Ravaged by Neglect, Part Three: Delinquents enabled by city’s failings

For decades, City Hall has been an indifferent steward of Philadelphia’s most elemental resource: the land itself.

The result has been low collection rates on real estate taxes, inaccurate property assessments, suspect property data, and poor management of thousands of parcels owned by city agencies.

The failures represent a breakdown in some of the most basic functions of municipal government, with enormous consequences for the city: thwarted development, the spread of blight, a stunted tax base, and diminished everyday quality of life for 1.5 million Philadelphians. Given the decades of municipal neglect, repairing these land-management systems and changing the behavior that caused the failure is a Herculean task.

But the job is not an impossible one, tax delinquency experts say. Indeed, these are duties most city governments perform as a matter of routine operations.

The Nutter administration’s release last month of new assessments for most of the 580,000 properties in the city was a critical first step in fixing the property management problems — provided the assessments prove to be reasonably accurate and City Council does not balk at enacting the Actual Value Initiative.

But the city’s progress on other fronts has been far less promising.

All objective indicators show that the delinquency epidemic has grown worse since Mayor Nutter was sworn-in, a year-long Inquirer/PlanPhilly investigation into the city’s property-tax delinquency and land-management systems has found. By some criteria, the city’s recent land-management and property-tax collection performance has been historically poor:

• Between 2008 and 2011 — the last year for which complete data is available — Philadelphia’s one-year property-tax collection rate has averaged just 85.5 percent. That average is lower than any big city in the nation, including Detroit, and a full 10 percentage points below the average collection rate of the 20 biggest cities over the same period. Some cities, including Boston, Baltimore and San Jose, routinely collect 99 to 100 percent.
• The city’s collection rate has hit a low point during the Nutter administration. The three single-worst collection years since 1980 have all been recorded on Nutter’s watch: 2009, 2010 and 2011. By this widely recognized standard, every mayor since William Green has had a stronger collection record than Nutter.
• Few chronic delinquents are taken to court by the city, a lax practice that appears to encourage non-payment. A survey of 593 randomly selected properties that in 2009 were delinquent for three or more years found that 86 percent were still in arrears on their taxes, and that 77 percent have not been sued by the city for non-payment.
• The city has issued at least 10,000 licenses and permits to tax-delinquent properties over the last five years, in apparent violation of the City Code.
• City land sales have ground almost to a halt under the Nutter administration, a trend that locks up thousands of publicly owned pieces of vacant land and empty homes in a state of disuse, and, frequently, disrepair. Since a peak in 2005, the annual rate of sales of public property has plummeted 74 percent, a review of deed transfers found.

City officials contend they are urgently grappling with the dual problems of property-tax delinquency and vacant land.

“We are not just standing by. We’re working on systematic improvement to our system and we’re seeing results,” said City Finance Director Rob Dubow in an email. He attributed the low collection rates of recent years to “the worst sustained economic contraction since the 1930s,” and said it was “not surprising that there has been an impact on tax collections.”

The 2009 recession did indeed lower collection rates in big cities nationwide, but no city’s rate fell as far as Philadelphia’s did, and only Detroit and Indianapolis have posted slower collection recoveries in the years since.

Dubow said that the city would post a collection rate of about 91 percent when the 2012 results come out next year, which would mark a significant improvement. The city made the same prediction in February of last year, however, and posted a final 2011 rate of just 86.6 percent.

“Now we understand that this is not good enough,” Dubow said. “Every Administration in the past has said it wanted to increase collections, what’s different now is that this Administration is moving in a different direction: by investing in and using new technology to target better tax delinquents; using outside agencies to help us collect; doing a much better job in communicating what we are and will be doing in an effort to create a vastly improved climate of compliance and by seeking additional tax collection authority from the Commonwealth.”

Nutter outlined those pending reforms and past initiatives – including the garnishing of wages of tax-delinquent city workers, a 2010 tax amnesty, and an internal reorganization designed to improve communication between the Revenue and Law Departments, the key enforcement agencies – at a February press conference.

It may be that these efforts will, in time, stamp out what City Controller Alan Butkovtiz calls Philadelphia’s “culture of non-payment” and “the most important financial issue facing city government.”

But this is hardly the first time the Nutter administration has pledged to improve the city’s collection efforts.

In March 2009, when the city publicly released the names of big business-tax deadbeats, the mayor proclaimed: “You owe it, pay it …. We cannot be more direct or more clear.”

Later that month, he invited the press to watch sheriff’s deputies serve notice to tax-delinquent law partners. “The city will be forced to collect our money by any means necessary,” Nutter said.

