It's obvious in many cities, not just Detroit, that government has not been able to hold up its end of the property tax agreement by providing and properly maintaining essential services such as water, streets, sewers, schools, fire and personal protection, and countless other "promises".
Why should homeowners lose their homes to non-payment if their streets are falling apart, their schools are sub-par, their personal safety is non-existent, their water pipes are 100 years old, and their government declares bankruptcy?
Selling off in tax delinquency court, homes with deeds that are free and clear, is an insult worthy of sustained organized protest. The fact that it doesn't happen is remarkable.
Not to mention the insane amounts that municipalities are paying towards the massive pensions and benefits for retired workers. How many existing police officers are cut in order to pay the pensions of the previously retired?
I will never understand this. I agree life-time pensions are unsustainable. I argue constantly for a) all new public employees being enrolled in a 401k and pensions being phased out and b) offering younger workers buy-outs, allowing them to invest their contributions themselves in reward for opting out of the pension system.
But that said - every pensioner out there worked for that pension. It was in their contract as an employee, a perk that often kept them in public service jobs, teaching your kids, putting out your fires, and so on.
Every single person that argues for pulling the tablecloth out from under pensioners would be ferociously mad at the idea of any company canceling or reneging on a contract.
To me, canceling or changing the pension of a retired (or soon to be retired) worker is the same as a bank deciding that you can't keep your house after all, even though you're not delinquent - it's just that the bank could use the value of your house, and breaking a contract is no big deal.
Get off of the backs of pensioners - they put in their time, worked often for decades, contracted the promise of some security in retirement, but hey, we have a financial crisis, and suddenly they're freeloaders.
Pretty much everything about pensions is broken and unsustainable, but that's not on the worker, that's on those that made the promise, and not keeping it is just the lowest form of horrible.
Apologies for the rant. I accept the down voting I expect.
Montreal has a particularly bad case going on, where for a large part of the 90s it showed on the city employees payslips that they were making pension contributions, but in reality the city just kept the money and said they'd pay it later (a "pension holiday"), but never did. The pensions in question do happen to be unreasonably large, but that was the problem that should have been dealt with at the time and not just kicked down the road. The city now want to get out of paying, which is a ludicrous position, in the same way that expecting new employees to get such generous pensions is insane.
Contracts aren't inviolate. When you contract with an entity to receive money in the future, you always take on the risk that the entity will discharge the obligation in bankruptcy. And people who have unsecured obligations, like pensioners, would normally be low on the totem pole in bankruptcy.
Ultimately, there's an inter-generational conflict. Voter participation at the state and municipal level is low, and its not inaccurate to say that the pensioners voted themselves these unsustainable benefits, and also voted not to put money away to fund them. Why should our generation come along and pick up the difference?
Your comment excludes a large group of pensioners: those that retired from state-funded employment, such as teachers or other public service personnel. Their contract stipulates an ongoing obligation that the state has to them once they retire, and many states (all?) don't have the legal right (or the realistic ability) to discharge their debt to their pensioners in bankruptcy. No potential employee would consider their future pension a discharge-able debt, and thus, they would not realistically consider the loss of their pension to be a risk to be accepted.
In other words, their in-kind exchange is: they work as instructed in return for immediate pay and a future obligation based on the time they worked.
Disclosure: from Illinois, where many public service employees are getting the shaft.
EDIT: additionally, teachers in Illinois expect to receive a benefit from the Teacher's Retirement System, and as such, they weren't contributing to federal social security programs. There has been an ongoing concern that the TRS funds will vanish and all those teachers would be without the usual post-retirement income that this country's social and taxation policies have all but guaranteed. Yeah, they are basically made to forego debt owed to them by the federal government in return for debt owed to them by a state government. The same state that brought you Rod Blagojevich, George Ryan and Dan Walker, prompting at least one person to suggest that they need to build a governor's wing at the prison.
People often criticize "defined benefit plans" like pensions, where the employee is guaranteed a certain pension payment by the employer. This guarantee means that the employer, rather than the the employee, takes on most of the market risk. Employees (via e.g. unions) often push for pension guarantees that are likely to exceed realistic market returns, further increasing risk to the employer (as has happened in many municipalities in the US). Politicians who are here today, gone in 20 years, are sometimes incentivized to provide expanded pension guarantees (to make employees happy today) without adjusting funding (to keep taxpayers happy today).
Defined contribution plans like 401(k)s, which have become much more popular in the past 20 or 30 years, move the risk to the employee -- nobody is guaranteeing anything, and your fortunes move with the market. Obviously there are downsides, but one of the big upsides is that it keeps everyone honest by forcing employers to fund plans today as needed (e.g. 401(k) matching is not a hypothetical cost to be faced in 20 years, it's something that must be paid out today).
