In the Matter of Prometheus Realty Corp., et al., Respondents,v.New York City Water Board, et al., Appellants.BriefN.Y.November 16, 2017 Reproduced on Recycled Paper APL-2017-00088 To be argued by: MELANIE T. WEST 15 minutes requested Court of Appeals State of New York In the Matter of the Application of PROMETHEUS REALTY CORP., PORTOFINO REALTY CORP., TUSCAN REALTY CORP., and THE RENT STABILIZATION ASSOCIATION OF N.Y.C., INC., Petitioners-Respondents, For a Judgment Pursuant to CPLR Article 78, against THE NEW YORK CITY WATER BOARD and THE NEW YORK CITY DEPARTMENT OF ENVIRONMENTAL PROTECTION, Respondents-Appellants. REPLY BRIEF RICHARD DEARING DEVIN SLACK MELANIE T. WEST of Counsel October 19, 2017 ZACHARY W. CARTER Corporation Counsel of the City of New York Attorney for Appellants 100 Church Street New York, New York 10007 Tel: 212-356-0842 or -0817 Fax: 212-356-2509 mwest@law.nyc.gov TABLE OF CONTENTS Page i TABLE OF AUTHORITIES ........................................................ ii PRELIMINARY STATEMENT ................................................... 1 ARGUMENT ............................................................................... 3 POINT I ....................................................................................... 3 PETITIONERS HAVE FAILED TO MEET THE HEAVY BURDEN OF ESTABLISHING THAT THE CREDIT WAS IRRATIONAL ............................................ 3 A. Even if the rate increase “paid for” the credit, that would not render either irrational. .............................. 3 B. Petitioners fail to grapple with the history of rate variances and the sustained rate relief offered to non-class one property owners. .................................... 7 C. Petitioners’ half-hearted attempt to revive their failed argument that the credit is an “impermissible tax” is unavailing. ....................................................... 13 POINT II .................................................................................... 15 AS THE BOARD’S RESOLUTION HAS NOT BEEN SUPERSEDED, THIS APPEAL REMAINS LIVE .......... 15 CONCLUSION .......................................................................... 18 CERTIFICATE OF COMPLIANCE .......................................... 19 TABLE OF AUTHORITIES Page(s) ii Cases Carey Transp. v. Triborough Bridge & Tunnel Auth., 38 N.Y.2d 545 (1976) ................................................................... 4 Elmwood-Utica Houses v. Buffalo Sewer Authority, 65 N.Y.2d 489 (1985) ................................................................... 4 Saratoga County Chamber of Commerce v. Pataki, 100 N.Y.2d 801 (2003) ............................................................... 17 Watergate II Apartments v. Buffalo Sewer Authority, 46 N.Y.2d 52 (1978) ............................................................. 14, 15 Statutes Pub. Auth. Law § 1045-j(1) ............................................................ 16 Pub. Auth. Law § 1045-j(3) .............................................................. 4 Pub. Auth. Law § 2801 ................................................................... 16 Other Authorities 2013 Water Rate Proposal ............................................................. 10 2012 New York City Annual Property Tax Report........................ 10 New York City Water Finance Authority Bond Official Statements ................................................................................. 10 2011 Water Board Public Notice ...................................................... 9 PRELIMINARY STATEMENT In their brief to this Court, respondents say nothing to call into doubt this basic truth: the Water Board’s one-time $183 credit was a pragmatic and expedient way to distribute an unexpected pool of funds, offering immediate financial relief to its recipients while having little effect on non-recipients. Petitioners’ attack glosses over the critical fact that the credit was meant to help people, not businesses, and the non-recipients are, petitioners concede, largely commercial entities, not ordinary households that would benefit the most from a small one-time credit. Petitioners insist that a more rational response to the City’s unanticipated rent forgiveness would have been a uniform rate freeze. But the question before this Court is not whether any other rational avenues were open to the Board. It is whether the Board’s decision to distribute these funds to a class of property owners long excluded from other extended rate relief programs was so fundamentally arbitrary as to compel its invalidation. Appellants have shown that it was not. Class one homeowners are small property owners—individuals and 2 families—while class two property owners are primarily commercial landlords like petitioners. And unlike most class two property owners, class one homeowners have not been offered