by the same law, the NYC Water Board leases the water and sewerage systems for an annual payment and in turn incurs all rights and responsibilities of those systems therein. (N.Y. PBA. LAW§1045) The Water Board, which leases the system from NYC, has three main responsibilities: establishing the rates which the DEP will utilized in billing customers for water and sewerage services, allocating the money received by the DEP from collection of customer payments for water and sewerage services, and enforcement of customer non-compliance. Similar to the Finance Authority, the Water Board is a legally independent entity vested with full legal control over all revenues generated from the operation of the system by the DEP. The Board is comprised of seven members, which are all appointed by the Mayor of the City. There are two unique stipulations for the members of the board, at least one member should have experience in the science of water and no member should be a director of the Authority. 4 Reform Strategy Analysis The 1980s reforms were organic in nature, not following any prescribed model at the time. However looking back on the strategy employed, it can be viewed as a variation of New Public Management (NPM), where the agency is fragmented into the three bodies in order to create a “checks and balances” system of accountability. (Barzelay 2002) The DEP, NYW, and the Board (collectively known as NYW) divided the obligations and duties of water services and remained a non-profit public entity, and in the execution of its duties should ensure the public health and welfare. (N.Y. PBA. LAW§1045) Although the reforms were not based on any particular model, New Public Management theory was used to analyze the reforms because the time period of the reforms and how those reforms reflected increasing the autonomy of state-owned utilities and requiring them to manage on a more commercial basis. (Schwartz 2008) 4.1 4.1.1 Analysis of Underlying Issues Financial Health Before the reforms, the fiscal woes of NYC greatly impacted the water sector. Post reforms, NYW and the Board were formed as independent legal entities to provide a shield from the financial risk born by NYC as well as political interference in price setting.(N.Y.PBA. LAW§1045) The new financial environment established by the reforms are reviewed in three parts: investment, price setting, and billing and collection. 4.1.1.1 Investment Investment in water infrastructure is very capital intensive and is often hard to procure funding as the rate of return, even though stable over time because of captive customer base, is relatively low.(Hukka 2003) Large amounts of capital are needed and collection of user fees alone is not sufficient. Therefore, the creation of debt through lending or issuance of financial obligations such as bonds is necessary to fund such infrastructure projects. The creation of NYW “ring-fenced” it from New York City, allowing it to raise the capital necessary for infrastructure rehabilitation and pay for the system upgrades to be in compliance with federal mandates. However, to attract and assure investors and lenders, NYW had to prove it was a safe and creditworthy. This was proven in six ways through the promulgation of N.Y. PBA. LAW§1045: First, the establishment of its legal status separate from NYC; Second, a new flow-of-funds model was introduced, which gave the Authority and consequently bondholders a statutory first lien on all revenues, guaranteeing debt issued would paid (see Figure 1); Third, mandatory financial planning and forecasting was instituted in accordance with the MAC to avoid reoccurrence of fiscal crisis during the 1970’s as well as includes mechanisms to anticipate and cope with budgetary shortfalls; Fourth, the tax-exempt status bestowed upon NYW allowed revenues generated to stay within and not subsidize other city agencies; Fifth, the captured market with a growing population, ensured a steady increase of customer base; Sixth, last assurance was procedure of price setting. NYW’s Flow-of-Funds Protects Bondholders With a True Gross Pledge of System Revenues Water & Sewer Revenues Board Local Water Fund DSRF 1 Revenue Fund Available to meet D/S payments Debt Service Fund Construction Fund General Resolution DSRF Refill Authority Expenses Subordinated Indebtedness Fund Second Resolution Revenue Fund Water Board Expenses Debt Service Fund Arbitrage Rebate Fund 2 3 O&M City Lease Payment 4 5 5 O&M Reserve Surplus goes to General Account in the O&M Reserve Fund and is available for pay-as-you-go capital and carryforward in subsequent years. 4 Figure 1: Flow of Funds Diagram. NYW Presentation September 3, 2009 4.1.1.2 Price Pricing of services is an inherent problem for water services, due to the problem of the natural monopoly water utilities face. The price should be affordable for consumers while at least be able to cover operation and maintenance and at most provide full cost recovery in order to pay down debt. The price is determined for the year in the previous year through the involvement of the three agencies. The DEP is responsible for calculating the cost of the operation and maintenance of the system. The Finance Authority calculates the debt service owed plus estimates the possible debt issued for the fiscal year. These inputs are combined along with operating expenses of the Water Board and Finance Authority to determine the price for both water and sewerage services. The price is subject to review first by the independent rate consultant 2 , who determines if the expenses reported are reasonable and appropriate and the price reflects full cost recovery. (NYC Water Board 2009a) It is then reviewed by customers through public hearings held 2 Finance Agreement Article VI, section 6.2 in each of the five city boroughs of NYC. In May, after the public hearings, the Water Board holds its annual meeting when the price is adopted to provide sufficient revenues that will cover all expenses of the NYW. A full report of the process is available for customer and investors. 4.1.1.3 Billing and Collection Pricing is dependent on accurate billing and collection rate. Metered billing was introduced in 1985, increasing the accuracy of the billed amount for each customer.(DEP 2015) The DEP bills the users and collects their payments. In the event of non-payment, theft, or denial of access by customers, the Board is responsible for the enforcement of compliance of billing. Alternative payment methods such as payment plans are provided for customers who cannot pay to ensure disconnection of service will not occur. If necessary, the Board can assess administrative penalties, disconnect service and enact property liens. 4.1.2 Infrastructure Rehabilitation New York City’s water infrastructure was nearly a century old in the early 1980s and had been neglected for a long time due to the lack of capital necessary to fund large-scale repairs. The reforms allowed for the influx of necessary capital to undertake many key projects, such as the construction of Tunnel 3 for example, to rehabilitate the system as well as comply with federal mandates. (NYW Water Board 2009b) Once the capital was secured, the problems of infrastructure rehabilitation were more related to planning and time. The DEP implemented the Asset Prioritization and Risk Mitigation program to undertake the task of identification and rehabilitation of assets in most need and address them according to priority.(Gilmore 2007) The DEP also introduced the Water Conservation Program to reduce consumption through the promotion of “low flow” water fixtures and educational programs. (Fitzhugh 2004) The plan was developed for two reasons: to raise awareness of the environmental and economic benefits for customers to conserve water and to conserve the water supply in order to avoid the costs to expand the reservoir system to accommodate the growing population yet again. The main infrastructure problem of filtration plants for NYC's drinking water supply, however, was still an issue. 4.1.3 Water Quality As stated earlier, the cost to construct the necessary filtration plants for the water supply was immense, too large to borrow or issue bonds. However, the City still had to find a way to deal with the issue of water quality and compliance with federal mandates. To prevent the escalation of conflict between the NYC, upstate municipalities and the state and federal environmental agencies, the Land Acquisition Program was developed. (NRC 2000) The program was for NYC to buy land around the watershed from voluntary sellers to ensure no development. This was a point of contention for the upstate residents who saw the plan as a hindrance to development, but NYC would also compensate for the estimated revenue for development of the region. Although this cost would be high, it was not as high as the construction and operation of filtration plants for the entire water supply. (Murphy 1995) The program was the core element of the comprehensive watershed protection program, which also included watershed rules and regulations to curb pollutant loading by agriculture around the reservoirs.(NRC 2000) The DEP also developed alternative means of water supply purification, such as an Ultra-Violet Disinfection Plant, that helped the City comply with federal regulations. (DEP 2015) The comprehensive nature of these programs to protect the watershed was a unique strategy employed by the city to postpone yet again construction of a filtration plant, which allowed for NYC to receive a filtration waiver until 1996 due to the relative high quality of the water supply and measures taken to ensure it short of filtration. (Murphy 1995) In addition to compliance with SDWA, wastewater treatment had to comply with CWA standards. The existing treatment plants were upgraded by the DEP to increase capacity, properly treat and dispose of NYC's effluence in accordance with CWA standards. Investment was secured for both these strategies through NYW. 4.1.4 Autonomy The laws drafted during the reforms established legal autonomy through the establishment of the Finance Authority and the Water Board as separate legal entities from NYC.