In the Matter of Prometheus Realty Corp., et al., Respondents,v.New York City Water Board, et al., Appellants.BriefN.Y.November 16, 2017 Reproduced on Recycled Paper APL-2017-00088 To be argued by: MELANIE T. WEST 15 minutes requested Court of Appeals State of New York In the Matter of the Application of PROMETHEUS REALTY CORP., PORTOFINO REALTY CORP., TUSCAN REALTY CORP., and THE RENT STABILIZATION ASSOCIATION OF N.Y.C., INC., Petitioners-Respondents, For a Judgment Pursuant to CPLR Article 78, against THE NEW YORK CITY WATER BOARD and THE NEW YORK CITY DEPARTMENT OF ENVIRONMENTAL PROTECTION, Respondents-Appellants. BRIEF FOR APPELLANTS RICHARD DEARING DEVIN SLACK MELANIE T. WEST of Counsel August 18, 2017 ZACHARY W. CARTER Corporation Counsel of the City of New York Attorney for Appellants 100 Church Street New York, New York 10007 Tel: 212-356-0842 or -0817 Fax: 212-356-2509 mwest@law.nyc.gov TABLE OF CONTENTS Page i TABLE OF AUTHORITIES ....................................................... iii PRELIMINARY STATEMENT ................................................... 1 QUESTION PRESENTED .......................................................... 3 STATEMENT OF THE CASE .................................................... 4 A. The Water Board’s mandate ......................................... 4 B. The Water Board’s history of adopting differential water charges ................................................................ 7 1. Multiple unchallenged Water Board programs offering relief to numerous class two property owners ....................................................................... 8 a. The Frontage Transition Program ............. 8 b. The Multi-family Conservation Program . 11 2. Other unchallenged charges differentiating between classes of users.......................................... 14 C. The Board’s rental payments to the City for using City-owned water facilities ......................................... 15 D. The 2016 Water Board resolution adopting a new rate schedule ............................................................... 16 E. Petitioners’ article 78 challenge to the new rate schedule ...................................................................... 19 JURISDICTIONAL STATEMENT ........................................... 23 TABLE OF CONTENTS (cont’d) Page ii ARGUMENT ............................................................................. 25 THE WATER BOARD HAD A RATIONAL BASIS FOR GRANTING THE ONE-TIME CREDIT TO CLASS ONE PROPERTY OWNERS ............................................ 25 A. Well-settled law grants the Water Board broad authority to set rates and entitles its decisions to substantial deference. ................................................. 25 B. Instead of reviewing for rationality, the Appellate Division effectively imposed a “perfect” or “close fit” standard on the Board’s rate-setting determination. 29 C. The Appellate Division majority inflated the connection between the rate increase and the credit. 39 CONCLUSION .......................................................................... 43 CERTIFICATE OF COMPLIANCE .......................................... 44 TABLE OF AUTHORITIES Page(s) iii Cases Big Apple Food v. Street Vendor Review Panel, 90 N.Y.2d 402 (1997) ........................................................... 26, 33 Carey Transp. v. Triborough Bridge & Tunnel Auth., 38 N.Y.2d 545 (1976) ......................................................... passim City of Chicago v. Shalala, 189 F.3d 598 (7th Cir. 1999) ...................................................... 27 Consolation Nursing Home v. Comm’r of N.Y. State Dep’t of Health, 85 N.Y.2d 326 (1995) ................................................................. 26 Dandridge v. Williams, 397 U.S. 471 (1970) .................................................................... 27 Elmwood-Utica Houses v. Buffalo Sewer Auth., 65 N.Y.2d 489 (1985) ......................................... 26, 28, 32, 40, 41 Heller v. Doe, 509 U.S. 312 (1993) .................................................................... 27 Matter of Vill. of Scarsdale v. Jorling, 91 N.Y.2d 507 (1998) ................................................................. 25 Statutes Pub. Auth. Law § 1045 ............................................................. 5, 6, 8 Pub. Auth. Law § 2824(1)(g) .......................................................... 38 N.Y.C. Admin. Code § 7-210........................................................... 30 TABLE OF AUTHORITIES (cont’d) Page(s) iv Other Authorities Affordable Water for Affordable Housing, University Neighborhood Housing Program ........................................... 9, 12 Conservation Program for Multiple Family Residential Buildings: Administrative Guidelines ....................................... 12 Governor’s Approval Memorandum (July 24, 1984) reprinted in New York Legislative Services’ Governor’s Bill Jacket, Ch. 513 of the Laws of 1984 .................. 5 In Policy Switch, City Eases Stance on Water Water Meters, New York Times, Dec. 15, 2000 ................................... 12 Multi-family Conversion Program Frequently Asked Questions ............................................................................. 11, 13 New York City Water Board: Activities, Operations and Accomplishments—Fiscal Year 2009 ................................. 10 New York Water Rates Pinch Low Income Co-ops, New York Times, October 8, 1992 ................................................. 9, 10 Notice of June 16, 2017 Public Hearing ........................................ 25 NYC Residential Property Taxes,” NYC Department of Finance ......................................................................................... 7 Office of the New York State Comptroller Report 2006- N-2, “New York City Department of Environmental Protection Universal Water Metering Program” ........................ 9 Press Release, Mayor de Blasio Proposes $183 Credit on Water and Sewer Bills for Over 664,000 Homeowners .............................................................................. 18 TABLE OF AUTHORITIES (cont’d) Page(s) v Press Release, Automatic Credit: Mayor Announces $115 Water and Sewer Credit for Over 53,000 Homeowners .............................................................................. 25 Report of the Infrastructure Division, Committee on Transportation, New York City Council, Int. No. 193 (June 27, 2003) ........................................................................... 30 Water Board Annual Budget ........................................................... 4 Water Board Annual Meeting Minutes ......................................... 24 Water Board Rate Schedule 1992 Rate Schedule ................................................................... 