DELINQUENT PROPERTY TAXES

Audit Report County Controller Stephen J. Barron, Jr., CFE DELINQUENT PROPERTY TAXES As of December 31, 2008 Audit Manager Frank S. Kedl, CIA Solicitor Timothy P. Brennan, Esq. County Executive John Stoffa County Council Ann McHale, President J. Michael Dowd, Vice-President Ron Angle Joseph H. Capozzolo John Cusick Charles M. Dertinger Margaret Ferraro Lamont G. McClure, Esq. Gerald E. Seyfried Office of the Controller County of Northampton Pennsylvania

STEPHEN J. BARRON, JR., CFE FRANK S. KEDL, CIA Audit Manager TIMOTHY P. BRENNAN, ESQ. Solicitor CONTROLLER OF NORTHAMPTON COUNTY NORTHAMPTON COUNTY COURTHOUSE 669 WASHINGTON STREET EASTON, PENNSYLVANIA 18042 PHONE (610) 559-3186 FAX (610) 559-3137 August 10, 2009 Members of the Northampton County Council John Stoffa, County Executive County of Northampton, Pennsylvania We have completed an audit of Delinquent Property Taxes as of December 31, 2008. The Executive Summary on page 1 summarizes the audit results and identifies opportunities for improvement, while the Audit Results section provides a detailed explanation. We acknowledge the cooperation and assistance we received from the Revenue Division and the Tax Claim Bureau. Their help was essential to the performance of this audit. Management did not request an exit conference to discuss the draft report. Management s response is included in the Audit Results section of the report. Very truly yours, Stephen J. Barron, Jr., CFE County Controller Paul L. Albert, CIA Lead Auditor

Table of Contents PAGE EXECUTIVE SUMMARY - OPPORTUNITIES FOR IMPROVEMENT...1 INTRODUCTION...3 PURPOSE AND SCOPE...5 METHODOLOGY...5 AUDIT RESULTS...6 Section A Economy and Efficiency 1. Approval Process for Repository Sales...6 2. Advertising Repository Properties...8 Section B Compliance 1. Pa. Real Estate Tax Sale Law Sale of Property...9 2. Pa. Real Estate Tax Sale Law Distribution of Proceeds...10 Section C Internal Controls 1. Funds Held from Previous Judicial Tax Sales...12 2. Delinquent Taxes on Bi-Tech...13 Section D Policies and Procedures 1. Policies and Procedures Manual...14 2. Repository List Instructions...15 Section E Accomplishments 1. Notification Process...16

EXECUTIVE SUMMARY - OPPORTUNITIES FOR IMPROVEMENT The following is a summary of the content of the enclosed report. See report references noted below for full detail. Section A Economy and Efficiency 1. Changing the method of seeking approval from County offices and taxing districts for properties in the repository will quicken the sale process, decrease the number of stale dated bid checks and decrease the amount of time the Parks Division spends maintaining the properties. (Section A-1, pg. 6) 2. Contacting the owners of property contiguous to properties in the repository and improving the information on repository properties on the County website may help to sell more repository properties. (Section A-2, pg. 8) Section B Compliance 1. Requiring successful bidders of any type of sale to provide certification that they are not delinquent in paying real estate taxes will ensure compliance with the Pennsylvania Real Estate Tax Sale Law (Tax Law). (Section B-1, pg. 9) 2. Disbursing the proceeds of repository sales in conformance with the Tax Law and filing a confirmation of distribution with the Court of Common Pleas when a surplus exists will ensure compliance with the Tax Law and lessen the possibility of legal action against the County. (Section B-2, pg. 10) Section C Internal Controls 1. Evaluating funds held by Tax Claim from previous tax sales and distributing those funds in compliance with the Tax Law will lessen bookkeeping for the Revenue Manager and decrease the funds held in the Tax Claim Agency Fund. (Section C-1, pg. 12) 2. Including interest owed to taxing districts as a receivable on the Tax Claim Agency Fund trial balance will be consistent with how interest owed to the County is reported on the General Fund trial balance. (Section C-2, pg. 13) 1

