The original PIOC expenditure weights and market basket were devised by the U.S. Bureau of Labor Statistics (BLS) which was retained by the RGB as the PIOC contractor from 1970 to 1981. From 1982 to 1990, the PIOC was prepared by private consulting firms. In 1991, the RGB staff's growing expertise and familiarity made it possible to move the PIOC "in house." This is the fifth year that the RGB staff has produced the price index.
Over the past several years many changes have been made to facilitate the data collection process and to insure the quality and reliability of PIOC price data. Staff reorganized and computerized the PIOC vendor database, updated the mailing list for the owner survey, and completely redesigned the owner survey mailing materials. In addition, price quotes for fuel oil were gathered on a monthly basis rather than once a year.
In addition to improving data quality, the process of gathering the PIOC data was also made more efficient. Fewer data collectors have been hired each year since the PIOC was brought "in house". In 1991 twelve temps were hired for a ten-week period; this year half as many data collectors worked six weeks to complete the survey.
Although staff has worked to improve the accuracy of the PIOC, a comparison of the PIOC with Income and Expense data over the past four years indicates that the PIOC may overstate increases in landlords' costs. In the 1995 Income and Expense Study RGB staff found that
Between 1989 and 1993 the price index indicated a 25% increase in total O&M costs, while actual expenditures reported to Finance rose by 18% for all stabilized buildings and 16% for modern ones in Manhattan....Accurate assessment of the effectiveness of the PIOC and its various components is not possible in four years....future years will allow the RGB to trace the source of the discrepancies between these two data sources, and to maximize the performance of the PIOC in measuring operating cost changes.
Although it is certainly too soon to conclude that the PIOC overstates increases in operating costs, staff will begin to investigate this issue in more detail during the coming year.
The cost of fuel oil fell nearly 13% this year. The substantial decrease in fuel oil costs was primarily due to a very mild winter (one of the warmest on record); a small drop in oil prices also played a part. A steep decline in natural gas prices had a notable impact on the price index too, pushing down overall utilities costs about 4%.
Increases in real estate taxes and water/sewer costs, which propelled the price indices of the late 80's and early 90's upward, were a negligible factor this year. Taxes rose only 1.4%. While tax assessments actually fell by 1.3%, this decrease was more than offset by increased tax rates and the impact of expiring tax exemptions. Water and sewer costs were unchanged from last year.
Among the labor-based components, Labor Costs rose only 4.1% this year, the smallest increase since 1976 and the second lowest increase on record. The increase in Contractor Services was also quite modest, rising 2.4%. Administrative Costs rose somewhat more (3.8%), but matched the increase of the two preceding years. Taken as a whole, the labor-based components are now exerting less inflationary pressure on prices than at any time since the sixties.
See Change in Costs for Rent Stabilized Apartments, April 94 to April 95
The sample frame for the owner survey included nearly 40,000 stabilized buildings registered with DHCR. A stratified sampling scheme was used to choose more than 6000 addresses from this pool for the owner mailing - about the same as in 1994. The number of buildings chosen in each borough was proportional to the concentration of stabilized buildings in that borough. Nearly 12% of the surveys mailed out were returned to the RGB. A total of 479 of these contained information which was used. The number of verified price quotes in 1994 and 1995 for the owner survey is shown in Appendix B.1.
Information on assessed value, tax exemptions, and tax abatements was obtained from the Department of Finance for approximately 31,000 stabilized buildings. This data was used to compute a tax bill for each stabilized building in FY '94 and FY '95. Each building's tax bill was "weighted" based on the number of stabilized units in the building. The change computed for the PIOC is simply the percentage increase in aggregate taxes levied from FY '94 to FY '95.
As in prior years, the Open Balance Register (OBR) was used to "check" the tax computations. The OBR consists of actual bills and payments by landlords. There was no significant difference between the traditional method of computing the tax increase and the OBR method.
