Philadelphia's tax lien sale and securitization.
City council's approval of the tax lien sale depended on
balancing the city's financial needs with safeguards for low-income
homeowners.
On June 30, 1997, the City and School District of Philadelphia closed their first securitization of tax liens. More than $106 million of real estate tax liens were sold to the Philadelphia Authority for Industrial Development (PAID). PAID used the liens to collateralize the issuance of seven-year bonds totaling $75,485,000. This sale marked the seventh securitization to take place since Jersey City's first effort in 1993. It also marked the first time the bonds were sold in a public offering and the first time a major rating agency insured the issue. Finally, there are many features in the transaction, such as the power to substitute liens during the life of the collection process, that make the Philadelphia tax lien sale and securitization a model for other cities interested in turning uncollectible liens into cash.
The tax lien sale and securitization process is possible because the rating agencies recognize that certain private-sector collection firms, known as servicers, can collect on real estate liens that governments with limited technical, financial, and personnel resources cannot. In fact, the rating agencies rate both the quality of the portfolio of liens and the tax lien servicer.
Because of the age of the liens, their high lien-to-value ratios, and other features of the lien portfolio, Philadelphia's independently elected city controller concluded that the revenue and law departments would collect only 40 percent of the proposed lien portfolio over the next five years. It should be noted that this is not the same as the city's real estate tax collection rate. It predicts only what the city would be able to do with a specific portfolio of old liens with high lien-to-value ratios. The difference between what the city would collect on its own and what the servicer is expected to achieve is new or found money for the taxing bodies. Securitizing the portfolio to collateralize bonds allows this found money to be available immediately. Because of the complexity of the transactions, the securitizations that have taken place have required cost of issuances that are greater than 3 percent of the bonds issued. In Philadelphia's case, costs of issuance were approximately $3 million or 3.8 percent of the bonds issued. This cost is justified since the sale and securitization provided $27 million in new money that would not have been available to the City and School District of Philadelphia otherwise.
Since 40 percent of the entire portfolio, or $42.5 million, would have been collected by the city with existing resources, this amount was removed from the proceeds of the sale and placed in a senior note that will be paid to the city and school district over the next five years. This so-called "hold harmless" money is separate from the new or found money achieved by the securitization.
Because the city will use the proceeds for economic development, the interest on the bonds is taxable. Typically, such taxable issues are priced at 50 to 75 basis points above the two-year Treasury bond.
The Portfolio and Servicers
Philadelphia's portfolio consisted of real estate tax liens on 33,591 properties of which 21,896 are residential. The city does not know how many of these residential properties are owner occupied and how many are rentals. More than 6,000 other properties are commercial or industrial and 5,908 are vacant lots. One third of the properties in the portfolio have liens that are at least 10 years old.
The rating agencies examined the portfolio from the time of its initial creation until four days before the bonds were sold. Because the portfolio was constantly changing, due to liens being deleted because payments had been arranged or errors in the liens had been identified, the rating agencies were asked to examine a moving target. However, once the portfolio was frozen and the agencies were asked to make a final rating, they had sufficient experience with the portfolio to give it a rating. In the end, the rating agency gave Philadelphia a 29 percent discount, which translated into a lien portfolio of $106 million supporting $75,485,000 in bonds. After establishing a $2.6 million interest reserve and paying issuance costs, available funds for the city and school district totaled $69,843,000. As stated, $42,527,000 of this amount was held in reserve to protect future years' budgets. The remaining $27.5 million (the new money) was divided between the city and school district in accordance with their tax authority.
The difference between the portfolio value, $106 million, and the amount of bonds issued, $75.5 million, was paid to the city and school district as a subordinated note. The $30.8 million subordinated note becomes the source of payment for both the bond holders and the servicers. The bond holders are paid quarterly from the collections on the liens. The servicers also are paid from the collections. Only after all the bonds are paid off, does the city and school district derive some revenue from the over-collateralized portion of the portfolio, the subordinated note of $30.8 million. While it is assumed that some revenue will come from the subordinated note, the city and school district have not projected any revenue from this portion of the deal. Exhibit 1 displays the details of the sale and securitization.
