Scaling the liening tower

When New Haven, Conn.’s current administration took office in 1994, it inherited a dismal record in tax collection. “Sixteen percent of the taxes went uncollected,” says Frank Altieri, budget director for the city. “We had an accumulation of back taxes, and we felt that the best way to get a quick infusion of funds was to do a securitized sale of our tax liens.”

In 1995, the city (which bills $120 million annually for real estate taxes) did just that. In a securitized sale of its oldest real estate liens, New Haven received $19.5 million for a $25 million portfolio. It followed up in 1996 and 1997 with bulk sales of additional real estate liens, and, a year later, it added collection outsourcing to its menu of tax-recovery tools.

New Haven is not alone in the battle to recover delinquent taxes. A January 2000 article in The Bond Buyer reported that estimates for uncollected local property taxes run as high as $15 billion nationwide.

When taxpayers do not pay their bills, cities and counties employ several strategies for encouraging quick turnaround. “Everything you do that you haven’t done before generates revenue,” says Verone Cloutier, tax collector for Marlborough, Mass. The government might begin with taxpayer notification, follow up with written reminders and calls, and offer the taxpayers financial counseling and payment plans. When those efforts fail to generate payment, a lien commonly follows.

Liens or notices to foreclose may be enough to prompt delinquent taxpayers to reconcile, but, if not, the accounts typically stall – the governments lacking cost-effective means of pursuing them further. “A municipality does not have the personnel and means to really chase these hard cases,” Cloutier notes.

Property seizure and foreclosure are prospects that local governments are generally loath to entertain. Few want to face the legal expenses; fewer want to act as property managers or, in the case of a business, negatively affect employment; and no one wants the image of a Big Bad Wolf. After all, the goal of tax recovery is to reconcile the account and return the taxpayer to current rolls.

Fortunately, as in New Haven, several tools are available to local governments seeking to collect their die-hard delinquencies. All involve third parties; not one requires huffing and puffing.

Need cash quick?

With a backlog of tax liens, a government has three choices for collection, Altieri says. They are: * Bulk sale. The government sells its liens as a single package for a discount, forfeiting the difference between the discount and full value. The seller receives a lump sum; the buyer owns the portfolio outright. * Securitized sale. The government sells its liens, at discount, to a trust. The trust issues bonds, and bondholders are paid with revenues collected on the liens. The government receives a lump sum for the sale, and, if there is residual money after the bondholders have been satisfied, it receives that as well. * Outsourced collection. The government hires a third party to collect the liens, and it pays a percentage of the collected revenues for the service.

“With those options in front of me, I like the last option the best,” Altieri says. “But the choice depends on the kind of cash infusion a community is looking for.”

“I definitely like the idea of selling better because you get your money right away,” Cloutier says. “If you outsource, it could take them 10 years to collect because, bear in mind, you’re giving them liens for which you’ve exhausted all means of collection. If you sell in bulk, the buyer can’t pick and choose; they have to take everything. And, when they take everything, they also have to pay you everything.”

Marlborough – which has an annual real estate tax base of $48 million – has used both bulk sale and outsourcing successfully. In 1998, it sold $1.8 million worth of real estate tax liens (the first such transaction in Massachusetts) to Norcross, Ga.-based GLS Capital. It then outsourced its remaining real estate liens, totaling $766,000, to McLean, Va.-based JER Revenue Services, which also is working with New Haven.

“We outsourced things that were withheld from the bulk sale,” she explains. “They were hard cases – they either had possibilities of [environmental liability], or people had made payment agreements prior to the bulk sale and defaulted. I didn’t expect to collect any of them.” To date, the collection firm has recovered $360,000.

Retaining control

Like Marlborough, New Haven has used sales and outsourcing to combat its delinquent taxes. Unlike Cloutier, however, Altieri would not undertake another sale. “I’m not sure I would have made a different decision in 1995, but today I would outsource,” he says. “In a bulk sale, you give up any residual, although, in a securitized sale, there’s potential for the residual to come back to the city. In both cases, we found that we had little or no control over the liens that we sold.

“In Connecticut, the first lien has precedent,” he explains. “Let’s say you sell liens up to 1995, and, in 1996, 1997 and 1998, you have to place additional liens on some of those properties. If [the buyer] is not collecting those liens aggressively, you get backed up because you can’t collect your money until they collect theirs.”

Additionally, when liens are sold, the seller has no control over the way in which payment is pursued. That is not the case with outsourcing, Altieri says. “We’re more familiar with the properties than a lien purchaser would be,” he explains. “With a servicer, we give direction to the individuals who are doing the collection; we determine the degree of aggressiveness [with which they can] collect.”