a choice, for over two decades, between metered and flat-rate billing. Petitioners’ claim that the credit is fundamentally different from prior rate relief programs is contradicted by the history of those programs. The credit is indeed different in one key way: unlike prior rate relief programs, it is a one-time credit in a relatively small amount, with no long-term impact on other ratepayers. In short, it is the kind of common-sense “rough accommodation” that administrative agencies routinely make to practically and expediently serve their multiple goals. At bottom, petitioners’ attacks on the credit amount to an argument that a different solution was available. Even if true, that is not a valid reason to jettison the deference to which the Board’s rate-setting determination is entitled. 3 ARGUMENT POINT I PETITIONERS HAVE FAILED TO MEET THE HEAVY BURDEN OF ESTABLISHING THAT THE CREDIT WAS IRRATIONAL A. Even if the rate increase “paid for” the credit, that would not render either irrational. Our opening brief showed that petitioners’ claim—repeated throughout this proceeding—that the rate increase effectively paid for the credit is an oversimplification (App. Br. at 39-42). The Board did not adopt the overall rate increase in order to create the credit; it adopted the rate increase based on five-year projections, and before receiving the unexpected surplus that paid for the credit. Thus, the relevant question is whether it was irrational to proceed with the planned rate increase in light of the City’s forbearance. It was not irrational, because an incremental rate increase now helps to ensure that future rates do not spike—a particularly valid concern given the history of rate hikes (id.). But even setting aside these realities, an overall rate increase accompanied by a non-universal credit is not per se irrational, as petitioners seem to believe. In a self-sustaining 4 system, any rate variance can be framed as a decrease in some ratepayers’ charges at the expense of other ratepayers. That is a tautology, not a revelation. Here, even if the Board had instituted this (or any other) credit without any corresponding rate increase, petitioners could by the same logic argue that the Board should instead have reduced the overall rate, and that its failure to do so effectively meant that non-eligible ratepayers were paying for the credit. At its core, petitioners’ argument is simply that the Board should not be permitted to impose differential rates. But both the governing statute and this Court’s precedent say otherwise. The Public Authorities Law explicitly contemplates that charges may be determined based on classes of users. Pub. Auth. Law § 1045-j(3) (charges “established for any class of users of property served shall be extended to cover any additional premises thereafter served which are within the same class”). And in Elmwood-Utica Houses v. Buffalo Sewer Authority, 65 N.Y.2d 489, 495-96 (1985), the Court confirmed that a broad delegation of rate-setting authority carries the power to differentiate rates on reasonable grounds and does not require “mathematical nicety.” 5 See also Carey Transp. v. Triborough Bridge & Tunnel Auth., 38 N.Y.2d 545, 553 (1976). The through line in petitioners’ narrative is the myth of a mandated uniform rate: the notion that, in general, all users pay identical amounts for identical services, and that the credit represents a departure from this “default” rate-setting model. To the contrary, not only is the Board permitted to set differential rates, but, as we demonstrated in our opening brief (see App. Br. at 7-14) and as discussed further below, differential rates have been the norm since the Board’s inception. The more telling point, one that petitioners gloss over, is that petitioners challenge a modest one-time credit that will have a de minimis impact on non-recipients. While petitioners assert that the “majority of ratepayers” live in class two properties (Resp. Br. at 16), they acknowledge that “the majority of residential households” living in class two properties—what they call “ratepayers”—are not actual accountholders, but residents whose water usage costs are only absorbed in some general sense into rental payments or maintenance fees (id.). Class two property 6 owners, on the other hand, are “typically…insured, corporate entit[ies]” (id. at 16, 52). Petitioners cannot credibly dispute that such entities would be unlikely to pass along a one-time $183 credit to residents (Resp. Br. at 51),1 but in any case they cannot deny that even if passed on in part, the credit could have far less financial impact when divided between multiple households in a large building. To avoid the fact that the credit is rationally fashioned to deliver immediate financial relief and logically targeted to small property owners exempt from other rate relief, petitioners repeatedly assert that the rational course was to cancel the planned rate increase (Resp. Br. at 54-57). But they have never explained the basis of their apparent belief that the Board was compelled to use the forgone rental payments for a uniform rate reduction (or freeze), or that the decision to use the funds in any other manner was ipso facto irrational. Nor, in their overblown 1 The claim is especially dubious for petitioner RSA, which has consistently argued for rent increases for rent stabilized apartments in New York City, where the bulk of rental units are rent regulated, on the claim that renters living in such units are not paying enough. 