In the Matter of Prometheus Realty Corp., et al., Respondents,v.New York City Water Board, et al., Appellants.BriefN.Y.November 16, 2017To be Argued by: MICHAEL BERENGARTEN (Time Requested: 15 Minutes) APL-2017-00088 New York County Clerk’s Index No. 653003/16 Court of Appeals of the State of New York 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 PETITIONERS-RESPONDENTS HERRICK, FEINSTEIN LLP Attorneys for Petitioners-Respondents Two Park Avenue New York, New York 10016 Tel.: (212) 592-1400 Fax: (212) 592-1500 Date Completed: October 4, 2017 COURT OF APPEALS STATE OF NEW YORK PROMETHEUS REALTY CORP., PORTOFINO REALTY CORP., TUSCAN REALTY CORP., and THE RENT STABILIZATION ASSOCIATION OF N.Y.C., INC., APL-2017-00088 New York County Index No. 653003/2016 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. CORPORATE DISCLOSURE STATEMENT Pursuant to 22 NYCRR Part 500.1(f), Petitioners-Respondents, through their undersigned counsel, disclose the following: (i) Petitioner-Respondent Prometheus Realty Corp. has no parents or subsidiaries, and is affiliated with (and owned by) John Vlachos, Christopher Athineos, and Danielle Athineos; (ii) Petitioner-Respondent Portofino Realty Corp. has no parents or subsidiaries, and is affiliated with (and owned by) Christopher Athineos Trust and Danielle Athineos Trust; (iii) Petitioner-Respondent Tuscan Realty Corp. has no parents or subsidiaries, and is affiliated with (and owned by) Christopher Athineos and Danielle Athineos Trust; and (iv) Petitioner-Respondent Rent Stabilization Association of N.Y.C., Inc. is a domestic not-for-profit corporation, has no parents, and controls the following subsidiary entities: Realty Services of America, Inc., RSA Insurance Agency, Inc., RSA Mortgage Brokerage, Inc. Dated: New York, New York October 5, 2017 Respectfully submitted, HERRICK, FEINSTEIN LLP By: Mipnael Berengarl Jdred D. Ndwman 2 Park Avenue _ New York, New York 10016 Tel: 212-592-1400 Attorneys for Petitioners-Respondents ten HF 11721800v.1 i TABLE OF CONTENTS Page TABLE OF AUTHORITIES ................................................................................... iv PRELIMINARY STATEMENT .............................................................................. 1 COUNTER-STATEMENT OF QUESTIONS PRESENTED ................................. 8 COUNTER-STATEMENT OF FACTS ................................................................... 9 A. The Board And The Authority .............................................................. 9 B. The Lease ............................................................................................ 11 C. The Financing Agreement ................................................................... 11 D. DEP Proposes A 2.1% Rate Increase To Close A Projected $76 Million Funding Gap In FY2017 ........................................................ 12 E. The Mayor Waives The Entire Rental Payment And Proposes The Credits .......................................................................................... 13 F. The Board Approves The Mayor’s Proposal ...................................... 14 G. The Board’s Justifications For The Credits Lacked Reasonable Support And A Rational Basis ............................................................ 15 (i) The Majority of Ratepayers Live in Class 2 Properties ............ 16 (ii) Class 1 Owners Did Not Bear the Brunt of Prior Rental Charges ...................................................................................... 16 (iii) The Mayor’s Credits Were Not Directed in a Manner Similar to the Board’s Programs ............................................... 17 (a) The Home Water Assistance Program (“HWAP”) ........ 17 (b) Freeze of the Minimum Charge ...................................... 18 (c) Multi-family Conservation Program (“MCP”) ............... 18 ii (d) Former Frontage Transition Program (“Transition Program”) ....................................................................... 20 (e) Other Programs ............................................................... 24 (iv) Public Officials Did Not Advocate a Rational Basis for the Credits ................................................................................. 24 H. The Board’s Justifications For The Rate Increase Lacked A Rational Basis ...................................................................................... 27 (i) The Rate Increase Was Not Required to Maintain Debt Service, Credit Ratings or Minimize Interest ........................... 27 (ii) A Five-Year Projection of Expenses Prepared Before the City Announced the Rent Forbearance Cannot Rationally Justify the Rate Increase ........................................................... 28 I. The Trial Court’s Order ....................................................................... 30 J. The First Department’s Orders ............................................................ 30 K. FY2017 Has Expired And The Board Elected Not To Raise Rates In FY2018 .................................................................................. 35 ARGUMENT .......................................................................................................... 36 POINT I THIS COURT LACKS SUBJECT MATTER JURISDICTION BECAUSE THE ISSUES PRESENTED HAVE BECOME MOOT ................................................................................................. 36 A. There No Longer Exists A Live Controversy Between The Parties .................................................................................................. 36 B. Appellants Cannot Establish Any—Let Alone All—Factors Required To Invoke The Exception To The Mootness Doctrine ........ 38 (i) This Controversy is Not Likely to Recur .................................. 39 (ii) This Controversy Does Not Present Issues That Typically Evade Review ........................................................................... 41 (iii) This Controversy Does Not Raise Substantial and Novel Questions ................................................................................... 42 iii POINT II THE CREDITS AND RATE INCREASE ARE ARBITRARY AND CAPRICIOUS ........................................................................... 43 A. The Board Did Not Previously Rely Upon Similar Classification Systems To Support Other Programs ........................... 47 B. There Is No Factual Basis To Conclude That Class 1 Owners Have Been More Financially Burdened By Paying Water Bills Than Other Customers ........................................................................ 48 C. Class 1 Owners Are Not More Financially Needy And Deserving Of Credits Than Other Ratepayers .................................... 50 D. Speculation That The City May “Reverse” The Rent Forbearance Without The Credits Is Unsubstantiated ........................ 52 E. Administrative Expedience Is Not A Rational Justification For The Credits .......................................................................................... 53 F. There Was No Rational Basis To Independently Justify The Rate Increase In FY2017 ..................................................................... 55 POINT III THE BOARD ACTED IN EXCESSS OF ITS AUTHORITY BY EXCISING AN IMPERMISBLE TAX ........................................ 58 CONCLUSION ........................................................................................................ 63 iv TABLE OF AUTHORITIES Page State Cases 125 Bar Corp. v. State Liquor Authority of the State of New York, 24 N.Y.2d 174 (1969) ......................................................................................... 44 770 Owners Corp./Allstate Realty Assoc. v. City of New York Dep’t of Envtl. Protection, 20 A.D.3d 572 (2d Dep’t 2005) .................................................................... 41, 46 Ador Realty, LLC v. Div. of Housing and Community Renewal, 25 A.D.3d 128 (2d Dep’t 2005) .......................................................................... 43 Albany Area Builders Ass’n v. Town of Guilderland, 141 A.D.2d 293 (3d Dep’t 1988), aff’d 74 N.Y.2d 372 (1989).................... 58, 59 Big Apple Food Vendors Ass’n v. Street Vendor Review Panel, 90 N.Y.2d 402 (1997) ......................................................................................... 45 Boreali v. Axelrod, 71 N.Y.2d 1 (1987) ............................................................................................. 45 Broida v. Bancroft, 103 A.D.2d 88 (2d Dep’t 1984) .......................................................................... 24 Carey Transp. v. Triborough Bridge and Tunnel Authority, 38 N.Y.2d 545 (1976) ................................................................................... 61, 62 City of Poughkeepsie v. Black, 130 A.D.2d 542 (2d Dep’t 1987) ........................................................................ 24 Clubside, Inc. v. Town Board, Town of Wallkill, 297 A.D.2d 734 (2d Dep’t 2002) ........................................................................ 44 Coconato v Town of Esopus, 152 A.D.2d 39 (2d Dep’t 1989), lv denied 76 N.Y.2d 701 (1990) .................... 59 Colavito v. New York State Comptroller, 130 A.D.3d 1221 (3d Dep’t 2015) ................................................................ 23, 24 v Dep’t of Envtl. Protection of City of New York v. Dep’t of Envtl. Conservation of the State of New York, 120 A.D.2d 166 (3d Dep’t 1986), lv denied 69 N.Y.2d 921 (1987) .................. 46 Doerrbecker v. Saunders, 229 A.D.2d 490 (2d Dep’t 1996) ........................................................................ 46 Elmwood-Utica Houses v. Buffalo Sewer Authority, 65 N.Y.2d 489 (1985) ......................................................................................... 61 Ghaffari v. North Rockland Central School District, 23 A.D.3d 342 (2d Dep’t 2005) .......................................................................... 23 Giuliani v. Hevesi, 90 N.Y.2d 27 (1997) ................................................................................. 9, 11, 45 Gold-Greenberger v. Human Resources Admin. of City of New York, 77 N.Y.2d 973 (1991) ......................................................................................... 37 Heinemeyer v. New York Power Authority, 229 A.D.2d 841 (3d Dep’t 1996) ........................................................................ 24 Holtzman v. Goldman, 71 N.Y.2d 564 (1988) ......................................................................................... 58 Jewish Reconstructionist Synagogue of North Shore v Incorporated Village of Roslyn Harbor, 40 N.Y.2d 158 (1976) ................................................................................... 58, 60 Koenig v. Morin, 43 N.Y.2d 737 (1977) ......................................................................................... 37 Leake v. Connelie, 75 A.D.2d 912 (3d Dep’t 1980) .......................................................................... 38 Malverne Volunteer Fire Dep’t v. New York Office of Fire Prevention & Control, 96 A.D.3d 1062 (2d Dep’t 2012) .................................................................. 43, 46 Mason v. Clifton Park Water Authority, 302 A.D.2d 818 (3d Dep’t 2003) ........................................................................ 58 vi Matter of Abrams v. Public Serv. Comm’n of the State of New York, 67 N.Y.2d 205 (1986) ......................................................................................... 45 Matter of GH Ville v. New York City Envtl. Control Board, 194 Misc. 2d 503 (Sup. Ct. N.Y. Cnty. Nov. 15, 2002) ......................... 43, 44, 46 Matter of Hearst v. Clyne, 50 N.Y.2d 707 (1980) ......................................................................................... 36 Matter of Leon RR, 48 N.Y.2d 117 (1976) ......................................................................................... 45 Matter of Medical Soc’y of the State of New York v. Serio, 100 N.Y.2d 854 (2003) ....................................................................................... 45 Matter of Nestle Waters N. Am. Inc. v. City of New York, 121 A.D.3d 124 (1st Dep’t 2014) ....................................................................... 43 Matter of New York Pub. Interest Research Group Straphangers Campaign v. Metropolitan Transp. Authority, 309 A.D.2d 127 (1st Dep’t 2003) ....................................................................... 62 Matter of Phillips v. Town of Clifton Park Water Authority, 286 A.D.2d 834 (3d Dep’t 2001), lv denied 97 N.Y.2d 613 (2002) ............ 58, 59 Metropolitan Movers Ass’n, Inc. v. Liu, 95 A.D.3d 596 (1st Dep’t 2012) ......................................................................... 45 New York Tel. Co. v. City of Amsterdam, 200 A.D.2d 315 (3d Dep’t 1994) ........................................................................ 59 Northway 11 Communities v. Town Board of the Town of Malta, 300 A.D.2d 786 (3d Dep’t 2002) ........................................................................ 44 Pistilli Assoc. III, LLC v. New York City Water Board, 46 A.D.3d 905 (2d Dep’t 2007) .................................................................... 