He repeated the pledge in September 2010. “This is not a threat; it is real, and it is a promise to the city,” Nutter said.

But to date, the administration’s record on collecting delinquent property taxes has not come close to matching Nutter’s rhetoric. The total amount of delinquent real estate taxes, penalties and interest owed the city increased 21 percent from 2009 to 2012, to $515.4 million. The total years of unpaid taxes increased 7 percent over the same period, to 7.2 years, and the total number of delinquent accounts edged up 2 percent, to 102,787.

“Let me assure you that we will do whatever is necessary to provide further inspiration for those who think that they can get away with not paying their taxes here in Philadelphia,” Nutter said last month, in his most recent proclamation about tax delinquents. “Those days are quickly coming to an end.”

A CULTURE TO CHANGE

In Philadelphia, property taxes have rarely been a mayoral priority. City budget watchdogs surmise that is because real estate taxes have historically accounted for only about 18 percent of total tax revenue, a figure that is well below that of many other big cities (in New York, the figure is 37 percent; in Boston, 66 percent).

Property taxes are considerably more vital for the financially desperate school district, accounting for 35 percent of the budget. But the district has no real role in tax collection or deadbeat enforcement, putting the schools budget at the mercy of the city’s Revenue and Law Departments.

Endemic delinquency also stands in the way of tax reformers who want the city to cut wage and business taxes – which they consider job killers – while shifting some of the burden onto real estate taxes. The idea is to develop a tax mix that more closely resembles that of cities like Boston and New York.

“The only way to get there is to have accurate and reliable real estate assessments and to collect delinquent taxes, so we don’t overload responsible owners with the added costs imposed by irresponsible ones,” said Center City District President Paul Levy, who is among those calling for sweeping change in the city’s tax structure.

The long-standing practice in Philadelphia, however, is to pick and choose enforcement targets from the 100,000 property-tax delinquents based on no particular policy other than trying to get the most bang for the city’s enforcement buck.

That’s largely meant targeting delinquent properties in well-to-do areas, where owners can generally afford to pay up more quickly and the market will snap up properties at sheriff sale when they can’t. It’s an ad hoc policy that takes little account of the blighting effects of delinquent properties, particularly in low and moderate income neighborhoods.

“It seems rational for the Law Department to go after big-dollar delinquencies rather than small-dollar debts,” said Frank Alexander, co-founder of the Center for Community Progress, a national organization working to resolve the problems of vacancy and blight. “But let me suggest that every delinquency actually has a double or triple impact. When you don’t enforce, you’re not only not getting your money, you’re driving down property values.”

These effects are most extreme in low income neighborhoods where delinquency is endemic, but there are well-to-do neighborhoods that are afflicted by poorly maintained delinquent properties as well. The city’s Graduate Hospital section, which has rapidly gentrified over the last 15 years, is still pockmarked by the occasional blighted and delinquent home.

This baffles Andrew Dalzell, programs coordinator for the South of South Neighborhood Association, the neighborhood’s robust community group. “Every developer in the neighborhood has shown an interest in purchasing those properties,” he said.
And yet the properties sit, delinquent, and unexposed to sheriff’s sale.

Early this month, a City Council committee unanimously approved an ordinance designed to overhaul the city’s enforcement system and do away the practice of tolerating chronic delinquency. The ordinance was first introduced in response to a 2011 Inquirer/PlanPhilly tax delinquency report.

The Nutter administration has not objected to much of the new ordinance, but it has balked at language that requires city agencies to “promptly” begin foreclosure proceedings against all delinquent properties not enrolled in payment plans 21 months after the tax due date has passed.

It is among a number of provisions the city has resisted as too restrictive of the administration’s authority.  “It’s just a question of keeping a reasonable level of operational flexibility in the system,” said Frances Beckley, chief counsel to the city’s Revenue Department.

“The interesting thing about that objection is that most states and municipalities already have a date where enforcement is required,” said City Councilman Bill Green, a sponsor of the delinquency reform ordinance. “I think a big part of the objection is the bureaucracy being used to doing it their way and just resisting change.

“You have dates certain for foreclosure everywhere else,” he said, “and everywhere else, there’s a whole lot less delinquency.”

MIXED INDICATORS

Very little is certain about delinquency enforcement in Philadelphia.

In April 2009, city records identified 59,600 properties with at least three years of unpaid taxes. The Inquirer and PlanPhilly randomly selected 593 of those properties and tracked them in the years since. The sample size is large enough to yield a 95 percent confidence level in the survey, with a margin of error of four percentage points.