(Verhoest 2004) The Water Board, which leases the system operated by the DEP, therefore is legally responsible for its operation and maintenance as one would be if they leased a car or residence. (Agreement of Lease 1985) The other two relevant forms of autonomy for water utilities is managerial and policy, which are discussed in the following sections. 4.1.4.1 Managerial Managerial autonomy can be divided into two dimensions, financial and human resources. As stated in earlier, the reforms solidified the financial autonomy of agencies of the sector. The reforms allowed NYW to be financially independent from NYC, as its revenue stream is based on collection of bills and capital is raised through the issuance of debt through financial obligations such as municipal bonds and commercial paper.( N.Y. PBA. LAW§1045) NYW no longer sought lenders as banks because the new laws and institutions established it as a creditworthy entity for investors to purchase bonds. The price-setting process was shielded from political interference, and the independent rate consultant serves as an arms-length regulator to ensure the price is at cost recovery level. As per the human resources dimension, the new laws permitted the Finance Authority and the Water Board to hire the required officers and employees without issues of political patronage. It also allows them to determine employee’s qualifications, duties and compensation for their position hired. For example, the employees of the DEP, which is still a NYC department although under the authority of the Water Board, must pass a public examination to gain employment. Although considered civil servants, under Public Authorities Law, they are obliged to follow the rules of conduct established by the amended bylaws that in the execution of their duties they must comply, if not appropriate measures can be taken depending on the violation including termination. (By-Laws 1984) In addition, the Mayor of NYC can remove members of the Water Board if the member neglected their duty or proof misconduct is established in the execution of their position. 4.1.4.2 Policy Policy autonomy is the ability for an agency to develop and implement necessary instruments for the execution of its duties and obligations. N.Y. PBA. LAW§1045 granted the Finance Authority and the Water Board, "to do all things necessary, convenient or desirable to carry out its purposes and for the exercise of the powers granted in this title.” In accordance with the general powers entrusted to both, they are allowed to create policies for internal management and promulgate external rules and regulations necessary to fulfill its obligations, enter into contracts, procure property and execute studies. In addition to these commonalities, the three agencies are task-oriented with specific duties and obligations which require different policy autonomies such as to issue debt and borrow money and enter into agreements with NYC and the Water Board to finance water projects for the Finance Authority; and all aspects regarding pricing, billing and collection of fees, acquire from NYC the title to water and sewerage system, invest monies not required for immediate use or disbursement subject to Finance Authority approval, and maintain those reserves in a special fund to ensure liquidity of NYW. (N.Y. PBA. LAW§1045) The DEP, although operates and maintains the system, can request the Board administer and execute the necessary actions on its behalf as per the responsibilities entrusted to it as the leasing authority of the DEP. NYW has its own instruments to investigate and enforce compliance, as the Water Board can promulgate rules and regulations for billing and collection, environmental matters and set administrative and penal sums. The DEP has its own division of police to serve as enforcement officers for the issuance of penal sums and arrests if necessary, generally used for enforcing watershed rules and regulations. (N.Y. PBA. LAW§1045) 4.2 Characteristics of New Public Management (NPM) The provision of water services in NYC can be classified as Direct Public Management, in which New Public Management (NPM) is the one of the most widely adopted institutional arrangements.(Van Dijk and Schouten 2004) NPM reforms usually embody five characteristics: increasing the level of autonomy of the utility; separating regulatory tasks from the service provision; creating quasi-competition in the water sector, through benchmarking exercises; increasing tariffs to cost recovery levels and increasing customer orientation; and increasing accountability for the results produced by the utility. (Schwartz 2008). Looking at the first characteristic, the legal reforms the legal, managerial and policy autonomy of NYW. According to Degrees of the Different Dimensions of Autonomy purported by Verhoest (2004), NYW has the maximum level of managerial autonomy and policy autonomy and high level of legal autonomy. The depoliticization of decisions is also mentioned through shielding of NYW from political interference. The second characteristic is separating regulatory tasks from the service provision. If the regulatory responsibilities are internalized, the poacher-gamekeeper problem can arise. (Foster 1996) Regulation for the water sector focuses on four main aspects, accessibility, affordability, availability, and quality of services. (Lang 2004) Regulation of the sector was separated from NYW by the introduction of the independent rate consultant operates as the arms-length regulator to ensure affordability for consumers and the federal mandates SDWA and CWA enforced through the New York State Department of Environmental Conservation Environmental to ensure water quality for drinking and wastewater. The aspects of accessibility and availability are regulated through NYS Local Water and Sewer Act, which requires all municipalities of New York State to provide water and sewerage services to all residents within their borders. The third characteristic is creating quasi-competition in the water sector, through benchmarking exercises. NYW benchmarks its performance with respect to annual rates as a percent of median family income, annual rates respective of national average, annual rate increase respective of national average, and collection rates compared to 30 major US cities.(Water Board 2009a) The DEP also institutes benchmarking studies with respect to operational performance such as customer complaints, repair response time and percentage of complaints solved within 24 hours. (DEP 2015) Benchmarking is done on a voluntary basis by the Utility, not required by the Act. These activities, however, are a tool to attract new investors and assure current ones the Utility is a well-performing entity relative to others, seeking ways to improve, with a reliable revenue stream and return on investment. The fourth characteristic is increasing tariffs to cost recovery levels and increasing customer orientation. As stated in earlier sections, the price is set cover full costs, operation and maintenance as well as debt service. The independent rate consultant is used to review the calculated price respective to operation and maintenance cost and provide sufficient revenue for repayment of debt for the bondholders. Customer orientation was increased by their inclusion in the price setting process, public access of information, utilization of benchmarking activities and regulation to ensure accessibility, affordability, availability and quality of service. The fifth characteristic is increasing accountability for the results produced by the utility. Reiterated through the laws passed as a result of the reform process, the agencies were created to perform an essential public service. The Finance Authority and Water Board are accountable to the bondholders by ensuring the payment of debt service. The DEP is held accountable to the customers to ensure reliable, high quality water services provision. NYW is accountable to the NYSDEC to ensure federal mandates are observed in providing water services to customers as well as to the independent rate consultant to assure bondholders and customers are paying a price that is full cost recovery. All the employees, officers and directors are held accountable in the execution of their office by the Act and if found in violation are subject to sanctions of NYS Public Authorities Law. 5 Discussion Authors such as Koeppel (2001), Galusha (1999), and Soll (2013) have highlighted the contentious relationship between water and urban development of the city. Financial health, infrastructure, water quality and autonomy, are as relevant to New York City today as they were over three centuries ago. Furthermore, these are prevalent issues that are ubiquitous to water utilities around the world. The common theme, regardless of geography or socioeconomic status, is management and governance. The purpose of water governance is provide answers for all stakeholders – those that are pro-environment or pro-development, upstream or downstream, urban or rural – on how to manage water, not to show who is right or wrong. The state of New York City’s current public infrastructure, in terms of capital investment as well as operation and maintenance, is not bad but could be better. Relative to the rest of the country, however, the city is performing above average. According to a 2013 report by the American Society of Civil Engineers (ASCE), New York City will require almost $50 billion in drinking water and wastewater infrastructure needs over the next 20 years. Luckily, the city’s progressive fiscal reforms will be able to fund these infrastructure needs. The same ASCE report rated the drinking and wastewater infrastructure of the United States as a whole with a “D.” Much as it was on your high school report card, this is a poor rating. Defined as, “infrastructure is in poor to fair condition and mostly below standard, with many elements approaching the end of their service life,” it indicates that, “a large portion of the system exhibits significant deterioration. Condition and capacity are of significant concern with strong risk of failure major improvements need to be made as soon as possible.” (ASCE 2013) In addition, according to the United States Congressional