Cherry Hill does it. Newark does it. But Philly doesn’t — sell lien certificates on the tens of thousands of properties whose owners have failed to pay their annual real-estate taxes.
Now, a city Realtors’ group is pushing to restart lien sales in Philadelphia as a way to boost the city’s tax revenues and to make the property tax system fairer for all.
Those who do pay their taxes would pay less if the city sold its uncollected debt to investors, said Allan Domb, president of the Greater Philadelphia Association of Realtors.
How such a proposal would go over with City Council is not certain, but one Northeast member, Republican Brian O’Neill, is all for the city getting out of the collections and foreclosure business.
Domb said his organization is preparing legislation that would outline how the city could conduct sales of tax lien certificates. O’Neill (R-10th dist.) said he would be happy to introduce such a measure.
“We have to get serious about this,” the councilman said.
A lot money is at stake. Clarena Tolson, the city’s new revenue commissioner, told City Council on April 23 that there are 107,000 tax delinquents in Philadelphia. O’Neill said there is about $175 million in taxes the city doesn’t collect every year. Those delinquencies add up year after year, and some estimate the city is owed about a half-billion dollars — or more.
Domb said selling tax liens would be fairer to the people who dutifully pay their city taxes because they are subsidizing those who don’t. They are paying taxes at higher rates to make up for the revenue that doesn’t come in.
He said Philadelphia’s collection rate is 85 percent, though former city Revenue Commissioner Keith Richardson put the figure at 91.5 percent.
Domb, who said his organization has researched tax lien sales in 20 states, said upping the city’s collection rate could shave the city’s real estate tax rate to $1,000 for every $100,000 of assessed property value. In his 2014 $3.75 billion budget proposal, Mayor Michael Nutter asked for $1,320.40 per $100,000.
THE CASH IS RIGHT HERE
City Council currently is holding budget hearings and must finalize a budget by June 30. Members are making their own proposals regarding the tax rate, or millage. They’re also looking at how they might ease the impact of new assessments that put properties at 100 percent of their market values.
In March, for example, Councilman Jim Kenney (D-at large) introduced a bill that would set the tax rate at $1,000 per $100,000. To set the rate that low, Kenney said, the city would have to find other money sources or slash spending by $200 million or more.
As far as Domb is concerned, that cash is right here — in uncollected taxes — and the surest way to turn hundreds of millions of dollars of delinquencies into real money is to sell off the debt to investors.
The purpose of the switch to assessing properties to their full market values is fairness, Domb said, adding his organization supports the city’s Actual Value Initiative. What could be fairer, he asked, than demanding less money from the people who never shirked their responsibilities to pay their taxes?
Given the acute attention property owners are giving to taxes since they began receiving reassessment notices in February, this may be the best time to look into addressing the impact of delinquent taxes, O’Neill said. Especially, he said, since so many people are not happy.
If lien sales are going to get serous consideration, O’Neill said, “It should be when the public is screaming … and there is a real call to get the millage down as low as possible.”
The city’s last lien sales were, in some respect, half-heartedly conducted. O’Neill said when the city conducted such sales in the 1990s, half of the city’s 10 councilmanic districts were exempt.
“You can’t exclude half the city,” he said.
HOW DOES IT WORK?
In Philadelphia, a lien in put on a property when the taxes on it are not paid. When the property is sold, the proceeds are first used to pay the taxes owed before the seller sees any money. Unless the owners of liened properties pay off their obligations, the city waits until those properties are sold — either in private sales or via sheriff’s sales — to get its tax money.
However, right across the Delaware in New Jersey, Cherry Hill doesn’t wait for its dough. The township sells its liens to investors. Cherry Hill gets its money, and it’s the investors who wait to get paid. There are no sheriff sales.
Investors bid on the liens, said Carol Redmond, Cherry Hill’s tax collector.
That bidding is done by bidding down how much interest an investor will charge the homeowner whose debt is being bought. The investor willing to charge the delinquent taxpayer the least amount of interest wins the bidding, Redmond said.
That bidding starts at 18 percent interest and goes down. Investors can bid a lien on a desirable property down to 0.0 percent interest and even offer the township an interest-free premium to get the lien, she said.
So how does an investor make any money by paying for a debt in which he collects no interest? Since the successful bidder would have an interest in the property, he can pay the succeeding delinquent taxes and charge the delinquent taxpayer 18 percent interest, Redmond said. Also, the bidder who holds the lien would be paid off first when the property is sold or if the owner wants to settle accounts. And, finally, the successful bidder can start foreclosing in two years, Redmond said.
The tax collection rate in Cherry Hill is 99.9 percent, Redmond said. Tax lien sales account for 0.54 percent of that total rate. Liens on properties that are in bankruptcy, she said, cannot be sold.
In Newark, New Jersey’s largest city, the tax collection rate is 96 percent, said Finance Director Susan Jacobucci.
The real estate tax-collection rate is somewhere between 91 and 92 percent before the city sells liens, Jacobucci said in an April 24 phone interview.
Newark, which has about a fifth of Philly’s population, sells tax lien certificates in two ways, she said.
First, it has as delinquent tax sales. Right now, that would mean liens for unpaid taxes in 2012 and earlier are sold. Those sales bring in money, Jacobucci said, but that cash doesn’t build up the current year’s tax-collection rate. But selling liens on 2013’s unpaid taxes in accelerated sales does push the collection rate up, Jacobucci said. Accelerated sales have been occurring for a couple years, she said.
Also, the fact that current-year debt can be sold off to investors, she said, gives property owners an incentive to pay Newark what they owe. And property taxes become delinquent on the 11th day of the year’s 11th month, she said.
According to Jacobuzzi, the threat of lien sales seems to be enough to bring some taxpayers into line. In 2011, the owners of 11,000 properties were notified that tax liens would be sold. About 6,000 paid up before the sale, Jacobuzzi said. In 2012, more than 5,000 liens were to go on sale, but only 3,000 were sold.
“People know you mean business now,” she said. “It’s changing the culture.”
IS IT JUST THAT SIMPLE?
Selling tax liens sounds uncomplicated. By selling its debt, a municipality takes itself out of the debt-collection business and the expenses associated with that, and also increases its revenues.
Or is it more complicated than that, especially in a big city like Philadelphia?
Philly isn’t Newark, said Councilman Bobby Henon (D-6th dist.), adding he has some questions about whether tax lien sales would work here.
“But any kind of encouragement is a plus,” he said in an April 24 phone interview.
Philly’s neighborhoods are different; employment here is different; and the city has large-scale tax delinquencies, he said.
“We should push more to sheriff sales,” he said.
Richardson said the city’s last tax lien sale was in 1997.
“We don’t do it anymore,” he said in an April 18 phone interview while still revenue commissioner. Richardson said he doesn’t think conditions exist to prompt the city to again sell liens.
Also, he said, letting a third party control how debt is collected takes some flexibility away from the city, and it might not be fair to people.
How will delinquent taxpayers be treated? “We wouldn’t have any control over how people behave,” he said.
Henon estimated that about half of the half-billion dollars in delinquent taxes the city is owed probably isn’t collectable.
“We are up in our delinquencies this year,” Henon said. “Why? … We are left with a process that has sympathy for tax delinquents, and it has to end.” ••
Reporter John Loftus can be reached at 215-354-3110 or email@example.com