10 2007 Rate Schedule ................................................................... 10 2013 Rate Schedule ................................................................... 13 2012 Rate Schedule ................................................................... 13 Water Board Public Notice on Billing Practices ............................ 10 PRELIMINARY STATEMENT The New York City Water Board, an independent public authority vested by the State Legislature with broad power to set water usage charges for New York City residents, decided to use unexpected funds from forgiveness of rental payments by the City to offer a one-time $183 credit against summer 2016 water bills to a subset of its users—those who own one-, two-, or three-family homes. That subset, known as “class one” property owners, is one of four pre-existing categories of property owners in New York City, defined in a property tax classification system created by the Legislature over 35 years ago. Although both the Board’s broad authority to set rates and its previous unchallenged use of similar classifications to offer differential water rates are undisputed, the Appellate Division held, in a split decision, that the Board’s decision was arbitrary and capricious—fixating on the fact that not every class one property owner is in particular need of financial relief. This Court should reverse. The Appellate Division majority adopted a sweeping understanding of the “arbitrary and 2 capricious” standard that, if allowed to stand, would invite judicial second-guessing of virtually every decision by a rate-setting agency that differentiates between or even categorizes its users. In essence, the Appellate Division held that because some class one property owners are wealthy, the Board’s goal of providing expedited financial relief to a group that, as a whole, had long been excluded from other forms of rate relief lacked any rational basis. That reasoning subjects the Water Board to a “perfect” or “close fit” standard that stands in sharp contrast to the Court’s longstanding precedent holding that within the parameters of their statutory authority, rate-setting agencies have broad power to fix rates. That precedent exists for a reason. Agencies like the Water Board are often called upon to make common-sense decisions in the course of efficiently and prudently providing services to the public. Here, faced with the unexpected opportunity to offer some immediate relief amid a history of rate hikes, the Board relied on a readily available classification system, established and ratified by the Legislature, in determining how to distribute a modest pool 3 of funds—expediently and with minimal depletion by administrative cost. Practical decisions like these are the core of an administrative agency’s function and should proceed free from judicial intervention unless they are truly irrational. In annulling the Board’s actions here, the First Department radically redefined the “arbitrary and capricious” test in a way that threatens to undermine the ability of administrative agencies to do their jobs in the public interest. This Court should reverse the Appellate Division’s order and reaffirm the deferential standard of review to which administrative agency determinations are entitled. QUESTION PRESENTED Did the Appellate Division err in finding that a Water Board resolution was arbitrary and capricious in adopting a rate schedule that (a) among other credits and programs for certain account-holders, included a one-time credit of $183 for owners of one-, two-, and three-family homes, and (b) imposed the lowest annual water rate increase (2.1%) in at least fifteen years? 4 STATEMENT OF THE CASE A. The Water Board’s mandate Every day, New York City’s water system provides more than a billion gallons of water, delivered from as far as 125 miles away, over roughly 7,000 total miles of water mains, to over nine million people (Record on Appeal (“R.”) 781). The wastewater system treats 1.3 billion gallons of water each day through 7,500 miles of mains, almost 100 pump stations, and 14 in-city treatment plants (id.). The system as a whole carries enormous infrastructure costs; in the next decade alone, $17.4 billion in investments are planned (R. 416). The State Legislature established two public authorities to help make New York City’s water and sewer system work. Pub. Auth. Law § 1045-c; Ch. 513 of the Laws of 1984. The New York City Water Finance Authority issues “revenue bonds” to ensure adequate funding to repair, replace, and extend the system. See Governor’s Approval Memorandum (July 24, 1984), reprinted in New York Legislative Services’ Governor’s Bill Jacket, Ch. 513 of 5 the Laws of 1984. The Water Finance Authority is empowered to borrow money and issue debt. Pub. Auth. Law § 1045-c. The Legislature established the Water Board to raise sufficient revenues to operate and maintain the system and to provide for debt service on related bonds or other obligations (R. 781). To that end, the Legislature vested the Water Board with authority to “establish, fix and revise, from time to time, fees, rates, rents or other charges for the use of, or services furnished, rendered or made available by, the sewerage system or water system, or both.” Pub. Auth. Law § 1045-j(1); see also id. § 1045- g(4). The Board is an independent entity whose seven members are appointed by the Mayor for a term of two years and thus do not serve at his or her pleasure. Id. § 1045-f(5). No State or City agency has jurisdiction over the Board’s setting of charges within New York City. Id. § 1045-j(9). The Public Authorities Law prescribes a public hearing process for setting and revising water and sewer charges. Id. § 1045-j(3). Charges must be sufficient to cover the costs of 6 administering, maintaining, and operating the system and paying debt service on Water Authority bonds. Id. § 1045-j(1). The Public Authorities Law otherwise leaves the determination of water and sewer charges to the Water Board’s discretion. The statute does not mandate that rates be charged at a uniform amount, and indeed explicitly contemplates that charges may be determined based on classes: it provides that the charges “established for any class of users of property served shall be extended to cover any additional premises thereafter served which are within the same class.” Id. § 1045-j(3). Although the Board typically adopts a new rate schedule annually, it is not mandated to do so—by law or any policy—and rate schedules do not automatically expire at the close of a given fiscal year. See id. The Water Board serves the accounts of roughly 834,000 property owners (R. 781). The Board’s annual budget is in the vicinity of $3.8 billion.1 Over the years, it has frequently increased water and sewer charges to cover the system’s costs. Indeed, since 1 See Water Board Annual Budget, available at http://on.nyc.gov/2uGtET9. 