LawDearth and taxes
|More Law Stories|
Pot, pols and polls (10/6/2010)
War (on drugs) is over (9/29/2010)
News Hits gets punked (9/29/2010)
|More from Lisa M. Collins|
Ode to Kilpatrick (11/12/2008)
A grand visionary (5/21/2008)
Fashion that walks the line (4/25/2007)
Allen Shiffman sits at his favorite deli and riffles through tax receipts. City of Detroit records indicate the 61-year-old Southfield Township resident is among the city’s top property-tax deadbeats, owing more than $1 million on nearly 300 rental houses.
Problem is, Shiffman doesn’t own those houses. He’s got documents to prove it.
“The tax rolls are wrong,” says Shiffman, who insists he pays taxes on hundreds of houses, though not always in a timely fashion, while throwing away reams of tax bills the city sends him for parcels he doesn’t own.
Shiffman’s role as an erroneous target of city tax collectors is illustrative of a city tax system in shambles. Every year, Detroit collects 87 percent of its property taxes on average — one of the lowest collection rates among large cities in the United States. Most cities collect 98 percent.
Detroit estimates it loses $60 million in uncollected property taxes every year, with more than $1 billion lost in the past 20 years, according to a Metro Times review of documents and interviews with city, county and state officials. Records indicate that one-third of all properties in the city are tax delinquent, and more than $165 million is owed.
Yet in many cases, city officials have no idea who owns — or owes — what. Records are shoddy and rife with inaccuracies.
Metro Times obtained and analyzed the city’s list of delinquent properties, and contacted the people and businesses that appeared to owe the most.
Like Allen Shiffman, virtually every high-dollar “delinquent” on the list was not delinquent by much, if at all, or had legitimate reasons for withholding tax payments. Many people who appear to be tax debtors are investors who bought “tax liens” on delinquent properties from Wayne County; these people don’t pay the city tax because they don’t officially own the property.
Of the 389,000 tax bills mailed this summer, as many as 40,000 will return stamped “undeliverable,” says City Treasurer Clarence Williams.
“We can’t find these folks,” says Williams, who blames absentee landlords for the staggering debt. “We don’t have a good database. We’re sending bills all over the place.”
Facing dwindling income and population, a $100 million budget deficit and the dire need to revitalize neighborhoods, Detroit nevertheless continues to lose ground. Last year the city collected $237 million in property taxes, or about 12 percent of the city’s $1.9 billion general fund budget.
Most Michigan cities rely on property taxes for survival; the revenue source accounts for 70 percent of income for many Michigan cities. Nationwide, property taxes make up an average of 26 percent of city budgets, and large cities often face problems collecting the tax, says Chris Hoene, research manager for the National League of Cities.
But few problems can compete with Detroit’s, where every year the city budgets to collect about 85 percent of its property taxes, knowing it can’t expect to collect much more than that.
Detroit is the only Michigan city hemorrhaging tax revenue on such a scale. That’s because with the exception of Kalamazoo, Detroit is the only city in the state to collect — or attempt to collect — its own property taxes. Every other Michigan city lets its county government collect taxes for it, with much greater return.
Wayne County’s rate of collection for its own taxes, and for municipalities in its borders, is 96 percent.
Moreover, Wayne and other Michigan counties are quick to foreclose for unpaid taxes, forcing taxpayers to settle the debt or lose the property. Some counties make money on delinquent collections and foreclosures, according to the state Treasury Department.
Not Detroit, which already owns nearly 50,000 delinquent parcels. The city historically has been loath to foreclose, letting deadbeats and low-rent landlords skate by with impunity. While 70,000 properties in the city are eligible for foreclosure, the city takes only 1,500 parcels a year.
The policy is to the city’s detriment, says Williams. For when the government fails to foreclose, there is “no incentive” to pay, he says.
Wayne County has lobbied for years to take over collections for Detroit, but the city has refused.
“The thinking has been that Detroit is big enough to govern itself,” says Williams, without a trace of irony.
Metro Times’ probe found that:
• Some 130,000 of the city’s 400,000 parcels are listed as tax delinquent.
• Detroit employs a total of two tax collectors for the entire city.