In addition to the items previously discussed, a number of other pieces of information are needed to complete the PIOC. They are: Union contract and benefit information, Social Security rates, unemployment insurance rates, heating degree days, and utility rate schedules. These items are used in computing some of the labor components, changes in utility costs for electricity, gas, steam, and telephone, and the cost-weighted change in fuel prices.
Taxes levied on rent stabilized properties increased by 1.4%, the lowest rate of increase since 1984 (1.0%). Although assessments FELL by 1.3%, an increase in the tax rate coupled with the net expiration of exemptions resulted in the increase in taxes.
While the pattern of changes was similar to last year (i.e. increasing tax rate and declining assessments), the magnitude of the changes was much smaller. Last year assessments dropped 5.8% while this year the decrease was only 1.3%. Similarly, while the tax rate increased by more than 6% last year, the rate rose only 1.8% this year. The chart [Components of Tax Change, 1988-1995] disaggregates tax changes by year for the last several years (see also Appendix B.4.).
In last year's PIOC we showed that while taxes fell in the more affluent areas of the city (i.e. lower Manhattan, Queens, Staten Island), there were sharp increases in the poorer boroughs. The disparity between affluent and poor neighborhoods moderated this year. Taxes rose the most in the Bronx (3.4%) and least in the Manhattan "core" (0.5%), but the increase for Queens (2.4%) was above average too.Even so, many very poor neighborhoods had sharp increases in real estate taxes - Mott Haven/Hunts Point, Morrisania/Belmont, Highbridge/S. Concourse in the South Bronx (8-10%) and Bushwick, Crown Heights, and Brownsville in Brooklyn (7-10%) fared poorly. Overall, tax bills rose faster in neighborhoods with high tax arrears (2.7%) than in neighborhoods with low arrears (1.2%). In terms of size, buildings with fewer than 30 units had an average increase of 1.6% while taxes increased 0.8% for buildings of 30 or more units.
After reaching a high for the eighties of 9.2% (in 1984), the overall increase in labor costs has been steadily declining, falling to 4.1% this year. This is the lowest increase since 1976 and the second lowest in the history of the price index. The 32B-32J contract signed last April, which expires in 1997, may signal even lower overall labor increases in the future.
Though the increases for the labor component have been fairly consistent over the last several years, ranging from 4 to 6%, there are variations in the subcomponents which comprise labor costs. Specifically, while the benefits segment has been increasing nearly 15% per year, wage increases have only ranged from 2% to 5%. There is some evidence that the growth in benefits may be slowing, which will mean even lower labor increases in the coming years.
After a year in which utilities increased moderately (2.1%) there was a DECREASE this year of 4.0%. All expenses, except for electricity, were constant or showed price decreases. Having the greatest effect on the component were double-digit decreases in gas costs.
Due to the Water Board's continued freeze of water and sewage rates for 1995 there was no increase this year. As a result, water and sewer rates had no impact on the overall utilities component.
Electricity costs showed an increase this year, up about 5%. Electricity costs have traditionally been measured on an April-to-April basis rather than a cost-weighted basis (as in the case of fuel oil and gas).
Last year gas costs increased considerably, rising about 15%, contributing to the increase in the utilities component. With costs falling roughly 20% this year, gas prices played a major role in the decrease of overall utility costs. Gas, like fuel oil, is measured largely on a "cost-weighted" basis which takes both price and heating degree days into consideration. The decrease in gas costs can be attributed to rate decreases and changes in the fuel adjustment factor as well as last winter's very warm weather.
To calculate changes in fuel oil costs staff gathers monthly price data from fuel oil vendors and weights the data using a degree day formula. The number of degree days is a measure of heating requirements.