Three years later, 375 of the properties surveyed, or 63 percent, owed more than they did in 2009. Only 84 properties had paid up in full, while the remaining properties had paid off only part of their debt or entered into registered payment agreements.

Most of these delinquent properties also escaped punishment in the courts; 458 properties were not subjected to any delinquency-related court action. The city initiated foreclosure proceedings against just 69 of the parcels, and slapped money judgements on 66 (22 properties were hit with both foreclosure proceedings and money judgements.

There are signs, however, that the city’s enforcement system has begun to cast a wider net, and indications that the administration’s commitment to improving collections may now be more substantive than tough talk at news conferences:

• Nutter said last month that the city would make a $40 million investment in the Revenue Department over the next five years — $15 million to beef up staff and open a call center, and $25 million to upgrade the unit’s technology.
• The city is pushing for state legislation that would empower it to place liens on property outside city limits, a gambit intended to pressure suburban deadbeats where they live.
• The Department of Licenses and Inspections has become much more aggressive at targeting blight-creating properties, including many that are delinquent. The number of code-enforcement cases brought against property owners in Municipal Court has risen exponentially since 2008, from 532 cases to 4,368 last year, according to an analysis of city records. These cases are not considered tax enforcement, and they rarely end in foreclosure, but the actions pressure many owners into maintaining their property.
• Redevelopment goals are beginning to play a role in enforcement. The Revenue Department now consults with L&I to determine which vacant and tax-delinquent properties that are eligible for sheriff’s sale should be denied payment agreements, to cycle property out of the hands of irresponsible owners.
• Past-due taxpayers are being subjected “to an aggressive campaign of dunning and phone calling” before they fall into formal delinquency, city officials say, which the Revenue Department hopes will “have a long-term effect of reducing the annual number of freshly delinquent properties.”

So far, these efforts have had no measurable impact on collections. But officials said there should be evidence of real improvement when the fiscal year ends June 30.

Collections on delinquent accounts are up $9.4 million over the comparable 2012 period, city officials said in a written response to questions from The Inquirer and PlanPhilly, a figure that would bring collection totals more in line with those of the previous administration.

If that trend holds — not a sure bet, given past performance — then the total amount owed the city and school district would decline over time, or at least stop growing.

Perhaps the clearest sign of stepped-up enforcement are the longer listings for the sale of tax-delinquent property.

In January and February, a combined 492 new tax-delinquent properties were listed for sheriff’s sale. The figure is roughly in line with the pace of listings under Mayor Street, but well below the Nutter administration’s stated goal of 600 new listings per month.
The current listings are, nonetheless, nearly triple the sluggish mark of Nutter’s first few years in office.

At the press conference, Nutter suggested that problems within the sheriff’s office were complicating a further ramp up in sales. “We’re not the ones who do the sheriff’s sales, the sheriff’s office does,” he said, adding later “there are a lot of issues that we’re talking about that we’re not going to talk about (at this press conference).”

The sheriff’s office, which is the subject of an FBI investigation that led to five indictments, has struggled to clean up its operations after the long and problem-plagued tenure of former Sheriff John Green, who retired two years ago. But new officials there dispute the administration’s contention that the office is contributing to an enforcement backlog.

“That is not true,” said chief deputy sheriff Joseph Vignola. “We have been for over a year and a half prepared to meet the administration’s request to go to 600 tax sales a month for quite some time.”

Vignola insisted the sheriff could “easily” process whatever the city sent its way, and he noted that the office is now posting sheriff sale results and listings online, and he promised more functionality to come once a $500,000-$700,000 tech upgrade is completed later this year.

SPECULATORS, SKEPTICS AND BANKERS

But there are problems with the sheriff sale process that go beyond the straightforward job of administering an auction. While there are active developers and plenty of responsible investors who frequent the sheriff sales, not all the regulars fit that bill.

“You get speculators. You get deadbeats. You can be tax delinquent on 20 properties and have code violations on all of them, and still buy property at a sheriff’s sale,” said Rick Sauer, executive director of the Philadelphia Association of Community Development Corporations.

Theoretically, bidders are ineligible when they owe taxes on other city properties and are not in a payment agreement. But, as a practical matter, “the pros know how to fudge it,” said Joseph Vignola, the deputy sheriff.

Properties that even the speculators do not want can ultimately end up as city-owned parcels, further swelling an enormous inventory of publicly owned land that the city struggles to manage.

“We have to ask the fundamental question as a city of whether we should be in the real estate business, period,” city Managing Director Richard Negrin said in an interview last spring (he reaffirmed that view in a recent email). “Clearly this is something that’s hard to do, and we don’t manage it well over time.”