Budget Office’s report on Public Spending on Transportation and Water Infrastructure, between the years 1956 and 2014, $109 billion was spent on water supply and wastewater treatment facilities investment. (CBO 2015) Although that sounds like a lot, that number represents only 0.07% of total public spending (federal, state and local combined), with 75% of these outlays being made by state and local governments. Moreover, federal investment related to water has declined almost 20% since 2002. If you look at percent of total budget for water infrastructure investment for developing countries, such as Indonesia or Uganda, it ranges from 2-4%, or three to eight times that of the United States. Combined with this additional expenditure, developing countries that take lessons from the New York City’s utility improvement process will find their water systems in much better shape in the future. Periodic droughts have impacted agricultural and urban areas across the globe for generations, but recent occurrences in more affluent areas such as California in the USA and São Paulo in Brazil, have furthered the discussion of resource availability and the impact of climate change in mainstream media. Climate variability has indeed contributed to recent water supply shortfalls; however, the problem has been decades in the making. As mentioned earlier, New York City’s water supply problems started nearly two centuries before the 1980s reforms. These historical issues influenced the decision to expand New York City’s storage capacity to approximately 580 billion gallons and design a system with various interconnections that allow for water transfers. The transfers are able mitigate localized droughts and take advantage of possible flooding between reservoirs and watersheds. (DEP 2015) While this feature does not mean the city will be immune to drought, it does add another layer of protection should such a climatological change occur. California and Brazil are currently pursuing various water conservation measures, but these are widely considered to be temporary solutions to a permanent problem. The ongoing shortages in California have been publically attributed to climate change and environmental factors. (NOAA 2014) However, the region’s current situation is also a symptom of many decades of water mismanagement and poor governance. (Propublica 2015) Overconsumption, rapid urbanization, competing users for socio-economic development and inefficiency of current water systems have been issues for the region, but water managers and politicians only started the conversation about overhauling the water systems when the situation reached drought levels of near-Biblical proportions. Similarly, the “hydric collapse” of Sao Paulo has been accredited to climate change and drought but many water managers, local politicians and advocates state that the situation is due to the poor governance and mismanagement of water resources. The area’s extensive agriculture and industry places intense pressure on available resources and the recent environmental factors are bringing these issues to the forefront. (Rigby 2015) In addition to available supply of water, the quality of that supply is an important concern. Epidemics of Yellow Fever and Cholera in the late 18th century not only influenced the formation of New York City’s first Board of Health; they also established the relationship of water quality and public health. (NYCDOH 2015) Since then, New York Water has taken various measures to ensure its water quality from biological and chemical contaminants including the recent Filtration Avoidance Determination regulations. Although the problem of biological hazards related to improper sanitation was identified centuries ago and the shared governance of water and health was a natural progression, it continues to be problematic in many parts of the world. In addition, the NYC Filtration Avoidance Determination regulations are not without its own controversies, specifically regarding upstream development versus downstream water supply. This water governance issue is all too familiar in municipalities everywhere: do you prioritize the quality of the water supply or the economic development of the land and its natural resources, including water? In both cases, the issue has been constantly managed and governed by many stakeholders coming to the table to express their interests and concerns. The concept of shared water governance is a daunting task and it does not mean that a solution has to be reached immediately but it does mean that stakeholders need to be in communication and not act unilaterally. In the case of New York City, the water utilities found a brand of autonomy that allowed the management of the sector to be protected, or “ring-fenced,” from external political interference. Moreover, autonomy meant that the utility could be financially responsible for operation, maintenance and capital investment and not subject to government transfers to cover other sectors budgetary shortfalls. Water, although not as sexy as other infrastructure concerns such as energy, does provide a constant return on investment over a long time scale. Because of this, in many developing areas, the water sector is often asked to cover budgetary shortfalls for the municipality, at the risk of reinvestment. The case of New York City provides a potential strategy for municipalities in developing countries, but the enforcement of such a program also requires a strong legal system that is not subject to corruption, an issue in many parts of the world. That being said, the strategy implemented can provide ideas for other water utilities on how they can ringfence themselves to ensure the revenue retention and reinvestment necessary to make themselves fiscally solvent, thus reducing their risk factors and attracting outside development assistance. The aforementioned discussion highlights the current problem, but what about the future? A confluence of natural and anthropogenic factors are impacting global water supplies today and will continue to do so. Urban populations surpassing rural in 2007 and numerous reports from the United Nations and World Bank estimate additional growth in the urban populations of the developing world of over 2 billion by the year 2050. The rise in urban populations will require increased investment in water utilities to accommodate need in these areas, which can exacerbate the problems of fiscal health and investment in water infrastructure, water quality and autonomy of water utilities. In order to cope with increased demand over a static supply of water resources, better governance is a necessity for developed and developing countries in order to turn this threat into an opportunity for positive growth and change. The United Nation’s new Sustainable Development Goals, specifically Goal 6: to ensure availability and sustainable management of water and sanitation for all as well as the other 16, will significantly impact water management and governance in the developing world. (UN 2015) Will these goals further the discourse of water governance or serve as just another version of green marketing to advance international development as an industry? The use of water as a political tool is not new. Regardless of your political leanings, water management and governance among all stakeholders is the only way for current and emerging urban areas to flourish sustainably. Across the board, those working in the water sector need to continue to share ideas and local best practices in order not to find the solution, but to find solutions that can best fit a situation. 6 Conclusion Reforms of the water services sector are an ongoing process in which their sustainability can be measured against their adaptability to new challenges, both internal and external, over time. The success of reforms is not only measured in response to what factors influenced them but how they will adapt to future issues that may arise. The reform strategy of NY Water, analyzed through New Public Management theory, managed this delicate balance of present and future issues. The promulgation of New York State and local city laws, creation of new institutions and new governance of the sector that works with sector stakeholders addressed the underlying problems of financial health, aging infrastructure, water quality and utility autonomy that were brought to the surface due to external shocks, for the betterment of New York City. Over 30 years later New York City has water and the utility is still facing problems of supply, investment and water quality in the face of new issues of climate change and environmental resiliency. So far, the foundation laid by the reforms had proven strong enough to handle them. Bibliography 1 1.1 Primary Sources Legislation The Charter of the City of New York (available at http://www.nyc.gov/html/charter/downloads/pdf/citycharter2004.pdf) New York City Water Board Regulation 2 (available at http://www.nyc.gov/html/nycwaterboard/html/home/home.shtml) New York City Water Board Regulation 3 (available at http://www.nyc.gov/html/nycwaterboard/html/home/home.shtml) New York City Water Board Regulation 4 (available at http://www.nyc.gov/html/nycwaterboard/html/home/home.shtml) N.Y. PBA. LAW § 1045 (1984) (available at http://www.nyc.gov/html/nyw/home.html) N.Y. PBA. LAW § 1046 (1984) (available at http://www.nyc.gov/html/nyw/home.html) N.Y. PBA. LAW §1196 N.Y. PBA. LAW § 3030-3041 United States Environmental Protection Agency Safe Drinking Water Act: Pub.L. 93523; 42 U.S.C. 1974 United States Environmental Protection Agency Clean Water Act : Pub.L. 92-500; 33 U.S.C. 1972 1.2 Documents Agreement of Lease between the City of New York and the New York City Water Board, July 1, 1985 (available at http://www.nyc.gov/html/nyw/home.html). By-Laws of the New York City Municipal Water Finance Authority, December 6, 1984 (available at http://www.nyc.gov/html/nyw/home.html ). Financing Agreement by and among the City of New York, NYW, and the NYC Water Board, July 1, 1985. (available at http://www.nyc.gov/html/nyw/home.html) New York State Department of Health. Mid-Term Revisions to the 2007 Filtration Avoidance Determination, May 2014. (https://www.health.ny.gov/environmental/water/drinking/nycfad/docs/final_revise d_2007_fad_may_2014.pdf) New York City Water Board (2009a). Public Information Regarding Water and Wastewater Rates. New York City: New York City Water Board. New York City Water Board (2009b). Water and Wastewater Rate Schedule. New York City: New York City Water Board. NOAA (2014). California Drought:2014 Service Assessment. http://www.nws.noaa.gov/om/assessments/pdfs/drought_ca14.pdf (last accessed September 13, 2015) United States Congressional Budget Office (2015). Public Spending on Transportation and Water Infrastructure, 1956 to 2014. https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/49910Infrastructure.pdf (last accessed September 13, 2015) 1.3 Interviews Personal interview and presentation with Executive Director of NYW Mr. Tom Paolicelli on September 3, 2009 (presentation available upon request). 