In 1994-5 weather conditions were much milder than the previous year, especially during the winter season. In both December and January the total number of degree days was well below normal (see [Both December and January Were Much Warmer Than Normal]). Although price increases were seen in February, a month that was slightly colder than the norm, they were moderate. The warm weather, coupled with slightly cheaper oil prices than the year before, meant considerably lower fuel costs for landlords - the overall fuel component was down 12.7%. This decrease in price was experienced by users of #2, #4 and #6 fuel oil. Among the various grades of fuel oil, the changes in price were: #6, -12.2%, #4, -13.6%, and #2, -12.5%.
During the 80's increases in Contractor Services costs routinely outpaced overall growth in the price index. In fact, while the PIOC as a whole rose 86% during the eighties, Contractor Services increased much more - 151%. However, in the early nineties prices charged by contractors began to moderate and by early 1992 (near the peak of the city's long-running recession) many contractors were actually reducing their charges to attract business. As a result of the recession, the Contractor Services component has risen only half as fast as the overall PIOC for the last four years.
In last year's PIOC we reported that
Continuing pressure on contractors to keep their customers has forced them to maintain or reduce their prices. In this year's survey about four-fifths of the painters reported that their prices either remained the same or even decreased, mainly due to lack of business. As a result, the increase in repainting costs was less than one percent...
The price dampening pressures of the recession were less apparent this year. About two-thirds of the painters raised their prices, but most of the increases were moderate. The increase in the repainting "spec" was 2.9%, somewhat higher than the rate of inflation for the year. Increases in the other Contractor Services specs were moderate, ranging from no change (Boiler Repair, Weld and Floor Refinishing) to a high of 3.6% (Plumbing Repair, Faucet).
See Contractor Price Increases Have Lagged Administrators' Since 1992
Over the past four years administrators have consistently fared better than contractors - the increase in Administrative Costs has been about the same as the overall PIOC, while contractor prices have risen only half as much. This year was no exception. Administrative Costs rose 3.8% compared to an increase of 2.4% in Contractor Services.
Among the various professionals who provide administrative services, attorneys prospered most. The cost of filing a disposess notice by an attorney rose 4.5%. Management company fees rose 3.7% over the period and accountant fees were up by 2.7%.
A great deal of the increased cost was due to higher insurance rates. Nearly half of respondents reported an increase in rates while a mere 5% reported rate decreases.
The price index for hotels was UNCHANGED from the prior year, showing a statistically insignificant drop of 0.1% (see Change in Costs for Rent Stabilized Hotels, April 1994 to April 1995). There was no significant difference between the three types of hotels (i.e. Hotels, SROs, Rooming Houses). None showed any meaningful increase in overall costs. (See Appendix B.8.)
Taxes rose 2.3% this year. Increases were greatest for Rooming Houses (3.9%) and Hotels (3.1%) and minimal for SROs (0.8%). While assessments were up 3-4% for Rooming Houses and Hotels, they declined slightly in the SRO sector.
The increase in Labor Costs (3.4%) was somewhat less than in the apartment sector, mainly due to low contract settlements for hotel union labor. Utilities Costs did not fall quite as much for hotels (-3.7%) as for apartments (-4.0%), largely because of the substantially different weights of items in the hotel sector. Changes in Fuel, Administrative Costs, and Insurance were not significantly different for hotels and apartments.
Overall, the PIOC is expected to grow by 3.2% between 1995 and 1996. Projected changes in the index's separate components are shown alongside actual increases observed from 1994 to 1995 in the chart Abnormally Warm Weather Made Fuel Particularly Hard to Predict in 1995.
In most years, changes occur in the distribution of the tax burden among various types of property in the city. In particular, the share of the levy to be derived from Class Two properties (which encompasses rent stabilized buildings) is expected to expansion between 1995 and 1996. In turn, this increase should cause the tax rate for Class Two buildings to grow roughly 4% next year.
Class Two property includes co-ops and condominiums as well as apartments. Within the Class Two category, rent stabilized dwellings are classified as either "rental buildings" or "4-10 family buildings". Based on the preliminary tax roll, the Finance Department forecasts billable assessments for rental buildings to increase by 0.6%, while billables for 4-10 family buildings are expected to increase by 1.9%. Overall, billable assessments for stabilized buildings, which are predominantly classified as "rental" buildings, would increase by 0.8% from 1995 to 1996.