7 at least 2000, the Board has increased rates every year, often substantially (R. 448-49). From fiscal year 2008 through fiscal year 2011, for example, rates increased 11.5%, 14.5%, 12.9%, and 12.9%, respectively (R. 128). B. The Water Board’s history of adopting differential water charges As background, we offer a brief description of property classes under New York City’s property tax system. Since 1981, the State Legislature has recognized four property tax classes in the City, each paying a different share of property tax: class one, including one- to three-unit residential properties; class two, residential properties with more than three units, comprising rental buildings as well as condominiums and cooperatives; class three, comprising utility company equipment and special franchise property; and class four, comprising all other real property, including office buildings, factories, stores, and hotels. See “NYC Residential Property Taxes,” NYC Department of Finance.2 2 Available at http://on.nyc.gov/2lkAjxx. 8 1. Multiple unchallenged Water Board programs offering relief to numerous class two property owners The Water Board has long instituted programs adopting differential water rates based on property characteristics. In fact, key programs previously adopted by the Water Board have benefitted exclusively class two property owners—the class that includes petitioners—rendering them eligible for rate relief based on their building size. And these programs have been in operation, unchallenged, for decades. a. The Frontage Transition Program In the early 1990s, New York City water users began switching from a flat-rate fee based on their property frontage to a metered rate based on actual water usage. The purpose of the switch from frontage to metered billing was to promote water conservation, and to achieve greater rate equity among users by bringing the rates of higher-usage multi-dwelling buildings closer 9 in line with those of smaller homeowners and other users.3 Frontage-based billing, in contrast, creates little incentive for users to conserve water, because it bases water costs on building and property size, rather than actual water use.4 To prevent a sudden spike in the water costs of multi- dwelling buildings, the Board adopted a “Frontage Transition Program,” which allowed certain properties to continue using frontage-based billing. At first, this program was limited to properties with water service lines of a certain size (which eliminated smaller properties), but in the late 1990s it was made available to all class two owners with buildings containing six or more units. See, e.g., Water Board Fiscal Year 1992 Rate Schedule at 25; 2007 Rate Schedule, at 31.5 The impetus for that program 3 See New York Water Rates Pinch Low Income Co-ops, New York Times, October 8, 1992, available at http://nyti.ms/2mBaObQ; Office of the New York State Comptroller Report 2006-N-2, “New York City Department of Environmental Protection Universal Water Metering Program” at 3-4, 9-10, available at http://bit.ly/2vUaclY. 4 Affordable Water for Affordable Housing, University Neighborhood Housing Program, April 29, 2015 at 5-7, available at http://bit.ly/2vU2pVq. 5 Available at http://on.nyc.gov/2moChKw; see also New York City Water Board: Activities, Operations and Accomplishments—Fiscal Year 2009, available at http://on.nyc.gov/2lyPv5m; State Comptroller Report at 9. 10 was to provide temporary relief from increased charges for rent- regulated and low-income buildings—that is, affordable housing— allowing these users time to review their water usage, make repairs, and prepare for the switch to metered billing.6 While a core animating principle behind the program was to safeguard affordable housing, the program was offered to all class two owners with six or more units, based solely on the number of units, regardless of income, actual water usage, or any demonstrated economic need.7 And, although it originated as a temporary measure to ease the transition from frontage to metered billing in the early 1990s, it was extended annually for two decades before eventually being phased out in 2012.8 In a report produced in 2006, the State Comptroller cautioned that allowing these accounts—all of them within class two—to avoid 6 See New York Water Rates Pinch Low Income Co-ops, New York Times, October 8, 1992, available at http://nyti.ms/2mBaObQ; State Comptroller Report at 5. 7 See 2009 Water Board Public Notice on Billing Practices, available at http://on.nyc.gov/2mLjrgO;” State Comptroller Report at 3-4. 8 “Multi-family Conversion Program Frequently Asked Questions,” available at http://on.nyc.gov/2nby6lm. 11 metered billing for so many years forestalled realizing the metering initiative goals of rate equity and water conservation.9 A broad swath of class two property owners therefore financially benefitted from the Frontage Transition Program for up to 21 years. No similar transition program was offered to class one homeowners, who were expected to install meters and transition to metered billing far earlier. Instead, class one owners were offered a one-time “bill cap” program for their initial bill after they installed meters. See Water Board Fiscal Year 2007 Rate Schedule at 30. b. The Multi-family Conservation Program In 2001, the Board instituted the “Multi-family Conservation Program,” which sets a fixed annual charge for enrolled users determined by the number of units per building, rather than a metered rate (R. 228-29). In return, participants were expected to invest in low-consumption plumbing fixtures and repairs, and to 9 State Comptroller Report at 10. 12 install meters that the City’s Department of Environment Protection could use to monitor consumption to assure that conservation was being achieved.10 This program was introduced in recognition of the fact that many users in the Frontage Transition Program had not transitioned to metered billing, despite the many extensions of the program. It thus aimed to promote some degree of water conservation by encouraging owners to address leaks and install high efficiency devices, while still giving them a “measure of control over their water and sewer costs.”11 Like its predecessor, the Multi-family Conservation Program is available only to class two owners—for the most part, without taking into account their financial circumstances12—and thus not 10 See In Policy Switch, City Eases Stance on Water Meters, New York Times, Dec. 15, 2000, available at http://nyti.ms/2m3H9Ve; Conservation Program for Multiple Family Residential Buildings: Administrative Guidelines, available at http://on.nyc.gov/2ljtsoc. 