2 Secondary Sources 2.1 Books Forestall, R. (1996). Population of the states and counties of the United States, 17901990: From the twenty-one decennial censuses. Washington, D.C.: United States Bureau of the Census. Galusha, D. (1999). Liquid Assets: A History of New York City's Water System. Fleischmanns, NY: Purple Mountain Press. Koeppel, G. T. (2000). Water for Gotham: A history. Princeton: Princeton University Press. National Research Council (2000). Watershed management for potable water supply: Assessing the New York City strategy. Washington, D.C.: National Academy Press. Soll, D (2013). An Environmental and Political History of the New York City Water Supply. Cornell: Cornell University Press UN-Habitat (2003). The Challenge of Slums: Global Report on Human Settlements 2003. Nairobi: Earthscan World Bank (2006). Approaches to Private Participation in Water Services: A tool kit. Washington, D.C.: World Bank. 2.2 Articles Barzelay, Michael (2002) Origins of the new public management: an international view from public administration/political science. In:McLaughlin, Kathleen, Osborne, Stephen P. and Ferlie, Ewan, (eds.) The New Public Management: Current Trends and Future Prospects. Routledge, London, pp. 15-33. Brustein, J. (2005). The Fiscal Crisis after 30 years. The Gotham Gazette, Fitzhugh, T. W., et al. (2004). Quenching urban thirst: Growing cities and their impact on freshwater ecosystems. BioScience, 54(8), 741-754. Foster, V. (1996). Policy Issues for the water and sanitation sectors. Washington, D.C.: Inter-American Development Bank. Gandy, M. (1997). The making of a regulatory crisis: Restructuring New York City's water supply. Transactions of the Institute of British Geographers, 22(3), 338-358. Gilmore, W. B. (2007). Capital prioritization in a large city. American Water Works Association Journal, 99(8), 44-47. Greenwell, M. (February 27, 2003). Rohatyn puts forth city budget solutions. Columbia Daily Spectator, Hukka, J. J., et al. (2003). Refuting the paradigm of water services privatisation. Natural Resources Forum, 27, 142-155. Lang, A. (2004). The GATS and regulatiory autonomy: A case study of social regulation of the water industry. Journal of International Economic Law, 7(4), 801-829. McMahon, E. J., et al. (2005). Gotham's fiscal crisis: lessons unlearned. The Public Interest, 158(Winter 2005). Moreau-LeGolvan, Y., et al. (2007). Organization and financing models of the drinking water sector: Review of available information on trends and changes. Aachen, Germany: Techneau. Murphy, S., et al. (1995). Land acquisition for water quality protection: New York City and the Catskills watershed system. Water Resources Update, 100, 60-63. NYC Department of Health. 1805-1865 Fighting Yellow Fever And Cholera. http://www.nyc.gov/html/doh/downloads/pdf/bicentennial/historical-booklet-18051865.pdf (last accessed September 14, 2015) Rigby, C. (2015). São Paulo – anatomy of a failing megacity: residents struggle as water taps run dry. The Guardian, Wednesday, February 25, 2015 (http://www.theguardian.com/cities/2015/feb/25/sao-paulo-brazil-failing-megacitywater-crisis-rationing) Schwartz, K. (2008). The new public management: The future for reforms in the African water supply and sanitation sector? Utilities Policy, 16, 49-58. Schwartz, K. (2009). The reform of public water utilities: successful utility reform efforts as punctuated equilibria. Water Policy, 11, 401-412. Verhoest, K., et al. (2004). The study of organisational autonomy: A conceptual review. Public Administration and Development, 24, 101-118. 2.3 Internet Sources American Society of Civil Engineers, http://www.infrastructurereportcard.org/executivesummary/ (last accessed September 13, 2015) The State of New York, Law and Order, http://www.state.ny.us (last accessed September 13, 2015). New York City Department of Environmental Protection, www.dep.gov (last accessed September 13, 2015). New York City Water Board, Regulations, http://www.nyc.gov/html/nycwaterboard/html/home/home.shtml (last accessed September 13, 2015). 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Red to Black – Institutional and Legal Reforms of New York Water By Manohar Patole LLM, Water Governance and Conflict Resolution Candidate, Master's in Urban Planning, International Development 2016 Robert F. Wagner School of Public Service New York University [email protected] www.linkedin.com/in/manoharpatole https://wagner-nyu.academia.edu/MannyPatole New York University 14 East 4th Street New York, NY, 10012 ABSTRACT: Water Supply and sanitation services are an essential requirement for the economic and social development of urban areas but are often constrained due to antiquated assets, laws and institutions. The current structure of New York Water sector was not always in existence but as a result of reforms that began in 1983 in response to new federal mandates, a citywide fiscal crisis, infrastructure health and water quality. This paper analyzes the legal and institutional reform strategy using New Public Management theory. Highlights: • • • • • Primary legal and institutional analysis of promulgated laws of New York water reforms was conducted Research found issues behind reforms of 1980’s are similar to issues that impact water utilities in developed and developing regions today The current state of public infrastructure, particularly water, is extremely underfunded world-wide The necessity of improved water governance is necessary in light of increased urbanization in developing regions, static or reduced resource availability, and stress on current infrastructure Innovative financing and planning will be needed to address the need of expanding water infrastructure to keep up with demand for the next century Keywords: Governance, Reforms, Infrastructure, Water Abbreviations: CWA - Clean Water Act; DEP - Department of Environmental Protection; NPM - New Public Management; NYS - New York State; SDWA - Safe Drinking Water Act; WATSAN –Water Supply and Sanitation Acknowledgements: I would like to thank Shayne Figueroa for proofreading and language assistance during this process 1 Introduction In October 2012, the aftermath of Superstorm Sandy left some areas of New York City decimated while others escaped relatively unscathed. My neighborhood – Sheepshead Bay in Brooklyn – was thrown back in time as the modern conveniences of power and running water disappeared. The days and weeks that followed Sandy brought back memories for me of my graduate research on water and sanitation for urban slums in subSaharan Africa: I was now living through a similar situation, granted for a much shorter time. New York City eventually recovered, some areas slower than others, but the superstorm prompted citizens, academics, policy-makers and politicians to re-evaluate the resiliency of New York City’s. What would happen if another catastrophic event struck the city? In order to answer this question, we need to look at the city’s history, its unprecedented rise to becoming not only the largest city in the United States of America, but also the “world’s most economically powerful city” (Florida 2015). Throughout the narrative, the governance and provision of water and sanitation services dominated the physical, economic and conceptual development of New York City. New York City is home to the world’s oldest continuously running urban water supply, beginning with a public well dug at Bowling Green in Manhattan in 1677 (Koeppel 2000). Although the well served the private citizens of residents of New Amsterdam, it’s primary purpose was to provide clean water for local breweries and businesses. Over the next century the over-pumping of groundwater by private businesses, poor sanitation, increased pollution, pandemics such as yellow fever all put immense strain on the city’s quasi-private water distribution systems. In 1744, Christopher Colles proposed the first public water system for New York City to make it competitive with the prominent colonial cities of Boston and Philadelphia, as well as European world capitals London and Paris. Today, 19 reservoirs 3 controlled lakes, 22 wastewater treatment plants (14 servicing just New York City), 6,500 miles (10,459km) of water mains, and 6,300 miles (10,137km) of sewers.(DEP 2015) make up New York City’s water supply and sanitation system. The entire supply chain (defined as water abstraction, delivery, distribution, and collection and treatment of wastewater) is publically owned and operated, with full coverage of all the residents of NYC.(World Bank 2006) The current system reflects a 200-year evolution of water engineering due to governance of the sector and responses to system failures and external shocks. Schwartz (2009) characterizes these phenomena as punctuated equilibrium, similar to evolutionary biology, where an established institution will maintain status quo until a disruption of significant magnitude occurs to change it. In the case of New York City, the population boom of the 1840s prompted the first wave of reforms.(Koeppel 2000) However, reform approaches were largely technocratic and supply oriented, focused on expanding the network to accommodate the growing population until the 1980’s.