Philadelphia Car Accident Lawyer: October 2016

City council's approval of the tax lien sale depended on

balancing the city's financial needs with safeguards for low-income

homeowners.

On June 30, 1997, the City and School District of Philadelphia closed

their first securitization of tax liens. More than $106 million of real

estate tax liens were sold to the Philadelphia Authority for Industrial

Development (PAID). PAID used the liens to collateralize the issuance of

seven-year bonds totaling $75,485,000. This sale marked the seventh

securitization to take place since Jersey City's first effort in

1993. It also marked the first time the bonds were sold in a public

offering and the first time a major rating agency insured the issue.

Finally, there are many features in the transaction, such as the power

to substitute liens during the life of the collection process, that make

the Philadelphia tax lien sale and securitization a model for other

cities interested in turning uncollectible liens into cash.

The tax lien sale and securitization process is possible because the

rating agencies recognize that certain private-sector collection firms,

known as servicers, can collect on real estate liens that governments

with limited technical, financial, and personnel resources cannot. In

fact, the rating agencies rate both the quality of the portfolio of

liens and the tax lien servicer.

Because of the age of the liens, their high lien-to-value ratios, and

other features of the lien portfolio, Philadelphia's independently

elected city controller concluded that the revenue and law departments

would collect only 40 percent of the proposed lien portfolio over the

next five years. It should be noted that this is not the same as the

city's real estate tax collection rate. It predicts only what the

city would be able to do with a specific portfolio of old liens with

high lien-to-value ratios. The difference between what the city would

collect on its own and what the servicer is expected to achieve is new

or found money for the taxing bodies. Securitizing the portfolio to

collateralize bonds allows this found money to be available immediately.

Because of the complexity of the transactions, the securitizations that

have taken place have required cost of issuances that are greater than 3

percent of the bonds issued. In Philadelphia's case, costs of

issuance were approximately $3 million or 3.8 percent of the bonds

issued. This cost is justified since the sale and securitization

provided $27 million in new money that would not have been available to

the City and School District of Philadelphia otherwise.

Since 40 percent of the entire portfolio, or $42.5 million, would

have been collected by the city with existing resources, this amount was

removed from the proceeds of the sale and placed in a senior note that

will be paid to the city and school district over the next five years.

This so-called "hold harmless" money is separate from the new

or found money achieved by the securitization.

Because the city will use the proceeds for economic development, the

interest on the bonds is taxable. Typically, such taxable issues are

priced at 50 to 75 basis points above the two-year Treasury bond.

The Portfolio and Servicers

Philadelphia's portfolio consisted of real estate tax liens on

33,591 properties of which 21,896 are residential. The city does not

know how many of these residential properties are owner occupied and how

many are rentals. More than 6,000 other properties are commercial or

industrial and 5,908 are vacant lots. One third of the properties in the

portfolio have liens that are at least 10 years old.

The rating agencies examined the portfolio from the time of its

initial creation until four days before the bonds were sold. Because the

portfolio was constantly changing, due to liens being deleted because

payments had been arranged or errors in the liens had been identified,

the rating agencies were asked to examine a moving target. However, once

the portfolio was frozen and the agencies were asked to make a final

rating, they had sufficient experience with the portfolio to give it a

rating. In the end, the rating agency gave Philadelphia a 29 percent

discount, which translated into a lien portfolio of $106 million

supporting $75,485,000 in bonds. After establishing a $2.6 million

interest reserve and paying issuance costs, available funds for the city

and school district totaled $69,843,000. As stated, $42,527,000 of this

amount was held in reserve to protect future years' budgets. The

remaining $27.5 million (the new money) was divided between the city and

school district in accordance with their tax authority.

The difference between the portfolio value, $106 million, and the

amount of bonds issued, $75.5 million, was paid to the city and school

district as a subordinated note. The $30.8 million subordinated note

becomes the source of payment for both the bond holders and the

servicers. The bond holders are paid quarterly from the collections on

the liens. The servicers also are paid from the collections. Only after

all the bonds are paid off, does the city and school district derive

some revenue from the over-collateralized portion of the portfolio, the

subordinated note of $30.8 million. While it is assumed that some

revenue will come from the subordinated note, the city and school

district have not projected any revenue from this portion of the deal.

Exhibit 1 displays the details of the sale and securitization.

In choosing the servicers, the city through its financial advisor,

Public Financial Management, sent a request for qualifications (RFQ) to

23 companies known to have interest in this line of collections work.