42, 46 Price v. City Board of Education, 16 Misc. 3d 543 (Sup. Ct. N.Y. Cnty. 2007) ...................................................... 45 Private Communications Ass’n. v. Gabel, 24 A.D.2d 427 (1st Dep’t 1965) ......................................................................... 44 vii Resto v. State of New York Department of Motor Vehicles, 135 A.D.3d 772 (2d Dep’t 2016) ........................................................................ 43 Rochdale Village v. New York City Water Board, 18 A.D.3d 664 (2d Dep’t 2005) .................................................................... 41, 46 Saratoga County Chamber of Commerce v. Pataki, 100 N.Y.2d 801 (2003) ........................................................................... 36, 37, 38 Sled Hill Café v. Hostetter, 22 N.Y.2d 607 (1968) ......................................................................................... 44 Stone v. Farr, 135 A.D.3d 775 (2d Dep’t 2016) .................................................................. 43, 46 Svenningsen v. Passidomo, 62 N.Y.2d 967 (1984) ......................................................................................... 44 Town Board of the Town of Poughkeepsie v. City of Poughkeepsie, 22 A.D.2d 270 (2d Dep’t 1964) .................................................................... 45, 59 Vucetovic v. Epsom Downs, 10 N.Y.3d 517 (2008) ......................................................................................... 51 Watergate II Apts. v. Buffalo Sewer Authority, 46 N.Y.2d 52 (1978) ..................................................................................... 60, 61 Westmoreland Apt. v. City Water Board, 294 A.D.2d 587 (2d Dep’t 2002) ........................................................................ 46 Wisholek v. Douglas, 97 N.Y.2d. 740 (3d Dep’t 2002) ................................................................... 36, 38 Statutes Rules & Regulations 40 C.F.R. pt. 141 ...................................................................................................... 24 CPLR § 7803 ....................................................................... 4,, 15, 30, 34, 42, 43, 58 N.Y.C. Admin. Code § 7-210 .................................................................................. 51 viii N.Y.C. Admin. Code § 7-211 .................................................................................. 52 N.Y. Pub. Authorities Law § 824 ............................................................................ 25 N.Y. Pub. Authorities Law § 1045-g ............................................................. 9, 11, 58 N.Y. Pub. Authorities Law § 1045-h ....................................................................... 11 N.Y. Pub. Authorities Law § 1045−i ....................................................................... 11 N.Y. Pub. Authorities Law § 1045-j .................................................................. 10, 38 N.Y. Pub. Authorities Law § 2824 .......................................................................... 10 PRELIMINARY STATEMENT Two courts have agreed that Appellants acted in an arbitrary and capricious manner by enacting a Water and Wastewater Rate Schedule (“Rate Schedule”) imposing a 2.1% increase to water rates (“Rate Increase”) in the recently expired fiscal year (“FY2017”) to fund one-time bill credits of $183 (“Credits”) to all account holders that own properties identified by the City of New York (“City”) as tax class 1 properties (“Class 1 Owners”). The facts underlying this proceeding are straightforward. On April 8, 2016, the City Department of Environmental Protection (“DEP”) published a rate proposal for FY2017 (“FY2017 Rate Proposal”) concluding that the Rate Increase was required to raise $76 million to fill a shortfall between projected revenue needs in FY2017 and projected revenue in FY2017 without a rate increase. DEP projected that Appellants required $3.67 billion to meet revenue needs in FY2017, whereas Appellants would earn only $3.594 billion based on FY2016 rates: The revenue need for FY2017 is projected to be $3.67 billion. Without a rate increase, projected FY2017 revenues would be $3.594 billion, which would translate into a $76 million funding gap. Raising rates by 2.1% will fill the $76 million funding gap. R.155. 2 The FY2017 Rate Proposal budgeted for the City Water Board (“Board”) to pay the City $122 million in rent in FY2017 under an Agreement of Lease (“Lease”) for the water supply and wastewater systems (“System”). On April 25, 2016, Mayor Bill de Blasio announced that the City waived all rent under the Lease through FY2020—including the budgeted $122 million rent for FY2017—as part of the City’s effort to limit water bills to the cost of water and dedicate fees solely to the System. This eliminated the projected $76 million funding gap in FY2017—the stated justification for the Rate Increase, and created an unexpected $46 million projected surplus in FY2017. But, rather than utilize the projected surplus to avoid the Rate Increase, the Mayor proposed that the Board issue the Credits in FY2017 to accounts identified with Class 1 properties, which the City defines as: Most residential property of up to three units (family homes and small stores or offices with one or two apartments attached), and most condominiums that are not more than three stories R.42. $183 was the largest whole dollar amount that could be credited to all 664,402 Class 1 Owners without exceeding the waived rent in FY2017. On May 20, 2016, the Board approved the Credits based on the City’s elimination of the FY2017 rent. By replacing the $122 million rental obligation with the same approximate cost to fund the Credits ($121,585,566), the Board 3 recreated another $76 million funding gap requiring the same 2.1% Rate Increase—this time solely to fund the Credits. Appellants would utilize the $76 million from the Rate Increase and draw down the $46 million projected surplus (created by the FY2017 rent forbearance) to offset the Credits and balance their books. As summarized below and discussed herein, this Court should either dismiss this appeal for lack of subject matter jurisdiction or affirm the Order of the Appellate Division, First Department. This Court lacks subject matter jurisdiction because the issues presented have become moot. Appellants cannot implement the Rate Increase and Credits in FY2017 because FY2017 expired. Further appellate review concerning a rational basis to enact the Rate Increase or issue the Credits in FY2017 cannot affect the rights of the parties. Moreover, Appellants cannot establish any—much less every—element required to invoke the exception to the mootness prohibition. First, this controversy is not likely to recur because it concerns the rationality of enacting the Rate Increase in an expired fiscal year—the justification for which was obviated by an unexpected change in circumstances: elimination of the budgeted rent. The Credits were the response to the same unexpected occurrence. 4 Appellants had the discretion and authority to raise rates in the new fiscal year—FY2018. Appellants decided not to—citing the strong health of the System resulting from, inter alia, the rent forbearance through FY2020. The rationality of a rate increase in another fiscal year, however, compels a distinct analysis of Appellants’ particular justifications for such rate increase (e.g., revenue needs), which is beyond the scope of this proceeding and record. Further, the Rate Schedule at issue in this proceeding does not provide for the issuance of the Credits beyond FY2017 because they were contemplated as an alternative means to disperse the waived, budgeted FY2017 rents. Second, this controversy does not present issues that typically evade review. The rationality of any rate-setting determination in a future fiscal year may be challenged, just as prior determinations by the Board, as arbitrary and capricious. Finally, this controversy does not raise substantial and novel questions because the Board’s authority to determine future water rates remains intact. And, contrary to Appellants’ claim that the lower courts radically redefined the arbitrary and capricious standard, this appeal does not present any novel questions concerning the relevant inquiry or burden of proof in Article 78 proceedings (which would not evade future review). The relevant inquiry pursuant to CPLR § 7803(3) was correctly applied. Respondents presented facts and evidence to demonstrate that the Board’s decision to issue the Credits and enact the Rate 5 Increase in FY2017 lacked a rational basis and reasonable support. For this reason as well, the Appellate Division correctly affirmed the Order of the Supreme Court, New York County (Edmead, J.) (“Trial Court”) granting Respondents’ petition. In particular, the lower courts scrutinized Appellants’ rationales for designating only Class 1 Owners as qualified for or deserving of Credits and determined that they lacked a rational basis and reasonable support. Appellants argue that the Credits would accrue in significant part to the benefit of senior citizen and low-income homeowners. But, Credits directed to an entire tax class bear little relation to that stated objective, and the data cited by Appellants did not support it. There is no factual basis to conclude that Class 1 Owners are needier than other ratepayers because the Credits are not tied in any way to financial need. And, just as class 1 properties include owners of luxury brownstones and other high value dwellings, class 2 properties consist of other types of residential buildings (including rentals, condominiums and cooperatives)1 occupied by seniors and persons of low or moderate income who pay for water and derive no value from—but are required to subsidize—the Credits issued to Class 1 Owners without regard to their income, economic need, or property value. 1 Class 2 is defined as “[a]ll other property that is not in Class 1 and is primarily residential (rentals, cooperatives and condominiums).” R.42. 6 Appellants argue that the Board previously relied upon similar classifications to offer differential water rates. In fact, the Mayor’s Credits uniquely relied only on property tax classification. The Board’s programs do not. They are directed to eligible participants within or among tax classes to support purposes consistent with the Board’s mission by promoting water conservation, a cleaner and efficient System, or narrowly addressing economic hardship by assisting vulnerable homeowners and densely populated multi-family properties housing lower income tenants maintain water service. Appellants argue that Class 1 Owners were excluded from prior water- related initiatives. Not so. Class 1 Owners have been included in various water-related programs administering rate relief—many of which principally benefit eligible Class 1 Owners based on their particular objectives. And, while Class 1 Owners were not eligible to participate in certain water-related programs directed to eligible class 2 property owners (“Class 2 Owners”), these programs were not a mere “giveaway” to an entire tax class. Appellants gloss over their eligibility criteria, costs and obligations for participation, and policy rationales designed to promote objectives consistent with the Board’s mission. Appellants resort to speculation that the City’s rent forbearance could be 7 reversed or discontinued if they did not rubber-stamp the Mayor’s proposal. But, Appellant’s speculation is unsubstantiated and contrary to the facts. The rent forbearance was not conditioned on the Board’s approval of the Credits. The City had already announced the rent forbearance when it proposed the Credits for the Board’s independent judgment. Moreover, the City’s justification for the rent forbearance was to limit water bills to the cost of water and dedicate fees solely to the System—not Class 1 Owners. Appellants argue that the Rate Increase in FY2017 was justified independent of the Credits. But, the Board’s own meeting minutes confirm that the Rate Increase was only to cover the projected funding gap in FY2017, which was eliminated by the rent forbearance. Appellants’ ability to collect adequate revenues in future fiscal years was not hindered because this proceeding restored a $46 million projected surplus in FY2017 that would have been extinguished under the Rate Schedule. Appellants retained the authority to raise rates in FY2018 to account for future revenue needs and adjust projections for future incremental rate increases, if necessary. Appellants did not raise rates in FY2018—citing the strong financial condition of the System. Thus, even if the Court were to reach the moot issues on this appeal, the facts and evidence proffered by Respondents establish that the Credits were not a rational means to disperse the budgeted FY2017 rents. By enacting the Credits 8 and Rate Increase, Appellants acted in an arbitrary and capricious manner and separately, exceeded the scope of their mandate by exacting an impermissible tax. COUNTER-STATEMENT OF QUESTIONS PRESENTED 1. Whether this appeal should be dismissed for lack of subject matter jurisdiction because (a) the issues presented have become moot by the