In choosing the servicers, the city through its financial advisor, Public Financial Management, sent a request for qualifications (RFQ) to 23 companies known to have interest in this line of collections work. The RFQs sought information regarding the servicers' experience in real estate tax lien collection and their approval or rating from any of the three rating agencies. Five servicing companies qualified after the RFQs were evaluated. The subsequent request for proposals basically sought the servicers' proposed fee structure. The most competitive aspects of the fees proposed by the servicers were blended into a single fee structure. Because of the relatively large number of parcels in the Philadelphia portfolio, it was decided to obtain three servicers. The contract between the PAID and the servicers allows for the shifting of liens from those servicers who are underperforming specific benchmarks to those who are achieving or exceeding the contracted benchmarks.
Termination Fee. The fee structure is in three parts. First, there is a termination fee. In the event that a servicer is terminated without cause, it is entitled to a fee based on 2 percent of the principal value of its portfolio, if termination takes place in the first year. This fee declines until the third year when a 1/2 percent termination fee would be paid by the issuer.
Administrative Fee. Second, there is an .8 percent administrative fee based on the size of the principal amount of the portfolio held by each servicer. As the portfolio is worked and liens converted into cash, the value of the administrative fee will decline.
Incentive Fee. Of greatest importance is the incentive fee, which is designed to encourage servicers to collect on even the most difficult liens. Accordingly, the first 10 percent of the portfolio each servicer collects will earn the servicer .25 percent of the funds brought in. The incentive fee increases with each 10 percent of the portfolio collected until the final 10 percent of the portfolio allows the servicer to earn 6 percent on the monies brought in.
The Rush to Pay
Publicity about the sale of the liens and the fear that the servicers would somehow be more draconian in their collection methods moved many long-standing delinquents to either pay their delinquencies or enter into 12- to 24-month payment plans.
The City of Philadelphia increased the pressure on delinquents by securing authority from the state legislature and city council to charge up to 18 percent in attorneys fees for the collection of delinquent real estate taxes. This 18 percent goes to the city and school district, not the servicer, but it increases the value of portions of the portfolio with liens filed after December 1990. Prior to the engagement of the servicers, Philadelphia's delinquents flocked to make restitution on their back taxes. This rush to pay before the terms of settlement got tougher was also reported by other cities that used securitizations, sold their liens directly to servicers, or simply hired private servicers.
The initial legislation for the sale and securitization was submitted to city council in November 1996, and final passage took place in June 1997. During the month of April, a series of public hearings was held by City Council that generated significant publicity. The misinformation that is the stock in trade of radio talk shows had a positive effect and motivated people to pay their back taxes. Between May 1 and June 16, the city and school district collected a combined $36,550,519 in cash. In addition, 30,230 payment plans worth $68,816,768 were obtained.
Balancing Financial Interests
The biggest obstacle in selling the liens, hiring servicers, and going forward with the securitization was obtaining city council approval. Philadelphia, like many cities, has large concentrations of lower-income people. City council members, particularly those who represent low-income districts, were concerned about protecting delinquent taxpayers from unfair collection methods. Even though servicers are required to use the same methods, payment plans, and techniques employed by the city revenue and law departments, many council members feared that low-income people would be forced to make payments they could not afford and also were concerned about adverse voter reaction from a large segment of the population. More than 30 percent of Philadelphia's 600,000 households live on an income of less than $15,000 a year. Almost 20 percent, one out of every five properties, had a real estate delinquency and at least one lien.
In the end, getting this tax lien sale to market required balancing the financial interests, as represented by the rating agencies, with the safeguards for citizens required by city council. Every measure to protect the interests of the delinquent citizen could result to one degree or another in a greater discount and less money in the deal. Without the provisions for protecting individuals, however, city council approval would not have been provided. Because the school district needed the money by the end of its fiscal year (June 30), finance staff were able to provide a solid reason to do the securitization and a real deadline for city council action.
