New Stormwater Charges May Bust Some Companies’ Books

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BY TONY WEST/ (Second In A Series)/ When life isn’t fair to begin with, it can be hard to make it fairer without hurting some people.

Water is one of the basic costs of life – and business. Both the water we consume and the rainwater we divert need a complex infrastructure of mains, drains and sewers – 6,000 miles in Philadelphia. Modern engineers have found ways to separate sewage runoff from stormwater runoff. But Philadelphia’s water system was mostly built before the modern era. Its older neighborhoods have a unified system in which stormwater and sewage are channeled into the same lines.

This works well when the weather is fair. The runoff is chiefly sewage which is channeled into treatment plants. But these lines can’t handle heavy rains. In a rainstorm, a poisonous slurry of rain and waste flows into the rivers.

Maintaining the Philadelphia Water Dept.’s infrastructure is complicated. Paying for it, on the other hand, used to be simple. People bought water; their revenues went to maintain the system. Water meters were the only way to figure out who was a heavy user and should pay more.

But this wasn’t a fair way. Roughly one-third of the costs of PWD’s infrastructure – about $125 million annually – come from stormwater, not sewage. But these costs aren’t caused by people who buy lots of water; they are caused by people who own lots of impervious (paved or roofed) land. Rain that falls on impervious land drains into gutters instead of soaking into the soil. Many such landowners weren’t even water customers; they weren’t paying anything at all. But they still used storm drains.

Starting in 1996, PWD set out to make things fairer. After years of painstaking study, it launched a plan to bill owners of impervious real estate for their share of stormwater costs in 2010. These charges are being phased in over a four-year period. As of 2012, most property owners are being assessed for 50% of their actual stormwater costs. Next year that will go up to 75%; by 2014, it will reach 100%.

PWD insists this process is strictly revenue-neutral; no overall rate increases have been slipped into its stormwater charge. It doesn’t affecvt homeowners, who pay a simple flat fee. Still, it did create winners and losers. Highrises are seeing their charges go way down; while they use a lot of water, they have a small impervious footprint so they don’t put much pressure on storm drains.

Commercial land-owners with low, sprawling buildings like warehouses or with large paved lots, on the other hand, are watching their charges skyrocket. In fact, tens of thousands of them which don’t have water service are being charged for the first time. Out of 56,974 non-residential land parcels in the city, 23,442 are brand-new PWD stormwater customers – involuntary customers to boot.

Econsult Corp., a consulting firm with a long track record in Philadelphia real estate, prepared an “Economic Analysis of Stormwater Fee Changes on Philadelphia Businesses” for PWD in February 2012. The report takes a sober look at how the new stormwater charges will affect businesses. When the transition is complete, Econsult estimates non-commercial property-owners will pay $84 million for stormwater charges alone, up from $58 million under the old meter-based system.

The biggest hit is to commercial land value. “Property owners are ultimately responsible for paying the stormwater fee, as it is based on the characteristics of the land that they own,” the Econsult report states. “Consequently, an increase in stormwater fees will impact the market value of the parcels. Our analysis indicates that the market value of private, non-residential parcels will decrease by approximately $190 million, causing a decrease of property tax billings of approximately $3.9 million for these parcels.”

At the same time, the report notes, other land in the city should see a corresponding rise in value. It predicts, therefore, not worth and net revenues to the City will stay the same.

Econsult found a small number of property-owners – 535, about 1% – would face charge increases greater than 100% and more than $10,000 per year.

While impacted commercial property-owners have grieved loudest about these charges, in fact the burden falls more heavily on public properties, Econsult found. Of the top 100 impacted parcels, private owners would wind up paying $3.4 million more; public owners like the City and the School District will wind up paying $7.7 million more. At a time when every million counts in pinched government budgets, this is a noticeable bite.

Nonprofit institutions, however, come out slightly ahead. Hospitals and universities will save $0.5 million a year under the new system.

Large multi-unit commercial land-owners like shopping centers pass on stormwater charges to their tenants. Because they mostly split this bill evenly among tenants regardless of each tenant’s size, smaller stores may see a bigger proportional increase than large department stores.

Older properties will likely be more hurt by the shift than newer ones. Newer properties were often designed with modern water-management standards built in.

“We are probably in a different situation than a lot of people,” said James Burnett of West Philadelphia Financial Services, Inc., which developed Park West Town Center in Parkside in 2008. “We were the first property that was built under the new regs. We capture the first inch of water that hits our surface anyway. Our Lowes has a cistern beneath it.”

Older operations, however, must either retrofit their properties to reduce runoff, or pay up to PWD.

Will businesses flee?