(Gandy 1997) A confluence of three factors changed this pattern in the 1980s. First, NYC's modern water supply and sanitation system, which has been around since the turn of the 20th century, had chronic break-downs and needed constant repairs to the nearly 100-year old infrastructure.(DEP 2015) Second, promulgation of the Safe Drinking Water Act (SDWA) and Clean Water Act (CWA) passed by the United States Environmental Protection Agency (USEPA) in 1974 and 1977 respectively, required extra attention and money for the water systems. Third, the fiscal crisis of 1975 made New York City agencies and utilities, including water and sanitation, a financial risk for many public and private lenders. (McMahon 2005) Taken together, the large-scale investment required rehabilitating its aging infrastructure and implementing new technologies for treatment of water supply and wastewater, compliance with the new federal mandates, and a fiscal crisis exposed an array of issues facing water management for the city. Those of particular interest include the financial health, water quality, infrastructure rehabilitation and autonomy of the system. What strategies were employed to transform the water and sanitation sector into its present incarnation, one that was able to respond to Superstorm Sandy in a relatively short period of time? How are the problems of the NYC water supply in 1980 different than those faced by public water and sanitation utilities across developed and developing cities today? In order to answer these questions, the underlying issues impacting sector will be reviewed. I will analyze the reform strategy implemented in New York City during the 1980’s and the outcomes of the reforms discussed by utilizing New Public Management theory. In doing so, potential strategies will be identified for developed and developing cities facing similar governance and infrastructure problems with water utilities. 2 The Underlying Issues The three items mentioned earlier - national environmental regulatory mandates, aging infrastructure and a city in fiscal crisis - brought several underlying issues of the New York Water system to the attention of the public. The system’s fiscal health, aging and poorly maintained infrastructure, water quality and autonomy all had to be addressed. Similar to issues facing water utilities across the world in the early 21st century, these interrelated factors impacted the water sector in various ways. The following is a brief overview of underlying issues and the reform strategies applied. 2.1 Financial Health Due in part to poor accounting practices, bloated city payrolls, over-extension of social welfare programs, and a looming national oil crisis, New York City government faced bankruptcy in 1975. (Brustein 2005) As Felix Rohatyn stated during the M. Moran Weston II Distinguished Lecture in Urban and Public Policy on February 26, 2003, "The banks lent too much and checked too little; the unions took more than the city could afford; the city cooked the books, and borrowed, and the state encouraged this whole exercise." At the time of the fiscal crisis in 1975, the sector was operated and maintained by the Board of Water Supply (established by the Water Supply Act of 1905), part of New York City government. Because of this relationship, the possibility of raising capital to invest in the necessary infrastructure rehabilitation projects as well as comply with the new federal mandates either through the issuance of bonds or lending, was no longer an option. Regarding the sector itself, drinking water and sanitation services were billed based on a frontage system, with rates based on the amount of fixtures on the property (such as faucet taps and toilets), not volumetric consumption because metering systems were not widely implemented. This led to commercial losses and had poor collection rates because frontage did not reflect the actual consumption. (Paolicelli 2009) 2.2 Infrastructure New York City’s current system dates back to 1842, with the completion of the Old Croton Aqueduct delivery system and the NYC distribution network. Water supply is impounded in three upstate reservoir systems which include 19 reservoirs and three controlled lakes with a total storage capacity of approximately 580 billion gallons.(DEP 2015) The collection systems were designed and built to mitigate periods of droughts and floods. 1842 to 1900, the population of NYC grew nearly 900% and another 130% from 1900 to 1970. (Forestall 1996) The constant need to expand coverage left little time to maintain and/or replace the aging infrastructure, leading to high physical losses. (Galusha 1999) To compound the problem, the new federal mandates of the Safe Water Drinking Act and Clean Water Act also required infrastructure to comply with more rigorous standards of treatment for drinking water supply and wastewater, furthering the issue of infrastructure rehabilitation higher on the NYC agenda. 2.3 Water Quality The SDWA and CWA introduced new standards for treatment of drinking water and wastewater respectively nationwide. New York City’s has the largest unfiltered water system in the US. During the 1970’s and 1980’s, development around the watershed by residents and governments outside of New York City threatened the quality, which created a conflict between the downstream New York City and upstate municipalities. The 1986 Surface Water Treatment Rule additionally required the filtration of all surface water supplies, adding another burden to the system. Until that time, treatment of drinking water supply for NYC is mainly done through chlorination, not water filtration plants.(NRC 2000) Construction cost estimates for such a treatment plant reached $6 billion, a price-tag the city could not afford. (Murphy 1995) NYC had avoided filtration of the supply for many decades as it could by maintaining the pristine quality of the watershed. The increase in land development around the watershed, however, continued to pose a serious threat to the quality of the drinking water supply of NYC. 2.4 Autonomy Managerial and policy autonomy served as a deeply divisive issue for the sector. Although the Bureau of Water Supply (BWS) knew the true costs of operation, the City Council determined rates and prices. In addition, the BWS could not borrow nor issue bonds to fund the necessary projects due to New York City’s tenuous fiscal position in the late 70’s. Managerial autonomy was also subject to political interference when public employment contracts were handed out to gain union support for political election campaigns. (McMahon 2005) Other examples of problems arising from issues of autonomy included the enforcement of non-compliance of payment, and inability to draft mandates or policies necessary for the efficient and effective management of the utility even though the sector appears to be decentralized on paper. The issues presented are not new to the water sector in developing countries. However, it was unusual to observe the scale of these problems in a large urban setting such as New York City. These underlying issues influenced the reform strategy discussed in the subsequent section. 3 NYC Reform Strategy Beginning in 1983, the city’s strategy shifted its approach from a technocratic, supply management driven one to one of a legal and institutional in nature. This new approach incorporated demand management and could be classified as New Public Management theory. Mark Page, the deputy director and general counsel of the Office of Management and Budget for NYC from 1982 until 1984 and later Executive Director of NYC Municipal Water Finance Authority, with the support of the Mayor Ed Koch, spearheaded the sector reforms. In accordance with New York Code Title 8A: New York State Local Water and Sewer Authority Act, decentralized water services for the state, and set the duties and obligations of the local governments should follow in the implementation of water services, whether public or private in nature.1 It implemented the necessary legal and institutional reforms to "provide expeditiously, efficiently and effectively, safe and adequate supplies of water and sewerage service." The reforms established a new institutional structure for water services in NYC: the Department of Environmental Protection, the NYC Municipal Water Finance Authority, and the NYC 1 New York State Public Authorities Code, Article 5, Title 8A, Sections 1196A-1196R. Water Board. Each of these entities was entrusted with specific legal duties and obligations regarding the provision of water services for NYC. 3.1 The Department of Environmental Protection (DEP) Chapter 57 of the NYC Charter in 1983 established the Department of Environmental Protection (DEP). It was the first of the three new bodies created, charged with the operation and maintenance of the entire supply chain of water services. The DEP incorporated the former Bureau of Water supply as well as established five additional bureaus, with tasks that included operation and maintenance of the system; planning, designing, engineering and construction of all works for the system; land use planning, environmental impact assessments, and consulting for other agencies. The DEP also handles all aspects regarding customer services, including meter installation and reading, billing, collection of fees, and customer complaints. The Commissioner of Environmental Protection, a political appointment, heads the organization. Under this position are six deputies appointed by the Commissioner, and a staff of over 5,500. (DEP 2015) 3.2 The NYC Municipal Water Finance Authority (Finance Authority) The second main body created from these reforms was the NYC Municipal Water Finance Authority (Finance Authority). It was established in 1984 as a public benefit corporation, under the jurisdiction of New York State Public Authorities Law, which is responsible for raising capital through the issuance of municipal bonds, commercial paper and other obligations for capital improvements of the system. (N.Y. PBA. LAW§1045) Established as a separate legal entity from New York City, it has full legal control over all revenues generated from the operation of the system. (Paolicelli 2009) NYW is governed by a Board of Directors, consisting of four of the ex officio members: the Commissioner of the DEP, the Director of Management and Budget of the City (OMB), the Commissioner of Finance of the City and the Commissioner of Environmental Conservation of the State (NYS DEC). In addition, two other directors are appointed, one by the Mayor and one by the Governor, for a total of seven members. (N.Y. PBA. LAW§1045) 3.3 The NYC Water Board (Water Board) Established by the same law, the NYC Water Board leases the water and sewerage systems for an annual payment and in turn incurs all rights and responsibilities of those systems therein. (N.Y. PBA. LAW§1045) The Water Board, which leases the system from NYC, has three main responsibilities: establishing the rates which the DEP will utilize in billing customers for water and sewerage services, allocating the money received by the DEP from collection of customer payments for water and sewerage services, and enforcement of customer non-compliance. Similar to the Finance Authority, the Water Board is a legally independent entity vested with full legal control over all revenues generated from the operation of the system by the DEP. The Board is comprised of seven members, which are all appointed by the Mayor of the City. There are two unique stipulations for the members of the board, at least one member should have experience in the science of water and no member should be a director of the Authority. 