The most significant protection provided to lower-income people was to structure the servicing agreement to allow unlimited lien substitution for either economic development purposes or because of the economic hardship of the property owner. If a property whose lien is being worked by a servicer is thought to be important for an economic development project where the tax delinquency might assist a public agency or a community development corporation in obtaining the parcel, or if the property owner is clearly destitute, the lien can be substituted with a lien of equal value and quality. Since the portfolio did not include all the tax liens held by the City of Philadelphia and because the city files up to $50 million of delinquent tax liens a year, there is no difficulty in finding suitable substitutes. This feature gave council members comfort that they could remove the truly destitute from the servicers' embrace.
The experience of other cities that have utilized servicers is that there has not been any increase in foreclosures, and the principal servicers themselves report that while owner-occupied properties may be threatened with tax sales, it is not in the servicers' financial interests to foreclose on these properties.
The portfolio Philadelphia provided to the servicers was constructed so that senior citizens and other taxpayers on special payment plans were not included. People who entered into payment agreements with the city before June 17, 1997, were assured that their liens would not be placed in the portfolio nor would their liens be used for substitution and put in the portfolio at some later date - even if they broke the payment agreement. City council members were assured that people who enter into payment agreements with the servicer and then break the agreement will have at least 60 days before the property goes to tax sale. District council members are to be notified two weeks before any tax sale of properties within their district.
At the last minute, three recalcitrant council members agreed to support the tax lien sale and securitization if the city would designate a million dollars of the new money gained from the sale to set up a loan program so that working people faced with tax foreclosure can get the necessary down payment to enter into a payment agreement. Since the city's housing funds come from community development block grants, current loan programs are income restricted. Use of the tax lien proceeds removes the income barrier. Under the new Homeowner Protection Program, loans will be repaid with the tax delinquency as part of the monthly payment plan. In addition, participants will be required to undergo household finance and budget counseling to insure that taxes are paid appropriately in the future.
As municipalities seek to turn uncollected taxes, fines, and fees into cash, the sale and securitization of these receivables may be an increasingly important tool. The Government Finance Officers Association adopted a recommended practice, "Sale and Securitization of Property Tax Liens," in June 1997, which is displayed in the accompanying sidebar.
RELATED ARTICLE: GFOA RECOMMENDED PRACTICE Sale and Securitization of Property Tax Liens (1997)
Background. Governments sell or securitize property tax liens to eliminate backlogs of accumulated delinquent tax receivables and convert those receivables into cash. Tax liens, which are attached to properties for nonpayment of property taxes or those assessments, may be bundled and sold directly to investors through a bulk-sale process. They also may be sold to a trust, where the payment stream is securitized. Bonds backed by the delinquent taxes are then sold to investors and the proceeds of the issue are paid to the government that sold the tax liens.
Recommendation. The Government Finance Officers Association (GFOA) recommends that governments contemplating the sale or securitization of property tax liens undertake a careful analysis of benefits and risks both in the current fiscal year and over the long-term. When evaluating the sale or securitization of tax liens, governments should:
1. Ensure they have legal authorization to enter into these types of transactions and understand any conditions or limitations imposed by state or local law.
2. Be clear about the public policy objectives to be achieved, such as improving collections or avoiding costs associated with the ownership of the property on which taxes are owed.
3. Evaluate whether changes in the collection process could reduce the occurrence of delinquencies.
4. Use sale proceeds for non-recurring purposes, particularly if the amount of the sale or securitization is large. Governments using a tax lien sale or securitization as a one-time mechanism to address a current year budget gap should assess the short- and long-term implications for the government's credit quality. They also should consider how gaps will be closed in later years and whether structural budgetary balance is able to be achieved without future tax lien sales or securitizations.
5. Determine that the net return after taking account of transaction costs is acceptable in terms of alternative approaches, including retaining ownership of uncollected receivables.
Once a decision has ben made to sell or securitize tax liens, governments should:
1. Examine the lien pool carefully to ensure properties will be acceptable to investors. Lien-to-value ratios of various classes of property, the age of the liens, historical redemption rates in the community, property types, and the number of environmentally impacted properties are among the factors that should be considered.
