Why One City Project Went $1.7B Over Budget

It was evening twilight in the Bronx but the sun was still throwing mid-day July heat. Hundreds of screaming kids packed the swings and water sprinklers on Van Cortlandt Park off of Broadway. They were well attended by parents and grandparents who did their best to pile picnic refuse neatly next to already overflowing garbage cans.

A few miles to the east, in the same park, sits the Croton Water Filtration construction site surrounded by high chain link fencing to discourage intruders. By nightfall the glaring industrial lighting on the site suggests the UFO landing pad from Close Encounters. The actual plant is being built eight stories below ground.

The Croton Filtration plant is years behind schedule and will cost more than three times its original estimate. Croton’s price spike was felt most directly by the City’s homeowners and businesses that saw their water and sewer rates more than double since 2006.

Back in 2001 Michael Bloomberg, self-made billionaire, campaigned on the premise that what the city needed was a captain of industry who would use private sector management techniques to usher in a renaissance of efficiency and accountability. Twelve years, three Bloomberg terms later, the Croton saga tells a very different story.

Throughout his tenure Bloomberg did not flinch from pushing forward with the 21st century big city infrastructure projects like the Croton Filtration plant or the city’s third water tunnel. Yet the Mayor was a real delegator who picked his managers and then moved on to the next big project and press event heralding it. Nothing short of a federal fraud indictment, as in the case of the $700 million dollar CityTime caper, or the botched December 2010 snow response, prompted him to loop back around for a self-critical second look.

As the city debates the qualifications for Bloomberg’s successor, it is imperative to double back and examine just how projects like the Croton have been managed. To start that exercise, you need to have a map and a little historical context.

Where water comes from

The City of New York’s vast upstate water supply system is a 19th-century engineering marvel that was the product of visionary thinking about the power of public works. Ninety-seven percent of the more than a billion gallons of water delivered every day to New Yorkers comes is gravity fed, with just 3 percent having to be pumped to the consumers. The system can store 550 billion gallons of water in a watershed complex that’s 800 square miles—larger than the entire state of Rhode Island.

The city’s water comes from three sources. There are the Delaware and Catskill systems, west of the Hudson River, situated in rural counties like Greene, Ulster and Sullivan, roughly 100 miles north of the city. Combined, these two systems supply 90 percent of the city’s water needs.

The remaining 10 percent comes from the Croton system that draws from a watershed situated east of the Hudson and includes the more developed Westchester, Putnam and Dutchess counties.

While the Catskill and Delaware systems have remained largely rural, the Croton watershed has seen a lot of development, and that has taken a toll on the Croton system’s raw water quality. Suburban sprawl short circuits the water cycle by paving over forests, wetlands and farmlands with parking lots and roads. As a consequence, when it rains housing and commercial projects generate more storm water run-off that carries stuff like motor oil, lawn fertilizer, and road salt directly into the rivers and streams that feed into the Croton system`s reservoirs.

A 2003 DEP assessment of the Croton watershed noted it was now home to 190,000 people, 98,000 septic systems and 63 sewage treatment plants. “Such urbanized development patterns increase peak flows of storm water run-off causing erosion, stream bank instabilities, and a higher concentration of pollution and risks of accidents,” the DEP reported.

Over the years the Croton system was periodically shut down over “aesthetic issues” about the taste, color and odor of the water it was producing. But the DEP was also increasingly worried about the incidence of microbial contamination from cryptosporidium and giardia, which can cause gastrointestinal illnesses that could threaten the lives of the young and elderly with compromised immune systems.

At the same time the federal EPA was alarmed about research that indicated the city’s increasing reliance on chlorine to kill microbes, was itself generating something called trihalomenthane, a chemical compound linked to cancer and even miscarriages.

A federal mandate

As early as 1992, in conversations with the New York State Department of Health, the city committed itself to filtering the Croton system. Yet years went by with no firm action. Finally, in 1997 the U.S. EPA and the state of New York sued the city to force it to build a filtration plant for the Croton water. A year later, the city committed in a consent decree to make it happen—and happen expeditiously, or the city could be fined as much as $30,000 dollars a day.

Then-DEP Commissioner Chris Ward was the driving force behind the Croton plant. He says he believes there would have been real public health consequences if the city had not moved to filter the Croton water. ‘‘The health risks associated with not filtering the Croton water—exposing women to spontaneous abortions, to long term cancer exposures—was an unacceptable standard for the city water,” says Ward, currently a Vice President of Dragados, a Spanish construction multi-national that is building the East side access Tunnel between Penn and Grand Central stations.

Eric Goldstein, senior attorney with the Natural Resources Defense Council, says back in 2003 the NRDC convened a panel of eight independent scientists to review the DEP’s scientific case for building the Croton Filtration plant and the NRDC panel found the DEP case for filtration compelling. “Start from the public health perspective and you have no choice but to err on the side of caution,” Goldstein says.
The question was where to do the filtering.