expiration of FY2017, and (b) Appellants cannot establish any—much less every— factor required to invoke the exception to the mootness prohibition? Answer: Yes. 2. Whether this Court should affirm the Order of the Appellate Division because the Board acted in an arbitrary and capricious manner by approving the Credits based on the elimination of the budgeted rents in FY2017? Answer: Yes. 3. Whether this Court should affirm the Order of the Appellate Division because there was no rational justification or reasonable support for a Rate Increase in FY2017 independent of the Credits? Answer: Yes. 4. Whether, by approving a Rate Increase to issue the Credits, the Board acted in excess of its authority by imposing a thinly veiled tax? Answer: Yes. 9 COUNTER-STATEMENT OF FACTS A. The Board And The Authority The Municipal Water Finance Authority Act created the City’s Municipal Water Finance Authority (“Authority”) and the Board, both public benefit corporations. See Giuliani v. Hevesi, 90 N.Y.2d 27, 34 (1997); R.8. “The central function of the Authority is to provide revenue bond financing for improvements to the City’s water and sewer infrastructure.” Id. “The [Water] Board’s main function is to provide sufficient funds—through fixing and collecting water and sewer charges and other revenues—for the City to operate and maintain the [System] and for the Authority to service water and sewer debt.” Id. at 34. The Board is mandated to: establish, fix, revise, charge and collect and enforce the payment of all fees, rates, rents and other service charges for the use of, or services furnished by the sewerage system, water system, or both, as the case may be, so as to receive revenues which, together with other revenues available to the board, if any, shall be at least sufficient at all times so that such system or systems shall be placed on a self-sustaining basis…. New York Public Authorities Law (“NYPAL”) §1045(g)(4). The Board is thus directed to collect revenues that are at least sufficient to make the System financially self-sustaining. The Board must hold public hearings before enacting service charges. 10 NYPAL §1045-j. Revenues derived from service charges must be deposited in a local water fund to “be held by it in trust.” NYPAL §1045-j(2). The revenues must “provide funds in an amount sufficient” to pay the cost of (i) debt service, (ii) System operation and capital improvements, (iii) reserve requirements, (iv) expenses of the Authority and the Board, and (v) if requested by the City pursuant to an agreement for the construction or financing of water projects, such other projects or purposes the City considers appropriate. NYPAL §1045−j(1). The Board is empowered to shut-off water to delinquent accounts and impose property liens for unpaid invoices. NYPAL §1045-j(5). The Board functions independently of other branches of City government. See R.873; R.780-81 ¶4; NYPAL §1045−j(9). Thus, while the Board “may take into consideration the views and policies of an elected official or body, or other person,” its members are mandated to “ultimately apply independent judgment in the best interest of the authority, its mission and the public.” NYPAL §2824(1)(g). The Board describes its mission as to “establish rates for and distribute the collected revenues of the [System] of the [City], proactively considering the optimal level to achieve efficient financing of the System’s infrastructure and sustainable provision of high-quality service at a fair price for our customers.” R.367; R.875. 11 B. The Lease Since 1985, the Board has leased the System from the City. R.873; R.54-72; NYPAL §1045-h. Under the Lease, the DEP retains responsibility for System administration. Giuliani, 90 N.Y2d at 34. The Board is required to pay the City rents for the System if “requested by the City in each Fiscal Year.” R.9; R.67 §8.2. C. The Financing Agreement Under a Financing Agreement, the Authority agreed to finance the cost of water projects by issuing bonds, and the Board conveyed to the Authority title to its revenues. R.748-49 §2.1 & §2.4; NYPAL §1045−g(6); §1045−i(1) (authorizing the Financing Agreement). Revenues must be disbursed in a specific order of priority with the balance deposited in an Operation and Maintenance Reserve Fund for the System. R.753 §4.2(c); R.750 §4.2(a)(ii). The Board must “review the adequacy of fees, rates and charges at least annually.” R.758 §6.1(c). The Board must also consider recommendations contained in a Rate Consultant’s annual report “as to any necessary or advisable revisions of rates, fees and charges and such other advice and recommendations as it may be desirable.” Id.; R.759 §6.2(b)(iii). The Board’s fiscal year is the twelve-month period commencing on July 1st. 12 R.59; R.744. D. DEP Proposes A 2.1% Rate Increase To Close A Projected $76 Million Funding Gap In FY2017 On April 8, 2016, DEP issued the FY2017 Rate Proposal (R.111-50) explaining the need to “continue providing world-class drinking and wastewater services to” the City, and proposing to increase rates by 2.1%. R.117; R.148; R.127. DEP highlighted strong revenues in FY2016, lower than expected costs, and a budgeted rental payment of only $122 million.2 R.141-42; R.144-45; R.154. Despite these “savings,” debt service continued to drive the System’s “revenue needs,” thereby warranting the Rate Increase. R.146-48. DEP stated that the Rate Increase was necessary to close a projected $76 million “funding gap” between stated “revenue needs” in FY2017 and projected revenues based on FY2016 rates. R.148. DEP’s budgeted revenue needs in FY2017 account for the cost of debt service, $122 million in rents and all other projected costs in its line items. R.148; R.321. On April 8, 2016, DEP presented the FY2017 Rate Proposal to the Board. Consistent with the FY2017 Rate Proposal, DEP explained that the purpose of the Rate Increase was to fill the projected $76 million funding gap: 2 The FY2017 rent was initially estimated as $244 million (R.80), but the City was expected to reduce rents by $122 million. R.145. DEP thus budgeted for $122 million rents in FY2017. 13 The revenue need for FY2017 is projected to be $3.67 billion. Without a rate increase, projected FY2017 revenues would be $3.594 billion, which would translate into a $76 million funding gap. Raising rates by 2.1% will fill the $76 million funding gap. R.155. E. The Mayor Waives The Entire Rental Payment And Proposes The Credits On April 25, 2016—after DEP published the FY2017 Rate Proposal—the Mayor announced that the City would forbear collecting rents under the Lease through FY2020. R.93; R.783-84. This reduced the budgeted “revenue need” in FY2017 from $3.670 billion to $3.548 billion. R.148; R.155. As a result, the $76 million projected shortfall was averted, a $46 million projected surplus was created for FY2017, and a 2.1% rate increase would not support any budgeted revenue needs in FY2017. Id. But, rather than propose that the Board operate within the $46 million projected surplus, the Mayor proposed that the Board issue Credits to all Class 1 Owners. R.93; R.95; R.100. The $183 Credit was the largest whole dollar amount that could be given to these 664,402 accounts without exceeding the waived, budgeted $122 million rent in FY2017. See R.95 (tabulating accounts associated with Class 1 Owners). The Mayor’s Press Release comments: “For decades the City has been using the water bill as a cash cow for the general treasury. That's not right. The 14 water bill should be for one thing and one thing only - the cost of water.” **** Mayor de Blasio said the fees NYC residents pay will be dedicated solely to the operation, maintenance and expansion of the water and sewer system. R.94. F. The Board Approves The Mayor’s Proposal Following the Mayor’s announcement, the Board published a revised notice commenting: “(4) Bill Credit: A bill credit based on the FY2017 elimination of the rental payment.” R.675. During public hearings in May 2016, the Board declined to address its justification for enacting the Credits. It merely stated that savings resulting from the rent forbearance in FY2017 would be directed to Class 1 Owners while savings from the rent forbearance in future years will be directed to all account holders. R.420-21; R.454-55. On May 20, 2016, the Board issued a Public Notice adopting a Resolution approving the Rate Increase for FY2017 and Credits “based on the elimination of the FY2017 rental payment.” R.158. The Public Notice included a website for the Rate Schedule effective FY2017 (R.161-206), which included the Credits in FY2017 “based on the City’s elimination of the FY2017 rental payment.” R.198. 15 On June 7, 2016, Respondents commenced this Article 78 proceeding pursuant to CPLR §§ 7803(2) & 7803(3) to challenge the propriety of the Resolution and the Rate Schedule for adopting the Rate Increase and Credits. G. The Board’s Justifications For The Credits Lacked Reasonable Support And A Rational Basis In opposition to Respondents’ petition, Appellants submitted an affidavit from the Board’s Acting Executive Director—Steven W. Lawitts (“Lawitts”). Lawitts stated that class 1 properties “make up the great majority (nearly 80 percent) of all account holders.” R.783 ¶9. While Lawitts testified that the Board “was established to be independent of the Mayor” (R.780 at ¶4), he identified only the City’s justifications for proposing the Credits: At the press conference, both Mayor de Blasio and Commissioner Lloyd set forth the justification for issuing the proposed $183 credit to class 1 property owners. Mayor de Blasio noted that home owners have long borne the brunt of the previously imposed rental charges. Commissioner Lloyd noted that the credit of $183 was directed to class 1 properties in a manner similar to already established programs for multi-unit apartments, seniors, and low-income households. In addition, numerous elected officials explained their support for the proposed $183 credit to class 1 property owners. R.784 ¶11. These justifications lacked a rational basis and reasonable support in the record. 16 (i) The Majority of Ratepayers Live in Class 2 Properties While Lawitts observed that Class 1 Owners constitute nearly 80% of accounts, this statistic does not advance a rational basis to distinguish between accounts. Moreover, the majority of residential households that use and pay for the System (i.e., ratepayers) do not maintain individual accounts because they live in larger buildings where residential units are not sub metered for water usage and water costs are passed down through maintenance and utility charges. R.822-23; R.798. According to the City, class 1 properties include approximately 37% of residential units in the City. R.798; Respondents’ Compendium (“Resp. Comp.”) Exh. A [FY2015], 1 (class 1 includes 1,091,639 residential units; class 2 includes 1,871,987 residential units); Exh. B [FY2016] at 2, Table 1 (class 1 includes 1,093,357 residential units and class 2 includes 1,859,732 residential units). The Rate Schedule would thus require Class 2 Owners and their residents— the majority of residential households—to subsidize the Credits to the minority of residential households in the City without regard to their income, economic need, or property value. (ii) Class 1 Owners Did Not Bear the Brunt of Prior Rental Charges Lawitts provided no support for the Mayor’s statement that “homeowners 17 have long borne the brunt of the previously imposed rental charges.” R.784 ¶11. Water is charged based on usage ascertained by a meter and all account holders pay the same metered rates with the exception of certain programs instituted by the Board (discussed below). R.785 ¶15; R.215. Since account holders pay a proportional amount for water based on usage and Class 2 Owners, on average, pay a larger share of that proportional amount, the exact opposite inference can be drawn. (iii) The Mayor’s Credits Were Not Directed in a Manner Similar to the Board’s Programs Unlike the Mayor’s Credits, the Board’s programs did not direct benefits based upon property tax classification. These programs were directed to eligible participants within or among tax classes to promote purposes consistent with the Board’s mission such as water conservation, a cleaner, efficient System, or narrowly addressing economic hardship by assisting vulnerable homeowners and densely populated multi-family properties housing lower income tenants maintain water service. A discussion of certain programs cited by Appellants follows. (a) The Home Water Assistance Program (“HWAP”) HWAP is “an initiative to make water and sewer bills more affordable for low-income homeowners.” Resp.Comp. Exh. J. HWAP provides an annual credit ($115.89 in FY2016) to 51,700 low-income, senior and disabled homeowners that qualify for the Home Energy Assistance Program, Senior Citizen Homeowners 18 Exemption, or Disabled Homeowner’s Exemption—each of which has income eligibility criteria for participation. R.247; R.95; Resp.Comp. Exhs. C-E. Based on HWAP’s eligibility requirements, participants include only qualified one- to four- family homeowners. Resp.Comp. Exh. J. The FY2017 Rate Proposal already proposed to increase the HWAP credit in