2. Review statutory cure periods established to permit owners to pay delinquent revenues to ensure that an appropriate balance is struck between government policy objectives and acceptability to investors.
3. Select legal and financial advisors and other service providers with demonstrated experience with these transactions.
4. Select a servicer with a proven track record if such a firm is being used to collect delinquent taxes. Rating agency approval of the servicer is typically required, and will be based, in part, on the record of the servicer. Among the qualifications that should be evaluated are:
* knowledge of state and local law;
* due diligence capabilities in the lien selection process;
* adequacy of the servicing system, including recording, auditing, and financial reporting procedures; and
* historical performance in serving liens, including procedures for workouts and foreclosures.
5. Recognize the community relations impact of establishing a private collection mechanism. Governments should take steps to maintain good relations among all affected parties, such as designating an ombudsman or instituting a formal complaint process through which problems that may arise are addressed.
References
* "Tax Lien Securitization: Putting Non-Performing Assets to Work," Government Finance Review, GFOA, June 1996.
* "Municipalities Turn to Property Tax Lien Sales," Standard & Poor's CreditWeek Municipal, March 25, 1996.
Approved by the GFOA Executive Board October 17, 1997
BEN HAYLLAR, Ph.D., is the City of Philadelphia Director of Finance and a member of the GFOA's Committee on Debt and Fiscal Policy. He joined the administration of Ed Rendell in 1993 after serving as Pittsburgh's director of finance.
On June 30, 1997, the City and School District of Philadelphia closed their first securitization of tax liens. More than $106 million of real estate tax liens were sold to the Philadelphia Authority for Industrial Development (PAID). PAID used the liens to collateralize the issuance of seven-year bonds totaling $75,485,000. This sale marked the seventh securitization to take place since Jersey City's first effort in 1993. It also marked the first time the bonds were sold in a public offering and the first time a major rating agency insured the issue. Finally, there are many features in the transaction, such as the power to substitute liens during the life of the collection process, that make the Philadelphia tax lien sale and securitization a model for other cities interested in turning uncollectible liens into cash.
The tax lien sale and securitization process is possible because the rating agencies recognize that certain private-sector collection firms, known as servicers, can collect on real estate liens that governments with limited technical, financial, and personnel resources cannot. In fact, the rating agencies rate both the quality of the portfolio of liens and the tax lien servicer.
Because of the age of the liens, their high lien-to-value ratios, and other features of the lien portfolio, Philadelphia's independently elected city controller concluded that the revenue and law departments would collect only 40 percent of the proposed lien portfolio over the next five years. It should be noted that this is not the same as the city's real estate tax collection rate. It predicts only what the city would be able to do with a specific portfolio of old liens with high lien-to-value ratios. The difference between what the city would collect on its own and what the servicer is expected to achieve is new or found money for the taxing bodies. Securitizing the portfolio to collateralize bonds allows this found money to be available immediately. Because of the complexity of the transactions, the securitizations that have taken place have required cost of issuances that are greater than 3 percent of the bonds issued. In Philadelphia's case, costs of issuance were approximately $3 million or 3.8 percent of the bonds issued. This cost is justified since the sale and securitization provided $27 million in new money that would not have been available to the City and School District of Philadelphia otherwise.
Since 40 percent of the entire portfolio, or $42.5 million, would have been collected by the city with existing resources, this amount was removed from the proceeds of the sale and placed in a senior note that will be paid to the city and school district over the next five years. This so-called "hold harmless" money is separate from the new or found money achieved by the securitization.
Because the city will use the proceeds for economic development, the interest on the bonds is taxable. Typically, such taxable issues are priced at 50 to 75 basis points above the two-year Treasury bond.
The Portfolio and Servicers
Philadelphia's portfolio consisted of real estate tax liens on 33,591 properties of which 21,896 are residential. The city does not know how many of these residential properties are owner occupied and how many are rentals. More than 6,000 other properties are commercial or industrial and 5,908 are vacant lots. One third of the properties in the portfolio have liens that are at least 10 years old.