Section D - Policies and Procedures 1. Developing and implementing a policies and procedures manual for the notification process and upset sales will clearly state management s policies including State and County law, and management s desired procedures to achieve compliance with those polices. A manual is an excellent training document for new employees and promotes consistency in how work is performed. (Section D-1, pg. 14) 2. Updating the repository list instructions to comply with State and County law and to ensure they reflect current practices will provide a more meaningful document for management staff and promote more consistent practices. (Section D-2, pg. 15) Section E Accomplishments 1. Tax Claim was in compliance with the time consuming and detailed notification process required before a property could be listed for an upset sale. (Section E-1, pg. 16) 2

INTRODUCTION The responsibility for collecting delinquent property taxes lies with the Tax Claim Bureau, which is part of the Revenue Division in the Department of Fiscal Affairs. In addition to collecting delinquent County taxes, they also collect delinquent property taxes for other taxing districts such as school districts and municipalities. The County withholds a 5% administrative fee on taxes collected on the behalf of other taxing districts before payments are made to them. During 2008 Tax Claim collected delinquent taxes of $14,774,550. Approximately $3,350,000 was for the County and they also earned commissions of roughly $631,000 for delinquent taxes collected on behalf of other taxing districts. The process of collecting delinquent property taxes is governed by The Pennsylvania Real Estate Tax Sale Law Act 542 of 1947 (Tax Law), as amended. The Tax Law has very specific notification procedures that must be followed before a property can be sold at a tax sale. The notification process for owners delinquent in their property taxes is outlined below to provide a background of the requirements of Tax Claim. Real estate taxes not paid in the year tax bills are issued are termed delinquent. Year One of Delinquency Between January 1 st and April 30 th of the following year, taxing districts must report their delinquent taxes to the Tax Claim Bureau. By June 30 th delinquent taxes are entered into the claim docket. Tax Claim utilizes the Integrated Assessment System (IAS) as the official claim docket of information pertaining to delinquent taxes. Before July 31 st Tax Claim gives notice by certified mail to the property owner that taxes are delinquent and if not paid, the property will be sold. If the signed receipt from the certified mail is not returned to Tax Claim by the post office, the property must be physically posted to notify the property owner that the taxes are delinquent. In December Tax Claim sends a reminder notice to delinquent property owners via first class mail with information similar to the first tax mailer. This mailer is not required by the Tax Law but is done as a courtesy to taxpayers and appears to be effective in prompting taxpayers to pay. Year Two of Delinquency Beginning in June a sale file is created in IAS and all interested parties to delinquent properties are manually entered into IAS. Around the first week of July the first Tax Sale Mailer is sent certified mail, restricted delivery, to all delinquent property owners and interested parties giving notice that their property is about to be sold without consent 3

for delinquent taxes. The notice also states the date, place and time of the upset tax sale which must be scheduled no earlier than the second Monday of September or no later than September 30. Beginning the end of July, properties owing taxes are posted at least 10 days prior to the scheduled upset sale. A copy of the sale notice is physically posted on the property and if the property is occupied, a copy is personally given to the occupant for their signature. If personal service could not be made within 20 days on an occupied property, an order of court is required to waive the owner(s) personal service requirement. Properties are posted by non-county personnel that are deputized by the Sheriff and given the authority to post the notices. At least 30 days before the scheduled upset sale, Tax Claim places an advertisement in two newspapers and the Northampton County Reporter listing all of the properties scheduled for the upset sale. At least 30 days before the scheduled upset sale date, Tax Claim must submit the list of properties on the tax sale list to Pa. Department of Revenue and other taxing districts to obtain their list of Commonwealth liens, and Municipal and School liens to be included in upset sale price. By the middle of August a second Tax Sale Mailer is sent via first class mail to all those that did not sign for the first Tax Sale Mailer. Between the second Monday of September and September 30, the upset sale is conducted of all properties that have delinquent real estate taxes and that received all of the mailers and postings. Year Three of Delinquency Anytime after the upset sale, Tax Claim may petition the court to conduct a judicial tax sale, to sell any properties not sold at the upset sale. These properties are sold free and clear of all taxes, liens, mortgages and other charges on the property. Any property not sold at the judicial tax sale is put into the repository for unsold property. The County maintains this list, has it posted on the County website and accepts bids on properties in the repository. The County and taxing districts where the property is located must all give approval to accept the bid for the property before it can be sold. 4