11 Affordable Water for Affordable Housing at 5-7; see also State Comptroller Report at 3-4. 12 Newly constructed or substantially renovated properties are eligible to enroll in the Multi-family Conservation Program only if they are subject to rent regulation and rent limitations (R. 229). 13 to owners of one-, two-, and three-family homes. The program was introduced to eventually replace the Frontage Transition Program, although the two co-existed for several years. Class two property owners who were still billed using frontage-based rates were ultimately transitioned to the Multi- family Conservation Program rate in 2012.13 When that finally happened, in yet another accommodation, the Multi-family Conservation Program rate was reduced by 14.1% so that the properties would not be significantly impacted. See Fiscal Year 2013 Rate Schedule, at 21; Fiscal Year 2012 Rate Schedule, at 37. Moreover, although they were transitioned from one program to another, users were given a grace period to meet the metering and high-efficiency fixture installation requirements, which has been extended several times.14 In fact, in 2016, in the resolution that petitioners challenge in this litigation, the Water Board decided to extend the deadline 13 “Multi-family Conversion Program Frequently Asked Questions,” available at http://on.nyc.gov/2nby6lm. 14 Id. 14 for compliance with the Multi-family Conservation Program’s conservation requirements because 10,000 of the 26,000 properties in the program still were not in compliance (R. 480-81). And meter-based billing would have cost the average property in the Multi-family Conservation Program 31% more (id.). As such, numerous class two owners continue to benefit from the program’s rate, without satisfying the program’s conservation requirements. 2. Other unchallenged charges differentiating between classes of users The Water Board has also offered limited credits against water and sewers charges for defined users. For example, in 2015, the Board adopted the Home Water Assistance Program, offering an annual $115 credit to low-income disabled and senior homeowners in the City (R. 247). Eligibility for this credit is tied to eligibility for other existing programs such as the Senior Citizen Homeowners’ Exemption and the Disabled Homeowners’ Exemption, which reduce property taxes for seniors and individuals with disabilities (id.). 15 In 2016, the Board extended this credit—increased to $118— and also adopted a new affordable housing credit—the Multi- family Water Assistance Program—in the amount of $250, available to up to 40,000 affordable housing units, in properties with 100% affordable units and automated meter reading devices (R. 374). The Board has also offered a one-time $100 credit to owners participating in a lead and copper monitoring program (R. 246). C. The Board’s rental payments to the City for using City-owned water facilities Although the Water Board sets charges for customers, the City owns the water system and leases the infrastructure to the Board (R. 53-71, 781). Under the lease, the City operates the system, performs required construction and repairs, and may acquire property for it (R. 64-65). The City’s Department of Environmental Protection serves as the Board’s billing agent (R. 65). The lease entitles the City to request and collect annual rent for the Board’s use of its water infrastructure (R. 67). The 16 payments to the City must be capped at either (a) interest and principal on general obligation bonds issued by the City for water and sewer purposes, or (b) 15% of interest and principal payable on bonds issued by the Water Authority (id.). In 2003, the City switched from the first metric to the second. In time, the amount of the rental payment came to greatly exceed the annual amount the City was paying for water- and sewer-related general obligation bonds (R. 782). Both the Water Board and the City received complaints that this was a windfall for the City (id.). These complaints corresponded with the period of consistent, and often substantial, annual increases in water charges, including double-digit increases in every year between 2007 and 2011. D. The 2016 Water Board resolution adopting a new rate schedule On April 11, 2016, the Water Board began its process for setting new water rates by publishing a notice on a proposed rate schedule (R. 371). In proposing a rate increase of 2.1%—the lowest rate increase in over 15 years—the Board took into account a prior 17 City announcement that it planned to request only 50% of the rental payment for fiscal year 2017, and reduce the rental payment by an additional 10% per year until it was eliminated in five years’ time (R. 371, 424, 783). On April 25—after the notice and just 10 days before the first public hearing was to be held—the Mayor indicated a willingness to forgo 100% of the rental payments not only in fiscal year 2017, but through fiscal year 2020 (R. 783).15 The forgiven rental payments were estimated to total $1.1 billion, including the portion previously announced (id.). The City requested that the surplus be passed on to customers in two parts: (1) a one-time immediate credit of $183 for account-holders who are class one property owners—approximately 80% of all account-holders— totaling the estimated $122 million attributable to 2017 (R. 400, 783); and (2) a rate mitigation for all account holders over the life of the rate schedule, totaling an estimated $988 million and yielding an average benefit of nearly $1200 per account (R. 783). 15 “Mayor de Blasio Proposes $183 Credit on Water and Sewer Bills for Over 664,000 Homeowners,” NYC website, http://on.nyc.gov/2vSBd9h. 18 Presented with this unexpected surplus, the Water Board accepted the City’s proposal, and issued a revised notice two days after the Mayor’s announcement, adding the $183 one-time credit for owners of one-, two-, and three-family homes to its prior proposal of a rate increase of up to 2.1% and its package of additional credits (R. 675).16 City officials advocating for the credit noted that it would benefit many senior-citizen and low-income homeowners, who would see a substantial average reduction in their 2017 water charges (R. 401-02). On May 20, after holding public hearings in all five boroughs between May 5 and 11 to receive comments, the Board adopted by resolution a new rate schedule, including an annual rate increase of 2.1%, as well as the various credits and other programs that had been described in the revised notice (R. 699, 209-55). In short, the resolution provided modest but immediate relief to class one 16 The resolution included the new $250 water bill credit for up to 40,000 affordable housing units, extended the Home Water Assistance credit and increased it to $118, extended the grace period for compliance with the Multi- family Conservation Program by six months, and reduced to 10% penalties for non-compliant participants (R. 374-75). Petitioners do not challenge these aspects of the resolution. 