The rating agencies examined the portfolio from the time of its initial creation until four days before the bonds were sold. Because the portfolio was constantly changing, due to liens being deleted because payments had been arranged or errors in the liens had been identified, the rating agencies were asked to examine a moving target. However, once the portfolio was frozen and the agencies were asked to make a final rating, they had sufficient experience with the portfolio to give it a rating. In the end, the rating agency gave Philadelphia a 29 percent discount, which translated into a lien portfolio of $106 million supporting $75,485,000 in bonds. After establishing a $2.6 million interest reserve and paying issuance costs, available funds for the city and school district totaled $69,843,000. As stated, $42,527,000 of this amount was held in reserve to protect future years' budgets. The remaining $27.5 million (the new money) was divided between the city and school district in accordance with their tax authority.
The difference between the portfolio value, $106 million, and the amount of bonds issued, $75.5 million, was paid to the city and school district as a subordinated note. The $30.8 million subordinated note becomes the source of payment for both the bond holders and the servicers. The bond holders are paid quarterly from the collections on the liens. The servicers also are paid from the collections. Only after all the bonds are paid off, does the city and school district derive some revenue from the over-collateralized portion of the portfolio, the subordinated note of $30.8 million. While it is assumed that some revenue will come from the subordinated note, the city and school district have not projected any revenue from this portion of the deal. Exhibit 1 displays the details of the sale and securitization.
In choosing the servicers, the city through its financial advisor, Public Financial Management, sent a request for qualifications (RFQ) to 23 companies known to have interest in this line of collections work. The RFQs sought information regarding the servicers' experience in real estate tax lien collection and their approval or rating from any of the three rating agencies. Five servicing companies qualified after the RFQs were evaluated. The subsequent request for proposals basically sought the servicers' proposed fee structure. The most competitive aspects of the fees proposed by the servicers were blended into a single fee structure. Because of the relatively large number of parcels in the Philadelphia portfolio, it was decided to obtain three servicers. The contract between the PAID and the servicers allows for the shifting of liens from those servicers who are underperforming specific benchmarks to those who are achieving or exceeding the contracted benchmarks.
Exhibit 1 CALCULATION OF PHILADELPHIA TAX LIE SALE AND SECURITIZATION Total Value of Liens $106,319,079 (A) School's Portion $58,475,493 (B) City's Portion $47,843,586 (C) $106,319,079 Bonds/Issuable = (A) x 71% $75,485,000 Less Issuance Cost & Reserve $5,353,146 Total Amount Bonds $70,131,855 (D) Total Amt. Subordinated Note = (A) x 29% $30,832,533 (E) Proceeds to School Dist. = (D) x 55% $38,572,520 (F) Proceeds to City = (D) x 45% $31,559,335 (G) City's Senior Note = (C) x 40% $19,137,434 (H) City's "New" Money = (G) - (H) $12,421,900 (I) City's Subordinated Note = (E) x 45% $13,874,640 (J) Sch. Dist. Senior Note = (B) x 40% $23,390,197 (K) Sch. Dist. "New" Money = (F) - (K) $15,182,323 (L) Sch. Dist. Subordinated Note = (E) x 55% $16,957,893 (M) (Because of different millage rates, the city's interest in the real estate tax lien portfolio is 45 percent while the school district's is 55 percent.)
Termination Fee. The fee structure is in three parts. First, there is a termination fee. In the event that a servicer is terminated without cause, it is entitled to a fee based on 2 percent of the principal value of its portfolio, if termination takes place in the first year. This fee declines until the third year when a 1/2 percent termination fee would be paid by the issuer.
Administrative Fee. Second, there is an .8 percent administrative fee based on the size of the principal amount of the portfolio held by each servicer. As the portfolio is worked and liens converted into cash, the value of the administrative fee will decline.
Incentive Fee. Of greatest importance is the incentive fee, which is designed to encourage servicers to collect on even the most difficult liens. Accordingly, the first 10 percent of the portfolio each servicer collects will earn the servicer .25 percent of the funds brought in. The incentive fee increases with each 10 percent of the portfolio collected until the final 10 percent of the portfolio allows the servicer to earn 6 percent on the monies brought in.