PURPOSE AND SCOPE The purpose of the audit was to determine if: The process of tracking and collecting delinquent property taxes complies with County and State regulations. Internal controls over the process are adequate. The processes are being done economically and efficiently. The scope of the audit included the collection of the 2005 real estate taxes that were turned over to Tax Claim and became delinquent in 2006. This included all of the notification steps leading up to the 2007 Upset Sale, the 2008 Judicial Tax Sale and the properties in the Repository or sold out of the Repository during 2008. We also examined the delinquent tax balances on the County s Bi-Tech financial system as of December 31, 2008. METHODOLOGY Our methodology included: Interviewing the Revenue Manager and Tax Claim Supervisor. Reviewing The Pennsylvania Real Estate Tax Sale Law Act 542 of 1947, as amended. Reviewing Tax Claim s policy and procedure manuals for judicial tax sales and the repository. Testing for compliance with State regulations including the notification process for upset sales, upset sales, judicial tax sales, properties in the repository and sold out of the repository. Analyzing delinquent tax figures on the County s Bi-Tech financial system. Researching the Internet for best practices. Also through the Tax Claim Supervisor, posting best practice questions on the Taxes listserv for other Pennsylvania counties. To achieve the audit s compliance objective we relied on computer-processed data contained in the Integrated Assessment System (IAS). The reliability of the application controls over the IAS were tested under a separate audit and the controls were found to be strong. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 5

AUDIT RESULTS Section A Economy and Efficiency 1. Approval Process for Repository Sales OBSERVATION The approval process for accepting bids on properties in the repository is lengthy, sometimes taking several years to complete. Most of these properties have minimal value and the main objective is to put them back on the tax rolls while also relieving the County from the responsibility of maintaining the property. There were 74 unsold properties in the repository as of 12/31/08. Internal policy requires Tax Claim to obtain approval from the Assessment and Parks Divisions, and the Department of Community and Economic Development before a property is sold. Also, the Tax Law requires similar approval be obtained from the municipality and school district where the property is located. In one case a County division took 355 days to return the approval form and a municipality took 339 days and 665 days, respectively, to give approval for two different sales, despite up to six reminder notices. Ironically during this time the municipality sent the County a letter notifying them that they must clean up debris that was dumped on the property. The Parks Division has the responsibility to cut grass, trim weeds, remove trash and even raze unsafe structures on repository properties. Ideas were discussed with the Tax Claim Supervisor such as obtaining approval from County divisions when a property is put into the repository instead of waiting until a bid is received. Also through benchmarking with other counties we found that most put a deadline of anywhere from 10 business days to 45 days for a taxing district to respond with their approval. If no response is received in that time frame their approval is presumed. RECOMMENDATION To put repository properties on the tax roll sooner, management should seek approval from County divisions, with a deadline to respond, as soon as the property enters the repository. Also they should give taxing districts deadlines for approving the sale of repository properties. Controls should be in place to monitor those deadlines and these policies should be documented in their policy and procedure manual. 6

MANAGEMENT RESPONSE Nancy J. Poplawski, Revenue Manager Cindy Hoffer, Revenue/Tax Claim Supervisor We will amend our repository instructions and our correspondence related to the approval process for repository sales to include deadlines for response from our internal County departments and the associated municipalities and school districts. We will include a deadline of 45 days from the date of the notice in our correspondence and indicate that if no response is received in the indicated timeframe that approval is presumed. We anticipate that we will be able to begin to address this issue after the September 2009 Upset Sale and before end of fiscal 2009. 7

