Strategies for Reducing In Rem Foreclosures in the …...2013/05/14 · Strategies for Reducing In...

Strategies for Reducing In Rem Foreclosures in the City of Milwaukee

Prepared by: Bryan Mette

Joe O’Connell Michelle Prost Erika Schoot

Elizabeth Silverstein

For the City of Milwaukee, Department of Administration, Budget and Management Division

May 14, 2013

Workshop in Public Affairs Spring 2013

©2013 Board of Regents of the University of Wisconsin System All rights reserved.

For additional copies: Publications Office

La Follette School of Public Affairs 1225 Observatory Drive, Madison, WI 53706

www.lafollette.wisc.edu/publications/workshops.html [email protected]

The Robert M. La Follette School of Public Affairs is a teaching and research department

of the University of Wisconsin–Madison. The school takes no stand on policy issues; opinions expressed in these pages reflect the views of the authors.

The University of Wisconsin–Madison is an equal opportunity and affirmative-action educator and employer.

We promote excellence through diversity in all programs.

Table of Contents

List of Tables .......................................................................................................... v

List of Figures ........................................................................................................ vi

Foreword ............................................................................................................... vii

Acknowledgments.................................................................................................. ix

Executive Summary ............................................................................................... xi

Introduction ............................................................................................................. 1

Problem Statement .................................................................................................. 3

Comparison to Other Cities .................................................................................... 5

Property Taxes and Assessment in Milwaukee ...................................................... 8

Pre-Foreclosure Process ........................................................................................ 19 Property Tax Collection Process ....................................................................... 19 Three-phase Tax Enforcement Process ............................................................. 19

Phase 1: In-house Collection ........................................................................ 19 Phase 2: Collection by Private-party Law Firm ............................................ 20 Phase 3: In Rem Foreclosure ........................................................................ 20

Post-Foreclosure Process ...................................................................................... 22

City of Milwaukee Constraints in Addressing In Rem Foreclosures .................... 24

Factors Associated with In Rem Foreclosure ........................................................ 25 Characteristics of Properties Acquired by City through In Rem Foreclosure ... 25

Assessment Class .......................................................................................... 25 Aldermanic District ....................................................................................... 27 Assessed Property Values ............................................................................. 31 Assessed Value Changes During Foreclosure Process ................................. 32 Housing Quality ............................................................................................ 33 Disposition of Properties ............................................................................... 36 Owner Occupancy ......................................................................................... 37 Previous Mortgage Foreclosure .................................................................... 38 Property Complaints and Violations ............................................................. 38

Characteristics of Taxes and Tax Collection Related to Property Acquired by the City through In Rem Foreclosure ................................................................ 38

Tax Delinquency ........................................................................................... 38 Special Charges ............................................................................................. 42

Major Costs of the Foreclosure Process ................................................................ 43

Regression Analysis: Factors of In Rem Foreclosure ........................................... 46 Independent Variables ...................................................................................... 46 Regression Analysis .......................................................................................... 50 Possibilities for Improvements to the Early Warning System .......................... 51

Policy Options ....................................................................................................... 52 Option 1: Early Warning System ...................................................................... 52 Option 2: Separation of Special Charges .......................................................... 52

Option 3: Credit Card Installments ................................................................... 53 Option 4: Hardship Loan Fund ......................................................................... 53 Eligibility Requirements ................................................................................... 54

Suggestions for Future Consideration ................................................................... 56

Conclusion ............................................................................................................ 58

Appendix A: Sample Delinquency Notifications ................................................. 59

Appendix B: In Rem Foreclosure Flowchart ........................................................ 65

Appendix C: Wisconsin Constitution Uniformity Clause .................................... 66

Appendix D: Wisconsin Statutes Covering Property Tax Delinquency ............... 67

Appendix E: Milwaukee Ordinances Covering Property Tax Delinquency ......... 69

References ............................................................................................................. 76

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List of Tables

Table 1. Comparison of Peer City/County Tax Foreclosures ................................. 6 Table 2. General Fund Revenue by Source, in 2013 Dollars .................................. 9 Table 3. 2012 Taxable Parcels by Property Class ................................................. 10 Table 4. Property Tax Delinquency throughout Three-Year Tax Collection

Enforcement Period for All Real Estate for Levy Years 2002–2012 ....... 13 Table 5. Comparison between All Tax Delinquent Residential Property

Owners for Levy Years 2008–2012 .......................................................... 14 Table 6. In Rem Tax Foreclosure Redemption and Acquisitions for All Real

Estate in Milwaukee, 2000–2012 .............................................................. 17 Table 7. In Rem Foreclosures of Residential Property Assessment Class,

2008–2012................................................................................................. 25 Table 8. Residential Properties Acquired by the City of Milwaukee through

In Rem Tax Foreclosure by Aldermanic District, 2008–2012 .................. 27 Table 9. Average Estimated Rehabilitation Costs for In Rem Residential

Properties Acquired and Inspected by the City of Milwaukee, 2008–2012........................................................................................................... 33

Table 10. Average Estimated Rehabilitation Costs for In Rem Properties by Property Type Acquired by the City of Milwaukee, 2008–2012.............. 34

Table 11. Dispositions of In Rem City of Milwaukee-Acquired Properties, 2008–2012................................................................................................. 36

Table 12. Residential Class Tax Delinquent Properties for Levy Years 2008 and 2009 Acquired by the City of Milwaukee through In Rem Tax Foreclosure in 2011 and 2012 ................................................................... 40

Table 13. A Comparison between Levy Years 2008 and 2009 Tax-Delinquent Residential Property Owners Whose Properties the City of Milwaukee Acquired through In Rem Tax Foreclosure in 2011 and 2012 .................................................................................................... 41

Table 14. Model of Average Change in Delinquent Property Taxes from the Point of Initial Delinquency City of Milwaukee Acquisition for Levy Years 2008 and 2009 ....................................................................... 41

Table 15. City Costs for Tax Foreclosed Homes .................................................. 44 Table 16. Variable Definition, Expected Marginal Effects on Probability of

Payment, and Source ................................................................................. 49 Table 17. Logistical Regression of Tax-Delinquent Residential Properties,

City of Milwaukee, 2008–2009 ................................................................ 50

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List of Figures

Figure 1. Number of Properties the City of Milwaukee Acquired Annually Through In Rem Tax Foreclosure, 2008–2012 ........................................... 3

Figure 2. Relationship between the Alternative Tax Foreclosure Measurements ............................................................................................. 7

Figure 3. 2012 Property Distribution Residential, Manufacturing, and Commercial Parcels .................................................................................. 10

Figure 4. Distribution of In Rem City Acquisitions for All Property Classes, 2008–2012................................................................................................. 11

Figure 5. Distribution of Owner Occupants and Investor Owners across All November Tax-Delinquent Residential Property Owners, 2008–2012........................................................................................................... 15

Figure 6. Distribution of Owner Occupants and Investor Owners Across All November Tax-Delinquent Residential Property Owners Who Made at Least One Installation Payment, 2008–2012 ........................................ 16

Figure 7. In Rem Tax Foreclosure Redemption and Acquisition Rates for All Real Estate, 2000–2012 ...................................................................... 17

Figure 8. Residential Property Proportion of All In Rem Acquisitions in the City of Milwaukee, 2008–2012 ................................................................ 26

Figure 9. In Rem Tax Foreclosure Acquisitions, 2008–2012 ............................... 26 Figure 10. Percentage of In Rem City of Milwaukee Acquisitions of

Selected Properties by Aldermanic District, 2008–2012 .......................... 28 Figure 11. Percentage of Total In Rem Tax Foreclosures of Residential

Properties by Aldermanic District, 2008–2012 ........................................ 29 Figure 12. In Rem Tax and Private Mortgage Foreclosure as a Percentage of

Residential Parcels by Milwaukee Aldermanic District, 2008–2012 ....... 30 Figure 13. Median Assessed Property Values and In Rem Tax Foreclosure

Rates for all Residential Properties by Aldermanic District ..................... 31 Figure 14. Percentage Change in Average Assessed Home Value by

Aldermanic District, 2011–2012 ............................................................... 32 Figure 15. Average Percentage Change in Assessed Value Between Tax

Delinquent Year and Year the City of Milwaukee Acquired the Property for Residential In Rem Tax Foreclosures, 2008–2012 ............... 33

Figure 16. Percentage of Average Estimated Residential Rehabilitation Cost Relative to Median Assessed Value by Aldermanic District, 2012 .......... 35

Figure 17. Median and Mean Selling Prices of In Rem City of Milwaukee-Acquired Properties, 2009–2012 .............................................................. 35

Figure 18. Vacated In Rem Judgments, 2008–2012 ............................................. 37 Figure 19. Percentage of Owner Occupancy of City of Milwaukee-Acquired

Properties, 2008–2012 .............................................................................. 37 Figure 20. Percentage of City of Milwaukee-Acquired Properties with

Previous Private Foreclosure, 2008–2012 ................................................ 38 Figure 21. Collections and Gross Tax Delinquencies Assigned to Kohn Law

Firm ........................................................................................................... 44

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Foreword

This report is the result of collaboration between the Robert M. La Follette School of Public Affairs at the University of Wisconsin–Madison and the Budget and Management Division of the City of Milwaukee’s Department of Administration. Our objective is to provide graduate students at La Follette the opportunity to improve their policy analysis skills while contributing to the capacity of the city government to provide public services to the residents of Milwaukee.

The La Follette School offers a two-year graduate program leading to a master’s degree in public affairs. Students study policy analysis and public management, and they can choose to pursue a concentration in a policy focus area. They spend the first year and a half of the program taking courses in which they develop the expertise needed to analyze public policies.

The authors of this report are all in their last semester of their degree program and are enrolled in Public Affairs 869 Workshop in Public Affairs. Although acquiring a set of policy analysis skills is important, there is no substitute for doing policy analysis as a means of learning policy analysis. Public Affairs 869 gives graduate students that opportunity.

This year the students in the workshop were divided into six teams. Other teams have completed projects for the Wisconsin Department of Public Instruction; the Wisconsin Department of Children and Families and the Wisconsin Department of Health Services; the Wisconsin Department of Revenue; and the Wisconsin Legislative Council. After soliciting possible research ideas from various city government departments, the City of Milwaukee’s Division of Budget and Management chose the topic of this report.

Over the past few years, Milwaukee has experienced a sharp increase in the number of tax foreclosures. The five authors of this report were asked to investigate the process through which delinquent property tax payments result in tax foreclosures and propose ways in which the city might reduce the incidence of tax foreclosures.

This report would not have been possible without the support and encouragement of city Budget Director Mark Nicolini and project liaison Aaron Szopinski. A number of other people throughout city government contributed to the success of the report. Their names are listed in the acknowledgments.

The report also benefited greatly from the support of the staff of the La Follette School. Marjorie Matthews contributed logistic support, and Karen Faster, the La Follette School publications director, managed production of the final bound document.

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By involving La Follette students in the tough issues confronting city government in Milwaukee, I hope they not only have learned a great deal about doing policy analysis but have also gained an appreciation of the complexities and challenges facing city governments in Wisconsin and elsewhere. I also hope that this report will contribute to the policymaking process in the City of Milwaukee.

Andrew Reschovsky May 2013

Madison, Wisconsin

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Acknowledgments

We would like to extend our deepest appreciation to Aaron Szopinski, an analyst in the Budget and Management Division, who served as our contact with the City of Milwaukee and was invaluable in providing assistance to us during the course of compiling our report. We would also like to express our gratitude to Jim Klajbor, Robert Potrzebowski, and Sam Leichtling for taking the time to meet with us in order to better explain the foreclosure process in Milwaukee. Furthermore, we extend thanks to La Follette faculty and staff, including Professor Andrew Reschovsky for his editing and advice and Karen Faster for her help in this report’s publication.

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Executive Summary

The downturn in the housing market during the Great Recession resulted in a foreclosure crisis for the City of Milwaukee. Especially troubling has been the steep rise in tax foreclosures initiated by the City. To collect delinquent property taxes, the City conducts an in rem foreclosure, which is the final step in a process used to satisfy outstanding tax debts. In this process, the City takes ownership of a property in lieu of receiving back taxes.

The problems surrounding tax foreclosure are twofold. During the past several years, the amount of properties going into in rem foreclosure has spiked. That many of the acquired properties are low in value, making it difficult for the city to sell them, exacerbates the problems. With the City facing fiscal constraints, the Budget and Management Division would like to investigate policies that could be implemented to decrease the number of in rem foreclosures in Milwaukee.

In this report, we examine the characteristics of in rem foreclosures using data compiled from various city sources. First, we look at the processes used in property assessment and taxation, noting challenges and trends in the City of Milwaukee in recent years. Next, we construct a comparison of peer cities and counties in order to put Milwaukee’s experience with tax foreclosures into a relative perspective. In addition, we examine the pre-and post-foreclosure processes employed by the City and the legal constraints that limit municipal decision-making. We also identify factors associated with in rem foreclosures and use regression analysis to assist in the City’s future management of the situation. Finally, we recommend policies designed to reduce the number of in rem foreclosures in Milwaukee.

Our analysis of city processes found significant factors contributing to in rem foreclosures. In particular, assessment classes, aldermanic districts, assessed value, and property quality all affected in rem foreclosures. The regression analysis also identified factors that may affect the likelihood of delinquent properties entering the in rem foreclosure process.

Based on our research, we recommend the following policies to reduce the number of city-initiated foreclosures. First, we recommend that the City of Milwaukee implement an Early Warning System to identify delinquent properties that are at risk for in rem foreclosure. Second, we recommend adjustments to tax payment methods for the City by allowing special charges added to the tax bill to be spread over installments while also allowing installment plans for owners who choose to use a credit card to pay their property taxes. Our final recommendation is to create a Hardship Loan Fund, modeled on similar programs coordinated by local governments, that allows taxpayers to apply for microloans to satisfy delinquent taxes.