19 account-holders and more substantial, extended relief to all account-holders, all while maintaining one of the lowest rate increases in decades. E. Petitioners’ article 78 challenge to the new rate schedule Petitioners—a landlords’ association and a few corporate landlords—filed an article 78 proceeding seeking to annul the new rate schedule, arguing that the rate increase and $183 homeowners’ credit were ultra vires and arbitrary and capricious (R. 33). Supreme Court granted petitioners’ application for a TRO and expedited the proceeding (R. 346). Supreme Court subsequently granted the petition, finding that the 2.1% rate increase was imposed to provide the $183 credit to class one property owners, and concluding that this made the rate increase into an unlawful “tax” (R. 22-23). While acknowledging that the Board may establish different charges for different categories of users, Supreme Court believed that the Board lacked authority to issue any credit against charges on the same basis (R. 26). The court thus enjoined implementation of the 20 new rate schedule and ordered that the Board maintain the prior schedule in effect. That schedule, with modifications irrelevant here, has remained in effect ever since. On appeal, the Appellate Division affirmed in a divided opinion (with one justice dissenting), but for different reasons than Supreme Court. Unlike the trial court, the Appellate Division did not hold that the Board lacked authority to issue the credit. To the contrary, acknowledging the Board’s “broad authority” to set water rates, both the majority and the dissenting justice declined to find that either a rate increase, or a credit program distinguishing among different classes of users, was outside the Board’s authority (R. 876-77). However, the court divided 3-1 as to whether the credit was arbitrary and capricious. The majority found that the one-time credit lacked a rational basis because, by relying on the users’ property tax classification, the Board did not “in any manner take into consideration an owner’s ability to pay or customers’ need for this benefit” (R. 879-80). The majority found the Board’s history of differential rates based on property class did not supply a rational 21 basis for the credit, describing the Frontage Transition Program as providing “temporary financial benefits for customers transitioning from flat rate billing to metered billing” and characterizing other rate relief programs as “serv[ing] legitimate objectives of the Water Board related to water usage or quality, such as water conservation or the servicing of vulnerable customers who demonstrate a financial need”—which, in the majority’s view, contrasted with this one-time credit (R. 877-78). The majority also found that the Board’s decision to issue a credit was incompatible with the 2.1% rate increase, given the Board’s mandate to “make the water system self-sustaining” (R. 880). Justice Kahn dissented, finding that neither the one-time credit nor the rate increase lacked a rational basis. Noting that petitioners bore the “heavy burden” of establishing that the Board’s decision was both unreasonable and unsupported by any evidence, Justice Kahn concluded that petitioners had failed to show that the Board’s decision was “so purely arbitrary as to have no reason” to support it (R. 895-96). 22 Thus, Justice Kahn found that the Board’s rationale of providing expedited relief to class one property owners, many of whom are financially overburdened lower- and middle-income homeowners, was not undermined by “anomalies in the classification system” (R. 904). As Justice Kahn noted, this Court has held that distinctions among classes of taxpayers or ratepayers need not be “exact or perfectly defined” in order for the classification to be sustained (id.). Moreover, Justice Kahn observed, the Board’s rationale was consistent with prior programs like the Frontage Transition and the Multi-family Conservation Programs, which had provided financial relief to non-class one property owners, but not to class one property owners (R. 898-99). And a requirement that any credit be based on financial need would “entail cumbersome application procedures, substantial processing delays and additional administrative expenses” (R. 901). Additionally, Justice Kahn noted that the Board was statutorily authorized to take into consideration City Hall’s recommendation to implement the credit (id.). 23 Finally, with respect to the rate increase, Justice Kahn found that the Board had provided a rational explanation: that it represented a planned increase in base rates over five years, with revenue going to specific capital projects in addition to water provision (R. 902-03). Thus, the record does not support the notion that the rate increase—calculated taking into account a five-year plan for water provision and infrastructure projects—was approved solely to pay for the one-time credit (id.). JURISDICTIONAL STATEMENT The Court has jurisdiction to hear this appeal because this proceeding originated in Supreme Court, and the Appellate Division’s February 16, 2017 order finally determined the proceeding (R. 872-906). See C.P.L.R. 5602(a)(1)(i). The Appellate Division granted leave to appeal on April 25, 2017 (R. 870). In its jurisdictional letter dated May 26, 2017, submitted at the Court’s request, the Board explained that it has taken no action to supersede the enjoined rate schedule. The Board adopted a new budget in May 2017 that did not revise existing water or 24 sewer rates.17 The Board also noted that it planned to hold a public hearing strictly limited to the question of whether it should adopt a resolution authorizing, on a stand-alone basis, the immediate implementation of the two other unchallenged credits approved by the 2016 resolution (R. 374-75; see also supra at 15). The Court terminated its jurisdictional inquiry and ordered the parties to proceed to briefing in the normal course. After a public hearing, in June 2017, the Board adopted the resolution for immediate implementation of the two unchallenged credits previously approved in the 2016 resolution.18 17 Meeting minutes and budget available at http://on.nyc.gov/2hXbYg1. 