2. Advertising Repository Properties OBSERVATION The process used to advertise and attract bidders for repository properties could be improved. The repository list on the County s website is difficult to find, there are no instructions that describe the bid process and property owners with a possible interest in the property are not contacted. After viewing websites from other counties and reviewing surveys returned from them, there are several things Tax Claim could do to increase the awareness of repository properties and make the bidding easier. The repository list on the County s website is under Community and Economic Development and then Available Properties (Northampton County Owned). Other counties have their repository list under either Tax Claim or Real Estate Taxes. Other counties have Rules and Regulations for Repository Sales to describe the process required to bid on a property and what the county s requirements are before a property can be sold. Some counties have a Repository Sale Bid Sheet to make the process easier. Some properties are so small that they have no value by themselves. Contacting property owners that are contiguous to properties in the repository may find someone that is willing to place a bid on a property that may only have value to a contiguous property owner. RECOMMENDATION Management should provide a link to the repository list from the Tax Claim or Real Estate Tax website making the list easier to find. They should also provide an explanation of the rules and regulations for the list and possibly a form to complete if someone wants to bid. If County Divisions approve the sale of a property, as time allows Tax Claim should send letters to property owners contiguous to repository properties making them aware that the property is owned by the County and is available for purchase. The goal is to sell the properties on the list and put them back on the tax rolls. MANAGEMENT RESPONSE Nancy J. Poplawski, Revenue Manager Cindy Hoffer, Revenue/Tax Claim Supervisor As soon as time allows, we will address the issue of making the Repository list more user friendly to the public and easier to locate and navigate on the County website including instructions placing bids on repository properties. After the September 2009 Upset Sale is completed we will begin the process of contacting owners whose properties are contiguous to repository properties to gauge their interest in obtaining a property in the repository. Going forward, as properties are added to the repository, we will begin the process of contacting contiguous owners right after the property is placed in the repository. 8

Section B Compliance 1. Pa. Real Estate Tax Sale Law Sale of Property OBSERVATION Section 619 of the Real Estate Tax Law was enacted in 1998. Section 619.1. Additional Restrictions states that Within twenty (20) days following any sale under this act, a successful bidder shall be required to provide certification to the bureau that the person is not delinquent in paying real estate taxes to any of the taxing districts where the property is located and that the person has no municipal utility bills that are more than one year outstanding. This requirement applies to upset sales, private sales, judicial tax sales and repository sales. This section of the Tax Law is not being enforced by Tax Claim. The Tax Claim Supervisor said this was not being done when she took over as supervisor and she was not aware of this requirement. RECOMMENDATION The management of Tax Claim should incorporate this requirement of the Tax Law into their policies and procedures manual. Also, when properties are sold by any type of sale for delinquent taxes, management should require this information from the buyer within the time period specified. MANAGEMENT RESPONSE Nancy J. Poplawski, Revenue Manager Cindy Hoffer, Revenue/Tax Claim Supervisor We will update the Conditions of Sale to reflect the need to produce a notarized affidavit affirming that there are no tax delinquencies or municipal utility bills that are not more than one year outstanding in the jurisdiction where the property purchased is located within 20 days following any sale warranted by the Real Estate Tax Law. We question however, what are the repercussions of not producing said affidavit or if in fact it is learned that a purchaser is not in compliance with this mandate since the law itself does not detail the penalties for non-compliance. The Tax Claim Bureau will need the Controller s office to recommend how we are to proceed in these instances. AUDITOR COMMENT Tax Claim will need to consult with their Solicitor when a buyer does not comply with this section of the law. The Controller s Office does not provide legal advice. 9

2. Pa. Real Estate Tax Sale Law Distribution of Proceeds OBSERVATION Once a bid is approved and property is sold from the repository, the proceeds of that bid are paid out. The distribution of the proceeds is governed by the Tax Law. According to the Tax Law the distribution is the same whether property is sold by upset sale, judicial tax sale or through the repository. We documented the method of distribution being followed by the Revenue Division and if a surplus remained after County costs and fees were repaid, a confirmation of distribution was not being submitted to the Court before other funds were distributed. Also after all costs, liens and delinquent taxes were paid, the previous owner of the property was not given the opportunity to claim the remaining balance; the balance was divided between the municipality, school district and County. We consulted with our Solicitor to determine the proper order of distribution because the order used by Revenue for repository sales did not agree with the Tax Law. After the County is repaid for costs, fees and expenses that were advanced by them and the County receives a commission of five percent (5%) of all remaining money collected to offset the costs of administering this Tax Law, the proper order of distribution is: First, any Commonwealth liens that were incurred after the judicial tax sale are paid. Second, respective taxing districts are paid in proportion to the taxes due them. Third, taxing districts or municipal authorities are paid for satisfaction of municipal liens that were incurred after the judicial tax sale. Fourth, mortgagees or other lien holders are paid, in order of priority. This does not apply to repository sales because those debts were dissolved for the judicial tax sale. Fifth, the remaining balance is paid to the owner of the property. Prior to the actual distribution after County fees are repaid and the County receives their commission, Tax Claim must petition the Court of Common Pleas for a confirmation of distribution. Also whenever no claim is presented by or on behalf of the owner within a period of three years of the date of sale, the balance of the proceeds shall be distributed to the respective taxing districts pro rata based on the millage imposed by the respective taxing districts as of the year such property was sold. Interest earned by the proceeds of the sale during this three-year period shall be retained by the County. RECOMMENDATION During 2008 twelve properties were sold from the repository. The total proceeds from these sales were $35,467, with four of the sales resulting in a surplus. Although few sales result in a surplus, management should pay out the proceeds of repository sales in conformance with State law. 10