FY2017 and extend HWAP to “as many as 68,000 additional senior homeowners who make less than $50,000 per year….” R.95. (b) Freeze of the Minimum Charge Approximately 150,000 accounts that use less than approximately 95 gallons of water per day pay FY2014 rates under a rate freeze. The freeze benefits accounts that conserve water. The FY2017 Rate Proposal proposed to continue it for the third consecutive year. R.96; R.216. (c) Multi-family Conservation Program (“MCP”) MCP is designed “to promote water conservation in multi-family housing, while giving Customers control over their water and wastewater costs.” R.229. MCP offers a billing option based on a fixed charge-per-unit in lieu of metered billing. Id. MCP is open only to residential premises with four or more dwelling units that (i) invest in low-consumption plumbing hardware and fixtures—e.g., 70% of the building’s toilets, showerheads and faucets must be high-efficiency, and (ii) cooperate with DEP in conservation efforts—e.g., by providing building 19 access and interior leak surveys, meeting maintenance requirements and repairing “Substantial Leaks”. R.230-31. The Board explained that MCP is critical to operate the System: This is a program we have that encourages people to buy, property owners who have multi units, to buy low-flow fixtures. We are trying to reduce our water rate by 5% by the time we have to shut down the Delaware Aqueduct. That conservation is a critical part of our having enough water for the city while the Delaware Aqueduct is shut off to be transferred over to the new bypass tunnel. R.534. Because MCP requires investments and imposes obligations for participation and benefits the System, the founding administrative guidelines explain that it was designed to be “revenue neutral relative to the water system as a whole and to other customer classes.” R.855. Lawitts testified that approximately 26,000 accounts participate in MCP. R.786. In FY2016, however, the City reported a total of 255,309 class 2 parcels. See Resp.Comp. Exh. B at 2. Based on these figures, approximately 10% of Class 2 Owners participate in MCP. While Lawitts highlighted MCP participants’ estimated savings on average from the metered rate (R.785-86 ¶15), he thus discounted that only a small percent of Class 2 Owners participate in MCP—whether because the flat rate afforded by 20 the program would not result in savings based on the metered rate or the costs of participation outweigh the benefit of the flat rate. (d) Former Frontage Transition Program (“Transition Program”) In 1992, the Board created a Transition Program (the predecessor to MCP) providing a flat rate in lieu of the metered charge for certain accounts transitioning from frontage to metered billing. Appellants’ Compendium (“App.Comp.”) Exh. 5 at 9.3 Appellants never raised the Transition Program to the Trial Court. On appeal, Appellants rely on various materials extrinsic to the record (including newspaper articles, studies and reports) to discuss the Transition Program and erroneously extrapolate from these materials that the Transition Program created rate inequities benefitting Class 2 Owners to the detriment of Class 1 Owners. As discussed below, even if the Court were to consider these extrinsic materials (it should not), they easily distinguish the Transition Program from the Credits. First, unlike the Credits, the Transition Program was not extended based upon property tax classification. 3 In 1988, DEP initiated a Universal Water Metering Program to charge customers for actual water usage having previously charged a flat rate based on frontage. App.Comp. Exh. 5 at 2. The goal was to make customers more conscious of water use by charging based on consumption. App.Comp. Exh. 6 at 7. 21 “To be eligible for the Transition Program, a residence must have been constructed before July 1, 1992. In addition, prior to July 1, 1997, the residence’s service line had to measure at least one and one-half inches in diameter.” App.Comp. Exh. 5 at 9. “After that date [July 1, 1997], the residence had to have six or more dwelling units.” Id. In addition, “[n]ew construction [wa]s not eligible for th[e] Transition Program” and other eligibility criteria applied. App.Comp. Exh. 8 at 31. Second, unlike the Credits, the Transition Program promoted objectives consistent with the Board’s mission: “The Transition Program was designed to give the owners time to review their metered water usage, repair leaky plumbing, educate tenants about water conservation, and install low-flow fixtures before metered billing began.” App.Comp. Exh. 5 at 9. Third, eligibility for the Transition Program was rationally related to its eligibility criteria to achieve these objectives. Appellants’ citations explain: “[N]ot all ratepayers are able to control their water use equally.” App.Comp.Exh. 6 at 5. “Owners and managers of apartment buildings have one meter for their entire building and cannot control the water use in individual apartments.” Id. As a result, eligible participants required more time to take measures necessary to exercise greater control over water use in their properties—and in turn, promote water conservation and control costs—before transitioning to 22 metered building. As Appellants acknowledge, the Board extended a bill cap on an initial meter bill (only) for residential premises with five or fewer dwelling units because these customers could more easily control over water use. App.Comp. Exh. 8 at 30. Fourth, much like HWAP currently targets homeowners requiring financial assistance, the flat rate available under the Transition Program was rationally directed to benefit densely populated buildings housing low-income tenants. In this respect, its extension through FY2012 supported a secondary objective consistent with the Board’s mission by directing rate relief to housing for vulnerable customers of the System. Appellants’ citations explain: “Results of meter readings show that the highest household water use is in low-income neighborhoods, in part because of large families and overcrowding.” App.Comp. Exh. 6 at 5; Exh. 6 at 11 (“many affordable housing buildings use significantly more water than the average apartment”); Exh. 4 (“more often [high water bills] “represent accurate charges for crowded buildings that use a lot of water”). The extension of the Transition Program reflected an effort “to try to ease the expected surge in water prices in landlords of densely populated, low income buildings where water use is typically high.” App.Comp. Exh. 12 at 1; Exh. 4 at 1 23 (The transition to metered billing “threatened the existence of several hundred of the low-income co-ops, formerly abandoned buildings that the city rehabilitated as part of its effort to create affordable housing.”). Appellants argue that both the Mayor’s Credits and their Transition Program administered rate relief “regardless of income, actual water usage, or any demonstrated economic need.” App.Br. 10. Appellants ignore, however, that the Transition Program was predicated upon a policy and economic rationale directing rate relief to housing for vulnerable customers of the System—not an entire tax class. Indeed, Appellants citations indicate that the flat rate was considered more expensive for less densely populated buildings and cooperatives housing higher- income residents: “Owners of higher-income buildings are more likely to choose to pay the meter rate;” “For most apartment buildings and cooperatives with higher- income residents, the meter bill will probably be less expensive than the flat rate.” See App.Comp. Exh. 12 at 1, 3. Finally, the extrinsic materials in Appellants’ Compendium were available to Appellants but were not submitted to the Trial Court in opposition to Respondents’ petition. For this reason, they should not be considered on appeal. Colavito v. New York State Comptroller, 130 A.D.3d 1221, 1222 (3d Dep’t 2015); Ghaffari v. North Rockland Central School Dist., 23 A.D.3d 342, 344 (2d Dep’t 24 2005); Heinemeyer v. New York Power Authority, 229 A.D.2d 841, 843 (3d Dep’t 1996); City of Poughkeepsie v. Black, 130 A.D.2d 542, 542 (2d Dep’t 1987); Broida v. Bancroft, 103 A.D.2d 88, 93 (2d Dep’t 1984). Further, the inferences that Appellants extrapolate from these materials (i.e., the Credits compensate for rate inequities favoring Class 2 Owners allegedly created by the Transition Program) are not supported, and hardly “conclusively established” facts that may be judicially noticed by this Court. Colavito, 130 A.D.3d at 1222. (e) Other Programs The Lead and Copper Monitoring Program provides a $100 credit to customers whose property meets DEP’s required plumbing criteria. R.246. It supports compliance with the EPA’s Lead and Copper Rule, which requires water providers to monitor water quality at the tap to ensure safe levels of lead and copper. 40 C.F.R. Part 141 Subpart I. Properties enrolled in monthly eBilling are also entitled to a bill credit, which facilitates System efficiency. R.247. Residential premises receiving metered water service are also eligible to receive a cap on their metered charges if they pass a leak and waste inspection and 70% of toilets at the premises are low-consumption. R.234-35. (iv) Public Officials Did Not Advocate a Rational Basis for the Credits Lawitts testified that “numerous elected officials explained their support” for 25 the Mayor’s proposal. R.784 ¶11. While the Board may consider the views of elected officials, it must ultimately apply independent judgment in the best interest of the authority, its mission and the public. NYPAL §824. Indeed, Lawitts testified that that the law was designed to protect the System’s “revenue stream from political intervention, perceived or otherwise[.]” R.780. Here, politicians advocating for their constituencies did not advance a rational basis for these Credits. For example, Appellants argue that “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.” App.Br. 18. The underlying data cited by the officials upon which Appellants relied, however, indicated that the Credits offered the greatest savings to 150,000 accounts that qualify for the freeze of the minimum charge—“many” of which are held by seniors: For approximately 150,000 homeowners, many of whom are seniors, who use less than 95 gallons of water per day and pay the minimum charge, the credit represents a nearly 40 percent savings on their annual water and sewer bills. R.402. Appellants did not assess what percentage of these 150,000 accounts was held by seniors and which of them even qualify for low-income assistance. Moreover, these 150,000 accounts constituted less than 25% of the 26 recipients of the 664,402 recipients of the Credits. Further, these accounts were already targeted in a rational fashion to receive benefits through the freeze of the minimum charge, which promotes water conservation. And, the FY2017 Rate Proposal also budgeted to supplement the economic assistance to low income households and seniors under HWAP. Lawitts also ignored that other customers of the System including the majority of City households must pay increased rates to fund Credits directed to the minority of City households—regardless of the recipients’ income, economic need, or property value. Based on the foregoing, some elected officials expressed serious objections to the propriety of the Mayor’s “proposal”—including that politics had displaced reason and improperly saturated the Board’s judgment. City council member Liz Crowley explained: “The mayor's administration has proposed refunding New Yorkers $183 on their water bills in this upcoming budget. If the city can afford a refund then there is clearly no need for a rate increase.” R.516. Council Member Councilman Rory Lancman equated the Mayor’s “proposal” to a “water-rate Ponzi scheme”: ‘We’re going to increase water rates on one class of homeowners to fund a tax credit for another class of 27 homeowners for a water-rate increase that there is no justification for,’ Mr. Lancman said. ‘It’s like a water- rate Ponzi scheme.’4 H. The Board’s Justifications For The Rate Increase Lacked A Rational Basis Lawitts testified that Appellants required the Rate Increase independent of the Credits. R.787. But, DEP justified the 2.1% Rate Increase to close a projected $76 million “funding gap” in FY2017 only. The forbearance of the $122 million rents in FY2017 obviated that justification. Every other “justification” offered by Lawitts lacked a rational basis or reasonable support: (i) The Rate Increase Was Not Required to Maintain Debt Service, Credit Ratings or Minimize Interest Lawitts testified that the annulment of the Rate Increase could adversely affect the Authority’s ability to service debt, maintain credit ratings, and minimize interest. R.787 ¶¶17-18. These arguments were nonsensical because Respondents proposed to save the System $46 million more than it would have had under Appellants’ Rate Schedule (by restoring the projected surplus). Under the Rate Schedule, the Board proposed to implement the Rate Increase to collect an additional $76 million which 4 R.36 ¶10 (citing Thomas Macmillan, “Cost of New York City Water to Rise 2.1% in July” (May 20, 2016) available at http://www.wsj.com/articles/cost-of-new-york-city-water-to-rise-2- 1-in-july-1463771089). 