7 rhetoric about the alleged unfairness of the rate increase—an increase, to be clear, that applied to all users—do petitioners ever really acknowledge how moderate that increase is: a 2.1% increase in water charges for a single year, and the lowest in more than 15 years. These details underscore the strict level of scrutiny petitioners are asking the Court to exercise to invalidate a credit because it, at most, results in a very slightly higher overall rate for class two property owners over a one-year period, while providing meaningful relief to class one property owners. Distilled to its essence, this lawsuit is nothing more than a challenge to a modest one-time credit that will have at most a negligible impact on non-recipients, who will continue to benefit from one of the lowest rate increases in recent history. No further analysis is required to reject petitioners’ objections. B. Petitioners fail to grapple with the history of rate variances and the sustained rate relief offered to non-class one property owners. For over two decades, a critical mission of the Water Board has been the conversion of all accounts to metered billing to encourage water conservation (see App. Br. at 8-9). But—in large 8 part because the Board has consistently offered relief to alleviate the anticipated impact of the billing switch on the owners of class two properties—this project is still underway. For twenty years, the Frontage Transition Program gave owners of properties with six or more units (with no other eligibility criteria required) a choice between metered and flat-rate billing (App. Br. at 9-11). While petitioners assert that the Frontage Transition Program was “rationally directed to target densely populated buildings housing lower-income tenants” (Resp. Br. at 49 (emphasis added)), the “fit” there was no more precise than in the case of the credit: the Board used six-plus unit buildings as a rough proxy for low- income and affordable housing, despite the fact that not all such buildings provide low-income or affordable housing.2 When the Frontage Transition Program was phased out and replaced by the Multi-Family Conservation Program, users were 2 Petitioners’ reliance on a New York Times article explaining that meter billing was “probably” the preferable option for “most” higher-income buildings (Resp. Br. at 23) ignores two critical points: first, that many higher- income class two property owners still likely benefited from flat-rate billing, and second—and more important—that all class two owners were given the choice to select the more cost-effective option for them. 9 given multiple grace periods to comply with the metering and high-efficiency fixture installation requirements, extending to the present (id. at 11-14). And petitioners’ insistence that eligibility for participation in these programs was tied to conservation measures ignores the reality that these programs have not, to date, required compliance with those measures—thus, effectively extending the option of participating to the majority of class two property owners, on the sole basis that they had six or more units in their buildings. Overall, petitioners attempt to minimize the scope of flat- rate billing carveouts for non-class one owners by emphasizing that only 26,000 accounts currently participate in the Multi- Family Conservation program (Resp. Br. at 19).3 This current-day 3 Petitioners’ claim that this represents approximately 10% of class two accounts is misleading: they compare the 26,000 participating accounts to the total number of class two parcels (Resp. Br. at 19). A parcel is a tax lot, not an account. Large buildings—like many class two properties—can cover multiple parcels; there are approximately 106,000 class two accounts in New York City. See Water Board 2011 Public Notice. In any case, a more relevant measure of class two participation is the number of residential units that are within the class two accounts billed at the Multi-Family Conservation Program rate. In 2012, when all units with frontage-based billing were phased into the program, nearly half of all class two residential units (cont’d on next page) 10 snapshot—well more than two decades