• Tax officials rely on a woefully archaic computer system. The 30-year-old computer requires 40 hours to generate a hard-copy list 2 million lines long — paperwork that fits into 21 binders and must be flipped through manually, account by account.
• Bills are recorded by address and cannot be searched by name, even by Treasury Department officials. This makes it difficult to identify and pursue people who owe taxes on multiple properties.
• No computerized database of tax delinquents exists, making analysis nearly impossible. “We can’t just hit a button and come up with the information,” says Williams.
• More than $16.5 million in back property taxes is owed by people identified only as “taxpayer” or “owner/occupant.” That’s because the city allows people to remove their names from the tax rolls in favor of the generic monikers. The policy was devised to disguise the addresses of city employees such as police officers, Williams says.
• Every year, the city gets $1.6 million to $2 million in bad checks. Other tax-collecting governments, such as Wayne County, require a cashier’s check.
• Until recently, the city didn’t track collection of its income taxes, and does not know how much is owed or by whom. The city estimates $80 million in income taxes is overdue.
The clock is ticking for Detroit to bring in its property-tax debts. Because of a change in state law, Detroit stands to lose as much as $50 million in potential tax revenue when the county forecloses on an estimated 4,800 Detroit properties this year; the numbers are expected to go up next year.
Under a new tax foreclosure system enacted by the state, Detroit’s back taxes will be wiped off the books every time Wayne County forecloses on a property within the city.
When the state Legislature changed the foreclosure system in 1999, it gave counties such as Wayne the power to take properties after taxes go unpaid for two years. When properties are sold, cities whose property taxes are collected by counties will get reimbursed for their back taxes. Detroit will not, because it does not participate in the county system.
County officials say the situation is unfortunate for Detroit.
“When I foreclose, all liens are wiped out,” says Robert Levi, Wayne County head of forfeiture. “The City of Detroit won’t get the money. Any other city will.”
Wayne County Treasurer Raymond Wojtowicz says he’s concerned about the city.
“Detroit is our central city,” says Wojtowicz, who has urged the city for years to let him collect the delinquencies. “If the current situation continues, all the deliberate planning that’s gone on for revitalizing the city, the community, the real estate, that is all threatened. The city’s current collection system is a great detriment to all of that. It could be devastating.”
Pay as you go
Bert Dearing is surrounded by paperwork in his office in the basement of Bert’s on Broadway, the downtown extension of his jazz and soul food joint in Eastern Market. The well-known Detroit entrepreneur, wearing a fishing hat and T-shirt, is flanked by books, including The House of Rothschild and Loopholes of the Rich: Guide to Investing.
His businesses run the gamut from catering to real estate. He owns hundreds of properties — nearly all vacant — on Detroit’s east side. City records show he owes $385,000 in back property taxes.
Dearing says he’s surprised by the number. He doesn’t know exactly how much he owes, or how many properties he owns, he says. All his records are kept on paper, in a filing cabinet in his office. He says he pays off the city debts as he can. Dearing illustrates how he moves the files from the bottom drawers to the top when they are all paid off.
But Dearing insists he doesn’t actually owe anywhere near $385,000, because he doesn’t really own the properties for which the city is billing him. His files support this claim. He keeps the taxes current on properties he owns, he says. His name shows up on the tax rolls because some of his new investments carry addresses that haven’t paid taxes to the city in 12 years, leaving behind huge debts.
“I pay as much as I can, as I go along,” Dearing says. “I can’t pay them all at once. I’m good, but not that good.”
The city doesn’t foreclose on the properties, so Dearing can take his time paying the bills. He protects his cash flow so he can purchase new properties, he says.
Dearing obtained most of his parcels from the county under the state’s old foreclosure system.
Under that system, if taxes were not paid to the county for three years, the county would put the property up for auction. Instead of buying the properties outright, investors such as Dearing bought “tax liens,” a legal hold on property that gives investors certain rights, such as first dibs on buying the property. Some investors came from as far as Florida with millions to invest in the system, buying hundreds of liens at a time. In essence, the investors paid off the taxes owed to the county. The taxes owed to the city never got paid, because the city didn’t sell tax liens or foreclose on delinquent properties.