28 the Board must utilize together with the $46 million projected surplus (created by the FY2017 rent forbearance) to offset the cost of Credits and balance its books. (ii) A Five-Year Projection of Expenses Prepared Before the City Announced the Rent Forbearance Cannot Rationally Justify the Rate Increase Lawitts testified that the FY2017 Rate Proposal was part of a broader five- year projection of expenses and rates. R.788-89 ¶¶19-20. He argued that the elimination of the Credits from the Board’s five-year forecast would result only in a small reduction in forecasted rates—from 2.1% to 1.9% in FY2017 and 2% to 1.85% in FY2019. Id. Lawitts also testified that a Rate Increase was consistent with policy promoting incremental increases to prevent gyrating or dramatic rate increases in future years. Id. Each justification lacked a rational basis. First, if the April 8th FY2017 Rate Proposal was part of a broader five-year forecast of projected expenses and rates, that forecast was invalid because it was made before the City announced the rent forbearance through FY2020 on April 25th. R.783-4. Second, Appellants were not locked into their rate forecast. Indeed, the Board must “review the adequacy of fees, rates and charges at least annually” and consider recommendations contained in a Rate Consultant’s annual report. R.758- 59. As the Trial Court aptly observed, when the Board met in the next fiscal year it had the discretion to set an appropriate new base rate level in line with projected 29 revenue needs and adjust projections for future incremental rate increases, to the extent necessary—factoring in the rent forbearance through FY2020 and $46 million Respondents saved the System in FY2017. See R.843-44. Third, there is no mathematical basis to justify a smaller rate increase in FY2017 (from 2.1% to 1.9%). As a threshold matter, the Board’s meeting minutes confirmed that the Rate Increase was required to fill a projected shortfall in FY2017 only. There were no revenue needs in FY2017 supporting a Rate Increase after the rent forbearance— other than the Credits. To arrive at a smaller 1.9% rate increase for FY2017, Lawitts testified that he removed the cost of only the “183 class 1 credit” (i.e., the Credits) from Appellants’ projected five-year expenses (prepared before the City announced the rent forbearance through FY 2020), and then recalibrated projected rates over this five-year period. R.789 ¶20. Accordingly, the projected expenses were inflated because the cost of the Credit is the equivalent of only FY2017 rents (and not rents estimated through FY2020). Regardless, as discussed below, Appellants were free to implement a rate increase in FY2017 if they contemplated other revenue needs that were not budgeted in their FY2017 Rate Proposal, which would have required a separate public hearing. A 1.9% rate increase in FY2017 is not the subject of this 30 proceeding. Appellants declined to revisit their Rate Schedule in FY2017 and determined that a rate increase was not appropriate in FY2018 either. I. The Trial Court’s Order On June 20, 2016, the Trial Court annulled and vacated the Resolution adopting the Rate Schedule and Credits pursuant to both CPLR § 7803(2) and § 7803(3), enjoined Appellants from enforcing or implementing the Rate Increase or Credits, and declared that the FY2016 rate schedule shall “remain in effect until further action by” Appellants. R.7. Appellants elected to take no further action in FY2017 and operated under the FY2016 rate schedule through FY2017. Resp.Comp. Exh. F. J. The First Department’s Orders On February 16, 2017, the Appellate Division, First Department (in a 3:1 Decision) affirmed the Trial Court’s Order. R.872. Appellants misconstrue the Appellate Division’s holding. Appellants contend: 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. App.Br. 2. 31 Accordingly, Respondents summarize the Appellate Division’s actual holding—including its proper application of the settled Article 78 standard to the uncontroverted facts and evidence: The Appellate Division agreed “with the trial court’s assessment that the one-time credit adopted for some, but not all, water customers at the same time the Board needed to increase overall water rates to fund a projected budget shortfall for that particular year, has no rational bases.” R.877. The Appellate Division explained that the Board typically imposes rates based on the ratepayers’ use of water. Id. “Exceptions have been made, however, for certain programs that benefit different categories of ratepayers.” R.877. But, “many of the programs highlighted by the Board serve legitimate objectives of the Board related to water usage or quality, such as water conservation or the servicing of vulnerable customers who demonstrate a financial need.” R.877-78. “At bar, however, the rationale for designating class one property owners as qualified for or deserving of a credit, but not other classes of property owners, is lacking.” R.878. While the Board “argues that consistent with its right to set rates ‘equitably,’ it acted rationally to alleviate the financial burden of water bills for class one property owners by issuing a credit,” that “rationale only repeats the action taken, but does not provide the underlying justification for it.” Id. 32 Here, “[t]here is no factual basis to conclude, as the Board claims, that class one property owners have been more financially burdened by paying water bills than other classes of users; there is no basis for any conclusion that class one property owners are more needy than other ratepayers.” R.878-79. “There is no rational basis for the conclusion that class one ratepayers have traditionally borne a disproportionate burden of water and sewage fees.” R.879. The Appellate Division rejected the Board’s argument that a rational basis derives from the fact that Class 1 Owners include (an unspecified percentage of) seniors and low or moderate income homeowners. R.879. “It is equally clear, however, that class one includes owners of luxury brownstones and other high value dwellings in the City; just as it should be clear that class two properties consist of other types of residential buildings, including coops and condominiums, also occupied by seniors and persons of low or moderate income, none of which derive any benefit, directly or indirectly, from this credit.” Id. In addition, assuming arguendo the Board’s estimate that 150,000 customers benefitted by the Credits are senior citizens (which is not supported by the record), the Board conceded that there are over 664,000 customers who are Class 1 Owners, and “[t]here was no information provided about the financial means and needs of these 150,000 customers.” R.880 fn.4. The Board’s argument that the Credits would be more financially 33 meaningful for Class 1 Owners also lacked reasonable support because “the credit is not in any way tied to financial need.” R.879. “While the [Board] argues that some members of class one rate payers experience financial hardship in paying for water, the application of the credit does not in any manner take into consideration an owner’s ability to pay or customers’ need for this benefit, solely relying on the classification of the property for tax purposes, which bears little relation to the stated objective.” R.879-80. The Appellate Division also observed that the Credits cannot be reconciled with the projected budget shortfall for the year in which the credit is given. “Once the City decided to forgo collecting rents, the resulting credit seems to have eliminated any shortfall for the particular year.” R.880. The Appellate Division also commented that there was no mathematical basis in the record to support a 1.9% rate increase (which regardless, is not the subject of this proceeding). R.880 fn.5. The Appellate Division thus held that there was no rational basis for the Rate Increase in FY2017. It observed that the Rate Increase and Credits are clearly “interrelated since the amount of the rent forbearance ($122 million) closely correlates mathematically to the total cost of the [C]redit….”. R.876. The Board’s justification for a 2.1% rate increase is irreconcilable with the Board’s subsequent implementation of the Credits if, as the Board claimed, it still needed funds to 34 balance its books for the year. R.880. The action also “seems inconsistent with the [Board’s] statutory mandate to make the water system self-sustaining.” Id. “Although the [Board] also argues that it can apply the forgone rental payments in the manner proposed, [its] decision to use the credit as proposed instead of meeting the costs of furnishing water services does not reflect any rational basis for doing so.” R.880-81. Finally, the Appellate Division rejected the Board’s attempts to justify the Rate Increase as part of its five-year projection of expenses. R.881. The “Board’s own meeting minutes confirm that the 2.1% rate increase was only to cover a $76 million budget gap for the FY2017.” Id. Further, the Board cannot explain how its five-year projections “still have validity when they were made before the City announced its intention to forgo rent for the next five years.” Id. “Moreover, even if this particular rate increase is unjustified, the Board’s authority to determine future water rates, including any necessary increases, remains intact.” Id. Accordingly, the Appellate Division found that the trial court correctly granted Respondents’ petition pursuant to CPLR § 7803(2). The Appellate Division declined to address whether the Credits and Rate Increase were also properly annulled by the Trial Court pursuant to CPLR § 7803(3) as an impermissible tax. It remarked that it “cannot say that as a general matter the Board’s adoption of a rate increase and/or implementation of a credit 35 program distinguishing among different classes of customers is an ultra vires action.” R.876. The Appellate Division, however, found it unnecessary to decide whether funding these Credits through the Rate Increase constituted an impermissible tax as opposed to payment for service. R.877 fn.3. On April 25, 2017, the Appellate Division granted Appellants’ motion for leave to appeal and certified the following question of law to be reviewed by the Court of Appeals: “Was the order of this Court, which affirmed the order of the Supreme Court, properly made?” R.870. K. FY2017 Has Expired And The Board Elected Not To Raise Rates In FY2018 DEP recently issued recommendations for billing rates in FY2018. DEP commented that “FY2016 rates are sufficient to fund the financial obligations in the Board’s FY2018 budget.” Resp.Comp. Exh. G. At the May 18, 2017 annual meeting, DEP reported that the System is in “strong financial condition” due to (i) the rent forbearance through FY2020, (ii) reduced debt service costs due to interest rate savings, (iii) stronger than expected revenues, and (iv) operational efficiencies and expense management. Resp.Comp. Exh. H Powerpoint 2. While Appellants always had the authority to implement a rate increase in FY2018, the Board thus adopted a resolution approving an Annual Budget in FY2018 which did not provide for any rate increase. Id. Resp.Comp. Exh. I. 36 ARGUMENT POINT I THIS COURT LACKS SUBJECT MATTER JURISDICTION BECAUSE THE ISSUES PRESENTED HAVE BECOME MOOT A. There No Longer Exists A Live Controversy Between The Parties “The jurisdiction of this Court extends only to live controversies.” Saratoga County Chamber of Commerce v. Pataki, 100 N.Y.2d 801, 810-11 (2003).” This court is “thus prohibited from giving advisory opinions or ruling on ‘academic, hypothetical, moot, or otherwise abstract questions.’” Id.; see also Matter of Hearst v. Clyne, 50 N.Y.2d 707, 714 (1980) (explaining that courts are ordinarily precluded “from considering questions which, although once live, have become moot by passage of time or change in circumstances.”). “In general an appeal will be considered moot unless the rights of the parties will be directly affected by the determination of the appeal and the interest of the parties is an immediate consequence of the judgment.” Hearst, 50 N.Y.2d at 714; Saratoga, 100 N.Y.2d at 810-11; Wisholek v. Douglas, 97 N.Y.2d. 740, 742 (3d Dep’t 2002). At issue in this controversy is a Rate Increase “for the fiscal year commencing July 1, 2016” (R.158), and Credits that were to be issued in an expired fiscal year based on the FY2017 rent forbearance (R.198). The issues 37 presented in this appeal have thus been rendered moot by the passage of time and change in circumstances. For example, in Saratoga, 100 N.Y.2d at 811, plaintiffs challenged the authority of the Governor to, inter alia, enter into a one-year amendment to a certain casino gambling compact in 1999 without legislative approval. By the time the challenge made its way to the Court of Appeals, the amendment had expired, and thus, this Court held that any further challenge as to its validity was rendered moot: A declaration as to the validity or invalidity of the 1999 amendment would therefore have no practical effect on the parties. Granted, a declaration as to the Governor's ability to negotiate amendments to the compact would provide beneficial advice to future officials who will have to make decisions about this casino and other similar projects. This is true, however, of all requests for advisory opinions. 