This is a good definition of "pension" and "401k" but it doesn't explain why the former is unsustainable and the latter is sustainable.
Why is it sustainable to shift all the risk of bad investment, mismanagement and unexpected longevity away from institutions and onto individual workers?
Are workers in a better position to shoulder those risks than institutions are? Or are they in a better position to minimize the risks? Do they have better access to the investment market or greater ability to choose good and trustworthy managers? Are they in a better position to pool longevity risks?
The difference is that the 401k the matching contributions go into the employee's fund immediately. The pension is really just a promise of funds in the future. Historically pensions have been:
a) reneged on by the employer
b) underfunded by the employer
It is correct to say that there is no reason a reasonable pension couldn't be just as good as a 401k, but it hasn't played out. The money keeps getting spent twice. I personally think this is nothing short of criminal. Because of the way the 401k works, the money can't be double spent, and you didn't have this problem of the retirement funds 'disappearing'.
401ks put the burden of investing wisely- and tightening your belt during recessions- on the pensioner and not the employer. This is bad in many ways, but, they are at least immune from the problem of crooked and moronic administrators investing in rare coins (http://en.wikipedia.org/wiki/Coingate_scandal) and sticking taxpayers with the fallout forever. It would be funnier if it wasn't so regular an occurrence.
Pensions were underfunded. If you underfund your own 401k, that's on you. The pensioned people were told they didn't need to save for retirement because they had a pension, and so many of them didn't.
I agree with you but I would like to point out that the US was basically founded on the idea of getting out of a bad contract instead of paying the money we owed. It has been spun in a lot of other ways because yay america, but really we didn't want to pay England back for financing the French and Indian War and for ongoing stationing of troops because of that conflict. So we didn't and that was that.
Not really. Had the colonists had better representation in parliament then the case for separation would have been non-existent, but as it stood even Burke, who famously opposed the French Revolution, thought they had a point.
Most of the English population didn't even have representation in parliament.
Its very convenient how this wasn't an issue until America owed England a huge amount of money. What about all previous import/export taxes up until the revolution?
I gave you an upvote, but the problem with your logic is that today's young workers didn't agree to forgo their retirement to pay for the teachers' retirements. The teachers of yesteryear got sweetheart deals that should be strictly honored only by those who agreed to them as voters when the deals were made, and by younger workers only if they explicitly agree to them now.
It's an interesting argument, but the deal is with the state. That's like saying I never agreed to the laws that passed before I could vote, so they shouldn't apply to me.
It's tough, though, I agree - who bears the brunt of the pain? At the same time, new workers can reject a contract's terms by not accepting a job. Old workers have no options.
When the law takes away your retirement to provide a cushy retirement to the older generation, it shouldn't apply. Laws that are blatantly unfair to you, that you didn't agree to, shouldn't apply to you.
Most pensioners would do fine on half their pension. After all, the ones their age who don't have a pension are surviving on one-fourth or less the amount. The pensioners could keep the condo but forgo the cruises.
The question is whether the pensioner provided enough benefit during their career to justify their pension. In a lot of cities the retirement benefits are completely out of proportion to the benefit provided by the government employee. The social contract works both ways. We're supposed to provide for the security of old people in retirement, but they were also supposed to leave a better future for young people. If the former people failed to uphold their end of the social contract -- and the retired government employees of Detroit have obviously failed completely in this regard -- then why should the current working-age people of Detroit be expected to hold their pensions as inviolable?
The problem with that is these people planned for what was promised to them.
As a younger person in a skilled occupation, like most HNers I expect, I have no expectation on the state to provide for me and consequently have my own provisions for retirement savings. I've been placing a percentage of my income aside for a while now to fund me later in life.
My grandparent's generation (in the UK) however were promised state pensions. They paid higher taxes than I currently do for this, secure in the knowledge that when they retired the state would cover them. They don't have any retirement savings.
You can't just pull out the cover for these people, because they have no backup. They were told they'd be covered and they planned for that.
Gotta use a throwaway because I'm going against the hive-mind.
People were promised pensions on the backs of future generations; the money wasn't set aside for the pension. That's a form of Ponzi scheme. Considering how much harm they do to others, pensioners should be happy to get a payout and not cry if it doesn't. Just as unfair as reneging on a pension is expecting today's workers to forgo retirement to pay the pensioners.
The people to blame are the previous generations who allowed this mess to form, not the current workers struggling under the weight of the pensioners. Today's younger workers didn't agree to the contract the pensioners had. They were born into the unfair system.
The cover needn't be pulled out. Many of these people are effective millionaires getting $US70K or more a year for the rest of their life. They'll still survive when that's cut in half.