MANAGEMENT RESPONSE Nancy J. Poplawski, Revenue Manager Cindy Hoffer, Revenue/Tax Claim Supervisor The current system of distribution of proceeds from the sale of repository properties is based on historical past practice. Currently, the proper order of distribution is followed as it has in the past based on the information gleaned from the title search obtained in order to bring the property to Judicial Sale. Known Commonwealth liens and municipal liens are satisfied before the distribution of any remaining funds to the related governments on a pro-rata basis. It is the recommendation of the management of the Tax Claim Bureau that the County Solicitor s Office be proactive in filing liens on any repository properties that the County incurs costs to maintain so that these amounts can be formally taken into consideration when preparing the schedule of distribution of the proceeds of repository sales. There is no historical evidence however of any past attempts to contact the prior owner of a repository property for the purpose of distributing surplus funds, especially in light of the fact that the County and the local municipal governments where the repository property is located often has to take over the responsibility of maintaining and securing properties in the repository. To comply with your recommendation, we will produce a schedule of distribution for all sales from the Repository, including any amounts to be distributed to the old owner if applicable, to be presented by our Solicitor in the Court of Common Pleas for a confirmation of distribution and follow up with the distribution of the proceeds from a repository sale as prescribed in the State law only distributing the excess surplus to the appropriate governments pro-rata after they are 3 years unclaimed. 11

Section C Internal Controls 1. Funds Held from Previous Judicial Tax Sales OBSERVATION Tax Claim is in possession of funds from prior judicial tax sales in the amount of $42,403 that have not been disbursed. These sales occurred before the current Revenue Manager took office. A spreadsheet exists that lists the five properties sold at judicial tax sales in 1995, 1997 and 2005 that make up that balance; however research performed by the Revenue Manager produced little detailed information. It appears though that a property owner or lien holder may have been left off of the schedule of distribution presented to the Courts and approved by them. RECOMMENDATION The Revenue Manager should review these cases with her Solicitor to determine if there is enough information to petition the courts to disburse these funds. If information is not sufficient, the Revenue Division should comply with State law and disburse these funds accordingly. MANAGEMENT RESPONSE Nancy J. Poplawski, Revenue Manager Cindy Hoffer, Revenue/Tax Claim Supervisor The Revenue Manager will make an appointment with the Tax Claim Bureau Solicitor as soon as practical after the conclusion of the current Upset Sale to review each individual case with the goal of determining the best course of action to insure disbursement of these funds. The Revenue Manager hopes to have this goal accomplished by the end of the 2010 fiscal year. The spreadsheet mentioned in the observation was developed by the Revenue Manager in 2008 in an effort to better understand and detail the balances included on the Taxes Held Judicial Sales Balance Sheet to reconcile at year end and to determine which amounts could be safely transferred to the Taxes Held Surplus Balance Sheet to be ultimately distributed pro-rata to the local governments after being unclaimed for three years. This distribution had not been accomplished for a number of years prior to the current Revenue Manager taking office. 12

