Cities Like Bridgeport Sell Off Residents' Tax Debts For Quick Cash
By Gregory B. Hladky
October 16, 2012
New Haven kicked the habit years ago. Hartford is still trying to "wean itself off." But Bridgeport and dozens of other cities and towns facing deficit nightmares seem to be hooked on the cash injection you can get from this financial quick fix.
The commodity these municipalities are selling is tax debt – back taxes their people and businesses owe on real estate, motor vehicles and other property. According to one expert, the ugly pressures from the Great Recession (shrinking revenue and rising costs) are pushing more cities and towns to take the plunge.
Elected officials often see it as a way to avoid more tax increases to pay for essentials like police and fire. But experts say depending on such "tax lien" sales can create even worse budget problems down the line, and cities can end up "losing control" of collection practices and the result may be more foreclosures and court actions for residents.
But Big Business is loving it. Banks, financial houses and collection operations are increasingly eager to buy up municipal debt and use their corporate and legal muscle to collect both the back debts and up to 18 percent interest per year.
"One company I represent has billions of dollars of this [municipal tax] debt across the nation," says Juda J. Epstein, a Bridgeport lawyer whose clients include two such corporations. "It's a national practice," he explains, that has multiple advantages for cities that use the system.
"There's no question there are a growing number of private-sector interests that see this as good business," agrees Jim Finley, executive director and CEO of the Connecticut Conference of Municipalities.
Major corporations "can bring enormous resources into play that many municipalities do not have… in order to track down those delinquent taxpayers," says Finley.
The biggest attraction for a city or town is that, by selling off their tax debts, they can get an immediate bundle of money to plug holes in their budget, to pay for stuff like fire and police costs. It's politically attractive because it means elected officials don't have to go to overburdened voters and ask for another tax increase.
Bridgeport, for example, auctioned off more than 100 delinquent tax accounts just before the close of its 2011 fiscal year. In return, the city got nearly $280,000 in up-front cash to help with its dire budget problems.
"It's been very successful for us," says Anne Kelly-Lenz, Bridgeport's finance director.
She says a big advantage is the city gets its money in the budget year that the tax debts are due, which means Bridgeport doesn't have to go through any long, often complicated and difficult collection process. And Kelly-Lenz argues that collection companies can grant a tax debtor additional time to pay off what he or she owes.
Of course, the reason companies want to buy these debts and offer time extensions is that they are allowed by Connecticut law to charge up to 1.5 percent per month interest, or about 18 percent a year.
And that, as the Connecticut Post reported last month, can add up fast. John LaRue Dawson owed $832.92 on his Bridgeport condo taxes, a debt that was sold by the city in that 2011 fiscal year auction. The company that bought the debt, Benchmark Municipal Tax Services Ltd., ended up billing Dawson $4,500.
Epstein, who represents Benchmark, ended up negotiating a deal in which Dawson will pay more than $2,700 to settle the tax lien debt, the Post reported.
According to Epstein, Benchmark officials never talk to the media about their tax-debt collections.
"Once we sell the lien, we have no control any more," was Kelly-Lenz's response when asked about Dawson's case.
And that lack of control, according to Hartford Tax Collector Marc Nelson, is one reason his city is trying to reduce its fiscal addiction to selling tax debts.
"It's not in the best interests of our taxpayers or businesses," Nelson argues. "You tend to lose control" and a city or town can end up with more foreclosures and more hardship for troubled taxpayers, he says.
City officials can work to help a delinquent taxpayer on "a reasonable payment plan," according to Nelson. "A lien-buyer may not care about that."
In 2008, Hartford's tax debt sales amounted to more than $10 million, Nelson says. By last year, that figure had been cut to $3.1 million and the goal is to get it much lower.
New Haven used tax lien sales back in the early-to-mid 1990s to help with their budget woes, says City Tax Collector Maurine Villani, but doesn't do it any more. "This city didn't have a good experience with it," she says, but she declines to elaborate.
Asked about why cities like Bridgeport insist it's a good financial tool, Villani comments: "Just because your neighbor jumps off a bridge, that doesn't mean you have to do it."
A major reason municipalities might want to avoid selling off their tax debt is that they can get addicted to such sales to balance their budget, and then be in bigger trouble trying to close budget holes in the future if they run out of tax liens to sell.
Finley says cities can fall into serious cash holes if they fail to understand that one-shot revenues like that are "going to end" and then the issue will be making up for money that's no longer there. And that usually translates to local tax hikes.
There can also be other nasty problems.
One example was last month's guilty plea by Crusader Servicing Corp. of Pennsylvania. Federal prosecutors charged Crusader with rigging tax lien auctions throughout New Jersey, and the company could face criminal fines of up to $100 million.