100 N.Y.2d at 811. Similarly, in Koenig v. Morin, 43 N.Y.2d 737, 738 (1977), this Court held that a controversy concerning the validity of a resolution enacting a 10-day furlough program was moot because the program had not been implemented and the authority of the enabling resolution, which was “explicitly restricted to the year 1976,” had been exhausted. Cf. Gold-Greenberger v. Human Resources Admin. of City of New York, 77 N.Y.2d 973, 974-75 (1991). 38 Here, as well, further review of the rationality of the Rate Increase in an expired fiscal year will have no practical effect on the parties. Similarly, the validity of a “one-time credit adopted for some, but not all, customers at the same time the Board needed to increase overall water rates to fund a projected budget shortfall for that particular year” (R.877) is now academic. Moreover, the terms of the Financing Agreement and application of the NYPAL prevent surplus revenues received by the Board from being disbursed to customers. Revenues must be disbursed in a specific manner and order of priority with the balance deposited into an Operation and Maintenance Reserve Fund for the System. See p.12, supra. Had these provisions not applied, the NYPAL would require any surplus of funds remaining in the Board to be returned to the City. NYPAL § 1045−j(1). This explains why the Credits were structured to offset against charges on FY2017 invoices. B. Appellants Cannot Establish Any—Let Alone All—Factors Required To Invoke The Exception To The Mootness Doctrine This Court has the discretion to reach a moot issue only “if the controversy or issue involved is likely to recur, typically evades review, and raises a substantial and novel question.” Saratoga, 100 N.Y.2d at 811 (citing Hearst, 50 N.Y.2d at 714-15). This exception cannot be invoked unless all three factors exist. See id.; Wisholek, 97 N.Y.2d. at 742; Leake v. Connelie, 75 A.D.2d 912, 913 (3d Dep’t 1980). Here, Appellants cannot establish any of the required factors. 39 (i) This Controversy is Not Likely to Recur Appellants erroneously suggest that this controversy is likely to recur in the new fiscal year. For example, DEP comments that the decision to maintain FY2016 rates in FY2018 allows Appellants “to preserve their rights” in connection with this appeal concerning the Rate Schedule. Resp.Comp. Exh. G; see also Resp.Comp. Exh. H at Powerpoint 2 & 4 (commenting that “FY2016 rates to remain in effect, consistent with trial court decision”) (emphasis added). But, Appellants always had the discretion and authority to raise rates in FY2018—assuming the decision to do so was rational. The Trial Court required that the FY2016 rate schedule remain in effect only “until further action by” Appellants. R.7 (emphasis added). The First Department also acknowledged that “the Board’s authority to determine future water rates, including any necessary increases, remains intact.” R.881. The Board also comments that—even though it has adopted a new rate schedule in every fiscal year “since, at least, 2000”—“it is not mandated to do so … and rate schedules do not automatically expire at the close of a given fiscal year.” App.Br. 6-7; Resp.Comp. Exh. J at 3. The Board suggests that it may still implement the Rate Schedule in FY2018 without committing—or articulating any rational basis—to do so. Even so, that could not render this controversy likely to 40 recur for several reasons. First, the rationality of imposing the Rate Increase in FY2018 compels a distinct analysis of the particular revenue needs, Rate Consultant’s conclusions, and other justifications for a 2.1% rate increase in the new fiscal year. Those issues are beyond the scope of this proceeding (and the record), which has nothing to do with the rationality of a rate increase in FY2018. That said, the rationality of implementing the same Rate Increase in FY2018 is dubious since DEP has already observed that a rate increase is not required in FY2018 due to the strong financial condition of the System attributable to, inter alia, the rent forbearance. Second, the Rate Schedule does not provide for the issuance of the “one- time” Credits beyond FY2017. The Credits were contemplated as an alternative means to disperse the budgeted rental payment in FY2017 only. The Mayor proposed that savings resulting from the rent forbearance in future years would be passed on to all account holders. See R.783. For this reason, the Rate Schedule provides: In FY2017, a Customer’s account identified by DOF as a Tax Class 1 property will receive a one-time bill credit of $183 … based on the City’s elimination of FY2017 rental payment. R.198 (emphasis added). Accordingly, even if Appellants implemented the Rate Schedule in FY2018 41 this controversy is not likely to recur. Third, Appellants would take inconsistent positions if they argue that this controversy is likely to recur. Appellants contend that there was a rational basis to increase rates in FY2017 independent of the Credits (which is erroneous). If Appellants implemented the Rate Increase and Credits in FY2018 notwithstanding their admission that FY2016 rates are sufficient to support revenue needs in FY2018, Appellants must concede that the Rate Increase is required solely to fund the Credits. In addition, Appellants acknowledge the Credits were an administrative mechanism designed to redistribute the budgeted rents in FY2017. App.Br. 18, 1. Appellants have not budgeted for rents in FY2018 because of the rent forbearance through FY2020. (ii) This Controversy Does Not Present Issues That Typically Evade Review The rationality of any rate setting determination in a future fiscal year may be challenged just as prior determinations by the Board or any other body made in violation of lawful procedure, affected by an error of law or that is arbitrary and capricious or an abuse of discretion. See Rochdale Village v. New York City Water Board, 18 A.D.3d 664, 664 (2d Dep’t 2005) (holding Board’s interpretation of the applicable rate schedule to be irrational and unreasonable); 770 Owners v. 42 City of New York Dep’t of Envtl. Protection, 20 A.D.3d 572, 573 (2d Dep’t 2005) (annulling Board’s determination as arbitrary and capricious); Pistilli Assoc. III v. New York City Water Bd., 46 A.D.3d 905, 906 (2d Dep’t 2007) (similar). (iii) This Controversy Does Not Raise Substantial and Novel Questions The Board’s “authority to determine future water rates, including any necessary increases, remains intact.” R.881 (emphasis added). In addition, the Appellate Division’s Order does not have far-reaching consequences concerning the Board’s authority to increase rates or establish credit programs distinguishing among different classes of customers in the future. The Appellate Division stated “[w]e cannot say that as a general matter the Board’s adoption of a rate increase and/or the implementation of a credit program distinguishing among different classes of customers is an ultra vires action.” R.876. Contrary to Appellants’ claim that the Appellate Division “radically redefined the ‘arbitrary and capricious standard,’” (App.Br. 3) this appeal does not present any novel questions concerning the relevant inquiry or burden of proof in an Article 78 proceeding (which regardless would not evade future legal review). The relevant inquiry pursuant to CPLR § 7803(3) was correctly applied. See Point II, infra. 43 POINT II THE CREDITS AND RATE INCREASE ARE ARBITRARY AND CAPRICIOUS “Pursuant to CPLR § 7803(3), the relevant inquiry in this case is ‘whether a determination was made in violation of lawful procedure, was affected by an error of law or was arbitrary and capricious or an abuse of discretion.’” Matter of Nestle Waters N. Am. v. City of N.Y., 121 A.D.3d 124, 127 (1st Dep’t 2014). The arbitrary or capricious standard relates “to whether a particular action should have been taken or is justified” and “whether the administrative action is without foundation in fact.’” Ador Realty v. Div. of Housing and Cmty. Renewal, 25 A.D.3d 128, 139-40 (2d Dep’t 2005) (citing Matter of Pell v. Bd. of Educ., 34 N.Y.2d 222, 231 (1974)). An action is deemed to be arbitrary if it is taken “without a sound basis in reason and generally without regard to the facts.” Id.; Stone v. Farr, 135 A.D.3d 775, 777 (2d Dep’t 2016); Resto v. State of N.Y. DMV, 135 A.D.3d 772, 773 (2d Dep’t 2016); Malverne Volunteer Fire Dep’t v. N.Y. Office of Fire Prevention & Control, 96 A.D.3d 1062, 1063 (2d Dep’t 2012). Rationality is characterized as “being supported by proof sufficient to satisfy a reasonable person of all the facts necessary to be proved in order to authorize the determination.” Ador Realty, 25 A.D.3d at 139-40 (citing Matter of Pell, 34 N.Y.2d at 231); Matter of GH Ville v. City ECB, 194 Misc. 2d 503, 505 (Sup. Ct. 44 N.Y. Cnty. Nov. 15, 2002) (“There must … be such relevant proof as a reasonable mind may accept as adequate to support a conclusion or ultimate fact.”) Because rational determinations must have reasonable support, proper determinations cannot rely upon presumptions or fears that are unsubstantiated in the record. See Svenningsen v. Passidomo, 62 N.Y.2d 967, 969 (1984) (“Nothing in the record establishes that the development of petitioners’ property will create” problems “anticipated” by the board); Sled Hill Café v. Hostetter, 22 N.Y.2d 607, 612-13 (1968) (“Where the Authority’s conclusions are based on speculative inferences unsupported by the record its determination should be annulled.”); Clubside, v. Town Bd. of Wallkill, 297 A.D.2d 734, 735 (2d Dep’t 2002) (“[T]he grounds for the denial were the unsubstantiated fears of the individual members of the Town Board . . . .”); Private Communications Ass’n. v. Gabel, 24 A.D.2d 427, 427-28 (1st Dep’t 1965) (“Unsupported suspicions or speculation that such may be the case are not sufficient to support such a determination.”); Northway 11 Communities v. Town Bd. of Town of Malta, 300 A.D.2d 786, 788 (3d Dep’t 2002); GH Ville, 194 Misc. 2d at 507; 125 Bar Corp. v. State Liquor Authority, 24 N.Y.2d 174, 179 (1969). Although the Board is the sole authority empowered to set the rates it charges to its customers, its rate-setting authority is not without limits. R.874. A rate-fixing determination must still have a rational basis and reasonable support in 45 the record. See Matter of Abrams v. Public Serv. Comm’n, 67 N.Y.2d 205, 212 (1986); Town Bd. of Town of Poughkeepsie v. City of Poughkeepsie, 22 A.D.2d 270, 273 (2d Dep’t 1964) (“[v]ariances in rates must have a ‘rational basis and not be purely arbitrary.’”). And, any service charge enacted by the Board (or use of revenues generated therefrom) must also be consistent with its statutory authority and mandate. See Giuliani, 90 N.Y.2d at 34; Matter of Medical Soc’y v. Serio, 100 N.Y.2d 854, 864 (2003); Boreali v. Axelrod, 71 N.Y.2d 1, 9 (1987); Matter of Leon RR, 48 N.Y.2d 117, 126 (1976); R.874 While the Board argues that deference should be accorded to its expertise (App.Br. 25), “the principle of Article 78 review that a Court must defer to the expertise of an agency with respect to matters within the agency’s jurisdiction does not mean … that the Court must capitulate to the agency’s determination.” Price v. City Bd. of Educ., 16 Misc. 3d 543, 554 (Sup. Ct. N.Y. Cnty. 2007).5 Indeed, determinations are routinely annulled where they are not based in reason or with regard to the facts. See, e.g., Metropolitan Movers Ass’n v. Liu, 95 5 Appellants cite Big Apple Food Vendors Ass’n v. Street Vendor Review Panel, 90 N.Y.2d 402 (1997) to argue that Respondents bear a heavy burden to challenge their rate-setting determinations. There, however, the petitioner did not even argue that the public body lacked reasonable support for its determination. See id. at 408 (“Significantly the petition itself does not even assert a claim that there was no evidence in the record to support the over-all adoption of the final rule by the Panel.”) 