Audit Report on The Department of Environmental Protection’s Administration of The Exemption From Water and Sewer Charges Granted To Property Owners

Executive Summary

The New York City Department of Environmental Protection (DEP) delivers 1 billion gallons of drinking water on average each day to New York City’s (the City’s) 8.3 million residents, 200,000 businesses, and thousands of schools and other institutions. DEP also maintains the City’s water supply system, which includes 19 reservoirs and 3 controlled lakes situated north and west of the City and protects the City’s environment by treating an average of 1.3 billion gallons of wastewater per day at 14 water pollution control plants.

In connection with these vital services, DEP is responsible for monitoring and controlling customers’ connections to the City’s water and sewer systems, reading water meters, and charging and collecting water and sewer fees from property owners in the City and the surrounding communities that DEP serves. Pursuant to New York City Water Board regulations, DEP can back-bill accounts for up to four years but is prohibited from billing for a previously unbilled service period or upwardly adjusting a previously billed charge more than four years after the service covered by the charge was provided.

As mandated by the New York City Charter, DEP determines the water and sewer charges for properties using those municipal systems. According to DEP, New York State (State) Law establishes exemptions from water charges for 17 types of organizations, and where they qualify, they receive exemptions from DEP for water and sewer charges.^[1] DEP grants the exemptions from such charges under the conditions defined in the State law and the New York City Administrative Code.

DEP’s Bureau of Customer Services manages 835,000 water and sewer customer accounts, which included 4,557 accounts where exemptions were granted to property owners as of December 3, 2018.

We conducted this audit to determine whether DEP is properly administering the exemption from water and sewer charges granted to property owners and requiring property owners to recertify for the exemptions.

Audit Findings and Conclusion

For the period of July 1, 2017 through January 21, 2021, DEP generally granted eligible organizations in New York City water and sewer exemptions in accordance with its policies and procedures and with the New York City Water Board Water and Wastewater Rate Schedule. However, we identified 265 accounts that appeared to be ineligible to receive the water and sewer exemptions that DEP had granted to them because they were missing proof of tax-exempt status, had a change of ownership, did not qualify under any of the 17 types of exemptions established by the previously cited State law, or did not meet the requirements established in DEP’s Application for Exemption from Water and Sewer Charges.

After we informed DEP of our preliminary findings, the agency reviewed the 265 accounts and determined that it would revoke each of their exempt statuses. Of those accounts whose exemptions DEP revoked:

• 107 were back-billed by DEP for $1,253,618;
• 69 were not back-billed because DEP determined that the accounts were either inactive or the locations were already being charged for their water and sewer usage through different accounts; and
• 89 were not back-billed by DEP at its discretion because it determined that the accounts had been and were still being used for exempt purposes. However, DEP revoked the exemptions because the accounts were missing some of the documentation necessary to establish their eligibility. Accordingly, since the accounts were missing eligibility documentation, DEP could have back-billed them for up to four prior years’ of improperly granted exemptions and potentially recovered as much as $1,047,969 in revenue.

The audit also found that DEP had not previously conducted a timely review of 124 of the 265 accounts whose exemptions DEP revoked as a result of our audit. Consequently, DEP lost the opportunity to collect additional revenue of as much as $2,369,488 because the charges would have applied to water and sewer usage that predated DEP’s four-year limit on back-billing.

Audit Recommendations

Based on the audit findings, we make the following nine recommendations.

DEP should:

• Continue to track outstanding charges for water and sewer usage.

• Ensure that it collects the remaining $510,227 that it back-billed to 107 customers as a result of this audit.

• Ensure, before granting an exemption, that the applying organization submits the required documentation in accordance with DEP’s Application for Exemption from Water and Sewer Charges.

• Ensure that it grants exemptions only to organizations that meet all the requirements in accordance with DEP’s Application for Exemption from Water and Sewer Charges.

• Establish, subject to Water Board approval, written policies and procedures that set forth the circumstances in which DEP should back-bill accounts whose exemptions have been revoked and clearly detail in the procedures how the pertinent information and resulting determination should be documented and recorded in its billing system.

• Review the 89 accounts whose exempt status was revoked and reconsider whether they should be back-billed for up to four years for a total of $1,047,969. In any case in which DEP chooses to forgo back-billing for all or any part of the full four-year period the rules allow, DEP should document the specific justification in BCIS. Further, DEP should document in the relevant BCIS customer account records its justification for back-billing any of the properties this audit identified for only two years and not four years.

• Review accounts in a timely manner to ensure the agency timely back-bills accounts that are ineligible for exemptions to prevent further revenue losses based on its four-year limit on back-billing.

• Consider using an automated system that would alert DEP that an account is due for the two-year recertification.

• Consider requiring the owners of the exempt properties to file for a recertification every two years.

Agency Response

In its response, DEP generally agreed with the audit findings and stated that it is “pleased with the positive results of your audit and will take care to ensure the continued progress with managing the exemption process and billing properties for water and sewer usage accurately.” DEP did not respond to the audit’s recommendations. However, after carefully reviewing DEP’s response, we determined that DEP appears to have agreed with three recommendations that it states are DEP’s current practice, did not fully address one recommendation and did not address the remaining five.

[1] DEP’s General Instructions and Information on Exemption from Water and Sewer Charges cites Chapter 696 of the Laws of 1887, as amended by Chapters 893 and 894 of the laws of 1980, also known as the “Silver Bill.” According to DEP the following types of organizations may qualify for an exemption from water and sewer charges under that State law: day care centers or nursery schools, dispensaries, emergency relief centers, free circulation libraries, free school societies, homes for the aged, hospitals, medical research centers, military veterans associations, non-public schools pre-k to grade 12, orphan asylums, places of public worship, public baths, shelters, social settlements, veteran firemen’s associations, and voluntary ambulance corps. DEP’s above-referenced publication further stated that the cited State law also places limits on the exemption if an organization’s water use exceeds certain levels or if the organization is eligible to receive reimbursement for water and sewer charges.