Sewer plan has usage-based fee, surcharge

Nassau County residents and businesses for the first time would pay for sewer service based in part on how much water they use, instead of solely on property values, under a plan by county officials.

Property owners also could be subject to a "surcharge" for unexpected capital expenditures if a $750 million proposal to privatize the county sewer system becomes reality.

Nassau is seeking a private investor to fund the privatization, in which an outside operator would run its three sewage treatment plants and 3,000 miles of sewers. County officials disclosed the proposed changes in the rate structure and capital responsibilities in a formal solicitation to investors and in interviews.

Deputy County Executive Rob Walker said the bulk of sewer bills still would be determined by the assessment, and that sewer bills wouldn't increase. He said the capital surcharge would be invoked only for repairs following extraordinary events such as natural disasters.

Plan to charge nonprofits

The county is adding a usage-based system as part of an effort to begin charging nonprofit users, including hospitals and universities, for use of the sewage treatment system. The county can neither tax nonprofits nor charge them differently than other customers. So officials want usage-based billing to apply to everyone who uses the treatment system.

But critics of the sewer system transfer say the measures will leave property owners vulnerable to increased fees.

"The more we learn about this deal, the more we learn how bad it is for Nassau consumers," said Sam Bernhardt, Long Island organizer for Food and Water Watch, a watchdog group opposed to sewer privatizations. "This is a deal to attract an investor and not to protect consumers."

Brian Nevin, spokesman for County Executive Edward Mangano, said outreach to investors is part of a fact-finding process.

"The terms . . . are not binding on the county," he said. "The final terms will incorporate comments from our residents and environmental advocates and will be reflected in a . . . [request for proposal] that will be available to the public."

For decades, Nassau has charged residents and businesses for sewage treatment based on assessed property value. The average homeowner pays about $225 on the property tax bill for sewage, county officials said.

Tax-exempt nonprofit entities do not pay sewage disposal fees, costing the county millions of dollars a year. In October 2010, the county legislature approved a 1-cent-per-gallon sewage tax on nonprofits. Hofstra University, Catholic Hospital Services of Long Island and other nonprofits won a temporary restraining order against the county. The case is now before a state appeals court.

County officials have said that, if successful in court, Nassau will charge nonprofits based on their water use. But administration officials say they cannot legally employ a two-tiered system -- one in which homeowners and businesses pay for sewage based on the value of their properties, and nonprofits pay based on usage.

Hybrid approach

Mangano wants to adopt a hybrid approach in which a portion of the sewage tax comes from assessments and the remainder from sewer usage, Walker said. "Residents would see no difference in their bills," he said.

But Legis. Dave Denenberg (D-Merrick), whose district includes the county's Cedar Creek sewage treatment plant, pointed to language in the pitch to investors that he says shows Nassau is planning to abandon the assessment-based system for one that relies solely on user fees. According to the document, Nassau is "considering moving from levying an ad valorem tax [assessment] on taxable properties. . . to imposing user charges on all such properties."

That move, Denenberg said, "will be an astronomical cost increase. They are taking a normal, tax deductible sewer tax and replacing it with an ever-increasing, non-deductible water rate for using the sewers."

Some business owners who will pay the hybrid sewage bill endorsed the change.

"This plan seeks to bring a strategy of rational usage fees to a system that has long defied logic," said Garden City real estate developer Michael Polimeni.

Harry Tyson, who once advised Suffolk County on the creation of the Southwest Sewer District, said the proposed Nassau system "could potentially work." But Tyson, president of Municipal Asset Providers, a New Jersey-based financial advisory firm, said the county likely will run into legal challenges from nonprofits that will argue the charges amount to a tax.

Attorneys for Hofstra and Catholic Hospital Services declined to comment.

Fee vs. tax

County Attorney John Ciampoli said sewer charges must be viewed as fees rather than taxes if they are to survive legal challenges. "The goal is to try and find a system that treats everyone equally," he said.

Suffolk charges its sewer district ratepayers based only on property values, officials said.

Mangano wants to privatize Nassau's vast sewer system, including its plants, sewers and 53 pumping stations. He has selected a private operator, New Jersey-based United Water, to manage the system.

The plan was dealt a setback in May when the Nassau Interim Finance Authority, a state monitoring board that controls the county's finances, rejected a contract to pay Morgan Stanley, the county's financial adviser on the deal, $5 million to manage the sewer transaction.

While NIFA officials continue to oppose the privatization, Nassau last month issued a Request for Information to determine if private sector investors are interested. Responses are due by July 11. The county plans to use the "bulk of the proceeds" from the privatization for debt retirement and reserves, according to a recent Fitch Ratings report.

County officials last week attempted to distance themselves from the solicitation, arguing it was written by Morgan Stanley. The document, however, bears the county's seal and Mangano's name appears on the front page. Morgan Stanley declined to comment.

In the section discussing emergency capital improvements, the request says, "unexpected, imperative capital expenditures" would be paid by the investor.

In return, the investor "would be contractually allowed to charge a surcharge to customers to allow for an adequate regulated return similar to other regulated utilities in the state of New York."

Walker said the reference is to "catastrophic" events such as hurricanes, not machinery or facility repairs.

Denenberg said the clause could be abused. "Taxpayers will pay a lot more than they did before," he said.

With Paul LaRocco

Sewer deal

Nassau County last week disclosed new details about its plan to privatize its sewer system in a Request for Information to private sector investors:

The county plans to move to a fee system based partially on water usage, rather than exclusively on tax assessments.

A private investor would be able to charge residents a surcharge for "unexpected" capital improvements.

The investor would sign a 50-year lease with the county and have exclusive rights to collect revenues from the system.

Sewage rates/taxes would be frozen through 2015 and then increase by the annual rate of inflation, which the proposal estimates to be 3 percent.

United Water, a New Jersey-based company that would operate the system, would earn a base fee of $60 million in the first year, 2013, with estimated increases of 3 percent a year thereafter. Company spokesman Rich Henning said the increases would cover escalating costs of labor and chemicals.

Source: Nassau County Request for Information to potential sewer financiers