18 Notice of June 16, 2017 Public Hearing available at http://on.nyc.gov/2wV5p00; announcement of credits available on NYC website at http://on.nyc.gov/2w3N0RD. 25 ARGUMENT THE WATER BOARD HAD A RATIONAL BASIS FOR GRANTING THE ONE-TIME CREDIT TO CLASS ONE PROPERTY OWNERS A. Well-settled law grants the Water Board broad authority to set rates and entitles its decisions to substantial deference. This Court has confirmed the Water Board’s “broad authority” to set charges for water usage. Matter of Vill. of Scarsdale v. Jorling, 91 N.Y.2d 507, 515 (1998). While the Appellate Division majority purported to acknowledge this authority, the effect of the court’s decision is to sharply curtail it, by requiring that the Board’s decisions withstand a degree of judicial scrutiny that is incompatible with the far more deferential standard articulated by the Court. Courts accord administrative agencies substantial deference when they act pursuant to a legislative grant of authority, especially when they act in an area of particular expertise. Consolation Nursing Home v. Comm’r of N.Y. State Dep’t of Health, 85 N.Y.2d 326, 331 (1995). A petitioner challenging administrative action thus carries a “heavy burden” of 26 establishing that the action was unreasonable and unsupported by the evidence. Big Apple Food v. Street Vendor Review Panel, 90 N.Y.2d 402, 408 (1997). Specifically within the context of differential rate-setting, this Court has been clear that administrative agencies with broad statutory authority to set rates should be accorded a high degree of deference. In Elmwood-Utica Houses v. Buffalo Sewer Authority, 65 N.Y.2d 489, 495-96 (1985), the Court affirmed that a broad delegation of rate-setting authority carries the power to differentiate rates on reasonable grounds, and such rates will not be invalidated simply because differential rates are not calculated “with mathematical nicety,” or because rate-payers do not pay the same amount for the same services. But that is precisely the basis on which the majority below found that the one-time credit lacked a rational basis. The Court has squarely rejected this kind of rigid approach to rate-setting on other occasions too. In Carey Transportation v. Triborough Bridge & Tunnel Authority, 38 N.Y.2d 545, 553 (1976), the Court found that a bridge and tunnel authority had 27 “unfettered discretion” to create toll classifications and charge differential rates. The only limitations this Court identified were that “invidious illicit discriminations are not practiced and differentials are not utterly arbitrary and unsupported by economic or public policy goals, as it reasonably conceives them.” Id. The bottom line is that “[t]he problems of government are practical ones and may justify, if they do not require, rough accommodations—illogical, it may be, and unscientific.” Heller v. Doe, 509 U.S. 312, 321 (1993) (discussing rational-basis review in equal protection case); see also Dandridge v. Williams, 397 U.S. 471, 485 (1970); City of Chicago v. Shalala, 189 F.3d 598, 607 (7th Cir. 1999) (“rational basis scrutiny does not require a perfect fit”). Here, the Appellate Division majority’s analysis stands in stark contrast to established principles of rational basis review, rooted in recognition of the difficulties of real-world governmental action and the proper domains of the policymaking branches of government. Nor can it be reconciled with this Court’s consistent approach in reviewing rate-setting, as Elmwood-Utica and Carey 28 make clear that differential rates are permitted, with great leeway for imprecision in achieving their stated purpose, as long as they are not wholly arbitrary. Affording rate-setting agencies this leeway makes good sense. The members of these agencies are not appointed simply to conduct ministerial computations yielding mathematically compelled rate schedules. The Legislature creates bodies such as the Water Board and endows them with broad authority and discretion so they can evaluate how to fund their public operations through user charges that are equitable and consistent with the public interest. Confirming the ability of administrative agencies like the Water Board to implement common-sense solutions without judicial second-guessing will benefit not just the hundreds of thousands of property owners here who have been deprived of bill relief the Water Board intended, but also New Yorkers across the State whose governments will continue to have freedom to make practical and expedient judgments. 29 B. Instead of reviewing for rationality, the Appellate Division effectively imposed a “perfect” or “close fit” standard on the Board’s rate-setting determination. The Water Board’s resolution to offer a one-time credit—an efficient approach to distributing the unexpected surplus announced only 10 days before the first public hearing and weeks before a new rate schedule was to be adopted—must be viewed through this lens. While the Board was motivated by the desire to alleviate the financial burden on the class one homeowners who had borne the brunt of increasing rates, many of whom were seniors or low-income families, that reasoning does not impose on the Board a requirement that each and every recipient of a credit be more financially needy than anyone excluded from the credit. Choosing to give a credit to a class of users that (as detailed further below) had been exempt from previous relief programs is rational—indeed, sensible—regardless of whether all or even most users in that class are in dire financial need. Here, it was rational to conclude that, as a one-time credit against water and sewer bills, the proposed credit amount could have a meaningful and immediate impact on the summer 2016 30 water bills of many families and households in class one, but would generally have a negligible impact for corporate property owners and landlords in class two (and would not likely be passed on to tenants).19 And, as the dissenting justice below astutely observed, the “already established” property tax classification system provided an easy-to-use standard, preventing the fairly modest pool of funds from being significantly diminished by an application process or other red-tape-heavy method of determining eligible users on an individual basis (R. 904). Instead, the use of this pre-existing classification standard would have allowed the Board to expediently deliver a credit to class one homeowners against their very next water bill. This pragmatic “bang for the buck” approach—pointing the way towards a one-time credit that 19 This is not the first time a distinct regulatory framework has borrowed the property tax classification system as a readily available proxy to separate small homeowners from owners of larger properties for the purpose of certain financial burdens. For example, the City’s Sidewalk Law exempts class one homeowners from the general liability of property owners for injuries resulting from defective conditions on sidewalks adjacent to their property, see N.Y.C. Admin. Code § 7-210, in recognition of the fact that “small property owners who reside at such property have limited resources.” Report of the Infrastructure Division, Committee on Finance, New York City Council, Int. No. 93 (June 27, 2003). 