About six months ago certain county official(s), including at least one member of the Board of Supervisors, had a meeting to start or investigate a program to raise short-term money for the county by selling off its delinquent tax rolls shortly after the property tax payment deadlines of Dec. 10 and April 10 of each year.
On its surface it appears OK, but let’s look under the hood. Is it too costly? Effectively the program works the same way as some companies sell off their receivables for immediate cash to maintain a consistent cash flow. But anyone in business knows receivable financing is one of the more expensive types of financing. It’s expensive with interest rates of more than 30 percent because financing unsecured account receivables is risky business.
I was able to obtain the initial offering prospectus of this Miami, Fla.- based company’s proposal and, according to the paperwork received, the deal is simple. A few days after the delinquency dates of Dec. 10 and April 10, this company will advance to the county the total amount of the delinquent taxes plus a 10 percent premium. Wow, that sounds good. And for that payment, this company becomes entitled to the delinquent tax receipts, which will include the taxes plus a 10 percent delinquency penalty that attaches to the tax owed at 12:01 a.m. on either Dec. 11 or April 11 plus 18 percent interest that accrues on the unpaid tax (delinquency penalty does not accrue interest) until paid.
Now, while this may seem to be a good deal for places like Detroit which have blocks of abandoned properties that are not even worth the property taxes, it is a very bad deal for El Dorado County. And here’s why. First, El Dorado delinquencies only average about 3 percent annually or about $10 million. Of that $10 million, about 60 percent are cured before the June 30 deadline (along with the 10 percent delinquency penalty) when unpaid taxes go into default and start earning 18 percent interest for the county. If not cured before the five-year sale date (most of the defaults are), the properties are sold by the county, with minimum bids that are at least the taxes plus all penalties and interest. In other words, all of the taxes are eventually collected, with the county earning the 10 percent delinquency penalty plus 18 percent interest per annum during the period of default. What other investment earns at least 18 percent interest annually guaranteed?
Real estate taxes are a first priority lien against property. Taxes come before things like first and second mortgages and judgments. Properties that have mortgages have their taxes usually cured with all the penalties and interest by the mortgage holder because a county tax sale would wipe them out. In El Dorado County, delinquent property taxes make the county an amount equal to 100 percent of the original tax in five years. In almost every case, delinquent property taxes are one of the county’s biggest money makers. Where else can you earn 18 percent interest per annum on a secured investment and in some cases where the taxes are only a few days late the amount earned on an annual interest basis exceeds 100 percent interest? Even good CDs pay only 2 percent.
The bottom line is that while this proposed financing program nets the county the 10 percent delinquency penalty in about five-10 days after the delinquency date, it gives up the right to earn 18 percent per annum on those taxes that go to default along with the 10 percent delinquency penalty. Over a five-year period for about a $10 million advance, the county would give up the right based on the tax delinquency history in the county, to about $5 million. When factoring in that about 60 percent of the delinquencies are cured within about six months that would mean the county would be borrowing money at rates as high as 20 percent. Some loan sharks charge less interest. Remember, the county would be borrowing on secure delinquent tax liens, which have a higher security level or priority than a first trust deed (mortgage) and homeowners borrowing money on a first trust deed have interest rates currently below 5 percent. Why would the county pay four times that rate?
A second problem with selling off delinquent tax rolls is that past history shows that when the properties go to tax sale, the private lenders’ delinquencies are packed with additional fees, such as attorney’s fees. The county doesn’t add any fees other than the required advertising, which usually amounts to less than $300. There have been cases of homeowners in other states where a county has sold off tax lien of $600 in tax and penalties only to have it grow to about $10,000 because of legally packing the foreclosure with fees. For property owners it’s nothing short of making the redemption of the property like being held up by a highway bandit. Horror stories like this as reported in AARP publications are well documented and rampant throughout the country. Talk about legalized property theft. Such a thing has not yet happened in El Dorado County, but it could if property tax delinquencies are sold off to a private lender.
Finally, El Dorado County doesn’t need the money. Under the tutelage of the county auditor-controller and C.L. Raffety, county treasurer-tax collector to a lesser extent, the county has amassed a $54 million surplus during their tenure in office. This type of county borrowing is not only unnecessary, but is extremely expensive and bad for property owners. Anyone suggesting such an idea is dumber than a box of rocks or is expecting to somehow profit directly or indirectly from such a deal. This is just a small but important reason why this county needs ELECTED officials like the Auditor-Controller and Treasurer-Tax Collector. They serve as an important check on the Board of Supervisors. If they were appointed like certain members of the BOS want, those offices would become a rubber stamp for the BOS.
One of the ways to make safe and easy money in the banking and finance industry (it’s an inside industry tenet) is to loan money to people who don’t need it. Hello, El Dorado County.
Larry Weitzman is a resident of Rescue.