4 Reform Strategy Analysis The 1980s reforms were organic in nature, not following any prescribed model at the time. However looking back on the strategy employed, it can be viewed as a variation of New Public Management (NPM), where the agency is fragmented into the three bodies in order to create a “checks and balances” system of accountability. (Barzelay 2002) The DEP, NYW, and the Board (collectively known as NYW) divided the obligations and duties of water services and remained a non-profit public entity, and in the execution of their collective duties should ensure the public health and welfare. (N.Y. PBA. LAW§1045) Although the reforms were not based on any particular model, New Public Management theory was used to analyze the reforms because the time period of the reforms and how those reforms reflected increasing the autonomy of state-owned utilities and requiring them to manage on a more commercial basis. (Schwartz 2008) 4.1 4.1.1 Analysis of Underlying Issues Financial Health Before the reforms, the fiscal woes of NYC greatly impacted the water sector. Post reforms, NYW and the Board were formed as independent legal entities to provide a shield from the financial risk born by NYC as well as political interference in price setting.(N.Y.PBA. LAW§1045) The new financial environment established by the reforms are reviewed in three parts: investment, price setting, and billing and collection. 4.1.1.1 Investment Investment in water infrastructure is very capital intensive and it is often hard to procure funding as the rate of return, even though stable over time because of captive customer base, is relatively low.(Hukka 2003) Large amounts of capital are needed and collection of user fees alone is not sufficient. Therefore, the creation of debt through lending or issuance of financial obligations such as bonds is necessary to fund such infrastructure projects. The creation of NYW “ring-fenced” it from New York City, allowing it to raise the capital necessary for infrastructure rehabilitation and pay for the system upgrades to be in compliance with federal mandates. However, to attract and assure investors and lenders, NYW had to prove it was a safe and creditworthy. This was proven in six ways through the promulgation of N.Y. PBA. LAW§1045: First, the establishment of its legal status separate from NYC; Second, a new flow-of-funds model was introduced, which gave the Authority and consequently bondholders a statutory first lien on all revenues, guaranteeing debt issued would paid (see Figure 1); Third, mandatory financial planning and forecasting was instituted in accordance with the MAC to avoid reoccurrence of fiscal crisis during the 1970’s as well as includes mechanisms to anticipate and cope with budgetary shortfalls; Fourth, the tax-exempt status bestowed upon NYW allowed revenues generated to stay within and not subsidize other city agencies; Fifth, the captured market with a growing population, ensured a steady increase of customer base; Sixth, last assurance was procedure of price setting. NYW’s Flow-of-Funds Protects Bondholders With a True Gross Pledge of System Revenues Water & Sewer Revenues Board Local Water Fund DSRF 1 Revenue Fund Available to meet D/S payments Debt Service Fund Construction Fund General Resolution DSRF Refill Authority Expenses Subordinated Indebtedness Fund Second Resolution Revenue Fund Water Board Expenses Debt Service Fund Arbitrage Rebate Fund 2 3 O&M City Lease Payment 4 5 5 O&M Reserve Surplus goes to General Account in the O&M Reserve Fund and is available for pay-as-you-go capital and carryforward in subsequent years. 4 Figure 1: Flow of Funds Diagram. NYW Presentation September 3, 2009 4.1.1.2 Price Pricing of services is an inherent problem for water services, due to the problem of the natural monopoly water utilities face. The price should be affordable for consumers while at least be able to cover operation and maintenance and at most provide full cost recovery in order to pay down debt. The price is determined for the year in the previous year through the involvement of the three agencies. The DEP is responsible for calculating the cost of the operation and maintenance of the system. The Finance Authority calculates the debt service owed plus estimates the possible debt issued for the fiscal year. These inputs are combined along with operating expenses of the Water Board and Finance Authority to determine the price for both water and sewerage services. The price is subject to review first by the independent rate consultant 2 , who determines if the expenses reported are reasonable and appropriate and the price reflects full cost recovery. (NYC Water Board 2009a) It is then reviewed by customers through public hearings held 2 Finance Agreement Article VI, section 6.2 in each of the five city boroughs of NYC. In May, after the public hearings, the Water Board holds its annual meeting when the price is adopted to provide sufficient revenues that will cover all expenses of the NYW. A full report of the process is available for customer and investors. 4.1.1.3 Billing and Collection Pricing is dependent on accurate billing and collection rate. Metered billing was introduced in 1985, increasing the accuracy of the billed amount for each customer.(DEP 2015) The DEP bills the users and collects their payments. In the event of non-payment, theft, or denial of access by customers, the Board is responsible for the enforcement of compliance of billing. Alternative payment methods such as payment plans are provided for customers who cannot pay to ensure disconnection of service will not occur. If necessary, the Board can assess administrative penalties, disconnect service and enact property liens. 4.1.2 Infrastructure Rehabilitation New York City’s water infrastructure was nearly a century old in the early 1980s and had been neglected for a long time due to the lack of capital necessary to fund large-scale repairs. The reforms allowed for the influx of necessary capital to undertake many key projects, such as the construction of Tunnel 3 for example, to rehabilitate the system as well as comply with federal mandates. (NYW Water Board 2009b) Once the capital was secured, the problems of infrastructure rehabilitation were more related to planning and time. The DEP implemented the Asset Prioritization and Risk Mitigation program to undertake the task of identification and rehabilitation of assets in most need and address them according to priority.(Gilmore 2007) The DEP also introduced the Water Conservation Program to reduce consumption through the promotion of “low flow” water fixtures and educational programs. (Fitzhugh 2004) The plan was developed for two reasons: to raise awareness of the environmental and economic benefits for customers to conserve water and to conserve the water supply in order to avoid the costs to expand the reservoir system to accommodate the growing population yet again. The main infrastructure problem of filtration plants for NYC's drinking water supply, however, was still an issue. 4.1.3 Water Quality As stated earlier, the cost to construct the necessary filtration plants for the water supply was great, too large of a sum to borrow outright or issue bonds as the risk would be too high. However, the City still had to find a way to resolve the issue of water quality and compliance with federal mandates. To prevent the escalation of conflict between the NYC, upstate municipalities and the state and federal environmental agencies, the Land Acquisition Program was developed. (NRC 2000) The program was for NYC to buy land around the watershed from voluntary sellers to ensure no development. This was a point of contention for the upstate residents who saw the plan as a hindrance to development of their region even though NYC would compensate the residents for the estimated revenue for development of the region. Although this cost would be high, it was not as high as the construction and operation of filtration plants for the entire water supply. (Murphy 1995) The program was the core element of the comprehensive watershed protection program, which also included watershed rules and regulations to curb pollutant loading by agriculture around the reservoirs.(NRC 2000) The DEP also developed alternative means of water supply purification, such as an Ultra-Violet Disinfection Plant, that helped the City comply with federal regulations. (DEP 2015) The comprehensive nature of these programs to protect the watershed was a unique strategy employed by the city to postpone yet again construction of a filtration plant, which allowed for NYC to receive a filtration waiver until 1996 due to the relative high quality of the water supply and measures taken to ensure it short of filtration. (Murphy 1995) In addition to compliance with SDWA, wastewater treatment had to comply with CWA standards. The existing treatment plants were upgraded by the DEP to increase capacity, properly treat and dispose of NYC's effluence in accordance with CWA standards. Investment was secured for both these strategies through NYW. 4.1.4 Autonomy The laws drafted during the reforms established legal autonomy through the establishment of the Finance Authority and the Water Board as separate legal entities from NYC.