The Rush to Pay
Publicity about the sale of the liens and the fear that the servicers would somehow be more draconian in their collection methods moved many long-standing delinquents to either pay their delinquencies or enter into 12- to 24-month payment plans.
The City of Philadelphia increased the pressure on delinquents by securing authority from the state legislature and city council to charge up to 18 percent in attorneys fees for the collection of delinquent real estate taxes. This 18 percent goes to the city and school district, not the servicer, but it increases the value of portions of the portfolio with liens filed after December 1990. Prior to the engagement of the servicers, Philadelphia's delinquents flocked to make restitution on their back taxes. This rush to pay before the terms of settlement got tougher was also reported by other cities that used securitizations, sold their liens directly to servicers, or simply hired private servicers.
The initial legislation for the sale and securitization was submitted to city council in November 1996, and final passage took place in June 1997. During the month of April, a series of public hearings was held by City Council that generated significant publicity. The misinformation that is the stock in trade of radio talk shows had a positive effect and motivated people to pay their back taxes. Between May 1 and June 16, the city and school district collected a combined $36,550,519 in cash. In addition, 30,230 payment plans worth $68,816,768 were obtained.
Balancing Financial Interests
The biggest obstacle in selling the liens, hiring servicers, and going forward with the securitization was obtaining city council approval. Philadelphia, like many cities, has large concentrations of lower-income people. City council members, particularly those who represent low-income districts, were concerned about protecting delinquent taxpayers from unfair collection methods. Even though servicers are required to use the same methods, payment plans, and techniques employed by the city revenue and law departments, many council members feared that low-income people would be forced to make payments they could not afford and also were concerned about adverse voter reaction from a large segment of the population. More than 30 percent of Philadelphia's 600,000 households live on an income of less than $15,000 a year. Almost 20 percent, one out of every five properties, had a real estate delinquency and at least one lien.
In the end, getting this tax lien sale to market required balancing the financial interests, as represented by the rating agencies, with the safeguards for citizens required by city council. Every measure to protect the interests of the delinquent citizen could result to one degree or another in a greater discount and less money in the deal. Without the provisions for protecting individuals, however, city council approval would not have been provided. Because the school district needed the money by the end of its fiscal year (June 30), finance staff were able to provide a solid reason to do the securitization and a real deadline for city council action.
The most significant protection provided to lower-income people was to structure the servicing agreement to allow unlimited lien substitution for either economic development purposes or because of the economic hardship of the property owner. If a property whose lien is being worked by a servicer is thought to be important for an economic development project where the tax delinquency might assist a public agency or a community development corporation in obtaining the parcel, or if the property owner is clearly destitute, the lien can be substituted with a lien of equal value and quality. Since the portfolio did not include all the tax liens held by the City of Philadelphia and because the city files up to $50 million of delinquent tax liens a year, there is no difficulty in finding suitable substitutes. This feature gave council members comfort that they could remove the truly destitute from the servicers' embrace.
The experience of other cities that have utilized servicers is that there has not been any increase in foreclosures, and the principal servicers themselves report that while owner-occupied properties may be threatened with tax sales, it is not in the servicers' financial interests to foreclose on these properties.
The portfolio Philadelphia provided to the servicers was constructed so that senior citizens and other taxpayers on special payment plans were not included. People who entered into payment agreements with the city before June 17, 1997, were assured that their liens would not be placed in the portfolio nor would their liens be used for substitution and put in the portfolio at some later date - even if they broke the payment agreement. City council members were assured that people who enter into payment agreements with the servicer and then break the agreement will have at least 60 days before the property goes to tax sale. District council members are to be notified two weeks before any tax sale of properties within their district.
At the last minute, three recalcitrant council members agreed to support the tax lien sale and securitization if the city would designate a million dollars of the new money gained from the sale to set up a loan program so that working people faced with tax foreclosure can get the necessary down payment to enter into a payment agreement. Since the city's housing funds come from community development block grants, current loan programs are income restricted. Use of the tax lien proceeds removes the income barrier. Under the new Homeowner Protection Program, loans will be repaid with the tax delinquency as part of the monthly payment plan. In addition, participants will be required to undergo household finance and budget counseling to insure that taxes are paid appropriately in the future.