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Introduction

The City of Milwaukee, like many municipalities in the United States, continues to face increasing fiscal pressure exacerbated by reduced employment and declining home values. Homeowners facing long-term unemployment are less likely to pay their property taxes. Two of the most significant consequences of the economic downturn for the City of Milwaukee have been a declining tax base and an increasing property tax delinquency rate (PNC Financial Services Group 2013). As the only “first class”1 city in Wisconsin, Milwaukee has the power to take ownership of a property in order to satisfy delinquent property taxes. Despite the efforts of the City to collect delinquent taxes, the number of properties ending up in tax foreclosure continues to increase. Declining property values, high-risk and predatory lending, and high unemployment have contributed to a sharp increase in tax foreclosures in the City of Milwaukee. Once the City has taken possession of these properties, many of them are not likely to be resold. A good number of the properties the City acquires are worth far less than the cost to maintain them. Tax foreclosures are disproportionately located in economically stressed areas. Many of the foreclosed properties are old and severely deteriorated by the time the city acquires title. In addition, abandoned, foreclosed houses may have become targets for thieves who strip the properties of their valuable contents, such as copper wire and fixtures. Vacant homes may fall into a state of disrepair without a resident to maintain the house, contributing to the downward trend in their values along with the values of surrounding properties in the neighborhood. The high cost associated with owning and maintaining many of these city-owned, tax-foreclosed properties represents a diversion of scarce resources. The properties need to be secured, critical structural problems corrected, and regular maintenance — mowing and snow removal — ensured. Increasing acquisitions in recent years translates to increasing costs. In addition to incurring these post-foreclosure ownerships costs, the City loses tax revenue from these properties. Tightening state budgets, tax levy limits, and tax revenues that have not kept up with inflation have made the issues surrounding tax-foreclosed properties more pressing for the City (City of Milwaukee n.d.b.). Milwaukee Mayor Tom Barrett asked the state legislature to allocate more money from the national mortgage settlements to offset the impact and cost of foreclosures shouldered directly by the City. However, even if the City received additional funding, it would not help people avoid tax foreclosure. In response, the City has asked the authors to address tax foreclosures by making recommendations that will decrease the number of properties that come into the City’s possession. To reach this goal, we

1 This designation requires a municipal population of 150,000 or more residents. Eligible cities must apply for this designation.

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have identified possible alternative approaches to preventing tax foreclosure taken by taxing districts (usually counties) around the country facing similar spikes in tax foreclosures. We also created our own alternatives to address issues specific to the constraints faced by the City of Milwaukee, such as the Wisconsin “uniformity in taxing” clause of the State Constitution. If successful, these policy proposals should serve to lower tax foreclosure costs by reducing post-foreclosure ownership costs for the City. In this paper, we begin with a description of the issue and our statement of the overarching problem our paper addresses. We then describe the three-phase tax-foreclosure process that the City has adopted. Next, we use a regression analysis to examine the characteristics that may affect the likelihood of tax foreclosure. Using the results from the regression analysis and the best practices we identified in other cities, we then propose some policy alternatives to the current process followed by the City and discuss the merits and drawbacks of each proposed course of action. Finally, we lay out the recommendations that we have for the City of Milwaukee to decrease the number of properties being acquired by the City.

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Problem Statement

Since 2009, the City of Milwaukee has acquired an unprecedented number of properties through in rem tax foreclosures, generating steeply increasing costs to the City and causing further stress to neighborhoods already experiencing high levels of mortgage foreclosures. The City pursues tax foreclosures as an in rem process, which means that the legal action is directed toward the property rather than a specific person. In 2012, the inventory of city-owned tax foreclosure properties stood at roughly 1,200 — 10 times that of 2008 levels. Of the total in rem foreclosures between 2008 and 2012, 65 percent have been residential properties. As shown in Figure 1, in rem tax foreclosures of residential properties have grown from fewer than 100 per year in 2008 to more than 700 in 2012. As the economic recovery continues to be slow, in rem tax foreclosures of residential properties are expected to increase.

Figure 1. Number of Properties the City of Milwaukee Acquired Annually Through In Rem Tax Foreclosure, 2008–2012

Source: Authors, using data from Department of City Development

As we will demonstrate, the city incurs the most substantial costs during the post-foreclosure phase. These costs include razing uninhabitable properties, securing the properties, renovating the properties, mowing lawns, removing snow, addressing other maintenance, and marketing the properties. Uncollected tax revenue is an additional cost incurred during the pre- and post-foreclosure phases. Because the City does not consider property management and marketing as either a core competency or in its long-term interest, it has identified addressing this growing problem as a top priority. Moreover, municipal expenditures on tax-foreclosed properties have associated opportunity costs. Such funds cannot be

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spent on vital municipal services such as public safety or road maintenance. City goals include maximizing the number of properties on the tax roll and reducing the negative impact of blighted, vacant, and demolished properties on its respective neighborhoods. Reducing the number of tax foreclosures would contribute to these goals as more properties would remain on the tax roll and fewer properties would become vacant.

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Comparison to Other Cities

More than 150 different systems for collecting the property tax exist within the United States. Alexander and Powell (2011, 4) believe that “[c]omplexity, rather than clarity and simplicity, characterizes property tax collection procedures in most jurisdictions.” For example, many jurisdictions have procedures that involve two, three, or four separate steps to enforce a property tax lien. Some states have two sales — an initial sale of the property or lien followed by a statutory time period before the final sale. Other states conduct a sale of the property that is followed by a statutory redemption period. On average, completing a property tax foreclosure in the United States takes anywhere from two to seven years (Alexander and Powell 2011). Alexander and Powell (2011) advocate for several changes to tax foreclosure laws to make the system more efficient and effective. Milwaukee currently follows these recommended practices. For example, Alexander and Powell support shifting to in rem foreclosures, which the City practices. In rem procedures have different constitutional requirements than proceedings against property owners personally, known as in personam judgments. As a result, the in rem process should result in less time, effort, and money spent obtaining personal jurisdiction over irresponsible owners. Another recommendation is to require constitutionally adequate notice and judicial tax foreclosure proceedings, as this route creates a better opportunity to resolve all outstanding title defects. The City of Milwaukee provides constitutionally adequate notice and judicial tax foreclosure proceedings. Alexander and Powell also suggest increasing efficiency of the tax enforcement system by permitting bulk petitions, which the City also utilizes. Bulk petitions allow a local government to process hundreds or thousands of properties in one hearing. Table 1 compares the City of Milwaukee with other cities and counties regarding tax foreclosures per year. The table lists the City of Milwaukee as having the lowest tax foreclosure rate per capita among the comparable cities and counties.

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Table 1. Comparison of Peer City/County Tax Foreclosures

City or County

Years Measurement

Average Number of Tax

Foreclosures Per Year*

Population

Percentage of Tax

Foreclosures Per Capita*

Milwaukee, WI

2008–2012

Tax Foreclosures (2008-2010); Residential

Property Tax Foreclosures (2011, 2012)

414 597,867 0.07

Baltimore County, MD (Baltimore)

2010–2012

Tax Foreclosures

for Sale 1,897 817,455 0.23

Marion County, IN

(Indianapolis)

2009–2012

Tax Foreclosure Sales for A

List Properties (2010-2012);

Tax Foreclosure Sales (2009)

3,664 918,977 0.40

Hamilton County, OH (Cincinnati)

2008, 2009

Property Foreclosure

Cases 4,259 800,362 0.53

Minneapolis, MN

2008–2011

Tax Foreclosure

Sales 2,334 387,753 0.60

Detroit, MI 2012 Tax

Foreclosures for Sale

19,001 706,585 2.69

*Tax foreclosures based on measurement identified such as tax foreclosures, residential property tax foreclosures, tax foreclosures for sale, tax foreclosure sales for A-list properties, tax foreclosure sales, or property foreclosure cases.

Sources: Hamilton, Ohio (2012) Annual Information Statement; Minneapolis Finance and Property Services Department (2011); Christoff (2013); Baltimore County Office of Budget and Finance (2013); City of Indianapolis and Marion County (2013); Ryan (2010); U.S. Census Bureau (2012)

The measurement of tax foreclosures in table 1 differs among the cities and counties due to available data. Ideally, the table would include only residential property tax foreclosures as a measurement because this paper’s focus is on those foreclosures. The various measurements include number of tax foreclosure cases, tax foreclosures, tax foreclosures for sale, residential property tax foreclosures, tax foreclosures sales for A-list properties (a subset of properties within Marion County, Indiana), or tax foreclosure sales. The number of tax foreclosure cases as a measurement will likely be larger than all the other measurements because some cases result in owners reclaiming their property and, therefore, properties are not foreclosed on and put up for sale. The measurement of tax foreclosures and tax foreclosures for sale are likely to be similar to each other because cities and counties try to sell most of the properties that they acquire through tax foreclosures. In a limited number of cases, a city or county may keep the property to serve specific city or county interests. Tax foreclosures sales will likely be

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smaller than the other measurements because properties sold may be less than tax foreclosures, possibly due to demand being less than supply. In addition, the table uses residential property tax foreclosures and tax foreclosures for A-list properties as a measurement. These two measurements refer to specific property types. Residential property tax foreclosures will likely be less than tax foreclosures because residential properties are a subset of all types of property. Tax foreclosure sales for A-list properties will likely be less than tax foreclosures for sale because A-list properties are a subset of properties within Marion County, Indiana. Figure 2 displays that relationship between the alternative tax foreclosure measurements. The measurement of residential property tax foreclosures is not included in figure 2 because its relationship with tax foreclosure sales and tax foreclosures for sale is unclear.

Figure 2. Relationship between the Alternative Tax Foreclosure Measurements

Tax Foreclosure Sales for A-List Properties ≤ Tax Foreclosure Sales ≤ Tax Foreclosures for Sale ≤ Tax Foreclosures ≤ Tax Foreclosure Cases

Source: Authors

Even though the measurements differ among the cities and counties, the tax foreclosures per capita are comparable because the various measurements are similar to one another. The City of Milwaukee tax foreclosure measurements include tax foreclosures and residential property tax foreclosures. In Milwaukee, about 65 percent of tax foreclosures are residential. Therefore, although Milwaukee’s tax foreclosure per capita is the lowest among the comparable cities, its tax foreclosure measurement is one of the more inclusive measurements. This means that Milwaukee’s foreclosure rate per capita is likely accurate, and the fact that it is lower than the other cities and counties not due to the alternative measurements of tax foreclosures.

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Property Taxes and Assessment in Milwaukee

The City of Milwaukee’s primary local source of tax revenue is the property tax. The City also receives revenues from the State of Wisconsin through a variety of intergovernmental grant programs, the largest of which is the Shared Revenue program. Per capita shared revenue payments are generally larger in municipalities, such as Milwaukee, with relatively low per capita values of property. The State of Wisconsin does not allow local government sales or income taxes. As a result, the property tax is the City’s only major source of tax revenue. The 2011–2013 Wisconsin State Budget included limits on the property tax levy of local governments, constraining the City’s ability to increase the levy to match its funding needs (Wisconsin Statutes: General Municipality Law Ch. 66, § 66.0602(2)). As a result, the City may only increase the property tax levy by an amount less than or equal to the percentage of value added due to net new construction relative to the previous year’s equalized property value. The equalized property value is determined by the Wisconsin Department of Revenue. The total equalized property value for Milwaukee has declined by more than 3 percent in each of the past three years (Assessment Commissioner 2012). The economic crisis has slowed net new construction in Milwaukee to less than 1 percent growth per year. Net new construction includes new construction and land improvements offset by the demolition of buildings. In Milwaukee, net new construction from 2011 to 2012 was 0.72 percent (Wisconsin Department of Revenue 2012). The binding levy limit enacted with the 2011–13 State Budget severely restricts the City’s ability to generate sufficient revenue to offset inflation-related increases in the cost of providing the current level of services (U.S. Bureau of Labor Statistics 2012). The Governor’s proposed budget for the 2013–15 biennium calls for extending the existing levy limit.

Further, as shown in table 2, from 2006 to 2013 the state reduced overall aid to Milwaukee, in real 2013 dollars, from $314.5 million to $259.6 million, or more than 20 percent. Once we adjust for inflation, Milwaukee’s total general fund revenues have declined overall by more than 3 percent since 2006. The annual reduction in intergovernmental support strains the City budget and burdens property taxpayers and residents with covering the growing deficit through user fees and charges for services (City of Milwaukee n.d.a.).

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Table 2. General Fund Revenue by Source, in 2013 Dollars

Year

Property Taxes and

Offsets

Intergovern- mental

Revenue

Other Own-Source

Revenue

Intra-Fund Charges

(Pensions and

Benefits) Total Millions of dollars

2006 $212.0 $314.5 $152.2 $56.6 $735.3 2007 $211.7 $306.0 $150.6 $48.6 $716.9 2008 $213.5 $293.1 $150.3 $49.9 $706.8 2009 $219.8 $295.5 $160.1 $53.0 $728.3 2010 $220.9 $289.2 $158.6 $71.2 $740.0 2011 $215.8 $282.8 $169.0 $50.7 $718.2

2012* $212.1 $263.1 $163.0 $55.3 $693.4 2013* $214.0 $259.6 $169.4 $70.3 $713.3

*2012 and 2013 are budget figures, not actual revenues Source: From actual revenues, as summarized in the adopted City budget

The City Assessor’s office is responsible for assessing the value of property in Milwaukee. Assessments are revalued annually using computer models that determine a property’s market value by considering factors such as age, size, condition, number of dwelling units, and location. Due to shifting market conditions, revaluations in 2013 included factors such as private foreclosures and board-ups, which may influence the market value of a property. The assessment process is intended to ensure that the assessed value of each property is consistent with its market value. Assessments on residential and commercial properties must be completed by January 1. These assessments are then used to determine each property owner’s share of the property tax burden the following December, when the City Treasurer’s office sends out tax bills. For administrative purposes, the City divides all property into several classes, sub-classes, and types. The primary property classes include residential, commercial, and manufacturing. The residential class includes two sub-classes: residential (one to three family units) and condominiums. The commercial class also includes sub-classes: local commercial, special commercial, and apartments (four or more units). The classes and sub-classes also contain a variety of property types. As illustrated in figure 3 and table 3, approximately 90 percent of the City parcels are residential, with commercial properties making up the majority of the remaining parcels. The City is responsible for the assessment of residential and commercial parcels, but the Wisconsin Department of Revenue handles the assessment of all manufacturing properties. Figure 4 illustrates the breakdown of in rem acquisitions by property class.