Tax liens were a lucrative investment. Homeowners had to pay 18 percent interest to redeem their property from the investor.
In some cases, the property never got redeemed by the rightful owner. As those unwanted properties filtered through a confusing maze of county, state and City of Detroit ownership, investors would add their names through tax liens and cloud property deeds beyond recognition. And city taxes would not get paid. Eventually, investors who purchased tax liens showed up on city tax rolls.
Dearing wants to own the properties. So he pays the county taxes to stave off foreclosure. He only pays the city tax when he completes the tedious legal process required to take full ownership of a property.
He says he wants to develop some of his properties. But right now, he’s building an east-side real estate dynasty.
“It’s an investment. Some people take their money to the casino. Some take it to a bar. I don’t drink or smoke. Land is an investment, and that’s my hobby,” says Dearing.
“I’d rather deal with vacant land, and just wait. I know it’s a 20-year turnaround. If something is in a slum, and they eliminate the slum, then the property will be worth something in 20 years.
“I’m not in this to hurt people. I’m in this as a business.”
Though Dearing may not have to pay all the taxes on his holdings, the city could foreclose for nonpayment. Doing so might increase those property’s values, according to some housing activists.
The city is losing out by not foreclosing, says state Rep. Steve Tobocman, D-Detroit, who spent years as a housing attorney and advocate in the city.
“Property taxes are a tool,” Tobocman says. “You need them to be a source of revenue for the government, and you also want them to work as a development tool, to make sure property sees its highest and best use. If taxes are imposed, there’s a cost to owning property. The city has not used those tools.”
Change in the air
Sean Werdlow, the city’s chief financial officer, inherited the city’s tax dilemma, and acknowledges the severity of the problems. The former investment banker says the city’s tax system needs a complete overhaul.
“There’s been a lack of enforcement,” Werdlow says. “People tend to not pay when they know they won’t be pursued.”
Werdlow, with the support of Mayor Kwame Kilpatrick, is pushing for wholesale reform. He successfully lobbied the City Council this year to hire a collections firm to go after tax delinquents. Despite heavy opposition from council members who wanted to keep collections in-house, Werdlow invoked the specter of the city’s $100 million deficit, and council finally signed off on the measure.
City Council President Maryann Mahaffey says she was not aware the city was losing $60 million a year in property taxes.
“They need to tell us,” Mahaffey says.
Mahaffey says she does not think the city is erring in not handing over its collection and foreclosure system to the county. It’s up to the city to get the job done, she says.
“If we did the job we were supposed to do, we would not have this problem,” she says.
The 30-year council veteran says she has lobbied for years to reform the city’s tax collection and foreclosure system. The City Council debated sending delinquent accounts to the county, as do other cities, but Mahaffey says there was political opposition to such a move.
Council members and city officials resisted using the county in part because they were suspicious of former County Executive Ed McNamara, and in part because city politicians didn’t want the county to make money on city collections, say current council members who asked to remain unnamed. In addition, the council members wanted to protect city union jobs.
Several months ago, Mahaffey proposed a compromise to allow the City Council to choose which delinquent accounts are sent to the county. The resolution was adopted, but no bills have been sent over for collection.
“I’ve been very upset about this for years,” says Mahaffey. “I’m upset we haven’t aggressively followed up on this.”
Meanwhile, Williams estimates taxpayers owe the city $300 million in property and income taxes, water bills and other debts.
But Metro Times’ review indicates that much of the $300 million could be phantom debt. Inaccurate records and debts recorded on properties owned or controlled by the city mean a share of this debt is not collectible.
“I spend all my time in City Hall fighting the tax bills,” says Shams Aigoro, who the city says owes $288,000 in delinquent taxes, a number she disputes. “They drag their feet in updating the tax rolls.”
Werdlow stands by the $300 million figure.
“Somebody out there owes the money,” he says. “I don’t care who it is, we are going to collect it.”
Since Williams became treasurer, he has ended such practices as “indefinite” tax abatements for large property owners. The number of accounts referred by Treasury to the City Law Department for foreclosure has increased from 20 a month to as many as 100 a day. Williams now requires all Treasury employees to pay their taxes on time.