The RFQs sought information regarding the servicers' experience in

real estate tax lien collection and their approval or rating from any of

the three rating agencies. Five servicing companies qualified after the

RFQs were evaluated. The subsequent request for proposals basically

sought the servicers' proposed fee structure. The most competitive

aspects of the fees proposed by the servicers were blended into a single

fee structure. Because of the relatively large number of parcels in the

Philadelphia portfolio, it was decided to obtain three servicers. The

contract between the PAID and the servicers allows for the shifting of

liens from those servicers who are underperforming specific benchmarks

to those who are achieving or exceeding the contracted benchmarks.

Exhibit 1

CALCULATION OF PHILADELPHIA TAX LIE SALE AND SECURITIZATION

Total Value of Liens $106,319,079 (A)

School's Portion $58,475,493 (B)

City's Portion $47,843,586 (C)

$106,319,079

Bonds/Issuable = (A) x 71% $75,485,000

Less Issuance Cost & Reserve $5,353,146

Total Amount Bonds $70,131,855 (D)

Total Amt. Subordinated Note = (A) x 29% $30,832,533 (E)

Proceeds to School Dist. = (D) x 55% $38,572,520 (F)

Proceeds to City = (D) x 45% $31,559,335 (G)

City's Senior Note = (C) x 40% $19,137,434 (H)

City's "New" Money = (G) - (H) $12,421,900 (I)

City's Subordinated Note = (E) x 45% $13,874,640 (J)

Sch. Dist. Senior Note = (B) x 40% $23,390,197 (K)

Sch. Dist. "New" Money = (F) - (K) $15,182,323 (L)

Sch. Dist. Subordinated Note = (E) x 55% $16,957,893 (M)

(Because of different millage rates, the city's interest in the

real estate

tax lien portfolio is 45 percent while the school district's is 55

percent.)

Termination Fee. The fee structure is in three parts. First, there is

a termination fee. In the event that a servicer is terminated without

cause, it is entitled to a fee based on 2 percent of the principal value

of its portfolio, if termination takes place in the first year. This fee

declines until the third year when a 1/2 percent termination fee would

be paid by the issuer.

Administrative Fee. Second, there is an .8 percent administrative fee

based on the size of the principal amount of the portfolio held by each

servicer. As the portfolio is worked and liens converted into cash, the

value of the administrative fee will decline.

Incentive Fee. Of greatest importance is the incentive fee, which is

designed to encourage servicers to collect on even the most difficult

liens. Accordingly, the first 10 percent of the portfolio each servicer

collects will earn the servicer .25 percent of the funds brought in. The

incentive fee increases with each 10 percent of the portfolio collected

until the final 10 percent of the portfolio allows the servicer to earn

6 percent on the monies brought in.

The Rush to Pay

Publicity about the sale of the liens and the fear that the servicers

would somehow be more draconian in their collection methods moved many

long-standing delinquents to either pay their delinquencies or enter

into 12- to 24-month payment plans.

The City of Philadelphia increased the pressure on delinquents by

securing authority from the state legislature and city council to charge

up to 18 percent in attorneys fees for the collection of delinquent real

estate taxes. This 18 percent goes to the city and school district, not

the servicer, but it increases the value of portions of the portfolio

with liens filed after December 1990. Prior to the engagement of the

servicers, Philadelphia's delinquents flocked to make restitution on their back taxes. This rush to pay before the terms of settlement got

tougher was also reported by other cities that used securitizations,

sold their liens directly to servicers, or simply hired private

servicers.

The initial legislation for the sale and securitization was submitted

to city council in November 1996, and final passage took place in June

1997. During the month of April, a series of public hearings was held by

City Council that generated significant publicity. The misinformation that is the stock in trade of radio talk shows had a positive effect and

motivated people to pay their back taxes. Between May 1 and June 16, the

city and school district collected a combined $36,550,519 in cash. In

addition, 30,230 payment plans worth $68,816,768 were obtained.

Balancing Financial Interests

The biggest obstacle in selling the liens, hiring servicers, and

going forward with the securitization was obtaining city council

approval. Philadelphia, like many cities, has large concentrations of

lower-income people. City council members, particularly those who

represent low-income districts, were concerned about protecting

delinquent taxpayers from unfair collection methods. Even though

servicers are required to use the same methods, payment plans, and

techniques employed by the city revenue and law departments, many

council members feared that low-income people would be forced to make

payments they could not afford and also were concerned about adverse

voter reaction from a large segment of the population. More than 30

percent of Philadelphia's 600,000 households live on an income of

less than $15,000 a year. Almost 20 percent, one out of every five

properties, had a real estate delinquency and at least one lien.