31 was broad-based and administrable yet retained meaningful impact—underscores the rationality of the Board’s determination. The fact that not every class one property owner is financially needy—or that not every class two property owner is a corporation or rental business—is beside the point. The credit was offered to a class of homeowners generally most likely to feel its impact; those homeowners had been left out of programs offering substantial and extended rate relief; and many of those affected were seniors or low-income homeowners (R. 400-05). Meanwhile, the vast majority of the class two buildings excluded from the credit were rental properties; the owners of those rental properties were far less likely to pass on the modest savings to renting families or individuals; and the great bulk of those owners were eligible for other rate-relief programs that had been denied to individual homeowners. And while a small fraction—less than a fifth—of accounts for class two properties are coops or condos, many of those buildings, too, were eligible for prior rate-relief programs. 32 The majority’s imposition of a requirement that the need being addressed be universal to the class is contrary to this Court’s precedent. In Carey, 38 N.Y.2d at 550, the Court upheld differential toll rates for different types of buses even though “neither the nomenclature, nor the scale of the fares” applied uniformly within the two classes. Rejecting the idea of a “perfect fit,” the Court held that “a definition of class is not required to be so perfect that some members of the class may not depart from its definitional norms.” Id. at 554. And in Elmwood-Utica, 65 N.Y.2d at 497-500, the Court found that exempting governments and charitable and religious organizations from the ad valorem component of their sewer rent was rational because those organizations could “properly be considered less able to pay for a sewer system”—even though these exemptions resulted in a 40% increase in recurring sewer charges for the non-exempt plaintiffs. The Court required no particularized accounting demonstrating that the exempt organizations were all less able to pay than non-exempt users. 33 Similarly, here, in adopting the $183 one-time credit, the Board rationally used the class one classification—made up primarily of families and individuals—as a shorthand for those users who had been excluded from longstanding rate relief programs related to the metering rollout, and for whom a modest credit generally would have real impact. And this was in the context of an overall rate package that included other, narrower credits that were targeted based on financial characteristics—like (1) the annual Home Water Assistance Program, which is not limited to class one property owners, but would be received in addition to the one-time homeowners’ credit by eligible account- holders in class one; and (2) the Multi-family Assistance Program, which is available only to qualifying properties in class two. Instead of recognizing the efficiency and pragmatism of the Board’s approach, the Appellate Division chose to zoom in on perceived imperfections like the presence of some wealthy homeowners within class one. Despite the “heavy burden” on a petitioner challenging an administrative agency’s determination, Big Apple Food, 90 N.Y.2d at 408, the majority seemingly laid the 34 burden of proof at the Board’s door, finding there was no “factual basis to conclude … that class one property owners have been more financially burdened by paying water bills than other classes of users” (R. 878-79). In addition to flipping the burden of proof on its head, the premise was incorrect: in fact, previous programs had afforded relief to non-class one property owners, making targeted relief to class one owners especially appropriate, and far from entirely irrational. As detailed at pages 8-14 above, non-class one property owners have had access to substantial and sustained rate relief for nearly three decades through the Frontage Transition Program and its successor. Led astray by petitioners, the majority below seemed to believe that these class two-focused programs were part of a group of initiatives designed to promote water conservation or deliver financial relief to needy accountholders, and thus were fundamentally different from the one-time bill credit. Not so. Rather, it was the initiative that precipitated these two programs—the switch to metered billing—that was designed to promote conservation and achieve greater rate equity by making 35 owners of the multi-dwelling buildings using the most water pay their fair share. The Frontage Transition Program was a response to this intended sea change, and it was implemented not to encourage conservation and rate equity, but instead to reduce bill shock, give users an opportunity to adjust, and to facilitate the rollout of metered billing. If anything, the Frontage Transition Program cut against metered building’s conservation and rate equity goals by delaying their realization.20 The extended financial benefits of the Frontage Transition Program were not limited to those class two owners who were the Board’s foremost concern in the switch to metered billing: providers of affordable housing. Nor were the financial benefits limited to those class two owners who undertook conservation measures or demonstrated that the switch to metered billing would be financially prohibitive. Virtually all class two property owners were eligible. To be sure, the Frontage Transition Program may not have been a perfect fit for the Board’s precise concerns, 20 See State Comptroller Report at 10. 36 but it was a sensible and rational solution, and one from which many large class two property owners reaped benefits for years. And while this program’s successor, the Multi-family Conservation Program, did introduce alternate conservation methods for the enrolled class two property owners, it did so because those users had not transitioned to metered billing—the primary water conservation initiative—unlike the class one property owners who had transitioned to that system long ago. In recognition of the financial burden imposed on class two owners by metered building, the Multi-family Conservation Program essentially split the difference, introducing a less onerous way for class two property owners to conserve water while controlling their costs. Class one owners, however, did not benefit from a remotely analogous program. The combined effect of the Frontage Transition Program and the Multi-family Conservation Program has been three decades of extended rate reduction available to a large swath of class two property owners, primarily driven by the Water Board’s recognition of the financial burdens that metered billing imposed 37 on a subset of those