after all class one accounts were placed on metered billing—ignores the bigger picture of the relief that has been made available for years to non-class one owners. For example, as of 1991, three years after the universal metering program was initiated, about 480,000 accounts were billed on a flat rate; as of 2000, the number was around 140,000 accounts; and by 2010, the number had been reduced to approximately 50,000 accounts.4 The Board’s success in gradually implementing the switch to metered billing does not negate its disproportionate impact on class one property owners over many years. Petitioners try to muddy things by discussing a variety of other programs available across classes, the relevance of which, if anything, is to underscore that Board has long adopted differential rates for classes of users. The only program that petitioners can point to that even arguably benefited primarily (900,000 out of 1,850,000) remained under flat rate billing. See 2013 Water Rate Proposal; 2012 Annual Property Tax Report. 4 See New York City Water Finance Authority Bond Official Statements Archive (by fiscal year), available at http://on.nyc.gov/2gQ3yEm 11 (but not exclusively) class one owners is a rate freeze based only on low water usage (Resp. Br. at 48). But the fact that class one homeowners are more likely to use less water—because they have smaller properties and fewer residents—and thus are more likely to qualify to pay less is not evidence of a benefit designed for class one owners specifically. The rate freeze program is available to all ratepayers with minimal water consumption (R. 96, 168, 216). The fact is that class one owners were always excluded from the longstanding programs allowing most class two owners to stay on frontage billing. Class one owners were given no choice but to switch over to metered billing. And while there was a reason for this—class one owners were less affected by the switch to metered billing because their water usage is typically lower—they were still subject to the higher metered billing rates in addition to the annual rate increases borne by all users. Plaintiffs never dispute the basic truth that this state of affairs—with the bulk of class two owners entitled to a benefit denied to class one—persisted for decades. Their claim that “all account holders paid the same metered rates with the exception of [these] programs” (Resp. Br. at 12 17, 47 (emphasis added)), is like saying all New Yorkers live upstate with the exception of those who live in New York City. Against this backdrop, when a relatively modest pool of funds was unexpectedly freed up by the City’s announcement of total rent forgiveness (partly in response to the recent history of very high water rate increases), the Board’s decision to offer immediate and meaningful financial relief to these small property owners was a practical, efficient solution to offer a small offset to their exclusion from other rate relief programs. And while petitioners harp on the absence of eligibility criteria other than property classification, the credit’s one-time nature and modest amount explain why it was fashioned this way: as Justice Kahn noted in her dissent, the “already established” property tax classification system provided an easy-to-use standard, preventing administrative costs and delays associated with developing and applying eligibility criteria from slowing matters down and whittling away the available funds (R. 904). Just as the Legislature did in creating the Sidewalk Law, the Board here used class one homeownership as a reasonable 13 proxy for identifying small property owners with limited resources (see App Br. at 30, n.19). Efficiency and practicality are not the afterthoughts that petitioners believe (see Resp. Br. at 53-54), but rather the essence of rational administrative action and good government. C. Petitioners’ half-hearted attempt to revive their failed argument that the credit is an “impermissible tax” is unavailing. Petitioners also argue, as they did unsuccessfully below, that the credit is a “thinly-veiled tax” (Resp. Br. at 58-59). But given that petitioners seem to concede that no problem is presented so long as there is a “rational underpinning” for differentiation (id. at 60), it is hard to see how this claim differs from their main one. In any case, as petitioners acknowledge, to prevail on such a claim, they must establish that charges are imposed to offset the cost of general government functions or are disproportionate to the services rendered (id.). They have not even attempted to do so. As to the first ground, the payments the Water Board collects from all ratepayers go to fund the operation of and capital construction on the water system. Payments made by water users 14 are quintessential fees or charges for services rendered that go to support the overall water