In 1998, New Haven outsourced $8 million in real estate tax liens, and, to date, it has recovered nearly two-thirds of that. (New Haven outsourced accounts from the backlog of inherited delinquencies, as opposed to Marlborough, which outsourced only those accounts that Cloutier believed were hopeless.) “The servicer contacts the taxpayer, offers credit counseling, puts the taxpayer in touch with banks, and it will do reverse mortgages,” Altieri notes. “Also, we have a Mayor’s Night In, [during which] delinquent taxpayers are invited to come to City Hall, and we have people available to help the taxpayers meet their obligations.”

Since its initial experience with outsourcing real estate taxes, New Haven has begun to outsource back taxes on personal property and motor vehicles as well. “As we review our files, we are giving [the firm] some older delinquencies that are out there,” Altieri says. “I think they have about $12 million now to collect.”

… a pound of cure

While some cities are successfully rejuvenating their tax rolls with sales and outsourcing, the best remedy for long-term tax delinquency is prevention, says Kevin Appel, chief deputy treasurer and legal counsel to the treasurer for Arlington County, Va. Since 1983, the county’s tax delinquency rate has decreased steadily, thanks in part to the Taxpayer’s Assistance Program (TAP) and Tax Busters – initiatives that focus on delinquency prevention and recovery of freshly delinquent accounts.

With an annual tax levy of $264 million, the county has a tax delinquency rate of 1.6 percent. Of course, it doesn’t hurt that, behind the tax-collection measures, the county treasurer has the power to seize assets directly.

“In Virginia, a local government treasurer can seize a bank account, a paycheck, business machinery and equipment,” Appel says. “The state legislature provided local government treasurers with administrative authority that is pretty profound. We do not have to go to court.” However, he notes, “We don’t want to be in a position where we have to seize people’s property or money, so we started a delinquency prevention program.”

He is referring to TAP, which was launched in partnership with a local branch of Virginia Commerce Banks in 1998. Under the program, taxpayers who are in danger of defaulting or have defaulted on tax payments can apply for an interest-free loan to meet their obligations. “The taxpayer completes an application with us, providing us information on their residence, employment and banking,” Appel says. “They are charged a $10 enrollment fee (for application processing) plus 10 percent of the taxes that will be financed. The 10 percent is where the bank gets its money.

“The bank pays the full amount of the taxes owed, clearing the liability, and the taxpayer makes monthly payments to the bank,” he says. “It’s an interest-free loan that must be paid off over six months.” If the taxpayer defaults on his payments to the bank, the unpaid portion of the loan is remanded to the county, which will then employ its power to seize assets. “We’ve got the information from the application process to assist us in doing that,” Appel notes.

“By entering into TAP, [the taxpayers] actually end up paying less than they would if they became delinquent,” he adds. “If they become delinquent, they are going to be hit with a 10 percent penalty, by law, plus interest. Even though there’s a 10 percent fee [for TAP], they’re not going to have to worry about paying interest.”

Since TAP’s inception, more than 1,000 Arlington County tax bills (more than $400,000) have been financed through the program, with no cost to the Treasurer’s Office. Although TAP is intended to assist taxpayers before they default, the program will assist people with first-time delinquencies. “It’s not for repeaters,” Appel says. “We’ll help out [the first-timers] if we can, and we’ll help them plan for the future.”

Pre-dating TAP is Arlington County’s Tax Busters, a program focusing on new delinquencies. Each year, from November until mid-February, 10 treasury staff members – the Tax Busters – contact taxpayers who have not paid their current bills. “They send them a notice, call them – all kinds of things,” Appel says. “Then, if we don’t get some kind of response, they start doing research for lien sources.” Bonuses from the county’s general fund are paid to the group and support staff, based on the collection goals achieved.

“Most of the staff is doing this year-round, but there’s a concerted effort on these accounts that have just recently become delinquent,” Appel says. “The quicker you go after them, the more likely you are to collect them.”

Creative measures such as those used by Arlington County can help prevent tax delinquency. However, no government is going to eliminate back taxes, and none has the manpower and monetary resources to devote to collecting the “uncollectibles.” When weighed against the cost of protracted in-house recovery efforts, options such as lien sales and outsourcing could provide cost-effective relief from governments’ most burdensome accounts.

For more information about procedures and policies for collecting delinquent revenues, contact the Government Finance Officers Association in Chicago. Call (312) 977-9700, or visit the association’s web site at www.gfoa.org.