Right, like I said the promise goes both ways. The city or other authority offering the pension expects a certain amount of productivity out of the employee and in many cases the employees "pulled out the cover" on their city. In general I support the idea of defined-benefit retirement plans, and even to some extent the right of public employees to organize into unions, but when I think about the secretary at the local bureau who types one letter at a time on her computer, with a pencil eraser, because her fingernails are six inches long, or when I think about the bus drivers who can't be fired from the San Francisco MTA, even though they are convicted criminals who can't hold a commercial drivers' license, then my faith in public systems begins to erode. Goldbricking and loafing can only proliferate a certain amount before the ability of the city to pay for the promised pension is impaired.
Your argument favors the idea of state or national pension systems, because they are large enough to average out the stupidity. With municipal systems you're virtually guaranteed to have a few cities unable to meet their promises.
> The question is whether the pensioner provided enough benefit during their career to justify their pension.
Hilariously wrong. The question is whether the city entered into a labor contract with the pensioner, and whether they fulfilled their end of the contract. Do you go to a restaurant, eat a seven course dinner, then skip out on the bill because you don't think the price was reasonable?
The better analogy is, you get the bill and discover you're supposed to also pay for the old couple who ate there. You didn't agree to do that. Instead the old couple's generation agreed that you'd have to pay for them when they reached a certain age. And oh yeah: you don't get the same deal when you're old.
If there was anything worth starting a KickStarter for, it would be to raise money to buy as many of these homes as possible, and give the deeds outright to the people who already live there. That'd be a really great thing.
Well my friend raised over $6,000 on IndieGoGo [1] to buy homes at the foreclosure auctions to give to the families who live in them. There's a potluck tomorrow with all the families and funders to celebrate the success.
I could see many more of this type of effort in Detroit being successful.
I would invest in something that took it a step further; turn it into self-sustaining non-profit or co-op that's focused on keeping people in their homes and able to repay the costs of repurchasing them.
According to that article a lot of these people already have paid off the mortgage and have the deeds to the house. It's that they can't keep up with the taxes. If you raised money to pay their back taxes, what would they do the following year? This kind of stuff really is sad, there has to be some solution to not kicking people that have lived in these houses for 30+ years because they can't afford the taxes.
> If you raised money to pay their back taxes, what would they do the following year?
Detroit property tax rates are something like 3% per year. If I own the house outright, shouldn't I get a mortgage on the house to pay the property taxes, rather than lose the entire house?
If I was a banker in the Detroit area I'd be all over this—with a little bit of marketing I could offer to “save your house from the tax man”, take care of all the paperwork, and charge the highest interest rate that still let me sleep at night. (People could shop around, but if you're going to shop around for a better interest rate, you're probably of the type that isn't about to lose your paid-off home over a bill for 10% of the total value.)
This kind of stuff really is sad, there has to be some solution to not kicking people that have lived in these houses for 30+ years because they can't afford the taxes.
There is, the article points it out:
Owners can buy their homes back with debts cleared at auction for $500 as a solution of last resort.
The problem doesn't seem to be the lack of a solution, but knowledge that it exists and what they have to do to benefit from it.
So, the solution is: Don't pay your taxes. Wait for your house to go to auction. Hope no one buys it. Pay $500 to effectively erase your three year tax debt. Repeat.
That apparently currently works. It's a clear market signal to the government that it has no alternative but to put up with you not paying your taxes. But, I expect if it became widespread, the tax man would see it as a loophole to be closed.
There is also clearly something fishy going on there. The only way you get to pay $500 is if no one else offers to pay more than that, i.e. the market value of the house is only ~$500. For a dilapidated house in a bad neighborhood that is entirely possible, but then why are the taxes on such a low value piece of real estate so high that the occupant can't afford them?
Agreed. Other government housing auctions have been recently documented in the press as bearing signs of bidder collusion. A closer look here would be welcome.
This assumes no one else buys the property out from under them the first time it goes up to auction. If someone does, it's nice that they get some value out of it, but they're still ejected from their home. If they can't find something nearby, their kids have to change schools. Their job may be harder to get to. Until they can find another place to buy, they're throwing money away on rent. Etc, etc.
Yes, in theory they can stay in their home, but only if no one else wants it. And if someone does, their lives are upended and from the sound of the article, the money they get isn't going to be anything like enough to buy something comparable to their former home.
Property tax is really onerous for those who own their houses but fall on hard times. Its implementation can be terribly unfair, because it essentially says that you don't really own all of your property. You own most of it, but if you don't kick that little bit up every year, then you're out on your duff and what you get back is subject to the whims of the auction bidders.
That's a troubling implication for me. I'm a big fan of first sale doctrine. If you bought it, it should be yours. I'm deeply uncomfortable with the notion that you must always pay rent to the government on something you ostensibly own, or you get the boot.