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Figure 3. 2012 Property Distribution Residential, Manufacturing, and Commercial Parcels

Source: Authors, using data from Office of the City Assessor

Table 3. 2012 Taxable Parcels by Property Class

Property Class Total Percentage of all City

Parcels

Residential 127,128 82.30%

Condominium 11,706 7.58%

Residential Total 138,834 89.88%

Manufacturing 651 0.42%

Manufacturing Total 651 0.42%

Local Commercial 6,832 4.42%

Special Commercial 3,083 2.00%

Apartments 5,069 3.28%

Total Commercial 14,984 9.70%

Total All Classes 154,469 100.00%

Source: Authors, using data from Office of the City Assessor

89.88%

0.42%9.70%

Residential Manufacturing Commercial

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Figure 4. Distribution of In Rem City Acquisitions for All Property Classes, 2008–2012

Source: Authors, using data from the Department of City Development

For the purposes of this analysis, the City of Milwaukee requested that we examine certain property classes and property types data from 2008 to 2012. Of the six unique property classes, the City requested that we examine two: residential and condominiums. Of the 32 unique property types, the City requested that we examine 11: condominium, duplex, duplex – 2, duplex and rear cottage, duplex and single family, multi-family, multi-family and duplex, multi-family and single family, single family, single family – 2, and townhouse. The City considers residential properties to be either vacant or improved lots. Vacant lots do not have an existing structure or housing unit, whereas improved lots are parcels that have a residential building or house on them. For the purposes of this analysis, we consider the acquisition of improved lots only. Of all city-acquired properties between 2008 and 2012, the selected property classes and types on improved parcels account for 1,599 acquisitions — about 65 percent of the total. Only these property classes and types are examined because they account for the vast majority and an increasing share of municipal acquisitions. The City Treasurer’s office sends out tax bills for the coming year each December, and property taxes are due each year on January 31, after which the City provides a five-day grace period. Failure to pay the property taxes in a timely fashion results in late fees and penalties totaling 18 percent per year. The City

Apartments Condominiums

Residential Commercial

Exempt Special Commercial

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allows payment of the property tax portion of the property tax bill to be distributed over a 10-month installment plan under Wisconsin Statute § 74.87 (3). This number of installments far exceeds that used by other Wisconsin counties and municipalities, which typically permit only two installments. Despite this generous installment payment option, each February a number of property owners of all classes of property fail to pay their property taxes in a timely fashion and become tax delinquent. The City Treasurer’s offices reports that more than 99 percent of real estate property taxes are collected over the course of the enforcement period. However, as shown in table 4, between 9 and 11 percent of taxpayers were delinquent at the end of the five-day grace period in February from levy years 2002 to 2013. Because the City relies heavily on the property tax to fund basic services, it must borrow money to cover the cash-flow deficit. This short-term debt is repaid by collections of delinquent taxes throughout the year. Table 4 also demonstrates that the City’s tax delinquency rates have remained stable throughout the private mortgage foreclosure crisis. One reason may be that banks that initiated the foreclosures have been paying the property taxes to keep them current until the banks can resell the properties. A lien on the property allows the City of Milwaukee to foreclose on the property ahead of other liens that may be against the property. If the bank failed to keep the property tax payments current, the City would initiate its tax foreclosure process. Even though the overall tax collection rate remains high, property owners are taking more time to pay their delinquent taxes (see table 4). For example, by August of the final year of the three-year tax collection enforcement process, delinquent taxes accounted for less than 1 percent of property taxes for levy years 2002 through 2006. However, from levy years 2007 through 2010, delinquent taxes exceeded 1 percent and were trending upward. Further, the longer delinquency periods appear to be correlated with an increase in in rem filings and acquisitions as a percentage of initial delinquency rates. As the economic recovery continues to be slow, this trend is expected to continue.

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Table 4. Property Tax Delinquency throughout Three-Year Tax Collection Enforcement Period for All Real Estate for Levy Years 2002–2012

Year 1 Year 2 Year 3

Levy Year February April June August Novem-

ber March April Novem-

ber Decem-

ber August In rem Filings

In rem Acquisi-

tions

2002 10.04% 9.08% 9.11% 9.08% 8.31% 4.52% 4.11% 1.86% 1.70% 0.73% 0.40% 0.18%

2003 10.02% 9.02% 8.57% 8.40% 7.10% 3.68% 3.08% 1.61% 1.49% 0.59% 0.28% 0.11%

2004 9.40% 8.36% 8.18% 8.00% 6.93% 3.57% 2.90% 1.42% 1.30% 0.56% 0.26% 0.10%

2005 9.52% 8.59% 8.40% 8.39% 7.43% 3.92% 3.21% 1.63% 1.50% 0.58% 0.34% 0.12%

2006 10.65% 9.63% 9.53% 9.46% 8.50% 4.92% 4.04% 2.11% 1.90% 0.82% 0.59% 0.30%

2007 11.39% 9.98% 9.97% 10.07% 9.26% 5.58% 4.88% 2.76% 2.54% 1.02% 0.71% 0.35%

2008 10.64% 9.92% 10.03% 10.28% 9.39% 5.35% 4.74% 3.01% 2.78% 1.29% 0.64% 0.39%

2009 10.15% 9.33% 9.42% 9.87% 9.14% 5.50% 4.85% 3.31% 3.14% 1.55% 0.76% 0.49%

2010 10.02% 9.18% 9.21% 9.46% 8.56% 5.62% 5.18% 3.42% 3.16% NA NA NA

2011 10.17% 9.38% 9.37% 9.66% 8.95% 5.94% 5.34% NA NA NA NA NA

2012 10.79% 9.27% NA NA NA NA NA NA NA NA NA NA

Average 10.25% 9.25% 9.18% 9.27% 8.36% 4.86% 4.23% 2.35% 2.17% 0.89% 0.50% 0.25% Source: Authors, using data from the Office of the City Treasurer

14

Table 5 illustrates the changes in tax delinquencies for owners of residential properties from levy years 2008 to 2012, comparing property owners who become delinquent in February with those who become delinquent during the 10-month installment period and are still delinquent in November. February delinquencies declined between levy years 2008 and 2010, when they reached a low of 12,002. February delinquencies then reached a five-year high in levy year 2012, suggesting that more property owners were unable to or were choosing to not pay their property taxes. The total amount of delinquencies that occur between March and October and remain delinquent in November has been trending downward since 2008, with a slight increase in levy year 2011. The average amount of delinquent property taxes due at the time of delinquency has remained stable across both those who went delinquent in February and those who later become delinquent and remained so into November. This suggests that even though the amount of property taxes owed may be shifting very little, the property tax burden on property owners may be increasing. Property owners may have less ability to pay their property taxes, despite relatively small changes in the nominal amount of delinquent taxes.

Table 5. Comparison between All Tax Delinquent Residential Property Owners for Levy Years 2008–2012

Levy Year

2008 2009 2010 2011 2012 Average

Feb

ruar

y D

elin

quen

cies

Owner- Occupied

8,400 7,176 6,063* 6,563 6,731 6,987

Investor- Owned

5,610 5,805 5,939* 6,906 7,657 6,383

Total 14,010 12,981 12,002

* 13,469 14,388 13,370

Average Amount

Delinquent $3,031 $3,032

$2,872*

$3,111 $2,920 $2,993

Nov

embe

r D

elin

quen

cies

**

Owner- Occupied

2,561 2,053 1,591 1,755 NA 1,990

Investor- Owned

1,575 1,600 1,264 1,220 NA 1,415

Total 4,136 3,653 2,855 2,975 NA 3,405

Average Amount

Delinquent $961 $964 $966 $877 NA $942

*The February 2011 delinquency report was not available, so these numbers are from March 2011.

**The number of delinquencies reported in this category are less than the total delinquencies that occur between March and October, the end of the 10-month installment period. The numbers are taken from November delinquency reports. Therefore, property owners who went delinquent between March and October and who completed payment of their property taxes prior to November are not counted in the delinquency totals.

Source: Authors, using data from the Office of the City Treasurer

15

Delinquent property owners can be divided into two categories: those who own and occupy their property (owner occupants) and those who invest in property and rent to tenants (investor owned). As shown in table 5, between levy years 2008 and 2012 the share of tax delinquencies between these two groups shifted. Figure 5 shows that owner occupants who were delinquent in February exceeded delinquent investors between levy years 2008 and 2009. In levy year 2010, the delinquencies of these two types of property owners were approximately equal; however, in levy years 2011 and 2012, however, investors comprised a larger share.

Figure 5. Distribution of Owner Occupants and Investor Owners across All November Tax-Delinquent Residential Property Owners, 2008–2012


Figure 6 illustrates the tax delinquency distribution of the two types of property owners who completed at least the first installment payment but were still delinquent in November. From levy years 2008 to 2011, owner occupants have consistently made up a larger share of property owners becoming delinquent during the 10-month installment period and remaining delinquent in November.

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012

Owner Occupied Investor Owned

16

Figure 6. Distribution of Owner Occupants and Investor Owners Across All November Tax-Delinquent Residential Property Owners

Who Made at Least One Installation Payment, 2008–2012


Table 6 shows that the City of Milwaukee filed in rem foreclosure against more real estate properties during the 2000–2002 economic recession than it did at any point during the recent housing crisis and Great Recession. However, consistent with the trend of increased delays in property tax payments, the City has seen a lower percentage of properties redeemed after filing in rem foreclosures (see Pre-Foreclosure Process and Post-Foreclosure Process for a more detailed review of the in rem tax foreclosure process). This may suggest that low-income homeowners have been slower to recover economically from unemployment. This may also indicate that investors are increasingly more likely to walk away from their properties or perhaps that “underwater” homeowners who took out peak-value home equity lines of credit loans in the mid-2000s have abandoned their properties to avoid loan repayment and subsequent taxes.

30%

40%

50%

60%

70%

2008 2009 2010 2011

Owner Occupied Investor Owned

17

Table 6. In Rem Tax Foreclosure Redemption and Acquisitions for All Real Estate in Milwaukee, 2000–2012

Year Parcels Filed

Against Parcels

Acquired Redemption

Rate Acquisition

Rate 2000 1,253 459 63.37% 36.63% 2001 2,755 723 73.76% 26.24% 2002 1,577 373 76.35% 23.65% 2003 389 149 61.70% 38.30% 2004 413 180 56.42% 43.58% 2005 598 263 56.02% 43.98% 2006 417 160 61.63% 38.37% 2007 385 155 59.74% 40.26% 2008 508 184 63.78% 36.22% 2009 892 461 48.32% 51.68% 2010 1,089 532 51.15% 48.85% 2011 991 597 39.76% 60.24% 2012 1,152 744 35.42% 64.58% Total 12,419 4,980 59.90% 40.10%

Source: Authors, using data from Office of the City Treasurer

As fewer property owners redeem their tax-delinquent properties, the City’s acquisition rate has continued to grow. As shown in table 6 and figure 7, the City acquired only 37 percent of the properties it filed against in 2000. However, by 2012, the acquisition rate rose to 65 percent.

Figure 7. In Rem Tax Foreclosure Redemption and Acquisition Rates for All Real Estate, 2000–2012

Source: Office of the City Treasurer

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Redemption Rate Acquisition Rate

18

Prior to 2008, the City’s acquisition of properties through in rem tax foreclosure was at a level that the Department of City Development could manage. The real estate market allowed for the City to acquire and re-sell properties at a rate that resulted in a stable turnover of inventory. The city’s process of acquiring properties allowed for the recoupment of lost or delinquent taxes through the acquisition and selling of properties. Beginning in 2008, however, the inventory of in rem city-acquired properties began to grow as house sales slowed. Despite an expansion of its marketing efforts, the Department of City Development has been unable to sell the majority of properties that the City acquires through in rem foreclosure due in part to stricter underwriting standards by banks and a lack of demand in the housing market. Another factor is the poor condition of the in rem properties themselves, which are increasingly located in economically stressed portions of the City. In general, Milwaukee’s housing stock is aging and in need of rehabilitation. An analysis of 2008 U.S. Census American Community Survey data completed by the Department of City Development (2010) found that more than one-half of the homes in the city were built prior to 1950 and more than 90 percent before 1980. As the credit market tightened in the wake of the housing crisis and recession, resources for homeowners to purchase and renovate properties were substantially reduced, diminishing the City’s pool of potential buyers. Due to the declining value of the housing stock and state-imposed levy limits, the City has sought to generate additional revenue to reduce reliance on the property tax. One result was an increase in user fees through the adoption of fees that directly correspond to the user benefit (Government Finance Officers Association Annual Conference 2012). However, the Wisconsin State Legislature has restricted the user fee charge to the actual cost of service. The weak economy plus the increased use of fees has resulted in a marked increase in the late payment and delinquency of fees. To encourage the timely payment of fees, the Milwaukee City Council passed ordinances that allow for many delinquent municipal fees to be applied to the property tax bill as special charges. The Department of Neighborhood Services, Public Works, and the Milwaukee Water Works issue more than 99 percent of the municipal fees that, if delinquent, are added to the property tax bill as special charges (Berger et al. 2011). The municipal fee collection process includes bill notification, the imposition of late fees, and the availability of multiple payment options. While each of these factors varies among each of the three primary municipal fee-issuing departments, after a municipal fee is delinquent and placed on the property tax bill, the City Treasurer assumes responsibility for collection. Once municipal fees are added to the property tax bill, they must be paid in full with the first property tax payment and are treated for collection purposes as a property tax balance.

19

Pre-Foreclosure Process

The City of Milwaukee has a standardized process for redeeming delinquent property taxes. This process consists of three phases in which the third and final phase begins with the City Treasurer filing an in rem tax foreclosure action in Milwaukee County Circuit Court. This section describes the City’s property tax collection process and tax enforcement procedure.

Property Tax Collection Process

The City of Milwaukee Treasurer’s Office maintains the responsibility of tax collection for all six taxing jurisdictions within the city limits, including the City of Milwaukee, Milwaukee County, State of Wisconsin, Milwaukee Public Schools, Milwaukee Metropolitan Sewerage District, and Milwaukee Area Technical College. Tax bills are sent out once per year and are due on January 31. A property taxpayer who does not or cannot pay the entire balance due by that date may have the option of going on an installment plan. That plan allows for up to 10 payments — interest free — with each payment due by the last day of each month between January 31 and October 31. This is the maximum number of payments allowed by state law. Any fees and charges, however, cannot be included in the installment plan and must be paid in full by January 31. Anyone who pays less than the total balance due but more than what the first installment would be automatically qualifies for the installment plan.

The city provides a number of payment options. One option is to pay the entire balance due or the installment amount via electronic funds transfer or in cash or with a personal check at City Hall, by mail, or at any one of the 13 US Bank locations in the city (City of Milwaukee 2012). Additionally, property taxes may be paid by credit card, but only for the entire balance due. A 2.75 percent convenience fee is added to the charge to cover the City’s transaction charges as a credit card merchant.

Three-phase Tax Enforcement Process

If neither the entire balance due nor the first installment has been paid by January 31, a five-day grace period begins. After that period has passed, the property tax bill is considered delinquent. At this point, the Office of the City Treasurer begins its tax enforcement process beginning with collection attempts, and if necessary, ending with foreclosure on the parcel. This process is outlined below.

Phase 1: In-house Collection

During the first phase, the City Treasurer begins by sending out a series of four collection letters, followed by two collection letters containing the signature of an Assistant City Attorney. Monthly interest of 1 percent plus a monthly penalty of 0.5 percent are applied, retroactive to February 1. This phase takes place over a period of 14 months. Samples of these letters can be found in appendix A.