46 A.D.3d 596 (1st Dep’t 2012); Malverne Volunteer, 96 A.D.2d at 1063; Matter of GH Ville, 194 Misc. 2d at 507; Doerrbecker v. Saunders, 229 A.D.2d 490, 492 (2d Dep’t 1996); Dep’t of Envtl. Protection of City of N.Y. v. Dep’t of Envtl. Conservation of the State of N.Y., 120 A.D.2d 166, 171 (3d Dep’t 1986), lv denied 69 N.Y.2d 921 (1987); Stone v. Farr, 135 A.D.3d 775, 777 (2d Dep’t 2016). Accordingly, “[t]he courts have the power to review the [Board's] determinations and may overturn determinations if the action is arbitrary and capricious, i.e., lacks a rational basis.” Westmoreland Apt. v. City Water Bd., 294 A.D.2d 587, 588 (2d Dep’t 2002); e.g., Rochdale Vill., 18 A.D.3d at 664; 770 Owners, 20 A.D.3d at 573; Pistilli Assoc. III, 46 A.D.3d at 906. Here, the lower courts correctly applied the applicable legal standard to the facts and evidence proffered by Respondents to conclude that Appellants acted without a rational basis by adopting the Resolution approving the Rate Increase and Credits. The lower courts scrutinized the rationale for designating all Class 1 Owners “as qualified for or deserving of a credit, but not other classes of property owners” and determined—based on unrebutted facts and evidence proffered by Respondents in the record—that Appellants’ justifications lack a rational basis and reasonable support. R.878-79. The lower courts also rejected the Board’s attempt to separately and independently justify the Rate Increase. The Board’s own meeting minutes and FY2017 Rate Proposal demonstrated that a Rate Increase was 47 not justified independent of the Credits. Every rationale advanced by Appellants has been rejected because it lacks reasonable support and a rational basis. A. The Board Did Not Previously Rely Upon Similar Classification Systems To Support Other Programs Appellants argue that the Board previously relied upon “similar classifications to offer differential water rates.” App.Br. 1. But, the Credits uniquely relied only on property tax classifications to administer financial benefits. Water is charged based on usage and all accounts pay the same metered rate based on consumption with the exception of differential rates and credits offered by water-related programs. Unlike the Mayor’s Credits, the Board’s programs do not administer financial benefits based upon property tax classification. These programs are directed to eligible participants within or among tax classes to promote purposes consistent with the Board’s mission: − HWAP provides credits to low income, senior citizen and disabled account holders that demonstrate an economic need for such credits, and thus assists vulnerable customers maintain water service. − The freeze of the minimum charge applies only to accounts with minimal water use and thus promotes water conservation. − From 1992 - 1997, eligibility for the former Frontage Transition Program was initially based on the age of the residence and diameter of its service line. From 1997 - 2012 eligibility applied to customers that own buildings with six or more dwelling units excluding new construction. It was designed to permit those customers that are less able to control water use more time to review their metered water usage, repair leaky 48 plumbing, educate tenants about water conservation, and install low-flow fixtures before metered billing began. − MCP is available to only those account holders that own four or more dwelling units and invest in low consumption plumbing, hardware and fixtures and cooperate with the DEP in conservation efforts. It promotes water conservation, which benefits the System in form of reduced demand. − The lead and copper monitoring program promotes a cleaner water System and compliance with federal regulations. − The credit for properties enrolled in monthly eBilling facilitates System efficiency. B. There Is No Factual Basis To Conclude That Class 1 Owners Have Been More Financially Burdened By Paying Water Bills Than Other Customers Appellants argue that the Credits are rational because Class 1 Owners were exempt from previously relief programs. App.Br. 29 (“Choosing to give a credit to a class of users that … had been exempt from previous relief programs is rational….”); id. at 34 (“previous programs afforded relief to non-class one property owners, making targeted relief to class one owners especially appropriate ….”). But, that is not true. Indeed, certain programs primarily benefit eligible Class 1 Owners: − Class 1 Owners with minimal water consumption may qualify for the rate freeze (FY2014 rates). It is less likely that larger buildings (class 2 properties) can meet the minimal consumption threshold. − Class 1 Owners that meet economic eligibility criteria may enroll in HWAP. Almost all Class 2 Owners do not qualify for HWAP (which is 49 directed to only qualified one- to four-family homeowners), and their tenants or unit owners cannot enroll because they are not individual account holders. − Class 1 Owners—like other customers—may receive credits for enrolling in the lead and copper monitoring program and the monthly eBilling program. − Class 1 Owners—like other owners of residential premises—may also receive a cap on their metered charges for installing low-consumption toilets and passing a leak and waste inspection. While Appellants argue that the former Transition Program and MCP provided extended rate relief to Class 2 Owners, Appellants ignore that these programs did not direct financial benefits to the entire tax class. For example, even assuming the Transition Program’s primary purpose of promoting water conservation efforts during a transition period arguably faded over its duration (which is not “conclusively established” by Appellants’ extrinsic materials), the Transition Program was still rationally directed to target densely populated buildings housing lower-income tenants. The flat rate was more expensive than the metered rate for less densely populated buildings and cooperatives housing higher-income residents. For these reasons the Board declined to adopt recommendations to terminate the Transition Program before FY2012. App.Comp. Exh. 5 at 10. And, only approximately 10% of those accounts identified as class 2 properties participate in the successor program, MCP—whether because the flat 50 rate afforded by MCP would not result in savings based on the metered rate or the costs of participation in MCP outweigh the benefit of the flat rate. See p.21, supra. MCP was also designed to be “revenue neutral relative to the water system as a whole and to other customer classes.” R.855. The flat rates available under MCP (and the Transition Program) were also subject to the same percentage rate increases as the metered rate. R.129. Finally, if programs like MCP or the Transition Program served rational objectives consistent with the Board’s mission, reason dictates that their eligibility criteria were rationally based. But, the rationality of distinct programs is not the subject of this proceeding. At bar, the rationale for designating Class 1 Owners as qualified for or deserving of the Credit, but not other classes of property owners, is lacking. C. Class 1 Owners Are Not More Financially Needy And Deserving Of Credits Than Other Ratepayers Appellants argue many of the intended recipients of the Credits were seniors and low-income homeowners. App.Br. 31. However, the data cited by the City does not support this conclusion. See p.27-28, supra. There is no factual basis to support Appellants claim that Class 1 Owners are needier than other ratepayers because the Credits are not tied in any way to financial need. Classification of property for tax purposes bears little relation to the stated objective. 51 Appellants also argue that Class 2 Owners are less likely to pass on savings from the Credits to renters and unit owners. App.Br. 30. Lawitts did not advance this “justification,” and there exists no support in the record for Appellants’ speculation that building owners or managers would charge renters or unit owners more money for water than was actually billed. Appellants also ignore that the Rate Schedule would require the majority of residential households (who pay for water through maintenance and utility charges) to pay increased water rates required solely to fund the Credits directed to the minority of residential households—regardless of income, economic need, or property value. Finally, Appellants relegate a footnote to argue that the City Administrative Code “Sidewalk Law” supports the issuance of the Credits. App.Br. 30 fn.19. 6 The Sidewalk Law, however, is easily distinguished. Unlike the Credits, the Sidewalk Law does not shift the cost of an exempted 6 Under the previous statutory scheme, property owners had a duty to maintain sidewalks adjoining their properties. Failure to comply with these directives resulted in fines or an obligation to reimburse the City for expenses incurred to perform necessary work, but generally not tort liability for injuries to pedestrians caused by defective conditions. In 2003, the City Council adopted Section 7-210 in an effort to transfer tort liability from the City to the adjoining property owner as a cost-saving measure. Section 7-210, however, excepted from liability one-, two- or three-family residential real property that is (i) owner occupied, and (ii) used exclusively for residential purposes. See Vucetovic v. Epsom Downs, 10 N.Y.3d 517, 519-21 (2008); N.Y.C. Admin. Code § 7-210. This exemption was “out of recognition of the fact that small property owners who reside at such property have limited resources and it would not be appropriate to expose such owners to exclusive liability with respect to sidewalk maintenance and repair.” App.Comp. Exh. 20 p.9. 52 homeowners’ tort liability onto other property owners. The City continued to bear responsibility for the exempted homeowners’ tort liability. See fn.8, supra. Relatedly, the exemption applies only if the homeowner procures personal injury and property damage liability insurance. NYC Administrative Code § 7-211 (“The city shall not be liable for any injury to property or personal injury, including death, as a result of the failure of an owner to comply with this section.”) The Sidewalk Law thus endeavored to ensure that homeowners exposed to tort liability for dangerous sidewalk conditions are insured. In addition, the policy underlying the exemption is designed to ensure that individual homeowners do not bear the potential for exclusive tort liability. The same policy does not apply equally to Class 2 Owners because individual residents and unit owners are not exposed to exclusive or personal liability, and the building owner is typically an insured, corporate entity. Finally, unlike the Credits, the homeowners’ exemption for tort liability does not apply in blanket fashion to all Class 1 Owners. See fn. 8, supra. D. Speculation That The City May “Reverse” The Rent Forbearance Without The Credits Is Unsubstantiated Although Lawitts never adopted this “justification,” Appellants argue that (i) the rent forbearance “could be reversed at some future point,” and (ii) approving the Credits may save future costs “if the present experiment with rent forgiveness is seen as a success by City officials.” App.Br. 38. 53 The case law makes plain, however, that proper determinations cannot be based on presumptions or fears that are unsubstantiated in the record. Here, the record demonstrates that the City’s rent forbearance was not conditioned on the Board’s approval of the Credits. Indeed, the City already announced the rental forbearance through FY2020 when it proposed the Credits for the Board’s independent judgment. See R.93-94; R.784; R.100. There is also no basis to speculate that the City would reverse the rent forbearance if the Credits were not approved—particularly since the City stated that the rent forbearance was intended to limit water bills to the cost of water and dedicate fees solely to the System (as opposed to Class 1 Owners) and indicated that savings would be passed to all accounts after FY2017. E. Administrative Expedience Is Not A Rational Justification For The Credits Appellants describe the Credits as a pragmatic measure to quickly distribute a modest pool of unexpected funds. See App.Br. 3, 27, 30-31, 41. Appellants’ argument makes little sense, which may explain why it was never adopted by Lawitts or presented to the Trial Court. The designation of Class 1 Owners as qualified for or deserving the Credits, but not other classes of property owners, must still have a rational basis. Here, it did not. 54 Further, the Board is required to revisit the soundness of its expense and rate projections annually. It thus must revisit its projections in FY2018—particularly since prior projections were prepared before the City announced the rent forbearance through FY2020. An efficient and rational course is to: − conclude that a 2.1% rate increase in FY2017 is no longer required to serve its stated purpose; − operate under a $46 million surplus in FY2017 without any Rate Increase (rather than increase rates and extinguish the projected surplus); and − meet in the next fiscal year with the Rate Consultant to set an appropriate base rate in line with projected revenue needs and adjust projections for future incremental rate increases, to the extent necessary, factoring in the rent forbearance through FY2020 and $46 million surplus in FY2017. Appellants erroneously suggest that Respondents insist that the Board is required to “set the lowest possible rate on a yearly basis.” App.Br. 40. Rather, Respondents contend that Appellants’ rate-setting determinations must have a rational basis and reasonable support. Appellants were not prohibited from reconsidering whether some other rate increase in FY2017 may support rational projects, programs or reserves that were not previously budgeted. Appellants were not locked into their FY2017 Rate Proposal. The Trial Court merely required that the FY2016 Rate Schedule remain in effect “until further action by” Appellants. R.7. 