In the end, getting this tax lien sale to market required balancing

the financial interests, as represented by the rating agencies, with the

safeguards for citizens required by city council. Every measure to

protect the interests of the delinquent citizen could result to one

degree or another in a greater discount and less money in the deal.

Without the provisions for protecting individuals, however, city council

approval would not have been provided. Because the school district

needed the money by the end of its fiscal year (June 30), finance staff

were able to provide a solid reason to do the securitization and a real

deadline for city council action.

The most significant protection provided to lower-income people was

to structure the servicing agreement to allow unlimited lien

substitution for either economic development purposes or because of the

economic hardship of the property owner. If a property whose lien is

being worked by a servicer is thought to be important for an economic

development project where the tax delinquency might assist a public

agency or a community development corporation in obtaining the parcel,

or if the property owner is clearly destitute, the lien can be

substituted with a lien of equal value and quality. Since the portfolio

did not include all the tax liens held by the City of Philadelphia and

because the city files up to $50 million of delinquent tax liens a year,

there is no difficulty in finding suitable substitutes. This feature

gave council members comfort that they could remove the truly destitute

from the servicers' embrace.

The experience of other cities that have utilized servicers is that

there has not been any increase in foreclosures, and the principal

servicers themselves report that while owner-occupied properties may be

threatened with tax sales, it is not in the servicers' financial

interests to foreclose on these properties.

The portfolio Philadelphia provided to the servicers was constructed

so that senior citizens and other taxpayers on special payment plans

were not included. People who entered into payment agreements with the

city before June 17, 1997, were assured that their liens would not be

placed in the portfolio nor would their liens be used for substitution

and put in the portfolio at some later date - even if they broke the

payment agreement. City council members were assured that people who

enter into payment agreements with the servicer and then break the

agreement will have at least 60 days before the property goes to tax

sale. District council members are to be notified two weeks before any

tax sale of properties within their district.

At the last minute, three recalcitrant council members agreed to

support the tax lien sale and securitization if the city would designate a million dollars of the new money gained from the sale to set up a loan

program so that working people faced with tax foreclosure can get the

necessary down payment to enter into a payment agreement. Since the

city's housing funds come from community development block grants,

current loan programs are income restricted. Use of the tax lien

proceeds removes the income barrier. Under the new Homeowner Protection

Program, loans will be repaid with the tax delinquency as part of the

monthly payment plan. In addition, participants will be required to

undergo household finance and budget counseling to insure that taxes are

paid appropriately in the future.

As municipalities seek to turn uncollected taxes, fines, and fees

into cash, the sale and securitization of these receivables may be an

increasingly important tool. The Government Finance Officers Association

adopted a recommended practice, "Sale and Securitization of

Property Tax Liens," in June 1997, which is displayed in the

accompanying sidebar.

RELATED ARTICLE: GFOA RECOMMENDED PRACTICE Sale and Securitization

of Property Tax Liens (1997)

Background. Governments sell or securitize property tax liens to

eliminate backlogs of accumulated delinquent tax receivables and convert

those receivables into cash. Tax liens, which are attached to properties

for nonpayment of property taxes or those assessments, may be bundled

and sold directly to investors through a bulk-sale process. They also

may be sold to a trust, where the payment stream is securitized. Bonds

backed by the delinquent taxes are then sold to investors and the

proceeds of the issue are paid to the government that sold the tax

liens.

Recommendation. The Government Finance Officers Association (GFOA)

recommends that governments contemplating the sale or securitization of

property tax liens undertake a careful analysis of benefits and risks

both in the current fiscal year and over the long-term. When evaluating

the sale or securitization of tax liens, governments should:

1. Ensure they have legal authorization to enter into these types of

transactions and understand any conditions or limitations imposed by

state or local law.

2. Be clear about the public policy objectives to be achieved, such

as improving collections or avoiding costs associated with the ownership

of the property on which taxes are owed.

3. Evaluate whether changes in the collection process could reduce

the occurrence of delinquencies.

4. Use sale proceeds for non-recurring purposes, particularly if the

amount of the sale or securitization is large. Governments using a tax

lien sale or securitization as a one-time mechanism to address a current

year budget gap should assess the short- and long-term implications for

the government's credit quality. They also should consider how gaps

will be closed in later years and whether structural budgetary balance

is able to be achieved without future tax lien sales or securitizations.

5. Determine that the net return after taking account of transaction

costs is acceptable in terms of alternative approaches, including

retaining ownership of uncollected receivables.

