A battle over water rates has erupted in New York City as the New York State Environmental Facilities Corp. begins institutional pricing today on $481.5 million of bonds sold on behalf of the New York City Municipal Water Finance Authority.

The MWFA also plans to sell about $500 million of bonds on its own credit in the last week of the month.

The EFC's bonds are being sold in two series - Series 2008A at a par of $262.6 million on the corporation's senior resolution, and Series 2008B at a par of $218.9 million. Both series have maturities out to 2037.

Hawkins Delafield & Wood LLP is bond counsel on the EFC's sale and Public Financial Management Inc. is financial adviser. Defpa First Albany LLC is lead managing the sale and JPMorgan is co-senior manager.

The EFC sells bonds on behalf of the city water agency on two resolutions on its clean water-drinking water state revolving fund credit. The Series A bonds are being sold on the EFC's senior resolution and are triple-A rated by Moody's Investors Service, Standard & Poor's, and Fitch Ratings. The Series B bonds are being sold on the corporation's second resolution and is rated Aa1, AA, and AA-plus by Moody's, Standard & Poor's, and Fitch, respectively.

The rate fight is in some ways a repeat of a fight last year. The city water board, which sets water rate increases based on a covenanted formula, proposed a 14.5% increase in water rates for fiscal 2009, a hike steeper than an anticipated 11.5% rate increase and higher than last year's 11.5% increase. The higher increase was partly in response to lower than expected collections from liens on customer water bills.

A law passed by the City Council in December allowing lien sales on customers' water debt permitted certain penalties and interest charges to be waived and allowed delinquent rate payers to set up five-year payment plans which stretched out revenue the board had assumed would be available in the current year. Annual debt service at the water authority is also growing and is projected to rise from $1.1 billion in fiscal 2009 to $1.47 billion by fiscal 2011.

A point of contention has been an annual rental payment to lease the water system that the authority has made to the city since 1985, when the authority was created. A large portion of the rental payment goes to pay debt service on the city's outstanding general obligation bonds.

In fiscal 2009, $56 million of a $178.3 million rental payment will go toward city GO debt service and in fiscal 2010 that will rise to $77 million of a $202.8 million rental payment, according to the MWFA.

"I'd like to see the excess rental payments that go into the general fund go back to the water authority to subsidize the water rate to reduce the rate by probably about 5.5%," said City Council member David Weprin, chairman of the finance committee.

The city has leeway in how the rental payment is set, according to a recent MWFA official statement that states: "The board shall pay the city a rental payment for the system, but only to the extent requested by the city."

The annual payment is set to a maximum of either the greater of principal and interest payable that year on the city's GOs that were issued for water and sewer purposes or 15% of the authority's debt service on its own bonds, according to the OS.

But the rental payment serves multiple purposes.

"The city has requested these funds and the city budget relies on these funds," said office of management and budget spokesman Raymond Orlando.

MWFA executive director Patrick McCoy said the timing of the rental payment helps the authority maintain its debt service coverage.

"The rental payment is the last payment to be made in the fiscal year," McCoy said. "Until that payment is made it represents real coverage, helps the authority meet its strong coverage to the credit."

The water board will vote on May 16 to set the new water rates.


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