Initially the city hoped to locate the federally mandated filtration plant at the site of the Jerome Park Reservoir, also in the Bronx, just a few minutes from Van Cortlandt Park. But community members and pols like Assemblyman Jeffrey Dinowitz were deeply skeptical, believing that Jerome Park Reservoir was worth preserving.

For people near it, the Reservoir was as iconic as Central Park’s lake. In 1995, worries about the fate of the Jerome Park Reservoir inspired 5,000 students to turn outcome and try to encircle it. According to Dr. Mirele Goldsmith, PHD dissertation “The Techincal Fix or the Systemic Solution to Urban Water Quality”, the fight to preserve Jerome Park Reservoir brought Bronx activists and suburban environmentalists together. “The Croton Coalition pursued the two agendas of stopping the construction of the filtration plant and increasing the level of watershed protection simultaneously,” Goldsmith writes.

The activists failed to get the city to make such dramatic a change in course and experts argue it was too late to avoid filtration for the Croton. But the activists did manage to use the courts to put pressure on the City to consider other locations. In 1998 the DEP worked through a Draft environmental Impact Statement looking at several sites for the plant, including Van Cortlandt Park and its Mosholu golf course, the first public course established in the country. Skeptics thought the notion of burying such a major project underground and then restoring the golf course and parklands above the plant would be prohibitively expensive, but the city determined that it was the most logical location. A year later, the City Council weighed in and backed the Mosholu Golf Course as the underground site for the filtration plant.

Activists went back to court and convinced the state’s highest court that the use by the city of any parkland for the project would require legislative approval. By 2003, with a lot of behind the scenes maneuvering and help from Bronx Democrat leader Assemblyman Jose Rivera, the city lined up enough support in Albany—both inside and outside the Bronx delegation—to get the legislature to vote to “alienate”, or carve out, the required acreage of parkland for the plant.

Digging down as costs went up

Years ago, water consumers were insulated from that kind of rate shock by the fact that the federal government could be counted on as a generous funding partner for mega projects that federal laws like the 1974 Clean Water Act and Safe Drinking Water Act required.

But increasingly the feds leave municipalities to take on more long-term debt and jack up water rates to pay for these large projects, which always seem to come with huge cost overruns. Across the nation , the federal government has cut back on how much it funds local water works. So while the EPA used the courts to compel the city to build the Croton plant, they were no willing to back that dictate up with dollars. The Croton project, Ward says, was “the ultimate unfunded mandate.” Whatever it costs, the city was going to bear most of it alone.

In 2003 the DEP estimated that the Croton Water Filtration Plant was going to cost $992 million dollars and be completed by 2007. The following year, community members predicted that the project costs would explode and drive up sewer and water rates for the public. In an April 2004 newsletter, opponents wrote “at a cost of $1.5 billion dollars, the DEP is relying on this Taj Mahal of an industrial facility to take care of all anticipated problems with the water—problems that can be avoided with the implementation of a comprehensive watershed management plan.”

City officials now say the filtration plant’s final price tag will be closer to $3.2 billion and that it will be fully operational by the end of this year.

During Mayor Bloomberg’s tenure, as a consequence of the massive price tag on the Croton facility and other DEP water management projects, the city’s debt service to cover the rapidly growing capital spending spiked as well. According to a DEP document, from 2002 through 2012 the agency’s annual borrowing costs shot up 176 percent from $496 million dollars a year to $1.37 billion dollars annually, driven in part by cost overruns on Croton and other DEP projects.

As a consequence, homeowners and businesses saw their water and sewer rates skyrocket. While more recently the administration has been able to keep the annual rate rise to single digits through improved management, there were years that saw back-to-back double-digit hikes even as the foreclosure crisis was bearing down on working-class neighborhoods. Average annual residential water bills that were in the hundreds of dollars were now closer to a $1,000 dollars or higher.

Diagnosing the overruns

So how was it that water project costs exploded under a mayor whose trademark was supposed to be world-class management?

DEP has said their estimate failed to take into account that in 2006 they were bidding for construction services and raw materials in the midst of a building boom when market forces, the law of supply and demand, had decidedly tipped to favor the builders and suppliers. And there were some surprises, like the abandoned trolley tracks they tripped across during excavation.

Ward concedes that when it comes to the big ticket projects, local officials are often their own worst enemy. “We rush to try to understand how much it is going to cost before we know, and we tell the people ‘We think it is going to cost X,’ when at the end of the day we don’t know,” he says. “For far too long we’ve allowed low-ball estimates to be defining what project costs are going to be, same in Newtown Creek, writ large at the World Trade Center.” Both the DEP’s Newtown Sewage treatment facility and the World Trade Center were plagued by missed deadlines and massive cost overruns.