As municipalities seek to turn uncollected taxes, fines, and fees into cash, the sale and securitization of these receivables may be an increasingly important tool. The Government Finance Officers Association adopted a recommended practice, "Sale and Securitization of Property Tax Liens," in June 1997, which is displayed in the accompanying sidebar.
RELATED ARTICLE: GFOA RECOMMENDED PRACTICE Sale and Securitization of Property Tax Liens (1997)
Background. Governments sell or securitize property tax liens to eliminate backlogs of accumulated delinquent tax receivables and convert those receivables into cash. Tax liens, which are attached to properties for nonpayment of property taxes or those assessments, may be bundled and sold directly to investors through a bulk-sale process. They also may be sold to a trust, where the payment stream is securitized. Bonds backed by the delinquent taxes are then sold to investors and the proceeds of the issue are paid to the government that sold the tax liens.
Recommendation. The Government Finance Officers Association (GFOA) recommends that governments contemplating the sale or securitization of property tax liens undertake a careful analysis of benefits and risks both in the current fiscal year and over the long-term. When evaluating the sale or securitization of tax liens, governments should:
1. Ensure they have legal authorization to enter into these types of transactions and understand any conditions or limitations imposed by state or local law.
2. Be clear about the public policy objectives to be achieved, such as improving collections or avoiding costs associated with the ownership of the property on which taxes are owed.
3. Evaluate whether changes in the collection process could reduce the occurrence of delinquencies.
4. Use sale proceeds for non-recurring purposes, particularly if the amount of the sale or securitization is large. Governments using a tax lien sale or securitization as a one-time mechanism to address a current year budget gap should assess the short- and long-term implications for the government's credit quality. They also should consider how gaps will be closed in later years and whether structural budgetary balance is able to be achieved without future tax lien sales or securitizations.
5. Determine that the net return after taking account of transaction costs is acceptable in terms of alternative approaches, including retaining ownership of uncollected receivables.
Once a decision has ben made to sell or securitize tax liens, governments should:
1. Examine the lien pool carefully to ensure properties will be acceptable to investors. Lien-to-value ratios of various classes of property, the age of the liens, historical redemption rates in the community, property types, and the number of environmentally impacted properties are among the factors that should be considered.
2. Review statutory cure periods established to permit owners to pay delinquent revenues to ensure that an appropriate balance is struck between government policy objectives and acceptability to investors.
3. Select legal and financial advisors and other service providers with demonstrated experience with these transactions.
4. Select a servicer with a proven track record if such a firm is being used to collect delinquent taxes. Rating agency approval of the servicer is typically required, and will be based, in part, on the record of the servicer. Among the qualifications that should be evaluated are:
* knowledge of state and local law;
* due diligence capabilities in the lien selection process;
* adequacy of the servicing system, including recording, auditing, and financial reporting procedures; and
* historical performance in serving liens, including procedures for workouts and foreclosures.
5. Recognize the community relations impact of establishing a private collection mechanism. Governments should take steps to maintain good relations among all affected parties, such as designating an ombudsman or instituting a formal complaint process through which problems that may arise are addressed.
References
* "Tax Lien Securitization: Putting Non-Performing Assets to Work," Government Finance Review, GFOA, June 1996.
* "Municipalities Turn to Property Tax Lien Sales," Standard & Poor's CreditWeek Municipal, March 25, 1996.
Approved by the GFOA Executive Board October 17, 1997
BEN HAYLLAR, Ph.D., is the City of Philadelphia Director of Finance and a member of the GFOA's Committee on Debt and Fiscal Policy. He joined the administration of Ed Rendell in 1993 after serving as Pittsburgh's director of finance.
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| Author: | Hayllar, Ben |
|---|---|
| Publication: | Government Finance Review |
| Date: | Dec 1, 1997 |
| Words: | 3064 |
| Previous Article: | Hitting the mark: communicating outcomes to the citizens. |
| Next Article: | The good and the bad of voter initiatives. |
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