20

Phase 2: Collection by Private-party Law Firm

During the second phase, any remaining delinquencies are turned over to the Kohn Law Firm, a private firm contracted to the City that specializes in collections. The firm begins by assessing each property owner’s ability to pay and then makes attempts to collect. Collection attempts begin by attempting to work out payment arrangements with the property owner may take the form of up to 10 monthly payments and include the interest and penalty. Payments may not exceed 10 months without approval from the City Attorney. Unlike most collections, however, the firm has no authority to reduce the balance due by any amount. Collection attempts are made via mail and telephone. No in-person visits are made. The firm may pursue an in personam judgment, which consists of obtaining a court order for the property owner to pay the City. After this point, the firm may have the option of pursuing wage garnishment, tax refund interception (essentially a garnishment of the property owner’s tax refund), and possession of personal property. Additionally, if the property owner has investments, the firm may pursue those, but retirement, social security, and other similar funds are exempt. If the property owner is a landlord, the firm may pursue a rent attachment, which is similar to wage garnishment and tax refund interception in that the firm collects rent payments to the landlord.

The Kohn Law Firm handles these cases for a period of six months, after which time they are returned to the City for further processing. The firm may hold onto a small fraction of cases, however, if they feel that there is a significant likelihood of collecting payment from a property owner in a relatively short period of time (typically about one month).

Phase 3: In Rem Foreclosure

Upon receiving cases back from the Kohn Law Firm, the City Treasurer begins the third and final phase of the tax enforcement process, called in rem foreclosure, by filing an in rem tax foreclosure action in Milwaukee County Circuit Court. When this occurs, the City’s lien takes precedence over all others that may exist and the City is listed as the first lienholder. Upon the publishing of the action in The Daily Reporter newspaper, an eight-week redemption period begins, during which a parcel may be saved from tax foreclosure by payment of the entire balance due. After this point, a four-week answer period begins during which a property owner may prevent tax foreclosure only by showing one of the following three circumstances: 1) the affected parcel was not liable to taxation, 2) the balance due was paid in full before the last day of the eight-week redemption period, or 3) the tax lien is barred by the statute of limitations. If none of those three circumstances are met, the City is granted a foreclosure judgment by the court and ownership is transferred to the City. The final option for a property owner to retain ownership of the parcel is to petition the Milwaukee Common Council to vacate the in rem foreclosure judgment. The property owner must do this within 90 days of the in rem foreclosure judgment and the petition must also include an administrative fee of $1,370. The council’s Judiciary and Legislation Committee then holds a hearing on whether or not to vacate the judgment. If the

21

committee recommends vacating the judgment, the full council then votes upon the recommendation. The property owner must pay all outstanding fees and charges prior to this vote. If the Council votes to vacate the judgment, the property owner must pay the entire tax balance due within 30 days. If the property owner is delinquent on property taxes for any other jurisdictional parcels, those also must be paid in full within 30 days, or an authorized payment plan must be put into place.

For a flowchart of the in rem foreclosure process, see appendix B.

22

Post-Foreclosure Process

If the 90-day redemption period passes without the former property owner recovering the title, the City’s Department of Neighborhood Services inspects the property, assesses its condition, and estimates the cost of bringing the property to code compliance where feasible. The property may be sold to a private party. Foreclosed houses sell for an average of $7,000 to $27,000. Prior to entering an agreement with a potential buyer, the City conducts a background and credit check to reduce the risk of having the property being vacated or foreclosed again. The buyer must also agree to be an owner-occupant of the home for a minimum of five years.

Unoccupied houses that are not immediately sold are boarded up for future sale, and the Department of City Development (DCD) remains responsible for property maintenance such as snow removal and grass cutting. If the foreclosed home is tenant-occupied, the City makes a lease with the tenants. In this case, municipal funds are used to make necessary repairs, and DCD remains responsible for property maintenance. Another option is that the property may be referred for demolition to the Department of Neighborhood Services, which makes the final determination to demolish the property. The department is responsible for coordinating demolition work on residential properties determined to be uninhabitable. The typical cost of demolishing a home is $10,000 to $15,000. The Department of Public Works-Forestry Division maintains foreclosed vacant lots or properties where a house was demolished. Vacant lot reuse strategies include using the property for community gardens, selling the lot to adjacent property owners for green space, holding property for larger future development, or selling the property for in-fill (U.S. Conference of Mayors 2008). Alternative uses being considered include pop-up art exhibits, neighborhood exercise stations, and batting cages.

The City has no interest in retaining most foreclosed properties and instead seeks to resell and restore them to productive, taxable use. DCD markets the properties that are suitable for resale. DCD operates under authority of §304-49 Milwaukee Code Ordinances and has developed policies for marketing foreclosed properties through both traditional means and over the Internet. The City will sometimes fund capital improvements to a small number of qualifying properties through its Housing Infrastructure Preservation Fund, per § 304-31.5.

According to the in rem foreclosure procedure based on Wisconsin Statute §75.521, the DCD notifies former owners that the City has taken title and advises them of their right to claim any excess proceeds from sale of their property under Wisconsin Statute §75.36. The former owners are sent any net proceeds minus the following: 1) delinquent taxes, interest, and penalties the homeowner owes on this or any other properties owned within the City and 2) additional costs associated with marketing the property, according to Wisconsin Statutes, Section 75.36 (2m). For the former homeowner to be entitled to these proceeds, he or she must fill out an affidavit and submit it within 60 days of the date of the City’s notice.

23

The DCD has set up a real-time database to track and map foreclosed properties. The information is shared with the Milwaukee Police Department, the Milwaukee Fire Department, and Department of Neighborhood Services. The latter works to quickly identify and monitor foreclosed properties for code violators, and the Milwaukee Police Department monitors vacant property for criminal activity. COMPASS2 and MapMilwaukee3 have started tracking foreclosed properties data so it can be analyzed with crime data and other neighborhood indicators (City of Milwaukee 2009).

2 Community Mapping and Analysis for Safety Strategies is a Milwaukee initiative that uses a shared database to help policymakers collaborate on citywide issues. 3 MapMilwaukee uses GIS to map citywide data.

24

City of Milwaukee Constraints in Addressing In Rem Foreclosures

Compared to private organizations that collect outstanding debt, the City of Milwaukee’s options for collecting property taxes are more constrained. Like most state constitutions, Wisconsin’s constitution contains what is commonly referred to as a uniformity clause (Johnson 2008). The clause is included in Article VIII, Section 1, the most relevant part of which reads: “The rule of taxation shall be uniform…” Essentially, this means that all property tax payers must be treated alike. The clause applies to the levying and, to a significant extent, the collection of property taxes. Because of that, while private organizations may choose to settle with debtors for lesser amounts, the City is not empowered to make settlements with delinquent property tax payers for less than the entire balance. One option the City does practice is the allowing of up to 10 installment payments. But a delinquent taxpayer is no longer automatically eligible for the installment payment option. In addition, because the City elects to add fees and charges to the property tax bill, the City must exhibit the same uniformity in collection of those as they do with property taxes. This self-imposed constraint prevents the City from offering any flexibility to property tax payers who are delinquent in their payments in terms of payment arrangements, settlements, or any other measure aimed at satisfying their debts and bringing them out of tax delinquency. As a result of the 1967 case Gottlieb v. Milwaukee, the Wisconsin Supreme Court ruled that, “for the direct taxation of property under the uniformity rule, there can be but one constitutional class.” In essence, this ruling means that all property that is subject to property taxation must be taxed at the same rate based on its value and that all other property “must be absolutely exempt from property taxation.” One of the most significant effects of this ruling has been to disallow property taxing jurisdictions, including the City of Milwaukee, from applying different standards of tax levying or tax collection to property owners who differ by any variable, such as income level or employment status, or to properties that differ by any variable, such as value or class (e.g., commercial versus residential). For the City to consider exhibiting flexibility in the realm of fees and charges, however, or even if the City were constitutionally permitted to exhibit some level of non-uniformity between differing property taxation classes, the role of moral hazard would need to be sufficiently considered. Offering delinquent debtors favorable payment options removes, to some degree, the incentive to pay on time. For the relevant constitutional text, state statutes, and municipal ordinances that govern the City’s foreclosure process, see appendices C, D, and E.

25

Factors Associated with In Rem Foreclosure

This section considers the characteristics that may be associated with in rem property tax foreclosure. We initially consider aldermanic districts and individual-property level characteristics. We then discuss characteristics of taxes and tax collection that may impact the likelihood of in rem foreclosure.

Characteristics of Properties Acquired by City through In Rem Foreclosure

Residential properties the City acquires through in rem foreclosure are concentrated in certain areas of Milwaukee. We first consider assessment class, aldermanic district, and assessed property values by aldermanic district when examining characteristics of residential properties that may contribute to the increased likelihood of in rem tax foreclosure. Next, we consider individual property-level data concerning property complaints and examine the potential impact of ownership occupancy in contrast to investor properties that may be renter-occupied.

Assessment Class

Milwaukee has various property types that fall into the residential property assessment class. As illustrated in table 7, in rem foreclosures in single-family homes and duplexes account for more than 95 percent of the total in rem foreclosures of residential property acquired by the City between 2008 and 2012.

Table 7. In Rem Foreclosures of Residential Property Assessment Class, 2008–2012

Property Class

Property Type Residential Condominiums

Condominium 0 48

Duplex 640 0

Duplex – 2 2 0

Duplex and Rear Cottage 1 0

Duplex and Single Family 15 0

Multi-Family 31 0

Multi-Family and Duplex 1 0

Multi-Family and Single Family

1 0

Single Family 853 0

Single Family – 2 6 0

Townhouse 1 0

Total 1,551 48


26

As mentioned, the selected property classes and types account for about 65 percent of all municipal acquisitions. When examining that proportion over the selected five-year period, we observe a relatively steady increase, beginning with about 47 percent in 2008 and ending with close to 78 percent in 2012. Figure 8 shows the historical trend of this data.

Figure 8. Residential Property Proportion of All In Rem Acquisitions in the City of Milwaukee, 2008–2012


The number of acquisitions during the selected period has also increased, with the exception of a noticeable decline in 2011 followed by a sharp increase in 2012, as shown in figure 9.

Figure 9. In Rem Tax Foreclosure Acquisitions, 2008–2012


45%

50%

55%

60%

65%

70%

75%

80%

2008 2009 2010 2011 2012

0100200300400500600700800900

1000

2008 2009 2010 2011 2012

Nu

mb

er o

f P

rop

erti

es

Selected Property Types All Property Types

27

Aldermanic District

The volume of and increase in the number of in rem foreclosures of residential properties varies by aldermanic district. However, the distribution is disproportional. As illustrated in table 8 and figures 10 and 11, of the City’s 15 districts, just four of them — Districts 1, 6, 7, and 15 — account for more than 75 percent of the total in rem foreclosures from 2008 to 2012. The remaining 11 districts account for fewer foreclosures than District 15 alone, which accounts for more than 26 percent of city-acquired residential foreclosures. The districts with the highest concentrations of in rem tax foreclosures also have the highest percentages of in rem tax foreclosures relative to the total number of residential parcels. This suggests that the higher concentrations of in rem tax foreclosures are not the result of more residential parcels in these districts, but rather the result of other factors.

Table 8. Residential Properties Acquired by the City of Milwaukee through In Rem Tax Foreclosure by Aldermanic District, 2008–2012

Aldermanic District

Year City Acquired Property through In Rem Tax Foreclosure

Total

Total Tax Foreclosures

as a Percentage

of Residential*

Parcels 2008 2009 2010 2011 2012

1 11 16 39 25 97 188 1.92%

2 1 6 12 10 17 46 0.48%

3 1 4 4 4 1 14 0.19%

4 5 8 8 8 16 45 0.98%

5 3 3 4 2 4 16 0.14%

6 16 31 71 81 139 338 3.77%

7 14 25 61 48 113 261 2.37%

8 4 5 13 8 22 52 0.79%

9 5 10 12 4 22 53 0.58%

10 4 2 10 9 17 42 0.38%

11 0 1 1 2 0 4 0.03%

12 3 8 14 11 38 74 1.14%

13 1 1 2 1 6 11 0.10%

14 2 8 4 3 17 34 0.30%

15 17 31 92 89 192 421 5.09%

Total/Average 87 159 347 305 701 1,599 1.15%

*Residential properties include properties classified as residential and condominium Source: Authors, using data from the Department of City Development and the Office of the City Assessor

28

Figure 10. Percentage of In Rem City of Milwaukee Acquisitions of Selected Properties by Aldermanic District, 2008–2012


0%

10%

20%

30%

40%

50%

60%

70%

80%

Districts 1, 6, 7, 15 All other districts

29

Figure 11. Percentage of Total In Rem Tax Foreclosures of Residential Properties by Aldermanic District, 2008–2012

Source: Map downloaded from the City of Milwaukee website and filled in using data from the Department of City Development and the Office of the City Assessor

0.00 – 0.49%

0.50 – 0.99%

1.00 – 1.49%

1.50% or greater

30

Despite the small percentage of tax foreclosures relative to the number of residential parcels in the district, the City’s in rem tax foreclosures are in addition to private mortgage foreclosures. The combined effects of private mortgage and tax foreclosures reduce property values throughout neighborhood and blight communities. Figure 12 illustrates the relative burden of in rem tax and private mortgage foreclosures as measured using data on sheriff’s sales in each aldermanic district. From 2008 to 2012, sheriff’s sales totaled 11,720. All districts have experienced private home foreclosures, with districts 1, 2, 6, 7, and 15 experiencing the highest volume of sheriff’s sales. District 2 bears a low burden of in rem tax foreclosures but has a relatively high number of sheriff’s sales, while districts 1, 6, 7, and 15 have the burden of both high numbers of in rem tax foreclosures and sheriff’s sales.

Figure 12. In Rem Tax and Private Mortgage Foreclosure as a Percentage of Residential Parcels by Milwaukee Aldermanic District, 2008–2012


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

In Rem Foreclosure Burden Private Mortgage Foreclosure Burden

31

Assessed Property Values

Median assessed property values vary across aldermanic districts in Milwaukee. As shown in figure 13, the districts with the highest concentration of in rem tax foreclosures — districts 1, 6, 7, and 15 — also have some of the lowest median property values in the City, while districts with the fewest in rem foreclosures are among those with the highest median property values.

Figure 13. Median Assessed Property Values and In Rem Tax Foreclosure Rates for all Residential Properties by Aldermanic District

Source: Authors, using data from the Office of the City Assessor

In addition to lower assessed property values, the districts with the highest concentration of in rem foreclosures in which the City acquired properties have also experienced the largest decreases in average assessed values from 2011 to 2012. As shown in figure 14, all aldermanic districts in Milwaukee saw sharp declines in property values. However, aldermanic districts 1, 5, 6, 7, 8, and 15 had declines of greater than 15 percent.