(Verhoest 2004) The Water Board, which leases the system operated by the DEP, therefore is legally responsible for its operation and maintenance as one would be if they leased a car or residence. (Agreement of Lease 1985) The other two relevant forms of autonomy for water utilities is managerial and policy, which are discussed in the following sections. 4.1.4.1 Managerial Managerial autonomy can be divided into two dimensions, financial and human resources. As stated in earlier, the reforms solidified the financial autonomy of agencies of the sector. The reforms allowed NYW to be financially independent from NYC, as its revenue stream is based on collection of bills and capital is raised through the issuance of debt through financial obligations such as municipal bonds and commercial paper.( N.Y. PBA. LAW§1045) NYW no longer sought lenders as banks because the new laws and institutions established it as a creditworthy entity for investors to purchase bonds. The price-setting process was shielded from political interference, and the independent rate consultant serves as an arms-length regulator to ensure the price is at cost recovery level. As per the human resources dimension, the new laws permitted the Finance Authority and the Water Board to hire the required officers and employees without issues of political patronage. It also allows them to determine employee’s qualifications, duties and compensation for their position hired. For example, the employees of the DEP, which is still a NYC department although under the authority of the Water Board, must pass a public examination to gain employment. Although considered civil servants, under Public Authorities Law, they are obliged to follow the rules of conduct established by the amended bylaws that in the execution of their duties they must comply, if not appropriate measures can be taken depending on the violation including termination. (By-Laws 1984) In addition, the Mayor of NYC can remove members of the Water Board if it can be proven that the member neglected their duty or proof misconduct is established in the execution of their position. 4.1.4.2 Policy Policy autonomy is the ability for an agency to develop and implement necessary instruments for the execution of its duties and obligations. N.Y. PBA. LAW§1045 granted the Finance Authority and the Water Board, "to do all things necessary, convenient or desirable to carry out its purposes and for the exercise of the powers granted in this title.” In accordance with the general powers entrusted to both, they are allowed to create policies for internal management and promulgate external rules and regulations necessary to fulfill its obligations, enter into contracts, procure property and execute studies. In addition to these commonalities, the three agencies are task-oriented with specific duties and obligations as conferred by N.Y. PBA LAW§1045, such as the New York City Municipal Water Finance Authority to issue debt, borrow money and enter into agreements; the Water Board to finance water projects, all aspects regarding pricing, billing and collection of fees, acquire from NYC the title to water and sewerage system, invest monies not required for immediate use or disbursement subject to Finance Authority approval, and maintain those reserves in a special fund to ensure liquidity of NYW. (N.Y. PBA. LAW§1045) The DEP, although operates and maintains the system, can request the Board administer and execute the necessary actions on its behalf as per the responsibilities entrusted to it as the leasing authority of the DEP. NYW has its own instruments to investigate and enforce compliance, as the Water Board can promulgate rules and regulations for billing and collection, environmental matters and set administrative and penal sums. The DEP has its own division of police to serve as enforcement officers for the issuance of penal sums and arrests if necessary, generally used for enforcing watershed rules and regulations. (N.Y. PBA. LAW§1045) 4.2 Characteristics of New Public Management (NPM) The provision of water services in NYC can be classified as Direct Public Management, in which New Public Management (NPM) is the one of the most widely adopted institutional arrangements.(Van Dijk and Schouten 2004) NPM reforms usually embody five characteristics: increasing the level of autonomy of the utility; separating regulatory tasks from the service provision; creating quasi-competition in the water sector, through benchmarking exercises; increasing tariffs to cost recovery levels and increasing customer orientation; and increasing accountability for the results produced by the utility. (Schwartz 2008). Looking at the first characteristic, the reforms positively impacted the legal, managerial and policy autonomy of NYW. Based on the different dimensions of autonomy purported by Verhoest (2004), the reforms NYW has the maximum level of managerial autonomy (the agency may decide itself upon all aspects of management like the general principle, the procedures and the transactions (high strategic managerial autonomy)) and policy autonomy (the agency may decide itself upon all aspects of policy like objectives, policy instruments to use and processes. The agency is authorised to issue general regulations (high strategic policy autonomy)) and high level of legal autonomy (The agency has a legal personality under public law and is created by a parliamentary act). The depoliticization of decisions such as hiring and rate setting, which also gives NYW a high level of structural autonomy, shields NYW from political interference. The second characteristic is separating regulatory tasks from the service provision. If the regulatory responsibilities are internalized, the poacher-gamekeeper problem can arise. (Foster 1996) Regulation for the water sector focuses on four main aspects, accessibility, affordability, availability, and quality of services. (Lang 2004) Regulation of the sector was separated from NYW by the introduction of the independent rate consultant who operates as the arms-length regulator to ensure affordability for consumers and the federal mandates SDWA and CWA enforced through the New York State Department of Environmental Conservation Environmental to ensure water quality for drinking and wastewater. The aspects of accessibility and availability are regulated through NYS Local Water and Sewer Act, which requires all municipalities of New York State to provide water and sewerage services to all residents within their borders. The third characteristic is creating quasi-competition in the water sector, through benchmarking exercises. NYW benchmarks its performance with respect to annual rates as a percent of median family income, annual rates respective of national average, annual rate increase respective of national average, and collection rates compared to 30 major US cities.(Water Board 2009a) The DEP also institutes benchmarking studies with respect to operational performance such as customer complaints, repair response time and percentage of complaints solved within 24 hours. (DEP 2015) Benchmarking is done on a voluntary basis by the Utility, not required by the Act. These activities, however, are a tool to attract new investors and assure current ones the Utility is a well-performing entity relative to others, seeking ways to improve, with a reliable revenue stream and return on investment. The fourth characteristic is increasing tariffs to cost recovery levels and increasing customer orientation. As stated in earlier sections, the price is set cover full costs, operation and maintenance as well as debt service. The independent rate consultant is used to review the calculated price respective to operation and maintenance cost and provide sufficient revenue for repayment of debt for the bondholders. Customer orientation was increased by their inclusion in the price setting process, public access of information, utilization of benchmarking activities and regulation to ensure accessibility, affordability, availability and quality of service. The fifth characteristic is increasing accountability for the results produced by the utility. Reiterated through the laws passed as a result of the reform process, the agencies were created to perform an essential public service. The Finance Authority and Water Board are accountable to the bondholders by ensuring the payment of debt service. The DEP is held accountable to the customers to ensure reliable, high quality water services provision. NYW is accountable to the NYSDEC to ensure federal mandates are observed in providing water services to customers as well as to the independent rate consultant to assure bondholders and customers are paying a price that is full cost recovery. All the employees, officers and directors are held accountable in the execution of their office by the Act and if found in violation are subject to sanctions of NYS Public Authorities Law. 5 Discussion Authors such as Koeppel (2001), Galusha (1999), and Soll (2013) have highlighted the contentious relationship between water and urban development of the city. Financial health, infrastructure, water quality and autonomy, are as relevant to New York City today as they were over three centuries ago. Furthermore, these are prevalent issues that are ubiquitous to water utilities around the world. The common theme, regardless of geography or socioeconomic status, is management and governance. The purpose of water governance is provide answers for all stakeholders – those that are pro-environment or pro-development, upstream or downstream, urban or rural – on how to manage water, not to show who is right or wrong. The state of New York City’s current public infrastructure, in terms of capital investment as well as operation and maintenance, is not bad but