Once a decision has ben made to sell or securitize tax liens,

governments should:

1. Examine the lien pool carefully to ensure properties will be

acceptable to investors. Lien-to-value ratios of various classes of

property, the age of the liens, historical redemption rates in the

community, property types, and the number of environmentally impacted

properties are among the factors that should be considered.

2. Review statutory cure periods established to permit owners to pay

delinquent revenues to ensure that an appropriate balance is struck

between government policy objectives and acceptability to investors.

3. Select legal and financial advisors and other service providers

with demonstrated experience with these transactions.

4. Select a servicer with a proven track record if such a firm is

being used to collect delinquent taxes. Rating agency approval of the

servicer is typically required, and will be based, in part, on the

record of the servicer. Among the qualifications that should be

evaluated are:

* knowledge of state and local law;

* due diligence capabilities in the lien selection process;

* adequacy of the servicing system, including recording, auditing,

and financial reporting procedures; and

* historical performance in serving liens, including procedures for

workouts and foreclosures.

5. Recognize the community relations impact of establishing a private

collection mechanism. Governments should take steps to maintain good

relations among all affected parties, such as designating an ombudsman or instituting a formal complaint process through which problems that

may arise are addressed.

References

* "Tax Lien Securitization: Putting Non-Performing Assets to

Work," Government Finance Review, GFOA, June 1996.

* "Municipalities Turn to Property Tax Lien Sales,"

Standard & Poor's CreditWeek Municipal, March 25, 1996.

Approved by the GFOA Executive Board October 17, 1997

BEN HAYLLAR, Ph.D., is the City of Philadelphia Director of Finance

and a member of the GFOA's Committee on Debt and Fiscal Policy. He

joined the administration of Ed Rendell in 1993 after serving as

Pittsburgh's director of finance.

By Julia Edwards

| WASHINGTON

WASHINGTON The U.S. Justice Department announced on Monday that more than 33,000 federal agents and prosecutors will receive training aimed at preventing unconscious bias from influencing their law enforcement decisions.

The training will bring Justice Department employees in line with many local police departments across the country that have implemented bias prevention plans following a spate of shootings of unarmed black men by white police officers.

Nationwide protests following those shootings blamed police bias for unnecessary use of force against minorities.

The department had been criticized for not developing its own policies to combat bias after recommending local police do so at the direction of a task force created by President Barack Obama after riots in 2014 in Ferguson, Missouri.

In a memo to Justice Department employees, Deputy Attorney General Sally Yates said the program targets "implicit biases" - subtle, unconscious stereotypes or characterizations nearly everyone makes about certain groups of people.

"But implicit bias also presents unique challenges to effective law enforcement, because it can alter where investigators and prosecutors look for evidence and how they analyze it without their awareness or ability to compensate," Yates said in the memo.

The training will be mandatory for all Justice Department agents and prosecutors and will be rolled out over the next year, Yates said.

Arrest data compiled by some police departments have shown that black and Hispanic men are more likely to be stopped by police than others, suggesting officers may be exerting implicit bias in deciding whom to question or apprehend.

The Justice Department will use a model developed by the former director of the Police Executive Research Forum, a nonprofit organization that provides expertise on policing issues. It is designed to make people aware of attitudes they may hold about certain races, genders, nationalities and other characteristics.

Wade Henderson, president and CEO of The Leadership Conference on Civil and Human Rights, said the training is an "imperative step forward" but "training alone will not eradicate discrimination in prosecutions and policing."

The Justice Department employs more than 5,800 attorneys and 28,000 law enforcement agents across four agencies: The Federal Bureau of Investigation, Drug Enforcement Administration, the Bureau of Alcohol, Tobacco, and Firearms, and the U.S. Marshals Service.

Police departments such as those in Baltimore, New York City, Seattle, New Orleans and Los Angeles have training programs in place that help officers recognize biases they may have but not be aware of following a national outcry against police bias in minority communities.

Asked why the Justice Department only now has begun such training for its employees, Yates said success in local jurisdictions caused the federal government to consider it as well.

"This program has been so well-received by our state and local counterparts, we thought it was something we should be offering to our federal agents, frankly, to get our own house in order," Yates said in an interview with Reuters.

Yates and the heads of other Justice Department components will begin their own implicit bias training course on Tuesday. Attorney General Loretta Lynch will promote the initiative in Phoenix on Tuesday when she travels there as part of her community policing tour, said a Justice Department official.

Department of Homeland Security employees, which include 60,000 border patrol officers and agents, will not be subject to the training.

Yates said the Justice Department hopes to serve as a model for other federal agencies that have not yet addressed implicit bias.

(Reporting by Julia Edwards; Editing by Dan Grebler)

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