0%

1%

2%

3%

4%

5%

6%

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Median Assessed Value 2012 In Rem Foreclosure Rate, 2008 - 2012

32

Figure 14. Percentage Change in Average Assessed Home Value by Aldermanic District, 2011–2012


Assessed Value Changes During Foreclosure Process

The three-year tax collection enforcement period between the time that a property owner is initially delinquent on the property tax and when the City acquires the property through in rem tax foreclosure may result in a significant decline in home value. Because we are analyzing data concurrent with the housing market crisis, it is difficult to isolate the decline in home values due to the housing crisis from the decline in value that typically occurs in the three years prior to in rem tax foreclosure. However, figure 15 illustrates the average changes in the assessed value of in rem tax-foreclosed residential properties from 2008 to 2012. The majority of the homes acquired by the City in 2008 resulted from the 2005 tax levy year and became delinquent in 2006. The properties the City acquired in 2012 were predominantly tax delinquent beginning in 2009. The percent change was calculated between the years that the properties went delinquent and the third year, when the City acquired the property. Most aldermanic districts experienced an increase in assessed home values between 2006 and 2008. However, consistent with the findings reported in figure 14, home values declined in every district across the City in the subsequent years. Aldermanic districts 6, 7, and 15 experienced the greatest increases in home value between 2006 and 2008, and the same districts also witnessed the biggest declines. These three districts also accounted for the majority of in rem tax foreclosures between 2008 through 2012 (see table 8). The jump in home values in the mid-2000s coupled with the availability of credit and flexible-lending practices may have induced people to buy and invest in properties. After home values declined significantly in subsequent years, owners may have walked away or disinvested in the properties, leading to the substantial increase in the inventory of in rem tax-foreclosed properties.

-25%

-20%

-15%

-10%

-5%

0%1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

33

Figure 15. Average Percentage Change in Assessed Value Between Tax Delinquent Year and Year the City of Milwaukee Acquired the Property for

Residential In Rem Tax Foreclosures, 2008–2012


Housing Quality

The quality of the residential properties the City acquired through the in rem foreclosure process deteriorated between 2008 and 2012. After acquiring an in rem foreclosed property, the Department of Neighborhood Services completes an inspection to determine the approximate cost to return the property to a minimum standard based on code compliance. The City does not engage in significant renovation projects; however, the minimum standard estimates serve as a proxy to illustrate the degradation in the quality of the properties. Tables 9 and 10 demonstrate changes in the estimated rehabilitation costs for in rem-acquired residential properties from 2008 through 2012.

Table 9. Average Estimated Rehabilitation Costs for In Rem Residential Properties

Acquired and Inspected by the City of Milwaukee, 2008–2012

Year Average Estimated

Rehabilitation Costs

2008 $28,070 2009 $32,881 2010 $31,936 2011 $41,952 2012 $36,439

Average Total Cost $35,725


-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2008 2009 2010 2011 2012

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Table 10. Average Estimated Rehabilitation Costs for In Rem Properties by Property Type Acquired

by the City of Milwaukee, 2008–2012

Property Type Average Estimated

Rehabilitation Costs Condominiums $30,796 Duplex $31,441 Duplex – 2 $15,233 Duplex & Rear Cottage $56,874 Duplex & Single Family $32,403 Multi-Family $51,126 Multi-Family & Duplex $15,225 Multi-Family & Single Family $79,375 Single Family $38,676 Single Family - 2 $27,121 Average Total Cost $35,762


Figure 16 shows the relationship between the minimum cost to bring a home up to code and the median assessed home value of the aldermanic district in 2012. In seven aldermanic districts, the City is acquiring homes that require an investment of more than one-half the median assessed value to return them to a minimum standard of habitability. City acquisitions in districts 6, 12, and 15 have the highest percentage of rehabilitation cost relative to median assessed home value. This indicates that the City or potential home buyer may be required to invest more in the property to return it to code than they could net from selling it. This degradation of property quality means the City is less likely to recoup delinquent taxes and it increases costs. As properties degrade in quality and diminish in value, the Department of City Development has greater difficulty selling the properties. As a result, property maintenance remains the City’s responsibility for longer periods of time as inventory continues to grow.

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Figure 16. Percentage of Average Estimated Residential Rehabilitation Cost Relative to Median Assessed Value by Aldermanic District, 2012

Source: Authors, using data from the Office of the City Assessor and the Department of City Development

Another trend in the data is the decline in the selling prices of acquired properties. Because there was only one sale in 2008 for the selected property classes and types, we use 2009 as the baseline. As illustrated in Figure 17, between 2009 and 2012 both the mean and the median selling prices of acquired properties declined by more than 60 percent.

Figure 17. Median and Mean Selling Prices of In Rem City of Milwaukee-Acquired Properties, 2009–2012


54% 58%

16%28% 24%

78%

53%

37%

25%

38%

20%

68%

51%

24%

102%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2009 2010 2011 2012

Median Mean

36

Disposition of Properties

After the City acquires a residential property through in rem foreclosure, the Department of Neighborhood Services assesses the property and makes a determination about whether the property should be demolished, restored and sold, or sold in its current condition (see Post-Foreclosure Process for further details). Table 11 shows some of the common dispositions of residential properties acquired through in rem tax foreclosure from January 2008 through the end of December 2012. Please note that the status of approximately 30 percent of the properties acquired in 2012 was unknown because many properties were acquired later in the year and had not yet been assessed or their status had not yet been recorded. Therefore, dispositions for these properties are not included in Table 11. Despite this, available information suggests that more acquisitions are entering the track to demolition and fewer properties are being sold relative to the inventory being acquired. The City will restore some historic properties, but such properties are a very small percentage of the overall acquisitions.

Table 11. Dispositions of In Rem City of Milwaukee-Acquired Properties, 2008–2012

Disposition

Year Demolition

Track Restoration

Track Sold Vacated

Judgment 2008 2.30% 0.00% 40.23% 50.57% 2009 1.89% 0.00% 54.09% 30.82% 2010 6.05% 0.29% 47.26% 17.58% 2011 13.44% 0.33% 37.05% 11.80% 2012 13.41% 0.57% 8.70% 7.70%

Average 10.07% 0.38% 28.71% 15.26% Source: Authors, using data from the Department of City Development

The last option that a property owner has to maintain title to their property is a vote by the Milwaukee Common Council to vacate the circuit court’s in rem judgment. Here, we observe a noticeable trend as well. In 2008, more than 50 percent of in rem judgments were vacated in this manner. By 2012, that number had plummeted to just less than 8 percent — a decline of nearly 85 percent. Figure 18 depicts this trend.

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Figure 18. Vacated In Rem Judgments, 2008–2012


Owner Occupancy

Another variable of interest is the owner-occupancy rate of acquired properties. As depicted in figure 19, less than 60 percent of the acquisitions of the selected property types between 2008 and 2012 were owner-occupied. From 2009 to 2011, the owner-occupancy rate trended sharply downward and then increased by more than 30 percent between 2011 and 2012.

Figure 19. Percentage of Owner Occupancy of City of Milwaukee-Acquired Properties, 2008–2012


0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011 2012

45%

50%

55%

60%

65%

70%

75%

2009 2009 2010 2011 2012

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Previous Mortgage Foreclosure

Consistent with previous reports, we found about 30 percent of city-acquired properties of the selected property classes and types previously had a private foreclosure filed against them. As shown in figure 20, this percentage steadily increased from 2008 to 2012. In 2008, a private foreclosure had been filed against just less than 20 percent of the selected city-acquired properties. By 2012, that figure rose to more than 36 percent.

Figure 20. Percentage of City of Milwaukee-Acquired Properties with Previous Private Foreclosure, 2008–2012


Property Complaints and Violations

Further analysis regarding property complaints and violations is needed. We hypothesize that residential properties acquired through in rem tax foreclosure have previous complaints and violations that may serve as a warning that a property is at risk. However, we were unable to test this hypothesis and complete a data analysis because the data was not available.

Characteristics of Taxes and Tax Collection Related to Property Acquired by the City through In Rem Foreclosure

In this section we examine the characteristics of taxes related to in rem acquisitions.

Tax Delinquency

Residential property owners whose properties the City acquires typically lose their properties because their property taxes and special charges that are added to the tax bill are in arrears for three years. Therefore, this report includes an analysis of tax delinquency. Table 12 illustrates the relationship between

15%

20%

25%

30%

35%

40%

2008 2009 2010 2011 2012

39

residential property owners who were delinquent in tax levy years 2008 and 2009 and how frequently such delinquencies concluded with the municipal acquisition of the property. Aldermanic districts 1, 6, 7, and 15 experienced the highest rates of both tax delinquency and in rem foreclosures resulting in the acquisition of properties. As discussed, residential property owners are both owner-occupants and investors who rent the property to tenants. Table 13 shows the number of owner-occupied and investor-owned properties that were delinquent in 2008 and 2009 and acquired by the City through in rem foreclosure in 2011 and 2012, respectively. In contrast to all residential class tax delinquencies for levy years 2008 and 2009 (see table 5), investors made up the majority of February property tax delinquent owners for all residential properties that were acquired by the City in 2011 and 2012. Consistent with all residential class tax delinquencies in levy years 2008 and 2009, owner occupants were more likely to attempt to pay property taxes and then become delinquent during the course of the 10-month installment plan. The average amount of delinquent property taxes for those who were delinquent in February and eventually lost their property through the City’s in rem tax foreclosure process is consistent with the average across all delinquent residential property owners for levy year 2008, but is more than 6 percent higher in levy year 2009 (see tables 5 and 12). Property owners who started paying property taxes in installments before becoming delinquent owed more at the point of delinquency than the average across all residential class tax delinquencies for levy years 2008 and 2009. For levy years 2008 and 2009, property owners who lost their properties through in rem foreclosure in 2011 and 2012, respectively, owed 12 percent more than the average for all residential delinquencies. For levy year 2009, such property owners owed almost 5 percent more than the average. The evidence suggests that property owners who ultimately lost their homes may have become delinquent earlier in the 10-month installment plan than the average property owner who managed to pay the delinquent property taxes and retain the property.

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Table 12. Residential Class Tax Delinquent Properties for Levy Years 2008 and 2009 Acquired by the City of Milwaukee through In Rem Tax Foreclosure in 2011 and 2012

Levy Year 2008 Levy Year 2009

Aldermanic District

February Tax

Delinquent Properties

Post-February

Tax Delinquent Properties

Percentage of Total


Residential In Rem City Acquisitions

2011*

Percentage of Tax

Delinquent Properties Acquired by City

February Tax


Post-February


***

Percentage of Total Tax


Residential In Rem City Acquisitions

2012**

Percentage of Tax

Delinquent Properties Acquired by City

1 1,391 391 9.82% 25 1.40% 1,249 361 9.68% 95 5.90% 2 1,044 298 7.40% 10 0.75% 825 249 6.46% 17 1.58% 3 364 198 3.10% 3 0.53% 407 165 3.44% 1 0.17% 4 523 141 3.66% 8 1.20% 524 117 3.85% 14 2.18% 5 624 224 4.67% 2 0.24% 565 179 4.47% 4 0.54% 6 1,955 441 13.20% 81 3.38% 1,969 387 14.16% 138 5.86% 7 1,772 468 12.34% 48 2.14% 1,672 398 12.44% 111 5.36% 8 652 190 4.64% 8 0.95% 568 193 4.57% 22 2.89% 9 863 259 6.18% 4 0.36% 766 238 6.04% 22 2.19%

10 739 274 5.58% 9 0.89% 634 223 5.15% 17 1.98% 11 312 137 2.47% 2 0.45% 289 142 2.59% 0 0.00% 12 828 276 6.08% 10 0.91% 789 219 6.06% 37 3.67% 13 454 150 3.33% 1 0.17% 381 160 3.25% 6 1.11% 14 629 245 4.82% 3 0.34% 550 208 4.56% 17 2.24% 15 1,860 444 12.70% 89 3.86% 1,793 414 13.27% 192 8.70%

Total/Average 14,010 4,136 100.00% 303 1.67% 12,981 3,653 100.00% 693 4.17% *Of the 305 residential class properties the City acquired in 2011 through in rem foreclosure, 303 were delinquent in levy year 2008.

**Of the 701 residential class properties the City acquired in 2012 through in rem foreclosures, 693 were tax delinquent in levy year 2009.

*** The April 2010 report was incomplete, so these numbers do not reflect delinquencies that occurred in April 2010 that were no longer delinquent in May 2010. Source: Authors, using data from the Office of the City Treasurer, Office of the City Assessor, and Department of City Development

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Table 13. A Comparison between Levy Years 2008 and 2009 Tax-Delinquent Residential Property Owners Whose Properties the City of Milwaukee

Acquired through In Rem Tax Foreclosure in 2011 and 2012 Levy Year

2008 2009 Average F

ebru

ary

Del

inqu

enci

es Owner-Occupied 132 293 213

Investor-Owned 140 350 245

Total 272 643 458

Average Amount Delinquent

$3,091 $3,235 $3,163

Pos

t-F

ebru

ary

Del

inqu

enci

es Owner-Occupied 16 31 24

Investor-Owned 15 19 17

Total 31 50 41

Average Amount Delinquent

$1,097 $1,013 $1,055

Source: Authors, using data from the Office of the City Treasurer and the Department of City Development

Data reporting the amount of delinquent taxes at the time of in rem foreclosure was not readily available. Therefore, we were unable to complete an analysis comparing the change in delinquent taxes over the three-year tax collection period for properties that were ultimately acquired by the City. Instead of conducting this preferred analysis, we modeled changes in delinquent taxes over time, applying the 1.5 percent interest and penalty charge and assuming the property owners made no payments after they became delinquent. Additionally, we assume that the interest and penalty charges accrued for 36 months, the length of the typical three-year tax collection period. As shown in table 14, the average amount of delinquent taxes in levy years 2008 and 2009 was approximately $3,000. Therefore, under the aforementioned assumptions, delinquent property owners whose properties were acquired by the City through in rem foreclosure would have owed an average of $5,000 in property taxes and special charges from levy year 2008. These calculations do not take into account delinquent taxes that were likely incurred during subsequent years.

Table 14. Model of Average Change in Delinquent Property Taxes

from the Point of Initial Delinquency City of Milwaukee Acquisition for Levy Years 2008 and 2009

Levy Year

2008 2009

0 months $2,887 $3,087

12 months $3,452 $3,691 24 months $4,127 $4,413

36 months $4,934 $5,276 Source: Authors, using data from the Office of the City Treasurer

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Special Charges

Further analysis in the area of special charges is needed. For example, specifying the proportion of the total tax bill that consists of special charges and the associated trends over time could illustrate their overall impact on delinquencies. Special charges, however, are added to the balance due on the tax bill once they have become delinquent. As of the publication of this paper, data that separates special charges from property taxes is unavailable.

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Major Costs of the Foreclosure Process

The City does not have an interest in either long-term ownership of vacant or abandoned properties or holding properties at the current volume. Once the City becomes the owner of the title of the property, it is responsible for property inspection and maintenance. To evaluate the structural integrity and safety of a property, Department of Neighborhood Services conducts monthly inspections of foreclosed properties owned by the City. Thus, the increase in tax foreclosures has led to a greater demand for inspectors and increase in staff time devoted to inspecting properties. The Department of City Development (DCD) devotes resources and incurs costs for maintaining properties. Property maintenance typically consists of boarding up properties, removing snow, and cutting grass. Depending on the status of the property, the City may market the property to find a buyer, demolish the property, or make a lease with a current tenant. Each of these tasks involves costs to the City.