In the past, the Finance Department's preliminary tax roll, which is an estimate, has tended to be higher than the final tax roll, upon which taxes are actually calculated. Accurate tax projections must adjust for this "gap", which amounted to 2% for stabilized properties in 1995. Assuming that the discrepancy between the preliminary and final tax roll is also 2% in FY '96, billables should decline by 1.2%. This decline in billables, combined with the projected 4% tax rate increase, adjusted for the average error between actual tax increases and PIOC tax projections over the past three years, should result in a 1.7% increase in tax bills for rent stabilized buildings.
"Labor Costs" is the largest of the three components listed above and primarily concerns the wages and benefits of building maintenance workers (e.g. superintendents, porters, etc). "Contractor Services" is mainly the work of plumbers and painters while "Administrative Costs" largely consists of management, legal and accounting fees.
Among the three components listed above, "Labor Costs" should increase the most (by 3.9%) over the coming year. As in last year's report, this projection is based on the most recent multi-year contract agreements negotiated between building owners and unions representing building workers. In the case of non-union employees, growth in wages and benefits was projected from average increases observed over the past three years.
In a similar vein, projected increases in "Administrative Costs" (3.8%) and the price of "Contractor Services" (1.9%) were derived from average growth rates witnessed in both components during the past three years.
The Energy Information Administration (EIA) currently projects that world oil prices will increase from $16.50 per barrel to $18.00 per barrel between the fourth quarter of 1994 and the fourth quarter of 1995. Two major assumptions drive this estimate. The first holds that worldwide demand for oil will rise by nearly one million barrels per day between 1995 and 1996, as developed economies in Western Europe, the Pacific Rim and North America, along with developing economies in Asia, Eastern Europe and South America continue to expand. The second assumption holds that global oil production will grow at a slightly slower rate, spurring some growth in crude oil prices.
The EIA projects that domestic demand for fuel oil will stabilize during 1995, as rising interest rates slow the rate of economic growth. Given that the winter of '93-'94 was somewhat cold, while last winter was unusually warm, predicting the weather for the upcoming year is no easy task. However, the EIA estimates that next winter's weather patterns will be cooler than this year. If this holds true, fuel oil prices should increase during the latter part of the year. Overall, EIA forecasts that global and domestic shifts in supply and demand, along with fairly "normal" weather conditions, will increase the price of fuel oil grades two, four and six by respectively 8%, 10% and 11%, for a weighted average increase of 10% between 1995 and 1996.
The utility index should increase by 2.1% over the coming year. Most of this growth may come from the first rise in water and sewer rates since 1993, combined with increases in the costs of natural gas and electricity.
Con Edison estimates that its electricity rates will remain stable through April of 1996, although change in total costs for electricity should increase slightly due to a rise in the fuel adjustment charge. Thus, the cost of electricity may change despite the fact that rates will stay the same over the coming year.
In contrast to electricity, rates for natural gas and steam should rise over the coming year, as Con Ed and Brooklyn Union Gas plan to petition the state for increases for gas and steam service. Although final increases will be determined by the Public Service Commission in June 1995, the probability of a colder winter between 1995 and 1996 along with growth in demand for natural gas among industrial users and utility companies should boost the price of natural gas by roughly 2% over the next year.
In 1993, after several substantial increases in water and sewer charges, Mayor Dinkins and the New York City Water Board froze water and sewer rates for Fiscal Years 1994 and 1995. Currently, the Water Board has yet to make a decision about rate increases for Fiscal Year 1996. However, rates will probably be allowed to increase by roughly 3%, contributing to most of the growth in the utility component of the PIOC for the coming year.
Thus, a 3% increase in water and sewer charges, combined with lower growth among the other three components, will produce an increase of 2.1% in Utility Costs in 1995.