“We have to set an example,” he says.
But when the Treasury Department sends accounts to the City Law Department for court action, city lawyers struggle to handle the load. City attorneys told the City Council earlier this year they need more staff and training to handle the job. More than 4,200 delinquent accounts are backlogged and waiting to be taken to court; some cases have been idle for two years, according to Treasury Department sources who asked to remain anonymous.
The biggest hope for the city is its contract with collections firm MBIA MuniServices of New York. The firm will begin collections this fall and keep a third of whatever it collects.
The contract limits the amount the company can keep to $17 million, and requires the agency to train Detroit employees.
MBIA will soon begin to “clean up” Detroit’s tax data, identify the names and addresses of scofflaws and enter the information into its custom software. At the end of the three-year contract, the city will spend $20,000 a year to use the database.
“When we’re done, you’ll know who’s delinquent, where they are and how much they owe,” says Werdlow. “If you need a report, you shouldn’t have to wait six months to get it.”
Immediate action is paramount, says Werdlow.
“If I don’t accomplish anything in this job but reduce the city’s delinquency rate, that would be phenomenal,” he says. “We’ve got to show people that, ‘Hey, you’ve got to pay.’”
A free ride
Companies owned by Ernest Karr of Bloomfield Township owe the city roughly $4 million in taxes, fees and penalties. The infamous Detroit landlord (“This cold house,” Metro Times, Nov. 6-13, 2002) has spent 20 years fighting the city’s tax bills in court, often successfully. His lawyer argues the city doesn’t follow its own rules and regulations in collecting, frequently waiting longer than six years to call in debts.
For years, the city never moved to foreclose on Karr’s companies’ properties. That’s because the city Treasury Department tracks debts by address, not name. In addition, the city only foreclosed after back taxes on an individual property exceeded $5,000. In this way, mass landowners such as Karr hovered beneath the city’s radar screen by keeping bills on individual houses below $5,000.
“That’s how Karr was able to get away with this,” says Mahaffey.
Karr was unavailable for comment.
Mahaffey says she sent lists of major delinquents to Treasury, but “nothing would happen.”
“I can’t do everything myself,” says Mahaffey.
Under the Kilpatrick administration, the city’s foreclosure policy has gotten more aggressive, Mahaffey says. Major landowners report receiving more foreclosure notices from the city.
Last year, the city tax collection department, under the supervision of Stuart Trager, filed a mass foreclosure action against Karr. The city wants the money, not the properties, and that’s the tricky part, says Trager.
Many delinquent properties, such as Karr’s, are worth less than the taxes owed on them, putting the city a jam, he says. In Karr’s case, the city is going after his money and his properties, says Trager.
But for years, the city’s lax foreclosure policies fueled delinquencies, say numerous property owners and city officials.
“It’s pathetic what people owe the city,” says Mike Kelly of Grosse Pointe, a Detroit property investor. Kelly says he pays county taxes to stave off foreclosure, but avoids paying city taxes where legally possible. The city bills him for some $500,000 on properties he does not own, Kelly says.
But Detroit isn’t alone in blame for its predicament, says Scott Schrager, special assistant to the Michigan state treasurer.
The city’s record keeping problems have been exacerbated by the state’s old foreclosure system and the county tax lien sales, which often clouded ownership records for thousands of delinquent Detroit properties.
The old county tax lien sales confused ownership of properties. Unclaimed properties went to the state, which did a poor job of foreclosure actions. The state sold thousands of houses in Detroit that were marred with unclear ownership records.
As a result, the city is forced to bill whomever it can for many of the properties.
“Detroit is not alone in responsibility for their situation,” says Schrager, who admits the state’s errors.
The Michigan Legislature reformed the foreclosure system, in large part because of the problems in Detroit. Since then, counties have the power to foreclose. And now, when houses are foreclosed on, they will have to clear title before they are sold, says Schrager.
Unfortunately for Detroit, it’s the only city that won’t benefit from the new system, because it doesn’t participate in it.“Detroit is unique in the state,” says Schrager.
Lisa M. Collins is a Metro Times staff writer. E-mail her at firstname.lastname@example.org.