Sell: The City may market and try to sell a property. If the City sells a property to a private buyer (an owner-occupant, investor or non-profit organization), it costs the City to market, manage, and prepare properties for sale. Some City programs will do limited exterior and interior renovation on a small number of tax foreclosed properties. By some estimates, these renovation costs can amount to 180 percent of the assessed value of the property.

Demolition: Some City-acquired properties are deemed unfit for habitation and unable to be cost-effectively rehabbed. In these cases, the Department of Neighborhood Services is tasked with arranging the demolition work and on average demolition costs range from $10,000 to $15,000. Neighborhood Stabilization Program 1 and Neighborhood Stabilization Program 2 funds have been used on a limited basis for this purpose but most costs are borne by the City’s operating budget.

Rent Property to Current Tenant: If a foreclosed property is tenant-occupied, then the City enters into a lease with the tenant(s) and acts as the landlord. To ensure that these properties are healthy and safe for habitation, the DCD must provide necessary repairs for the property. The City incurs labor and material costs in performing this obligation.

Table 15 presents major costs to the City in acquiring tax-foreclosed homes.

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Table 15. City Costs for Tax Foreclosed Homes

Tasks* Inspection Property

Maintenance Demolition Marketing

Cost

About $40 per tax

foreclosed home for each inspection**

$1.22 million in 2011

(about $1,300 per

tax foreclosed home***)

About $10,000-

$15,000 per tax foreclosed

home

$60,000 in 2012

*Most homes are inspected and boarded. Usually homes are marketed or demolished.

**Cost estimated based on inspector pay and time required to inspect homes and conduct relevant paperwork/data entry. Inspections are done monthly for each property in the City’s inventory.

*** This estimation uses vacant lots in the calculation of property maintenance.

Source: Authors, using data from City of Milwaukee Division of Budget and Management

The above-mentioned costs are attributed to the post-foreclosure phase. The tax foreclosure process has additional costs prior to foreclosure. One cost to the City is its contract with Kohn Law Firm. Figure 21 shows the increasing number of cases and delinquent tax receipts assigned to Kohn between 2005 and 2012.

Figure 21. Collections and Gross Tax Delinquencies Assigned to Kohn Law Firm

Source: Authors, using data from Kohn Law Firm

According to the its contract with Kohn Law Firm, the City compensates the firm based on the value of individual claims, the amount collected pre-lawsuit, and the amount collected post-lawsuit. In 2012, the City paid $2,059,796 to Kohn Law Firm for collecting $10,132,059 in delinquent property taxes.

0

5

10

15

20

25

0

1000

2000

3000

4000

5000

6000

7000

2005 2006 2007 2008 2009 2010 2011 2012

Gro

ss v

alu

e of

del

inq

uen

cies

ass

ign

ed t

o K

ohn

(m

illio

sn o

f $)

Col

lect

ion

s as

sign

ed t

o K

ohn

Year

Collectionsassigned to Kohn

Gross value ofdelinquenciesassigned to Kohn(in millions of $)

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Another relevant cost is the lost tax base. From 2008 to 2012, the City of Milwaukee lost about $5 billion in value (Assessment Commissioner 2012). Because of this lost tax base, the City makes up for lost revenue with the use of non-property tax sources, such as user fees, charges for service, and assessments (Department of City Development and Department of Neighborhood Services 2011).

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Regression Analysis: Factors of In Rem Foreclosure

Because of its limited resources, the City of Milwaukee must target interventions to the highest risk properties. To assist the City with targeting highest risk properties, this regression will follow all properties that were delinquent on their taxes from 2008 to 2009 to identify what factors are common to the properties that ended up in tax foreclosure in 2011 or 2012. We use a multivariate logit regression to estimate the probability of a property ending in tax foreclosure. Our dependent variable returns a 0 if the property is not, as of 2012, in tax foreclosure and a 1 if it is in tax foreclosure. The population for this regression is any residential property that was delinquent on its taxes during levy years 2008 and 2009. This time frame means properties that continued to be delinquent on their taxes were in tax foreclosure by 2011 or 2012. The authors compiled the dataset used in this analysis from the Assessor’s Office, the Treasurer’s Office, and the Department of City Development.

We were unable to find literature on early warning systems or regressions analyzing tax foreclosure. Thus the regression model’s variables are based on previous scholarly and city-level models simulating abandonment or vacancy likelihood for other large cities such as Chicago, Washington DC, Minneapolis, Los Angeles, and Philadelphia. Additionally, City of Milwaukee officials posited some of the variables in the model as possible indicators of tax foreclosure likelihood.

Only variables that can easily be monitored by the City were included in the model. This allows the City to use the results to target properties for earlier interventions. This data only involves properties, which means that individual characteristics of property owners, such as job loss or illness, are not taken into account. Two properties may appear identical in all of our independent variables but may result in one going into foreclosure and one not going into foreclosure. This model is intended not to predict what properties will go into foreclosure, but rather to assess whether certain factors are associated with an increase in tax foreclosure.

Independent Variables

Property Class: This variable differentiates between the two major property classes in the dataset, residential (1) and condominiums (0). There is not much literature on the differences in likelihood of tax foreclosure between these two classes of properties. However, differences are likely to arise because a residential property is assumed to be in less affluent areas of the city than condominiums.

Mortgage Foreclosure: This variable describes whether a banking institution filed against a property. The data on mortgage foreclosures dates back to 2008, but only foreclosures before 2011 are counted to help

47

with any endogeneity4 issues. Mortgage foreclosures are commonly used as an indicator of a property in distress. Lori Mardock (1998) used mortgage foreclosure as a variable in her early warning system for housing abandonment in Minneapolis. She posited that mortgage foreclosure would increase the likelihood of abandonment. However, Hillier et al. (2003) found “no mortgage” as increasing the likelihood of abandonment. These contradicting articles mean that we have no prediction of how this variable will affect our regression.

Other Recent Tax Foreclosure: This variable will indicate whether the property was in tax foreclosure between 2006 and 2010. Hillier et al., in their 2003 article, found that having a property with a forced sale (e.g., some type of recent foreclosure) was statistically significantly more likely to be abandoned. Because of the timing of the housing market crash, we believe that many of the owners of these recent tax foreclosed properties may have been trying to flip the house and got caught in a housing crash, meaning they could not recoup their losses. The rapid change in the economic climate may cause this variable to increase the likelihood of tax foreclosure.

Owner-occupied: Another dichotomous variable is whether the property is owner-occupied at the end of the tax foreclosure process. City staff indicated that owner occupancy might be a variable that affects likelihood of tax foreclosure. We posited that owners who also live in properties have a stronger incentive to keep from being foreclosed upon. However, Hillier et al. (2003) found that owners living on site created a statistically significant increase in the likelihood of the property being abandoned.

Wisconsin Resident Owner: This variable will represent whether the owner is a Wisconsin resident. State residents are generally easier to collect on when taxes are delinquent then out-of-state owners, according to City employees. For example, Kohn Law Firm is more likely to be able to collect on owners who have other property within the state. Out-of-state owners include two broad categories of owners who may not be very invested in the Milwaukee properties. The first category is non-Wisconsin owners who buy properties from banks in bundled deals. These deals are the bank’s way to eliminate properties from their balance sheets they do not want by selling them in conjunction with more desirable real estate in other states. This may mean that the new owners of the mortgage foreclosed properties did not want the property in the first place, making them less likely, City staff posits, to pay their taxes. Other out-of-state owners are in fact located out of county and presumed to be less invested in the wellbeing of a Wisconsin neighborhood than owners who live in the state. There will be co-variation with the “owner-occupied” variable,

4 Occurs when the independent variable is correlated with the error term in a regression model.

48

requiring for the regression that these two variables be combined into a three category dummy variable. See table 16 for details.

Purchase Year: This variable will indicate the number of years since the last purchase of this property, meaning the number of years since the purchase and 2012 (e.g., if a property was purchased in 2008 this variable would equal 4). Hillier et al. (2003) found a small but statistically significant correlation between houses that were bought in earlier years and likelihood of abandonment. A possible explanation of these findings is that owners may be more likely to abandon their homes after they have lived there longer. The Chicago Neighborhood Early Warning System also uses real estate sales data in their abandonment model, but the results of their model are murky at best (Snow et al. 2003). Alternatively, due to the recession, our data may show more of a trend that those who bought their properties closer to 2008 would be more likely to be in tax foreclosure. 2010 is listed for those properties that had no purchase date.

Value of House: This will be assessed in $1,000 increments. For example, a house valued at $25,467 would be listed as 25, for ease of variable interpretation. These values are for the year 2012. In the Philadelphia Neighborhood Information System, assessed value is a variable of interest for assessing abandonment according to their website; however its exact implications are not explained (University of Pennsylvania 2013). We decided to include this variable because owners will have less incentive to keep a house that is not worth much at market value.

Aldermanic District: This was used as a proxy for the relative wealth and other socioeconomic factors. We added this variable based on our initial research showing significant differences among the aldermanic districts in rate of tax foreclosure. This variable will be divided into 14 dummy variables to account for each district individually.

These variables are summarized in table 16 along with the source information for each variable.

49

Table 16. Variable Definition, Expected Marginal Effects on Probability of Payment, and Source

Variable Definition

Expected Marginal Effect on Probability of Property Going into Foreclosure Source

Property Class Dummy = 1 if Residential Non Condo = 0 Condo

+ Assessor Data

Mortgage Foreclosure

Dummy = 1 if the property has been filed against since 2008 = 0 if no mortgage foreclosure

No Expectation DCD Data

Other Recent Tax Foreclosure

Dummy = 1 if the property has been in tax foreclosure since 2006 = 0 if no tax foreclosure

+ DCD Data

Non Owner Occupied, Non Wisconsin Resident

Dummy = 1 if the property has a non-WI resident owner = 0 if the owner is a WI resident

+/- Assessor Data

Non Owner Occupied, Wisconsin Resident

Dummy = 1 if property has an owner who does not live on the property but is a Wisconsin resident = 0 if the owner is both a non-WI resident and not living on the property

No Expectation Assessor Data

Year Property Was Purchased

This is a series of dummy variables representing different intervals of dates (start date is 2010) DummyOne = 0–5 Years since last purchase DummyTwo = 6–10 DummyThree = 11–20 DummyFour = 21–30 DummyFive = 31–65 65+ years since last purchase is included in the constant of the regression

- Assessor Data

Value of Property

2010 assessment of property value (in $1,000 units)

- Assessor Data

Aldermanic District

Dummy = 1 if property is located in specific district = 0 if not located in specific district

No Expectation Treasurer Data

Source: Authors

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Regression Analysis

The following section is an analysis of the results from our logistical regression found in table 17.

Table 17. Logistical Regression of Tax-Delinquent Residential Properties, City of Milwaukee, 2008–2009

Variable Odds Ratio Natural Log Assessed Value 0.59** Mortgage 0.96 Other Tax Foreclose 214.95** Not Owner-Occupied, Not Wisconsin Resident 3.24** Not Owner-Occupied, Wisconsin Resident 0.87 Property Type 3.64** Alder District 2 0.15** Alder District 3 0.45* Alder District 4 1.29 Alder District 5 0.15** Alder District 6 1.72** Alder District 7 1.36* Alder District 8 0.77 Alder District 9 0.15** Alder District 10 0.65 Alder District 11 0.28* Alder District 12 0.97 Alder District 13 0.25** Alder District 14 0.44** Alder District 15 1.97** Dummy Five-Year Purchase 0.96 Dummy Four-Year Purchase 1.08 Dummy Three-Year Purchase 1.04 Dummy Two-Year Purchase 0.89 Dummy One-Year Purchase 0.95 Constant 0.14** Number of observations = 18975 LR chi2(25)= 1483.34, Probability > chi2 = 0, Pseudo R2 = 0.1662

*Significant to a .05 level

** Significant to a .01 level Source: Authors

The LR ratio chi2 statistic (1483.34) indicates that, overall, the model demonstrates a statistically significant improvement (p < .001) in the predictive ability with the inclusions of the independent variables. The Pseudo R2 statistic indicates roughly a 17 percent improvement in likelihood score generated by the fully specified model. These two statistics essentially demonstrate that the independent variables are useful for prediction of the value of the dependent variable. Because tax foreclosures are such an uncommon event, this model was tested with a rare events logistical regression (relogit), but this was found to make

51

little difference in the coefficients as compared to a conventional logistical regression. Finally, relevant variables were tested for co-linearity and no concerns were found. Thirteen of the independent variables in the model were statistically significant with an alpha = .05 (or a p-value less than .05).

The assessed value of the property is a statistically significant variable. Because it was transformed using natural log, the odds ratio is actually a percent change in the odds. So if there were a 1 percent increase in the assessed value of a property, we would expect to see the odds ratio of tax foreclosure drop by .59 percent. Another statistically significant variable was other recent foreclosures. This variable is associated with a 214.95 increase in the odds ratio, indicating that a property that has had a foreclosure between 2006 and 2010 has a 21,494 percent increase in the odds of being in foreclosure in 2011 and 2012. However, this result must be tempered by the fact that there were not many properties in this dataset that had a recent tax foreclosure (n = 133), so the results may reflect small sample bias. The model also shows that a property that is owned by someone who is not from Wisconsin also has an over three-fold increase in its odds of being in tax foreclosure (or 3.24). In contrast, being a Wisconsin owner who does not occupy the property was not statistically different from a Wisconsin owner who resides on the property (which was part of the constant). Because properties were divided by property type (0 for condos and 1 for residential building), the significant positive odds ratio for the property type variable means that residential non-condos are more likely to be in tax foreclosure. The aldermanic districts were divided up, with district 1 being included in the constant. The districts that were statistically different from district 1 included districts 2, 3, 5, 6, 7, 9, 11, 13, 14, and 15. Districts 6, 7, and 15 all had odds ratios above one, meaning properties located in these districts were more likely to be in tax foreclosure than properties in district 1. This also means that if properties were in districts 2, 3, 5, 9, 11, 13, or 14, the odds ratio that the property would end up in tax foreclosure went down.

Possibilities for Improvements to the Early Warning System

There were three variables that we were unable to include in this model due to data issues. Many of the early warning systems concerning property abandonment we studied used number of neighborhood violations as an indicator of abandonment likelihood. The Department of Neighborhood Services, which keeps track of such neighborhood violations, has a database that can only be searched by individual properties. This makes large-scale modeling more time-consuming. Another variable of interest in the literature we analyzed was the number of tax liens against the property. We were unable to locate enough data to find all the tax liens against the properties in this study. Finally, we did not include a variable that compared special charges as a percent of total house value as a variable. The City posited that this may increase tax foreclosure. Any data about special charges includes any charges to the total amount owed by a property, so there is no way to separate out special charges and compare them among different properties. These three variables could be added to future regression models to get a better picture of the factors that correlate with tax foreclosures in the City of Milwaukee.