Government operations may be hurt by the new charges, but they aren’t going to leave town. Private companies do have that option, however. How many will take that step?

Some members of United Business Owners Association of Philadelphia say this is inevitable. UBOAP was formed two years ago by hundreds of property-owners who were facing stormwater-rate increases.

“You’re going to see a lot of the city’s auto dealers look at suburban locations,” said Kerry Pacifico, Sr., who heads Pacifico Ford in the Auto Mall in Southwest Philadelphia. Pacifico is watching his stormwater charge skyrocket from $13.22 per month in 2010 to $1,063.41 a month in 2014.

Warehousing and auto sales are areas where good suburban locations already have an edge over Philadelphia. Econsult did acknowledge a risk these businesses will flee if rising water rates press them harder.

The Econsult study made light of such worries, however. Retailers are unlikely to move because they need to stay close to their customer base, it said. And Philadelphia will still offer manufacturers an advantage in overall operating costs compared to typical suburban industrial sites.

However, the report observed, “After the stormwater-fee increase, the business has two choices – stay or leave. If the business stays, it pays the increased stormwater fee every year. If the business decides to leave, it would save on the stormwater fee but discover that the value of its land has decreased by the present value of the savings in the stormwater fee, which offsets the value of annual savings. Thus, the business is impacted either way, and cannot increase its value by moving.”

Water companies aren’t raising their stormwater rates in most suburban communities. But that’s because they don’t handle storm sewers in the first place. Most of suburbia has separate systems, with private companies often delivering water for consumption. Stormwater, on the other hand, is managed by municipalities. Like Philadelphia, these municipalities are under federal mandate to improve stormwater-runoff control. So a business which moves to Delaware Co. will pay for stormwater control through its taxes instead of its water bill.

PWD has developed a variety of means to reduce the pain for businesses with new stormwater costs. It has made available $5 million in low-interest loans to companies wishing to retrofit their properties with modern controls which trap stormwater and release it slowly into the soil rather than gushing into the sewers. Another $5 million is available in direct grants from PWD. Both programs are administered by the Philadelphia Industrial Development Corp.

Forty-five applications were received for these grants by their Mar. 31 deadline, said PWD spokeswoman Joanne Dahme. The agency will offer a second round of grants in the fall.

“Our intent is to work with impacted customers to the best of their ability,” said Dahme.

This incentive isn’t large, though, as even Econsult admitted. Pacifico’s property, which is typical, would require a $100,000 investment but be stuck with a 20-year payback – an eon in the world of business capital.

And not all properties are suited for it. Lisa Magee, an environmental engineer for Philadelphia Regional Port Authority, sat on PWD’s Customer Advisory Committee which fine-tuned the new stormwater policy last year. Magee supports the new system, saying, “The switch in philosophies more accurately reflects true costs,” and commended PWD for being responsive to customer concerns. But some concerns remain, she stated.

“A port requires huge amounts of impervious surface,” she pointed out. “We have seen significant rate increases which we have passed onto our tenants. But they are often in a close competitive situation with terminal operators in other ports.”

Also, at the river’s edge, stormwater-diversion projects aren’t much use, she noted.

To meet concerns like these, PWD has prepared a plan whereby customers can build stormwater-diversion systems off site and earn credits toward their on-site stormwater charge.

PWD also set a cap on the annual increase in stormwater charges at 10%, so no business would be socked too hard in any one year. All businesses will eventually rise to the new rates, however.

And this is a good thing, insist the business owners who for years had been overcharged for stormwater costs.

“It is a question of equity,” said Don Haas, a legislative specialist for Building Owners & Managers Association – Philadelphia.

“It is a small minority that is crying injustice right now. But when the shoe was on the other foot, they said nothing about our problem. Our meters weren’t contributing to stormwater costs at all.”

Nevertheless, Haas said BOMA sympathizes with UBOAP’s members.

“Believe me, I understand their plight,” Haas said. “We worked hard to come up with policies that would help them. We want to see a system that is fairer for all – but nobody wants to see another business-owner driven into bankruptcy.”

It’s a complicated policy, but it reflects good-faith efforts to manage a transition that will inevitably stick new costs on some.

It can leave small-businessmen frustrated, though, as they deal with what looks from their point of view like an imperious octopus of public regulation.

“Thirty years ago, we parked all our cars on gravel and grass,” recalled Pacifico. “It was all permeable surface.

“Then the Water Dept. told us we had to pave it over, because the rain was washing mud into the storm drains. So we did.

“Now they’re coming at us about the storm drains again! We’re supposed to rip it all up and start over.”

(Next week, we will see if the Water Dept. and the City are doing all they can to ease this business transition – and better handle this storm.)

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