55 F. There Was No Rational Basis To Independently Justify The Rate Increase In FY2017 The record demonstrates that there was no rational basis to justify the Rate Increase in FY2017 independent of the Credits. The Rate Increase was required solely to fund the Credits: − DEP justified a 2.1% rate increase in FY2017 for the specific purpose of closing a projected $76 million “funding gap” between stated revenue needs in FY2017 and projected revenue in FY2017 without a rate increase. R.148; R.155 − When DEP budgeted for the revenue needs, it factored in the cost of debt service and anticipated rental obligations, among all other projected costs in FY2017, in its line items. R.147-48; R.321. − The elimination of the budgeted $122 million rental obligation turned the $76 million projected shortfall in FY2017 into a $46 million projected surplus in FY2017, and obviated the stated justification for the Rate Increase. R.87;R.155 − The Rate Increase was no longer required to meet any revenue needs in FY2017 but for the Credits. Appellants highlight that the 2017 Rate Proposal was developed before the City announced its total rent forbearance. App.Br. 39. But, this fact supports Respondents’ position (not Appellants): − The FY2017 Rate Proposal did not include any Credits. − The City announced the rent forbearance and proposed the Credits after the FY2017 Rate Proposal was published. − The $183 credit was the largest whole dollar amount that could be given to all Class 1 Owners without exceeding the $122 million budgeted, waived rents in FY2017. 56 − By replacing the excused $122 million rental obligation with the same approximate cost to fund the Credits ($121,585,566), the Board recreated the $76 million funding gap requiring the Rate Increase. − Appellants would utilize the $76 million derived from the Rate Increase and draw down the $46 million projected surplus (created by the FY2017 rent forbearance) to offset the cost of the Credits and balance their books. Appellants argue that the FY2017 Rate Proposal was part of a broader five- year forecast of costs and projected rate increases. App.Br. 39. Appellants ignore, however, that: − The Rate Proposal clearly states that the purpose of the Rate Increase was to fill a projected $76 million funding gap in FY2017 only. R.148; R.155. − Regardless, a five year forecast of projected expenses and rates prepared before the City announced the rent forbearance through FY2020 lacks validity. − Appellants were not locked into their projections because the Board is contractually required to “review the adequacy of fees, rates and charges at least annually” (R.289 at § 6.1(c)), including by considering an annual report of a Rate Consultant (R.290 at § 6.2(b)). Appellants continue to parrot—but avoid supplying any mathematical basis for—Lawitts’ testimony that a 1.9% Rate Increase was still justified in FY2017. App.Br. 40. There is no reasonable support in this record for a smaller rate increase in FY2017. See p.31-32. Regardless, this argument is a red herring. Appellants were always authorized to propose a new Rate Schedule if they contemplated other revenue needs that were not previously budgeted supporting a smaller rate increase 57 in FY2017, which would not have been the subject of this proceeding. See R.7. But, Appellants elected to apply FY2016 in FY2017. Appellants argue that the Board prefers incremental rate increases to ensure that future rates do not spike drastically. App.Br. 39. But, there is no factual basis to conclude that future rates will spike, gyrate or hamper Appellants’ ability to collect adequate revenues: − In FY2017, this proceeding restored a $46 million projected surplus which would have been extinguished by the Rate Schedule. − The Board was empowered to set a new base rate level in FY2018 in line with projected revenue needs and adjust projections for future incremental rate increases factoring in the rent forbearance through FY2020 and the $46 million that Respondents saved the System in FY2017. − Tellingly, Appellants elected to apply FY2016 rates in FY2018 because DEP reported that the System is in strong financial condition due to, inter alia, the rent forbearance. − Appellants cannot now legitimately argue that a Rate Increase was necessary in FY2017 to support incremental rate increases when Respondents elected not to increase rates in FY2018. In sum, there was no rational basis for a Rate Increase in FY2017 independent of the Credits. 58 POINT III THE BOARD ACTED IN EXCESSS OF ITS AUTHORITY BY EXCISING AN IMPERMISBLE TAX “A public benefit corporation is authorized to act in accordance with the powers enumerated in and necessarily implicated by its enabling statutes.” Mason v. Clifton Park Water Authority, 302 A.D.2d 818, 819 (3d Dep’t 2003). A writ of prohibition under CPLR § 7803(2) is appropriate where such a body “threatens to act either without jurisdiction or in excess of its authorized powers.” Holtzman v. Goldman, 71 N.Y.2d 564, 569 (1988). The Board is authorized to impose “fees, rates, rents and other service charges” for the “use of, or services furnished by” the System—not taxes. NYPAL §1045-g(4). Service charges reflect the cost of special services upon those that derive a benefit from them; taxes are imposed for the purpose of defraying the costs of government services generally without the necessity to relate them to specific benefits received. See Matter of Phillips v. Town of Clifton Park Water Auth., 286 A.D.2d 834 (3d Dep’t 2001), lv denied 97 N.Y.2d 613 (2002); Jewish Reconstructionist Synagogue v Incorporated Vil. of Roslyn Harbor, 40 N.Y.2d 158, 162 (1976); Albany Area Builders Ass’n v. Town of Guilderland, 141 A.D.2d 293, 298 (3d Dep’t 1988), aff’d 74 N.Y.2d 372 (1989). Service charges have been invalidated as thinly veiled taxes where (i) they 59 are imposed to offset the costs of other government functions, or (ii) lack a rational relationship to the cost or value of the service furnished to the particular customer class, and thereby impose burdens on some for benefits received by other or all customers. See Matter of Phillips, 286 A.D.2d at 834-37 (town’s assessment of source and storage fees on two new buildings was a “prohibited tax” where it “actually fund[ed] improvements to the water system which benefit everyone” and thus imposed the burden of capital improvements that benefitted all users upon a discrete group of residents); Albany Area Builders Ass’n, 141 A.D.2d 293, 298 (3d Dep’t 1988) (“To the extent that the transportation impact fee imposes the expense of highway improvements upon a small group of home buyers even though the benefit of such improvements is enjoyed by the public generally, this fee indeed resembles a tax.”); Coconato v Town of Esopus, 152 A.D.2d 39, 43 (2d Dep’t 1989), lv denied 76 N.Y.2d 701 (1990) (uniform hook-up fee assessed by a water district on all new dwellings constituted a prohibited tax where it was imposed without regard to whether plaintiffs will be primarily and proportionately benefitted by any such expansion); New York Tel. Co. v. City of Amsterdam, 200 A.D.2d 315, 318 (3d Dep’t 1994). While Appellants recite the vanilla proposition that charges may vary among classes of ratepayers, that right is deemed included even if enabling legislation is general and does not specifically authorize a variance. See Town Bd. of Town of 60 Poughkeepsie, 22 A.D.2d at 273 (explaining that rates “may vary according to differences in cost of delivery. Such variance in rates is permissible even if enabling legislation is general and does not specifically authorize a variance; the right is deemed included.”); Jewish Reconstructionist Synagogue, 40 N.Y.2d at 164 (“Where classifications are rational, fees for each class may be based on its average”). Appellants also highlight that their rate setting determinations do not require mathematical precision. They do, however, require a rational underpinning. For example, in Watergate II Apts. v. Buffalo Sewer Auth., 46 N.Y.2d 52, 59 (1978) this Court acknowledged: “Exact congruence between the cost of the services provided and the rates charged to particular customers is not required. Where only an approximation of cost or value is possible, discrepancies may have to be endured in the name of administrative flexibility so long as there exists some rational underpinning for the charges levied.” (Emphasis added). There, the court held that the Buffalo Sewer Authority (“BSA”) did not exceed its statutory powers by considering the assessed property values of real property (i.e., an ad valorem component) as part of its calculation of sewer rents because the practice retained a rational relationship between the sewer charge and the BSA’s cost of furnishing sewer services. In particular, more valuable business districts or residential properties require a disproportionate outlay for sewer 61 construction and maintenance due to the density of construction and increased need for sanitation. Id. at 60-61. Appellants also cite Elmwood-Utica Houses v. Buffalo Sewer Authority, 65 N.Y.2d 489 (1985) and Carey Transp. v. Triborough Bridge and Tunnel Auth., 38 N.Y.2d 545 (1976), to convince this Court that their rate fixing determinations are effectively immune from judicial scrutiny. These cases are distinguishable. In Elmwood, this Court addressed whether the BSA’s practice of excluding certain real estate tax-exempt properties from the same ad valorem component of the sewer charge rendered the charge a prohibited tax. Id. at 493. The Court held that the BSA’s practice had a rational basis because governmental, charitable and religious institutions do not obtain the same value, in terms of overall market appreciation from the entirety of the sewer system, as commercial and residential property owners, and are less able to pay for the sewer system. Id. at 497-98. The practice was thus deemed consistent with the BSA’s enabling statute which permitted the BSA to charge rents as “may be determined by the [it] on any other equitable basis.” Id. at 493-94 & fn.2.7 In Carey, 38 N.Y.2d at 552-54, this Court held that the Triborough Bridge and Tunnel Authority (“TBTA”) was authorized to charge higher bridge tolls for 7 Also, the Legislature expressly amended the BSA’s enabling statute to provide “explicit authorization” for the subject exemption. Id. at 497. 62 “special” than “general” purpose franchised buses based upon the purpose of most of their passengers. Notably, the TBTA’s enabling statute is distinguishable from the Board’s. TBTA is authorized to act “akin to an entrepreneur” and thus, even “less limited” than a “tax collector” if “that were conceivably possible.” Carey, 38 N.Y.2d at 552-53. Indeed, the TBTA is (i) empowered to raise tolls without obligation to provide notice of proposed toll increases or hold public hearings, (ii) not required to operate on a self-sustaining basis, and (iii) permitted to generate funds to subsidize mass transit by other governmental agencies like the MTA or NYCTA. See Matter of New York Pub. Interest Research Group v. Metropolitan Transp. Auth., 309 A.D.2d 127, 134 & 139 (1st Dep’t 2003); Carey, 38 N.Y.2d at 552. Nonetheless, the Carey Court still identified a rational basis to differentiate toll charges as part of its efforts to encourage mass transportation, reasoning that special purpose buses “are distinguishable as the luxury subgroup of public franchised buses,” and utilized “most often without periodicity and at separate irregular time intervals.” Carey, 38 N.Y.2d at 553-54. In the case at bar, the Board may be permitted to differentiate between customer classes based upon approximations of value afforded by the System or other equitable considerations consistent with the Board’s mission. But, there was no rational basis to conclude that Class 1 Owners have received less value from the System, or are more needy or deserving of Credits. And, because the record makes plain that the Rate Increase was required solely to fund Credits, the Board acted in excess of its authority to impose service charges by exacting a thinly veiled tax, which burdened ratepayers solely to administer benefits to Class 1 Owners unsupported by any rational objective consistent with the Board’s mission. CONCLUSION For all of the foregoing reasons, Respondents respectfully request that this Court answer the certified question of law in the affirmative. New York, New York October 5, 2017 Dated: HERRICK, FEINSTEIN LLP BY Mij ielBi Med D.(Newman 2 Park Avenue' ' New York, New York 10016 Tel: (212)592-1475 Attorneys for Respondents 63 NEW YORK STATE COURT OF APPEALS CERTIFICATE OF COMPLIANCE I hereby certify pursuant to 22 NYCRR PART 500. l(j) that the foregoing brief was prepared on a computer using Microsoft Word 2010. Type. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: 14 Line spacing: Double Word Count. The total number of words in this brief, inclusive of point headings and footnotes and exclusive of pages containing the table of contents, table of citations, proof of service, certificate of compliance, corporate disclosure statement, questions presented, statement of related cases, or any authorized addendum containing statutes, rules, regulations, etc., is 13,999 words. New York, New York October 5, 2017 Dated: HERRICK, FEINSTEIN LLP By: Npdhael Sfrengarten Jared D. Newman j 2 Park Avenueÿ"--New York, New York 10016 Tel: (212)592-1475 Attorneys for Respondents HF I I719904v.1