That management has not improved in the first five years of the Nutter administration, a review of 12 years’ worth of property records reveals.

Between 2000 and 2007, the city was selling and giving away publicly owned, vacant land at an average clip of 565 parcels per year. That average has plunged to 195 properties per year since Nutter took office. Last year, the city recorded only 54 sales.

It’s not for lack of inventory. The city still owns more than 9,000 vacant lots and empty shells. Nor is it for a lack of would-be buyers: the city received 2,345 “expressions of interest” in acquiring publicly owned land in the second half of last year.

Indeed, significant chunks of the city’s holdings are in neighborhoods where there is remarkably strong market demand for land. The 1500 block of Catharine Street in Southwest Center City is a case in point. The median assessed value of single family homes on that block is a healthy $265,150.

The Philadelphia Redevelopment Authority owns two parcels on the 1500 block of Catharine; properties that easily could have found buyers on the open market years ago. Yet the agency never managed to sell the rowhomes on those lots. Worse, it failed to maintain the properties.

And so, by late last year, the structures had degraded to the point where Licenses and Inspections had the two homes demolished. Two homes that could easily have fetched over $100,000 apiece if sold at an earlier date were instead torn down, at a cost to taxpayers of $29,000.

The Nutter administration acknowledges the city has a problem, but officials contend that it is a longstanding one that needs systemic reform, not just stepped up sales.

Last year, the city concluded an exhaustive overhaul of its land disposition policy, a sensitive project that required the cooperation of several independent agencies. New leaders are running the Department of Public Property and, soon, the Redevelopment Authority. And in May, the city opened a “Front Door” — intended as a single point of entry to the dizzying bureaucracy of land-owning entities — to improve the land-disposition process.

The Front Door includes a map of publicly owned property, a searchable database, and an online purchase application form. City officials say it should make it easier to get publicly-owned land in the hands of qualified buyers in the future.

All of the moves, Negrin said, are designed to put more idle, vacant land into productive use more quickly.

“No one is dancing in the endzone,” Negrin said Monday in an email. “We know we aren’t where we need to be. But we are committed to it.”

In the near future, Philadelphia hopes to go further and create a land bank: a single city entity that would own, maintain and sell all publicly held land. The land bank would also have a powerful new tool that other agencies lack: the ability to seize tax-delinquent land without exposing the property to sheriff’s sale.

“The land bank gives us a chance to think strategically about delinquency and redevelopment,” said Councilwoman Maria Quiñones Sánchez, the chief proponent of a city land bank. “The sooner we can repurpose those delinquent properties, the sooner we get them to a developer or a nonprofit, the better.”

Some builders worry that granting broad powers to a land bank would backfire, given Philadelphia’s poor record of land management. But they are in a minority. Most developers and redevelopment experts consider a land bank to be an essential piece to solving the city’s vacant-land and tax-delinquency crisis.

“These are big, significant problems,” said Kevin Gillen, an economist with the University of Pennsylvania’s Fels Institute of Government, who analyzed the effects of delinquency on property values for The Inquirer and PlanPhilly. “But the fact that they are finally being addressed means the city is trending in the right direction.”

Provided that the city can address the problems competently.

PART ONE: THE STAGGERING TRUE COSTS OF PHILADELPHIA’S TAX DELINQUENCY EPIDEMIC

PART TWO: WHO’S TO BLAME? A PROFILE OF THE DELINQUENTS, AND THE NEIGHBORHOODS THEY DAMAGE.

Next: Possible solutions.

ABOUT THIS SERIES:

Patrick Kerkstra has spent years exploring Philadelphia’s property tax crisis. For this collaborative effort between thePhiladelphia Inquirer, PlanPhilly and AxisPhilly, he interviewed property owners, city officials and redevelopment experts and analyzed millions of records in the city’s property, delinquency, billing and code violation databases. That reporting was complemented by a professional economic analysis of delinquency’s impact on property values by Kevin Gillen, PhD, a Fels School of Government economist and the region’s leading property values expert (read his complete study, and methodology). Inquirer editors, photographers and designers produced the package, and PlanPhilly journalists Jared Brey and Ashley Hahn provided significant reportorial contributions. The project was made possible through funding by the William Penn Foundation. Contributors include AxisPhilly‘s news application editor, Casey Thomas, researchers Evan Croen, James Robertson and John Dailey and designer John Suvannavejh.

PlanPhilly.com is an alternative media news website that covers design, planning and development issues in Philadelphia. AxisPhilly is a non-profit news and information organization which educates and engages citizens on topics of public interest.