2. Delinquent Taxes on Bi-Tech OBSERVATION Delinquent taxes on Bi-Tech are recorded from a report in the IAS. Through the process of reviewing the report it was noted that while interest receivable on delinquent County taxes is shown as a receivable on Bi-Tech, interest receivable of $991,296 on delinquent municipal and school taxes is not shown on Bi-Tech in the Tax Claim Agency Fund. RECOMMENDATION Management should include the interest owed on delinquent municipal and school taxes on the Tax Claim Agency Fund as a receivable along with the taxes and penalty owed which are already recorded. MANAGEMENT RESPONSE Nancy J. Poplawski, Revenue Manager Cindy Hoffer, Revenue/Tax Claim Supervisor Year end journal entry for Tax Claim will be amended to include the interest receivable on delinquent municipal and school taxes beginning with the closing entries for 2009 effective 12/31/09. The current year end journal entry for this purpose is based on past practice developed prior to the current Revenue Manager taking office. 13

Section D Policies and Procedures 1. Policies and Procedures Manual OBSERVATION The Tax Claim Bureau does not have a detailed policies and procedures manual from the point at which delinquent taxes are turned over to the County through to the judicial tax sale. They do have a Manual for Judicial Tax Sales and a List of Instructions for the Repository. Much of the delinquent tax collection process is governed by the Tax Law with deadlines and notification requirements, as is noted in the Introduction section of the report. Currently the Tax Claim Supervisor relies on her experience as well as on notes and a calendar of when procedures were done in previous years. A well-written, detailed manual will help management achieve their goals of complying with the Tax Law and being efficient in their practices. It helps to ensure that the staff understands their roles and responsibilities, and it provides an excellent source for training new employees and management. RECOMMENDATION The management of the Revenue Division should develop and implement a policies and procedures manual to document the policies necessary to comply with State law and County regulations. The manual should start with the receipt of delinquent tax information from taxing districts and include the notification process, upset sales and the work needed when upset sales are complete. The Controller s Office is available to assist Division staff if requested. MANAGEMENT RESPONSE Nancy J. Poplawski, Revenue Manager Cindy Hoffer, Revenue/Tax Claim Supervisor As soon as it is practical, the management of the Revenue Division will develop and implement a policies and procedures manual to document the policies necessary to comply with State law and County regulations beginning with the receipt of delinquent tax information from the taxing districts and culminating with the follow up work necessary and the completion of the Upset Sale process. It is anticipated that such a manual can be completed by the end of the 2010 fiscal year. 14

2. Repository List Instructions OBSERVATION Tax Claim maintains a list of instructions for properties in the repository. The instructions include procedures for when properties are placed in the repository, when bids are received, the approval process, the preparation of a new deed, the distribution of proceeds and the removal of properties from the repository and website. The section of the instructions dealing with the distribution of funds received from selling a property do not agree with the method of distribution used by the Revenue Manager or the method outlined in the Tax Law. RECOMMENDATION The Tax Claim Supervisor should update the instructions to reflect the proper order of distribution; see Finding C.2. for more information. The instructions should be reviewed and updated on a regular basis as policies and procedures change. Recent changes include the use of an Excel spreadsheet to track each of the unsold properties and the use of a checklist on the front of each folder which contains the paperwork for each of the properties. MANAGEMENT RESPONSE Nancy J. Poplawski, Revenue Manager Cindy Hoffer, Revenue/Tax Claim Supervisor As soon as it is practical, the Tax Claim Supervisor will update the repository instructions to reflect the proper order of distribution of the proceeds from repository sales and will review and update the instructions periodically to reflect any changes in the policies and procedures related to repository sales. 15

Section E Accomplishments As was noted in the Introduction section of this report, the process of collecting delinquent property taxes is governed by the Tax Law and thus is subject to many regulations as to what has to be done and when. In this Accomplishments section we are highlighting the notification process that has to occur before a property can be listed for an upset sale. This process requires a lot of time and attention to detail. We found that Tax Claim is accomplishing their goals in this area. 1. Notification Process OBSERVATION We selected a sample of 25 property owners that were delinquent in paying their 2005 property taxes and were turned over to the County in 2006. We reviewed documentation verifying that each of the notification steps outlined on pages 3 & 4 of the report were performed. We also verified that any property owners that did not pay their taxes by the end of the notification process were offered for sale at the 2007 upset sale. CONCLUSION Tax Claim was in compliance with the notification process such as sending notices by the required deadlines, posting properties and advertising properties in two local newspapers as well as the Northampton County Reporter. Properties with unpaid taxes were listed for the 2007 upset sale. We found no exceptions in our testing. 16