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In re Prometheus Realty Corp.

New York Court of Appeals

December 19, 2017

In the Matter of Prometheus Realty Corp., et al., Respondents,
New York City Water Board, et al., Appellants.

          Melanie T. West, for appellants.

          Michael Berengarten, for respondents.

          Natural Resources Defense Council et al., amici curiae.


          FAHEY, J.

         The New York City Water Board collects revenues to keep the City's water and sewer systems financially self-sustaining. Since the early 1990s, to serve the goal of water conservation, the Water Board has been ushering in a transition from flat-rate fees based on property frontage to a metered rate proportional to actual water usage. To provide relief from increased charges to the owners of larger residential buildings, the Board soon introduced a temporary Frontage Transition Program, whereby owners of buildings containing six or more units were permitted to continue frontage-based billing. In addition, some owners of buildings containing four or more units have benefitted from a Multi-Family Conservation Program, which set a fixed annual rate in return for owner investment in low-consumption plumbing fixtures and the like. Owners of smaller residential buildings than these did not enjoy similar benefits related to the transition to metered billing.

         The Water Board leases the infrastructure of the water supply and wastewater systems from the City, pursuant to an agreement providing that rental payments are required "only to the extent requested by the city in each Fiscal Year." Historically, the rent was tied to what the City owed on its water- and sewer-related general obligation bonds, but in 2003 the metric whereby the rent was calculated was changed pursuant to the lease, and in time the rent began to exceed the City's debts on these general obligation bonds. The increased payments to the City coincided with a period of regular annual increases in water rates, including double-digit increases from 2007 to 2011. The City and the Board received complaints from ratepayers that the City was enjoying a windfall.

         In early April 2016, the Water Board and the New York City Department of Environmental Protection (DEP), which acts as administrator and billing agent for the Board, published a rate proposal notice for Fiscal Year 2017, with a rate increase of 2.1%, to fund a $76 million gap between projected needs and revenues. The Water Board and DEP also proposed the extension of a Home Water Assistance Program for low-income, senior, and disabled homeowners; the establishment of a new Multi-family Water Assistance Program for owners of affordable housing, providing a per-unit credit not to exceed $250; and a rate freeze for account-holders using less than 95 gallons of water per day.

         At a press conference on April 25, 2016, the Mayor of the City of New York announced that the City would forbear collecting rents from the Water Board through Fiscal Year 2020, resulting in a saving of $122 million in Fiscal Year 2017. At the same time, the Mayor proposed that the Board issue a one-time bill credit of $183 for the fiscal year to all account holders that owned properties identified by the City as belonging to Tax Class 1, a category to which almost 80% of the Water Board's account holders belong. The New York City Department of Finance defines a Tax Class 1 property as "[m]ost 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." The Mayor further proposed that in Fiscal Years 2018-2020 the savings from the rent forbearance would be passed on to all account holders.

         The Water Board accepted the Mayor's proposal and issued a revised notice for Fiscal Year 2017. On May 20, 2016, following public hearings, the Board adopted a resolution approving both the 2.1% rate increase and the bill credit, as well as the assistance programs and low-consumption rate freeze. The Board published a rate schedule effective July 1, 2016.

         Petitioners - various landlords not eligible for the bill credit and a landlords' not-for-profit association - commenced this CPLR article 78 proceeding against the Water Board and DEP, challenging the resolution and rate schedule. They assert that the Water Board's determinations were irrational, arbitrary and capricious, and exceeded the Board's authority.

         In reply, respondents submitted an affidavit of Steven W. Lawitts, Acting Commissioner of DEP and Acting Executive Director of the Water Board, explaining the rationale for the bill credit and simultaneous rate increase. The $183 credit "was directed to class 1 properties in a manner similar to already established programs for multi-unit apartments, seniors, and low-income households." Lawitts added that elimination of the one-time credit would not obviate the need for a significant rate increase, because the Board, by long-standing practice, sets water rates to maintain rate stability over at least a five-year forecast, as is standard in the public water supply industry. He stated that even if the bill credit were eliminated and the rental forbearance dedicated to across-the-board rate mitigation, there would only be "a relatively small reduction" in the rate increase, from 2.1% to 1.9% in Fiscal Year 2017. Petitioners did not offer expert proof challenging the affidavit.

         Supreme Court granted the petition on the basis that increasing the rates while simultaneously giving a bill credit "amounts to an impermissible tax" (54 Misc.3d 745, 751 [Sup Ct, NY County 2016]). The court held that the resolution and rate schedule were "ultra vires and exceeded the Water Board's statutory authority" (id. at 762, citing CPLR 7803 [2]) and "unreasonable, arbitrary, capricious and an abuse of discretion" (id., citing CPLR 7803 [3]); vacated the resolution and rate schedule; enjoined respondents from implementing the rate increase or bill credit; and ordered that the Fiscal Year 2016 water and wastewater rate schedule remain in effect until further action by respondents.

         The Appellate Division, with one Justice dissenting, affirmed Supreme Court's judgment (147 A.D.3d 519');">147 A.D.3d 519 [1st Dept 2017]). The court rejected the claim that the Water Board's action was ultra vires, but upheld the lower court on the ground that there was no rational basis for adopting the one-time credit at the same time as a water rate increase (see id. at 521-22). The Appellate Division reasoned that Tax Class 1 owners were not "more needy than other ratepayers, " and that the one-time 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" (id. at 523). The Appellate Division further stated that the credit lacked a rational basis because it could not be reconciled with the projected budget shortfall for the year in which the credit was given (see id.).

         The dissent focused on the standard of review, noting petitioners' "heavy burden of making a prima facie showing that the Water Board's determination was purely arbitrary and without any reason, however insufficient, or support in the record" (id. at 532 [Kahn, J., dissenting]). The dissenting Justice would have held that "the Water Board's approval of the credit furthers the economic and public policy goal of providing financial relief to the low and middle-income homeowners comprising many, if not most, of the class 1 property owners, " by "reduc[ing] the disproportionate share of the burden of payment of water bills that has been placed on class 1 property owners in recent years, largely due to recent Water Board programs... that provide credits only to ratepayers other than class 1 property owners" (id. at 532-534).

         The Appellate Division granted respondents leave to appeal, certifying the question whether its order was properly made. Following a mootness inquiry, we retained ...

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