could be better. Relative to the rest of the country, however, the city is performing above average. According to a 2013 report by the American Society of Civil Engineers (ASCE), New York City will require almost $50 billion in drinking water and wastewater infrastructure needs over the next 20 years. NYC’s progressive fiscal reforms reviewed in this research and the filtration avoidance directive will be able to manage these infrastructure needs over time but it is not 100% certain due to factors of climate resiliency protocols, increased urbanization and increase pressure for upstream development that may divert resources. The same ASCE report rated the drinking and wastewater infrastructure of the United States as a whole with a “D.” Much as it was on your high school report card, this is a poor rating. Defined as, “infrastructure is in poor to fair condition and mostly below standard, with many elements approaching the end of their service life,” it indicates that, “a large portion of the system exhibits significant deterioration. Condition and capacity are of significant concern with strong risk of failure major improvements need to be made as soon as possible.” (ASCE 2013) In addition, according to the United States Congressional Budget Office’s report on Public Spending on Transportation and Water Infrastructure, between the years 1956 and 2014, $109 billion was spent on water supply and wastewater treatment facilities investment. (CBO 2015) Although that sounds like a lot, that number represents only 0.07% of total public spending (federal, state and local combined), with 75% of these outlays being made by state and local governments. Moreover, federal investment related to water has declined almost 20% since 2002. If you look at percent of total budget for water infrastructure investment for developing countries, such as Indonesia or Uganda, it ranges from 2-4%, or three to eight times that of the United States. (UNHDR 2006) Combined with this additional expenditure, developing countries that take lessons from the New York City’s utility improvement process will find their water systems in much better shape in the future. Periodic droughts have impacted agricultural and urban areas across the globe for generations, but recent occurrences in more affluent areas such as California in the USA and São Paulo in Brazil, have furthered the discussion of resource availability and the impact of climate change in mainstream media. Climate variability has indeed contributed to recent water supply shortfalls; however, the problem has been decades in the making. As mentioned earlier, New York City’s water supply problems started nearly two centuries before the 1980s reforms. These historical issues influenced the decision to expand New York City’s storage capacity to approximately 580 billion gallons and design a system with various interconnections that allow for water transfers. The transfers are able to mitigate localized droughts and take advantage of possible flooding between reservoirs and watersheds. (DEP 2015) While this feature does not mean the city will be immune to drought, it does add another layer of protection should such a climatological change occur. California and Brazil are currently pursuing various water conservation measures, but these are widely considered to be temporary solutions to a permanent problem. The ongoing shortages in California have been publically attributed to climate change and environmental factors. (NOAA 2014) However, the region’s current situation is also a symptom of many decades of water mismanagement and poor governance. (Propublica 2015) Overconsumption, rapid urbanization, competing users for socio-economic development and inefficiency of current water systems have been issues for the region, but water managers and politicians only started the conversation about overhauling the water systems when the situation reached drought levels of near-Biblical proportions. Similarly, the “hydric collapse” of Sao Paulo has been accredited to climate change and drought but many water managers, local politicians and advocates state that the situation is due to the poor governance and mismanagement of water resources. The area’s extensive agriculture and industry places intense pressure on available resources and the recent environmental factors are bringing these issues to the forefront. (Rigby 2015) In addition to available supply of water, the quality of that supply is an important concern. Epidemics of Yellow Fever and Cholera in the late 18th century not only influenced the formation of New York City’s first Board of Health; they also established the relationship of water quality and public health. (NYCDOH 2015) Since then, New York Water has taken various measures to ensure its water quality from biological and chemical contaminants including the recent Filtration Avoidance Determination regulations. Although the problem of biological hazards related to improper sanitation was identified centuries ago and the shared governance of water and health was a natural progression, it continues to be problematic in many parts of the world. In addition, the NYC Filtration Avoidance Determination regulations are not without its own controversies, specifically regarding upstream development versus downstream water supply. This water governance issue is all too familiar in municipalities everywhere: do you prioritize the quality of the water supply or the economic development of the land and its natural resources, including water? In both cases, the issue has been constantly managed and governed by many stakeholders coming to the table to express their interests and concerns. The concept of shared water governance is a daunting task and it does not mean that a solution has to be reached immediately but it does mean that stakeholders need to be in communication and not act unilaterally. In the case of New York City, the water utilities found a brand of autonomy that allowed the management of the sector to be protected, or “ring-fenced,” from external political interference. Moreover, autonomy meant that the utility could be financially responsible for operation, maintenance and capital investment and not subject to government transfers to cover other sectors budgetary shortfalls. Water, although not as sexy as other infrastructure concerns such as energy, does provide a constant return on investment over a long time scale. Because of this, in many developing areas, the water sector is often asked to cover budgetary shortfalls for the municipality, at the risk of reinvestment. The case of New York City provides a potential strategy for municipalities in developing countries, but the enforcement of such a program also requires a strong legal system that is not subject to corruption, an issue in many parts of the world. That being said, the strategy implemented can provide ideas for other water utilities on how they can ringfence themselves to ensure the revenue retention and reinvestment necessary to make themselves fiscally solvent, thus reducing their risk factors and attracting outside development assistance. The aforementioned discussion highlights the current problem, but what about the future? A confluence of natural and anthropogenic factors are impacting global water supplies today and will continue to do so. Urban populations surpassing rural in 2007 and numerous reports from the United Nations and World Bank estimate additional growth in the urban populations of the developing world of over 2 billion by the year 2050. The rise in urban populations will require increased investment in water utilities to accommodate need in these areas, which can exacerbate the problems of fiscal health and investment in water infrastructure, water quality and autonomy of water utilities. In order to cope with increased demand over a static supply of water resources, better governance is a necessity for developed and developing countries in order to turn this threat into an opportunity for positive growth and change. The United Nation’s new Sustainable Development Goals, specifically Goal 6: to ensure availability and sustainable management of water and sanitation for all as well as the other 16, will significantly impact water management and governance in the developing world. (UN 2015) Will these goals further the discourse of water governance or serve as just another version of green marketing to advance international development as an industry? The use of water as a political tool is not new. Regardless of your political leanings, water management and governance among all stakeholders is the only way for current and emerging urban areas to flourish sustainably. Across the board, those working in the water sector need to continue to share ideas and local best practices in order not to find the solution, but to find solutions that can best fit a situation. 6 Conclusion Reforms of the water services sector are an ongoing process in which their sustainability can be measured against their adaptability to new challenges, both internal and external, over time. What this article aims to have shown is an illustration of how conflicts of interest have been avoided and a system has been made creditworthy by adapting a governance framework. These are the lessons from the NYC experience. The success of reforms is not only measured in response to what factors influenced them but how they will adapt to future issues that may arise. The reform strategy of NY Water, analyzed through New Public Management theory, managed this delicate balance of present and future issues. The promulgation of New York State and local city laws, creation of new institutions and new governance of the sector that works with sector stakeholders addressed the underlying problems of financial health, aging infrastructure, water quality and utility autonomy that were brought to the surface due to external shocks, for the betterment of New York City. Over 30 years later New York City has water and the utility is still facing problems of supply, investment and water quality in the face of new issues of climate change and environmental resiliency. 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