52

Policy Options

In this section, we will propose several options that should help reduce in rem foreclosures and their associated costs.

Option 1: Early Warning System

The Early Warning System model is designed to help the City identify properties that are at the highest risk of tax foreclosure. This knowledge should help the City to target its resources toward the most needy properties. Staff could use the early warning system to make decisions about allocating their scarce resources. The system would require the hiring of an additional DCD staff member to monitor the system and target outreach to individuals and families at risk of tax foreclosure. The City could also conduct outreach such as publicizing the availability of non-profit financial counseling.

The Early Warning System is based on the results of the regression analysis in the previous section. The most significant variables found in the regression analysis were other recent tax foreclosures, the assessed value of the property, property type, and a property being in district 6, 7, or 15. City staff could use the initial list of tax delinquencies released from the City Treasurer and compare it with DCD data on previous tax foreclosures, type of property, and the aldermanic district location of the delinquent properties. Once the properties with the highest risk of reaching tax foreclosure are identified, City resources can target the lowest assessed properties first, allowing the City to target the properties with the highest probability of ending in tax foreclosure. This Early Warning System can work with any City or non-profit resources, be it money or debt counseling. Putting this system into place would require coordination between City offices and a staff person to create the database, collect information on delinquent properties, and disseminate final lists of properties to be targeted.

Option 2: Separation of Special Charges

As mentioned, once payment of special charges has become delinquent, the balance due for those is combined with the balance due for property taxes. Because of that, from that point forward they are considered to be property taxes. Interest on this outstanding balance accumulates over time at a combined rate of 18 percent per year, increasing the total amount that a property owner must pay to avoid tax foreclosure.

Under Wisconsin’s constitution, in rem tax foreclosure may only be pursued for non-payment of property taxes. Further, when not combined with the outstanding balance for property taxes, special charges are not considered to be property taxes and therefore not subject to the state’s uniformity clause. Keeping special charges separate from the property tax balance could decrease the total amount that property owners would need to pay to keep their property. In addition, because special charges would not be subject to the uniformity clause, the City would have

53

more options for working with property owners who are delinquent on such charges. Two possible options are flexible payment arrangements or settlement for less than the total balance due. However, any such policy would still be subject to other state statutes, municipal ordinances, and constitutional guidelines, such as the equal protection clause of the state constitution. While the City’s options could have increased flexibility, the similar treatment of similarly situated individuals would need to be ensured.

Option 3: Credit Card Installments

Currently, the City of Milwaukee offers several different options to property owners for paying their property tax bills. One option is to pay by credit card. Property owners who choose this option must pay the entire balance due in a single payment; installment payments are not permitted. In addition, a 2.75 percent convenience fee is added to the charge to cover the City’s transaction charges as a credit card merchant. One option for the City to consider is allowing property tax payers to make installment payments by credit card. This option is suggested under the premise that increasing the means for property tax payers to pay their property tax bills may decrease delinquency. Under this policy, a convenience charge would be added to each payment for the same reason that they are included under current policy.

One potential consequence of such a policy, however, is that it could lead to property tax payers accruing increased credit card debt, but this is also possible under the current policy, which allows one lump-sum credit card payment. Administrative costs of this policy should be low or negligible because those costs associated with the accepting of installment payments by credit card should not vary significantly from those associated with the accepting of other forms of electronic payment, such as debit cards or electronic funds transfer, and because the transaction costs would be passed on to the individual property tax payer.

Option 4: Hardship Loan Fund

In rem foreclosures are primarily concentrated in aldermanic districts with residential properties of low property value. Circumstantial evidence suggests tax delinquency for some property owners is not an issue of unwillingness to pay but rather an inability to pay. Helping homeowners with their property taxes could allow the City to prevent municipal acquisition via in rem foreclosure. Furthermore, assistance would keep residents in their homes, thereby avoiding an increase in the City’s in rem inventory while also maintaining the integrity of the community.

There are established programs that assist property owners in paying taxes. State governments in regions of the country hit especially hard by the foreclosure crisis have implemented short-term loans directed toward property tax assistance. The Michigan State Housing Development Authority (through the Michigan Homeowner Assistance Nonprofit Housing Corporation) created a program called Step Forward Michigan that allows homeowners to apply for property tax

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assistance through the Loan Rescue Program (Michigan Homeowner Assistance Nonprofit Housing Corporation 2011). Applicants are allowed to apply for tax loans up to $30,000. In this specific program, homeowners who are approved are given a loan with a 0 percent interest rate and not required to make monthly payments; the loan is forgiven at 20 percent each year the property remains as the grantee’s residence. The state of New Hampshire also has a property tax assistance program for low-to-moderate income residents who must satisfy income eligibility requirements to receive funds for property tax relief (New Hampshire Department of Revenue Administration 2013).

In Wisconsin, local governments have also implemented property tax assistance programs designed to keep people in their homes. These programs contain certain eligibility criteria including income and age requirements designed to minimize administrative and program costs for these local units of government. The City of Madison employs the Modified Reverse Mortgage Program, which provides reverse mortgages to resident homeowners age 62 or older who are delinquent on their property taxes. The City of Madison lends to participants at an interest rate of its borrowing rate plus 1 percent and then places a lien on the property. It collects the loan balance whenever the property is sold or the title is transferred (City of Madison 2013). The Wisconsin Housing and Economic Development Authority (2012) operates a state-run property tax deferral program directed toward seniors that allows for a property tax loan. Payment of the loan is deferred until the recipient either moves or the title of the property is transferred.

Property tax assistance initiatives are an innovative policy for addressing the rise in in rem foreclosures. Keeping people in their homes and avoiding the costs of low-value property acquisition are in the City’s long-term fiscal interest. To apply a property tax assistance program to Milwaukee, the City must take steps to ensure that there is adequate funding for the program as well as sound eligibility criteria. We analyzed what a program like this could look like in Milwaukee. Additionally, we predicted what a funding mechanism would look like and what types of eligibility requirements should be included.

The Hardship Tax Loan Fund would provide loans to low-to-moderate income Milwaukee residents who have become tax delinquent due to personal hardship such as unemployment. Applicants would be required to meet stringent eligibility criteria to limit risks to the lender, ensure loans are going to Milwaukee residents, and discourage the moral hazard of recipients declining to pay property taxes.

Eligibility Requirements

Annual income of less than $20,000 Residency requirement Residence is a single family dwelling Must have lived in home for a minimum of five years No prior tax delinquencies

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Outstanding debt and/or liens on the home cannot exceed 33 percent of its property value

Through discussions with City staff, we determined that the City should not directly finance this program. Instead, an outside party should administer the fund to maintain independence and ensure that the City is not directly influencing residents’ tax delinquencies (Szopinski, personal communication, April 19, 2013). An outside party would be able to lend directly to homeowners to ensure that people remain in their homes. Possible candidates include foundations with involvement in the Milwaukee area such as the Greater Milwaukee Foundation. Other candidates include organizations from the private sector as well as housing non-profits. A successful program should leverage financing from these independent groups to help establish a funding mechanism. As a guide, Madison’s Reverse Mortgage Program has been a successful policy tool. A similar program in Milwaukee could yield positive results.

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Suggestions for Future Consideration

This analysis provides a basic framework for understanding the relationship between common characteristics of properties and of taxes and tax collection in conjunction with in rem tax foreclosure. A comprehensive analysis would involve violations and complaints with the Department of Neighborhood Services as well as more detail related to the special charges that are added to the property tax bill and changes in the balance owed over the three-year tax collection enforcement period. We recommend that further analysis be completed to examine the predictive value of property violations and complaints and the extent to which special charges contribute to the property tax balance of property owners who lose their properties through in rem tax foreclosure. Additionally, a more in-depth analysis of the change in the outstanding property tax balance over the course of the three-year period would provide insight into the extent to which property owners may be struggling to retain their properties. Further, the analysis completed in this report includes two complete three-year tax collection enforcement cycles, beginning with levy years 2008 and 2009. To understand trends in tax delinquency and in rem tax foreclosure over time, this analysis should be extended to include findings from subsequent levy years.

To conduct a comprehensive analysis that examines trends across tax collection enforcement cycles, we recommend that data maintenance within and across City departments be improved. This recommendation is consistent with that of a 2011 La Follette School of Public Affairs report, “The City of Milwaukee: The Collection of Municipal Fees” (Berger et al.). Currently, the data maintenance system presents challenges to conducting in-depth analysis of problems that the City encounters, particularly those that involve multiple departments. For example, the Office of the City Treasurer collects data sufficient to accomplish many of the department’s goals. However, special charges that are transferred to the property tax bill become difficult to track and monitor over time, making detailed analysis unfeasible. With limited time and resources, City staff should have access to data to analyze to improve efficiency.

In addition to enhancing efficiency, the improvement of data maintenance would allow the City to expand its use of Milwaukee-specific evidence to make policy decisions. For example, the policy recommendations concerning property taxes and the handling of special charges in this report are difficult to quantify, primarily because we could not discern the proportion of the property tax bill that comprises special charges. While we consider the costs of the report recommendations to be minimal and likely to be offset by the prevention of in rem tax foreclosure, we were ultimately unable to quantify the impact. A comprehensive, integrated data management system would provide information to expedite evaluation of policy options to address time-sensitive problems that the City encounters. Further, such a system could be used to identify changes in trends that may highlight areas of concern. For example, even though the tax delinquency rates have remained fairly steady since 2002, the observed trend suggests that property owners were taking longer to pay their outstanding

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property taxes. Identification of this trend may have alerted City staff more quickly, allowing them additional time to implement evidence-based prevention strategies. Improved data maintenance is particularly vital when multiple departments may be involved. A timely examination of data across departments may signal a warning even when an internal report may appear normal.

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Conclusion

The rapid increase in Milwaukee’s in rem housing pool has intensified fiscal and administrative burdens for City policymakers. In this report, we identified and described the various elements of the municipal procedures used to respond to property tax delinquencies as well as factors contributing to in rem foreclosures. Our analysis also found certain variables linked to an increased likelihood of in rem foreclosure for tax delinquent properties. Finally, we prescribed policy options for the City to limit the number of properties entering the in rem foreclosure process. Ultimately, we hope this report will help policymakers to improve municipal governance and, more importantly, increase the efficiency of City programming for the benefit of Milwaukee’s taxpayers.

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Appendix A: Sample Delinquency Notifications

Shown below are sample delinquency notifications. The first four letters are sent in February, April, June, and August of the delinquent tax year from the Office of the City Treasurer. The last two letters below, sent in November of the first year of tax collection and March of the second year, are from the Office of the City Attorney.

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Appendix B: In Rem Foreclosure Flowchart

Property owner becomes delinquent on taxes

City Treasurer sends a series of 4 letters to delinquent owners

City Attorney sends 2 final letters to delinquent owners warning of collection by Kohn Law Firm

Collections are turned over to Kohn Law Firm

Kohn works with delinquent owners to

collect back taxes, arrange installment plans, or pursue in

personam judgments

Kohn returns lists of delinquencies found to be uncollectible,

bankrupt, or ineligible for in

personam judgment

City Treasurer prepares a list of tax accounts for in rem

foreclosure

City Attorney initiates suit against delinquent properties in

Milwaukee County Circuit Court

8 week redemption period, followed by 30 day answer period

In rem foreclosure judgment

90 day period to petition the

Common Council to vacate judgment

City takes ownership of the property

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Appendix C: Wisconsin Constitution Uniformity Clause

Wisconsin Constitution Article 8, Section 1: Uniformity Clause

The rule of taxation shall be uniform but the legislature may empower cities, villages or towns to collect and return taxes on real estate located therein by optional methods. Taxes shall be levied upon such property with such classifications as to forests and minerals including or separate or severed from the land, as the legislature shall prescribe. Taxation of agricultural land and undeveloped land, both as defined by law, need not be uniform with the taxation of each other nor with the taxation of other real property. Taxation of merchants’ stock-in-trade, manufacturers’ materials and finished products, and livestock need not be uniform with the taxation of real property and other personal property, but the taxation of all such merchants’ stock-in-trade, manufacturers’ materials and finished products and livestock shall be uniform, except that the legislature may provide that the value thereof shall be determined on an average basis. Taxes may also be imposed on incomes, privileges and occupations, which taxes may be graduated and progressive, and reasonable exemptions may be provided.

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Appendix D: Wisconsin Statutes Covering Property Tax Delinquency

Wisconsin Statute 74.53: Personal liability for delinquent taxes and other costs

(1) Recovery of taxes and costs against persons. Except as provided in subs. (3) and (5), a county or a municipality may bring a civil action against a person to recover any of the following amounts that are included in the tax roll for collection and any of the amounts under pars. (b) and (c) that are not included in the tax roll for collection:

(a) Delinquent real property taxes, special charges, special assessments and special taxes, not including amounts under pars. (b) and (c), that were delinquent during the period that the person owned the property.

(b) The cost of razing and removing property and restoring the site to a dust-free and erosion-free condition incurred under s. 66.0413 (1) (br) 2., (f), (g) or (i), (2) (d) or (4) or of filling an excavation incurred under s. 66.0427 if the person owned the property when the property was razed and removed and the site restored or the excavation was filled, or if the person owned the property while the order to raze the property was recorded in the register of deeds office.

(c) The cost of abating a public nuisance under s. 254.595 or 823.04 if the person owned the property when the public nuisance was abated.

(2) Co-owner liability. Co-owners of property are jointly and severally liable for the payment of real property taxes, assessments or costs collectible under sub. (1).

(3) Limitation. A county or a city authorized to act under s. 74.87 may not proceed against any person under sub. (1) for amounts under sub. (1) (a) unless the property against which the amounts are levied in the tax roll is included in a tax certificate issued under s. 74.57.

(4) Recovery limited. A county or a municipality that proceeds against a property owner under this section may not recover more than the amount owed plus interest and penalties.

(5) Prior approval; notice. No action may be commenced under sub. (1) for the amounts under sub. (1) (a) unless it is approved by the county board or the governing body of the municipality. The clerk shall mail, to the last-known address of the person against whom an action is proposed to be commenced, advance written notice of the time and place the county board will meet to consider approval of legal action. A county board or the governing body of the municipality may abrogate its duty to approve and notice each action to be commenced under sub. (1) by adopting an ordinance waiving the duty and specifying procedures by which an action under sub. (1) may be commenced.