Indeed, a 2009 comptroller’s audit concluded that from the start, the DEP did not have an adequate management system in place to double check the work of private engineering firms Metcalf & Eddy and Hazen & Sawyer that back in 2003 had provided the initial low-ball estimate that DEP plugged in to its official Environmental Impact Statement, which helped convince the City Council to approve the project.

But beyond the bean-counting is the reality that there are powerful constituencies behind these projects who stand to directly profit from any exponential increase in what they cost. Both contractors and trade unions are generous campaign benefactors. As Susan Lerner with Common Cause notes, there is not much of a political upside for elected officials to go ballistic over cost over runs. “Between the contractors and the unions that build these projects there is tremendous pressure,” Lerner says. “The more money invested, the more jobs.”

Some decision-makers came under particular scrutiny. Back in 2005 Ward raised a few eyebrows when a year and a day after he left the DEP he became a managing director of the General Contractors Association of New York, one of the Croton Plant’s biggest boosters. Ward confirmed the timing but would not comment for the record beyond that.

Questions about competition

In November 2008 the City’s Independent Budget Office identified another reason the plant’s cost spiked and it shows just how small the construction business ecology is in the Big Apple.
The huge Croton plant construction job had only attracted two bidders. The lower bidder was Perini/Tutor, who submitted a $1.13 billion dollar bid compared to Slattery/Skanska’s $1.33 billion bid. But, according to IBO, “after negotiations with the city, the lowest bidder on the contract withdrew” after it had won the bid. As a consequence “the city awarded the contract to the second bidder at $200 million higher than the lowest bidder,” the IBO reported.

“Suddenly the highest bid was the only bid,” says Dinowitz, a long time Croton critic.

The DEP publicly chalked up Perini/ Tutors April 2007 withdrawal to an impasse over business terms. But it wasn’t long before it was widely reported that Perini was the radar of federal prosecutors over allegations its executives were fraudulently exploiting the program that gives preference to minority and female sub-contractors for government contracts. A year later ,two Perini executives were convicted on charges that came out of that probe. One of them committed suicide just before he had to surrender to start serving his sentence.

In 2010 another big contractor handling site preparation and excavation on the Croton job, Schiavone Construction, agreed to a $20 million dollar settlement with the feds for abusing the minority set-aside provision in securing almost $700 million dollars in public works projects. One industry insider said it was merely a “cost of doing business.”

By March of 2011 it was time for Skanska USA Civil, the contractor that got the Croton job despite its $200 million dollar higher bid, to reach a deal with federal prosecutors for its own version of minority business enterprise corruption involving a major sub-contractor on the Croton project. Skanska admitted no wrong doing but paid almost $20 million dollars to settle the federal fraud case, which involved work on Croton and other public works. Two principals with Environmental Energy Associates, the firm that helped Skanska and other outfits manipulate the minority business set asides, pled guilty to mail fraud charges.

Still waiting for the parks payback

In exchange for losing the parkland for the plant, Bronx elected officials were promised over $200 million dollars for dozens of “park enhancements” in their neighborhoods. But hard-core filtration plant opponents like long time Community Board 12 Chair Father Richard Gorman still feels the community has been sold out without seeing any enduring benefits. Instead, they were hit with exponentially higher water bills and less open space.

“I would really like to see the blessing of all these so called development projects just in real terms; how they made the Bronx better,” Gorman says. “ I know that we can have a lot of statistics thrown at us. I want to see the people who can now afford a home, or afford a car or afford a decent school for their kids or can go to a park that has been greatly enhanced. If I can’t really see that, then I wonder just how much we have benefited from these things.”

Late last month City Comptroller John Liu released a long awaited audit of that $200 million dollars in capital park improvements that were supposed to be done by 2009 under the terms of a memorandum of understanding between the city and the community. Liu found that of the 67 capital improvement projects promised, only 46—worth just $107.4 million—were completed.

Assemblyman Jeffrey Dinowitz was not surprised by Liu’s audit. “Once again what we predicted came to pass, “ Dinowitz says. “It has been nine years since the plant was approved and the Bronx still has not got its park projects.”

Ironically, the Jerome Park Reservoir, which so galvanized the community almost 20 years ago, has remained drained since 2008 as part of the city’s long overdue rehabilitation of its water distribution system and its integration of the new filtration plant. What’s more, longstanding community desires for closer access to the reservoir, which is now surrounded by a high fence several yards from the water’s edge, have been frustrated: DEP officials say post-September 11th concerns for the city’s water supply may result in limited access by the public to the Reservoir.

“We were told, ‘Yeah, there will be no problem’—when everything was said and done, Jerome Park Reservoir would be open to the public. This was said time and time again,” Gorman insists.
“Now we can’t have people near the reservoir as a matter of security?” he asks rhetorically. “It is absolutely stupefying how we have gone a whole 180 degrees turn on that issue. Now, instead of a community jewel it has become a place where the community is told to stay away and stay out.”