users. These benefits overwhelmingly have not been contingent on any showing of need, however. And that makes good sense: administrative agencies require leeway to categorize users based on common-sense factors and deliver efficient solutions, lest they become bogged down in actuarial calculations and administrative deadlock. Against this backdrop—and for the same reason—the one- time credit is also a sensible use of the modest funds freed up by the City’s unexpected rent forgiveness. While class one property owners may not have been affected to the same degree by the switch to metered billing, they were still subject to generally higher usage-based rates instead of frontage rates, and at the same time were subject to the same yearly percentage rate increases as class two owners. When an unexpected pool of money arose late in the rate-setting process, the Water Board decided to use it to deliver financial relief directly and immediately to households of individuals and families. A one-time credit of $183, extended to a class of owners excluded from three decades of rate reduction initiatives, cannot be considered “irrational.” 38 The context of the credit’s adoption only further confirms its rational basis. The City has the legal right under the lease agreement to request and collect rent every year, including future years. The City’s decision to forgo those rental payments for now could be reversed at some future point. The Board’s determination to follow the reasonable proposal of the City, its landlord, in distributing the benefits of the forgone payment was doubly rational because it will serve all users’ long-term interests of minimizing future costs to the water system if the present experiment with rent forgiveness is seen as a success by City officials. As the dissenting justice correctly observed (R. 901), the Public Authorities Law expressly authorizes local authorities like the Water Board to “take into consideration the views and policies of any elected official or body” in making its determinations “in the best interest of the authority, its mission, and the public,” Pub. Auth. Law § 2824(1)(g)—precisely what the Board did here. 39 C. The Appellate Division majority inflated the connection between the rate increase and the credit. The petitioners in this case have attempted to make hay of the fact that the 2.1% rate increase and the bill credit were passed at the same time, successfully convincing both the trial court and the majority below that this means that the rate increase actually or effectively paid for the credit, and that the credit lacked a rational basis for this reason (R. 22-23; 880-81). But the record belies this simplistic tale. The rate proposal was developed before the City announced its total rent forbearance (R. 783). And the rate proposal was based—as rate proposals typically are—on a five-year forecast of costs and projected rate increases (R. 787-88). Proceeding with an overall 2.1% rate increase after the City’s unanticipated forbearance announcement was rational because of the Board’s preference for incremental rate increases that help to ensure that future rates do not spike drastically. Petitioners have pointed to Board meeting minutes indicating that the 2.1% rate increase was proposed to fill a $76 million gap between projected revenues and need (R. 155). But while 40 petitioners claim that this minute entry establishes that the intervening rental forgiveness should have eliminated the rate increase, the record shows that even if the credit were eliminated and the entire rental forgiveness dedicated instead to across-the- board rate mitigation, it would reduce the rate increase over the four-year period only from 2.1% to 1.9% (R. 787-89). Contrary to the Appellate Division majority’s reasoning, the Board’s mandate to “make the water system self-sustaining” does not require it to set the lowest possible rate on a yearly basis (R. 880). The Board can and should set rates with a long-term view that allows it to impose steady and incremental rate increases rather than sudden and disruptive ones. The courts also wrongly ascribed legal significance to the petitioners’ exaggerated claim. In a self-sustaining system, budgeting is in some sense a zero-sum game. As a result, any reduction in some users’ charges can be framed as the cause of a corresponding increase in others’ charges. By petitioners’ logic, class one owners paid for the Frontage Transition and Multi- family Conservation Programs by their exclusion from those 41 programs; if so, that is only another reason that it is equitable and rational for them to receive their own class-specific benefit now, especially as the benefit is far more modest than those for which numerous class two owners have long been eligible. It is also useful to place petitioners’ rhetoric about the rate increase in perspective. Though the Court has cautioned against requiring “mathematical nicety,” Elmwood-Utica, 65 N.Y.2d at 495, petitioners are challenging what they themselves paint only as a 2.1% increase in their water charges for a single year. Compare id. at 500 (upholding sewer rate exemption that drove up challengers’ rates by 40% on a recurring basis). Petitioners’ claim thus only highlights the exacting quality of the Appellate Division’s review. Against the backdrop of a history of overall rate hikes combined with decades of rate relief offered to other account- holders, the Board’s decision to extend a moderate one-time credit to class one property owners is a sensible and pragmatic measure to effectively and quickly distribute a modest pool of unexpected funds in a way that remains financially meaningful to users. 42 Petitioners may disagree with the decision or even find it unfair. But the Appellate Division’s close scrutiny of this one-time, small- scale measure flies in the face of both longstanding precedent and sound policy, and should be rejected in favor of the restrained judicial review appropriate for such a case. 43 CONCLUSION This Court should reverse the Appellate Division’s order, insofar as it found the rate increase and one-time credit arbitrary and capricious. Dated: New York, NY August 18, 2017 RICHARD DEARING DEVIN SLACK MELANIE T. WEST of Counsel Respectfully submitted, ZACHARY W. CARTER Corporation Counsel of the City of New York Attorney for Appellants By: __________________________ MELANIE T. WEST Assistant Corporation Counsel 100 Church Street New York, NY 10007 212-356-0842 mwest@law.nyc.gov 44 CERTIFICATE OF COMPLIANCE I hereby certify that this brief was prepared using Microsoft Word 2010, and according to that software, it contains 7,971 words, including the table of contents, the table of cases and authorities, this certificate, and the cover. ____________________________________ MELANIE T. WEST