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(6) Action by taxing jurisdiction. A taxing jurisdiction may bring a civil action under this section against a person to recover special assessments as defined in s. 75.36 (1) and special charges levied by it for which the county or municipality did not settle in full or which were not fully paid by proceeds distributed under s. 75.05 or 75.36. Any amount recovered in an action under this subsection shall be reported to the county or city treasurer, who shall subtract it from the amount owed for purposes of sub. (4).

(7) Appointment of receiver. A court may appoint a receiver to take charge of property included in a tax certificate under s. 74.57 if a county or a city authorized to act under s. 74.87 proceeds against the owner of the property under this section. The receiver shall manage the property, collect rents and apply income to the payment of delinquent real property taxes.

Wisconsin Statute 75.521(3m): Extending time for foreclosing tax liens

(a) In this subsection:

1. "Dwelling" means any building that contains one or 2 dwelling units and any land included with that building in the same entry on the tax roll.

2. "Dwelling unit" means a structure or that part of a structure used as a home, residence or sleeping place by one person or by 2 or more persons maintaining a common household, to the exclusion of all others.

(b) The common council of any city authorized to proceed under s. 74.87 may by ordinance direct its treasurer to defer the foreclosure of tax liens on dwellings. The ordinance shall designate the period of time that the foreclosure of tax liens shall be deferred after the one-year period provided under sub. (3) (a) 1. and 2. The deferral period may not exceed 2 years. The deferral shall apply to those delinquent taxes and assessments incurred while the dwelling was owned and occupied by the person who owns and occupies the building at the beginning of the deferral period. If the owner ceases to occupy the dwelling during the deferral period, the city treasurer shall foreclose the tax lien on the dwelling as soon as practicable. A city adopting an ordinance under this subsection may require the dwelling owner to submit proof that the owner is eligible for a deferral under this subsection.

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Appendix E: Milwaukee Ordinances Covering Property Tax Delinquency

Milwaukee Ordinance 304-38: City penalty on delinquent taxes

In accordance with s. 74.47(2)(a), Wis. Stats., the common council imposes a penalty of 0.5% per month, or fraction of a month, on any delinquent general property taxes, special assessments, special charges and special taxes included in the tax roll. This penalty is in addition to the interest under s. 74.47(1) Wis. Stats., and also in addition to any penalty that Milwaukee county imposes under s. 74.47(2)(a), Wis. Stats. In accordance with s. 74.47(2)(b), Wis. Stats., this section shall be effective February 1, 2004, and the penalty hereunder shall then and thereafter apply to any general property taxes, special assessments, special charges and special taxes that are delinquent on or after February 1, 2004.

Milwaukee Ordinance 304-39: Deferred foreclosure on tax liens

1. The city treasurer shall, under s. 75.521, Wis. Stats., defer the foreclosure on tax liens for one and 2-family owner-occupied dwellings for a period of 2 years from the date the tax lien is originally filed, provided sufficient evidence is presented to the city treasurer to justify the deferral.

2. Each applicant for a deferred foreclosure shall submit an application form supplied by the city treasurer before a determination on the deferral shall be made.

3. If the owner ceases to occupy the dwelling during the deferral period, the city treasurer shall foreclose the tax lien on the dwelling immediately.

Milwaukee Ordinance 304-48: In personam actions for delinquent real estate taxes and other charges

In accordance with s. 74.53(5), Wis. Stats., the common council waives the duty to specifically approve each in personam action that the city may bring under s. 74.53, Wis. Stats., and waives its duty to send notice to each person against whom such actions may be commenced.

1. PURPOSE. As authorized under s. 74.53, Wis. Stats., this section allows the city to bring in personam actions (actions against the person, not the property) for delinquent real estate taxes, special charges, special assessments and special taxes.

2. DECISION TO BRING ACTION. The city attorney shall review the city treasurer’s records regarding delinquencies and determine in his or her discretion whether to commence an in personam action against the parcel owner.

3. LETTER OF NOTICE. The city attorney shall report to the treasurer those parcels where the city attorney in his or her discretion deems that an in personam

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action is advisable. The city attorney (or his or her collection agent) shall send written notice to the owner or owners of parcels selected as defendants that a decision has been made to commence an in personam action against him or her. The notice shall indicate that if full payment of the amounts recoverable under s. 74.53, Wis. Stats., including interest and penalties is received within 4 weeks from the date of the notice, the action will not be commenced. The notice shall be mailed to the owner at his or her last known address. An affidavit of the city attorney (or his or her collection agent) setting forth the names of the owners for whom an address has been ascertained, giving the addresses and stating that notice was mailed, giving the date of mailing, and stating that no present address was ascertainable for the Finance 304-50other owners, shall constitute full compliance with this subsection.

4. COMMENCEMENT OF ACTION. If the owner fails to make full and timely payment as requested in the notice, the city may commence the in personam action.

5. RECEIVER. Upon commencement of any in personam action, the city may request that a receiver be appointed in accordance with s. 74.53(7), Wis. Stats.

Milwaukee Ordinance 304-49: Disposal of city real estate

1. DEFINITIONS. In this section:

a. A Commissioner means the commissioner of the department of city development.

b. A Development property means any city-owned parcel that is not neighborhood property.

c. A Neighborhood property means any city-owned parcel that is any one of the following:

c-1. An improved residential lot containing 4 housing units or less.

c-2. A vacant residential lot suitable for one or 2 housing units.

c-3. A vacant lot which is not suitable or amenable of improvement because of the size, shape, dimensions, surface or subsurface conditions or other conditions of the lot.

d. A Report means a neighborhood property disposition report sent to the common council from the commissioner describing all neighborhood property that, in the commissioner’s determination, is not being used by the city and is recommended for sale or disposition.

2. NEIGHBORHOOD PROPERTY REPORT. a. The commissioner shall, from time to time, tender to the common council by letter, a report listing, by

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aldermanic district, each parcel in the city's inventory of neighborhood property. For each parcel, the following information shall be provided:

a-1. Address.

a-2. Tax key number or numbers, if available.

a-3. Property description, including whether or not the property is improved and, if improved, a brief description of such improvements.

a-4. Parcel size.

a-5. If the parcel is improved, the classification of the property pursuant to par. b.

a-6. If the property is either a vacant lot or an improved property classified as a habitable property pursuant to par. b, the proposed method of disposition of the property.

b. In consultation with the local common council member, the commissioner shall classify each improved neighborhood property in one of the following categories:

b-1. Habitable Property. This property is habitable in its current condition or can be rendered habitable with reasonable effort and funds proportionate to the assessed value of the property. The property shall be marketed to private purchasers for owner-occupancy unless otherwise directed by the common council member in whose district the property is located. If rehabilitation or restoration is required, the property shall not be sold until the commissioner of neighborhood services has approved a rehabilitation or restoration plan for the property and the commissioner of city development has determined that the prospective purchaser has the skills and financial resources to successfully carry out the plan.

b-2. Uninhabitable Property. This property is not habitable in its current condition and cannot be rendered habitable with reasonable effort and funds proportionate to the assessed value of the property. The property shall be designated for demolition or deconstruction and shall not be subject to further disposition action under this section.

b-3. Special Consideration Property. This property is not habitable in its current condition and is unlikely to be restored or rehabilitated by a private purchaser because the scope of work exceeds the amount of work that a private purchaser would reasonably be able to complete. However, the property is worthy of restoration or rehabilitation based on such factors as neighborhood context, architectural characteristics or quality, historic status of the structure or the neighborhood in which it is located, or other relevant factors. Each property in this category shall be further categorized as one of the following:

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b-3-a. Restoration Property. This property is suitable and recommended for immediate restoration or rehabilitation by the city, the housing authority, the redevelopment authority or another public entity. The commissioner shall submit to the common council, concerning any property classified as public restoration property, a recommendation as to the source of funds and identity of the public entity that might restore or rehabilitate the property. Classification under this category does not itself impose any duty on any public entity to restore or rehabilitate the property.

b-3-b. Mothballing Property. This property is not suitable for immediate restoration or rehabilitation, but shall be designated for mothballing or landbanking by the city and maintained in accordance with s. 304-59. Mothballing shall include boarding of windows with Lexan, securing the structure and emergency repairs required to prevent further deterioration of the structure, including but not limited to roof repairs, basic landscaping and exterior site clean-up. A property in this category shall not be subject to further disposition action under this section, but shall be re-evaluated annually to assess any change in circumstances which may warrant a change in its classification.

3. COMMON COUNCIL DIRECTION AFTER REPORTS. Any member of the common council may, within 15 calendar days after receipt of a report, direct the commissioner to withhold from disposition any parcel listed on the report that is located in his or her aldermanic district. The council member may also direct the commissioner to remove the restriction to market the property only to private purchasers for owner-occupancy. Such directives shall be in writing and timely delivered to the commissioner. In the event of timely designation, the commissioner may only sell or dispose of the designated parcel after common council approval.

4. CITY SALES OF NEIGHBORHOOD PROPERTY. a. The department of city development, under direction of the commissioner, shall, pursuant to this subsection, have authority to advertise and market for conveyance, and to convey, by lease, deed, or other appropriate form of conveyance, all neighborhood property in the report except:

a-1. An improved parcel of neighborhood property which is classified as an uninhabitable property or a special consideration property pursuant to sub. 2-b.

a-2. Any parcel of neighborhood property designated by a member of the common council pursuant to sub. 3, and for which the common council fails to approve the sale of such parcel of neighborhood property.

b. If the department chooses to solicit bids for a neighborhood property, the department shall, at the direction of the common council member in whose district the property is located, prepare a notice which may be mailed by the common council member to each resident and property owner of the circular area having a radius of 500 feet, centered on the property which is to be sold,

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informing residents and property owners that the city is soliciting offers to purchase the property. The bid solicitation notice shall state that if the resident or property owner is interested in purchasing the property, the resident or property owner should submit an offer to purchase by 10:00 a.m. on the 30th day after the date of notice. If the 30th day falls on a weekend or holiday, the deadline for submitting an offer shall be the next business day. A bid submitted by a resident or property owner within the 500-foot radius who intends to occupy as an owner shall be given first consideration with respect to the purchase of a property. Any person submitting a bid for an improved parcel of neighborhood property that is classified as habitable property shall be able to demonstrate that the person will satisfy the owner occupancy requirement, unless this requirement has been removed through direction of the council member, and also that the person will submit a restoration plan and demonstrate skills and financial resources to carry out the plan

c. All conveyances shall be for adequate market consideration, as determined by the commissioner or commissioner's designee, which consideration may recognize and value monetary as well as non-monetary consideration, including, but not limited to, public policy considerations of property and neighborhood stabilization, health, safety and welfare concerns, future improvements to or development or remediation of the parcel, returning the parcel to the tax rolls, and promoting home ownership. The commissioner may impose restrictions and remedies in connection with any such conveyance in order to effectuate the transaction, including, but not limited to, deed restrictions requiring home ownership or ownership by property-tax-paying owners, deadlines for commencement and completion of improvements, requiring the combination of the parcel with another or other parcels, requiring the correction of building code violations and satisfaction of orders of the health department and department of neighborhood services, requiring the satisfactory completion of a property rehabilitation or restoration plan required by sub. 2-b-1 and reversionary or other city-protective provisions in the event of breach or default.

5. CITY SALES OF DEVELOPMENT PROPERTY. a. The commissioner may only sell, convey or lease, for a term greater than one year, city-owned development property after and pursuant to council approval.

b. Notwithstanding the foregoing, the commissioner may, without common council approval, lease development property for a term not to exceed one year, provided the commissioner has provided the member of the common council in whose district the development property is located, notice of such proposed lease and a summary of the terms thereof; and either the commissioner receives no objection to the proposed lease from the common council member at any time during the period 15 days following delivery of such notice, or the commissioner timely receives an objection to the proposed lease from the common council member in whose district the development property is located, but such objection is overruled by a vote of the common council approving such proposed lease.

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6. GARDEN PERMIT LEASES. Annual leases, for no more than the growing season, of neighborhood property, may be issued to individuals by the department of neighborhood services in order to permit such individuals to plant and cultivate a garden thereon.

7. ALL SALES. The city of Milwaukee adopts ss. 62.22(1) and 62.23(17) Wis. Stats., pursuant to the council’s authority under s. 62.03(2) Wis. Stats. Pursuant to those provisions, and to s. 62.11(5), Wis. Stats., and s. 4-10 of the city charter, sales and conveyances authorized hereby may be to designated persons or entities for adequate fair market consideration which consideration may recognize monetary as well as non-monetary consideration, including, by not limited to, those public policy and other considerations referred to in sub. 4.

8. GENERAL BUYER POLICIES. Notwithstanding the foregoing, unless otherwise authorized by a vote of the common council, the city shall not convey development property or neighborhood property to any person or entity (A grantee) unless the commissioner determines that the grantee has the skills and financial resources needed to successfully carry out the property rehabilitation or restoration plan required by sub. 2-b-1, if applicable, and without first obtaining such grantee's warranty that neither the grantee nor any principal of the grantee is:

a. Delinquent in the payment of any property tax, special assessment, special charge or special tax to the city.

b. A party against whom the city has an outstanding judgment.

c. A party against whom the city has outstanding health or building code violations or orders from the city’s health department or department of neighborhood services that are not actively being abated.

d. A party who has been convicted of violating an order of the health department or department of neighborhood services within the past year.

e. A party who owned property in the city that, at any time within the past 5 years the city acquired by means of property-tax foreclosure.

f. A party who has been convicted of a felony determined by the commissioner to reasonably cause neighborhood or community concern with respect to neighborhood stability, health, safety or welfare. In making this determination, the commissioner may consider factors such as the nature of the crime, the date of conviction and the existence and nature of community impact and complaints.

9. DEED SIGNATURES. The commissioner or designee is authorized to sign deeds and instruments of conveyance and related documents such as, without limitation, a release of deed restriction on behalf of the city with respect to conveyances authorized hereunder.

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10. RECORDING OF DEEDS. All deeds for conveyances authorized hereunder shall be recorded by the department of city development with the Milwaukee county register of deeds office within 7 business days of closing, and the grantee shall pay the cost of recording. Alternatively, a title insurance company, a lender or the grantor’s or grantee’s attorney may record the deed so long as such party agrees to meet the time period for recording required hereunder.

11. SALE PROCEEDS. The net proceeds from the sale of city-owned real estate acquired through property-tax foreclosure, other than rental proceeds, shall be credited to the reserve for tax deficit fund.

12. NO TAX EXEMPTION. All deeds of conveyance for development property shall contain a permanent restriction prohibiting the grantee and all subsequent owners from applying for an exemption from real estate taxation for such development property pursuant to s. 70.11, Wis. Stats., unless otherwise approved by a two-thirds vote of the common council.

13. PROPERTY NOT AFFECTED. This section does not affect or apply to:

a. Property owned or utilized, at any time, by the Milwaukee board of school directors.

b. Property owned or controlled by the board of harbor commissioners.

c. Leases of neighborhood property pursuant to sub. 6.

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