system, not to the City’s general coffers. Here, indeed, the City’s forbearance of the rental payments has reduced water charges for all users, including petitioners. And second, petitioners have failed to establish that their water charges are disproportionate to services received under the rate schedule. It is true that, for one year, petitioners and other owners in the same property class will not benefit from a $183 bill credit that class one owners will receive. But simply pointing to a differentiation—explicitly allowed by the governing statute— cannot establish that petitioners are paying a tax, if they cannot demonstrate that they are paying an overall amount that is disproportionate to the services rendered to them. In Watergate II Apartments v. Buffalo Sewer Authority, 46 N.Y.2d 52, 60 (1978), the Court rejected a similar argument that a differential rate was ipso facto a tax. The Court concluded that in a scenario where ratepayers pay not just for use of the water and sewer system, but for the support of the system as well, there will 15 always be some lack of congruence between rate payers on a comparative basis. That does not convert the rate into a tax. Id. And this makes sense: in a system as vast as the City’s water system, satisfying every ratepayer that they pay a share that is the same as that borne by their neighbors (or other owners) is neither possible nor desirable. Petitioners’ argument here is nothing more than a slight variation on their overall misguided theme: that differential rates should not be permitted (unless petitioners are the beneficiaries), and that the Board should be compelled to adhere to a fictional “platonic ideal” rate that has never existed and never will. POINT II AS THE BOARD’S RESOLUTION HAS NOT BEEN SUPERSEDED, THIS APPEAL REMAINS LIVE Petitioners revive their contention that this appeal is moot because the resolution it concerns was adopted “for the fiscal year commencing July 1, 2016,” which has now passed (Resp. Br. at 36). Petitioners can point to nothing beyond that quoted language—which merely indicates the timeframe in which the 16 Board intended to adopt the credit before its plans were derailed by this lawsuit—to support their mootness argument. Nothing in the Public Authorities Law or elsewhere mandates the Board to revise rates or adopt a new rate schedule at the close of each fiscal year, or on any fixed schedule.5 See Pub. Auth. Law § 1045-j(1) (providing that the Board has authority to fix and revise rates “from time to time”) (emphasis added). Accordingly, neither the new rate schedule as a whole, nor the rate increase or the credit—the components of the resolution at issue in this case—automatically expired at the close of the fiscal year. Nor has the Board acted to supersede them since. In granting the Article 78 petition, the trial court ordered that the Board was “enjoined from enforcing or implementing the Rate Increase or Bill Credit provided for in the Resolution and/or Rate Schedule” (R. 27). Thus, by operation of law, the new rate 5 The rate schedule, which sets water and sewer rates for New Yorkers, is distinct from the Water Board’s annual budget, covering debt service, operating and maintenance costs of the System and administrative costs. The Board is required to adopt a budget annually; that new budget may, but will not necessarily, alter the extant rate schedule. See Pub. Auth. Law § 2801; Financing Agreement (R. 760-61). 17 schedule would become operative and poised to be placed into effect if the injunction were lifted by this Court, unless the Board acted to supersede the rate schedule. And accordingly, the claims at issue remain the subject of a live controversy as to whether the injunction should be lifted, so that the enjoined resolution of the Board may take effect, as it should have long ago. See Saratoga County Chamber of Commerce v. Pataki, 100 N.Y.2d 801, 812 (2003) (“Where, as here, a judicial determination carries immediate, practical consequences for the parties, the controversy is not moot”). 18 CONCLUSION This Court should reverse the Appellate Division’s order, insofar as it found the rate increase and one-time credit arbitrary and capricious. Dated: New York, NY October 19, 2017 RICHARD DEARING DEVIN SLACK MELANIE T. WEST of Counsel Respectfully submitted, ZACHARY W. CARTER Corporation Counsel of the City of New York Attorney for Appellants By: __________________________ MELANIE T. WEST Assistant Corporation Counsel 100 Church Street New York, NY 10007 212-356-0842 mwest@law.nyc.gov 19 CERTIFICATE OF COMPLIANCE I hereby certify that this brief was prepared using Microsoft Word 2010, and according to that software, it contains 3,627 words, including the table of contents, the table of cases and authorities, this certificate, and the cover. ____________________________________ MELANIE T. WEST