There are so many ways this could be addressed. Property taxes could be eliminated and other taxes raised for a revenue neutral solution. Or below a certain property value, the tax levied could be zero. Lots of ways to fix this.
That is what we did in California. We started capping the rate of growth of property taxes. Now old people and companies pay little property taxes since they bought the property long ago. Meanwhile the young people usually end up paying the bulk of the property taxes (along with sky high mortgages.)
I think it's even more screwed up than that, right? One pays property taxes in order to get the benefits of the people they pay taxes to. It looks like the local and state government have utterly failed to provide the policing, schooling, or other tangible benefits associated with taxes.
There is literally no incentive to abide by that part of the social contract other than the vague fear that they'll be called in one day or forcibly evicted. The state is acting in bad faith.
> If you bought it, it should be yours. I'm deeply uncomfortable with the notion that you must always pay rent to the government on something you ostensibly own, or you get the boot.
> There are so many ways this could be addressed. Property taxes could be eliminated and other taxes raised for a revenue neutral solution.
I made this same argument in my high school civics class. As I recall, the deal is you're not paying 'rent' on the property but for the services that property receives courtesy of the state/nation (e.g. fire, police, protection from invading armies, etc).
Real estate taxes are a pretty progressive tax, I'd hate to see landowners (generally in the upper echelons of income distribution) get a tax break and have that passed down to the lower tiers with something horribly regressive like sales tax (which is the general go-to funding scheme). It'd be a lot better to eliminate all other taxes and make all government revenues come from a flat land value tax.
There are plenty of ways to pay for the services the property owner receives courtesy of the state/nation. It doesn't have to be by a tax that in the case of arrears results in eviction of the property owner, and many taxes can be made as progressive as you like.
> It doesn't have to be by a tax that in the case of arrears results in eviction of the property owner, and many taxes can be made as progressive as you like.
As a renter, I have a hard time feeling sympathy for the downtrodden landowning class. While there may be cases where an unfortunate landowner is forced to liquidate and find a place to live that's in line with their income, there are more cases where a drop in real estate tax simply means the landlord gets a better profit margin.
If there's a big enough reduction in property taxes, the market will adjust, absent other dominating effects, and your landlord's margin will be reduced.
Also consider that the vast majority of the landowning class consists of a person or family that owns one SFR, and most-to-all of their wealth is tied up in it. Those are the people that will get hurt if they can't keep up with property taxes, and it includes most of the middle class that isn't renting. I rent too. My landlord is not wealthy. If he can't cover his property taxes, then I'm the one who gets the boot.
And lest you think this is mostly a theoretical consideration, there were enough cases where an unfortunate retiree was forced to liquidate that it prompted the California electorate to pass Prop 13, which froze property taxes. If real estate values increase rapidly, for whatever reason, a property tax that rides that slope creates terrible injustices.
> If he can't cover his property taxes, then I'm the one who gets the boot.
That's a funny way to spell rent increase ;)
Forcing retirees out of their homes is pretty unpalatable, I'll agree. However, this is really easily solved through policy: place a tax lien on the property instead of confiscating it. The taxes owed can be collected when the property is passed on and no one gets put out on the street.
And if I and the local market can't bear a rent increase for a time?
A lien has the problem that, for a retiree who probably won't need another credit line, there isn't much incentive to pay. They could just let that go on until they die. Local governments would eventually get upset.
You can pile on all the rules you want, but every rule has unintended consequences. Best not to set up rules that force people out of their homes in the first place.
> Property taxes could be eliminated and other taxes raised for a revenue neutral solution.
The perfect solution for this is to eliminate both property tax and the mortgage interest tax deduction and let them cancel each other. For most people it makes no difference, but we stop kicking little old ladies out of the homes they own just because they can no longer afford the property taxes.
The numbers depend on several variables, but they seem to be in the same ballpark.
The amount people owe on their mortgages is generally in the neighborhood of the assessed value of their homes. People may make some headway into actually paying off the mortgage, but the tax deduction makes that financially unattractive (better to pay off all other debt before the mortgage because the interest rate is lower and the interest is tax deductible) and housing crisis notwithstanding the assessed value is generally lower than what people pay for houses to begin with.
So you're really comparing tax rates against approximately the same base. Then you only need to know the mil rate, the marginal income tax rate and the loan interest rate. Plug in typical numbers and they end up within an order of magnitude of each other one way or the other (e.g. somewhere around 2%).
Unless your point is that property tax applies to more than single family homes, but there is no reason we have to eliminate property tax for e.g. commercial property.
Why would that be in any way good? If someone can't manage to pull together $500 to buy the house they already live in, they also can't pull together $500 to fix anything that breaks in the house. Giving these houses to the people living in them is EXACTLY the same as encouraging people to live in houses that we know are not going to be maintained, and have them evicted in a few years, leaving the city with the cost of condemning and tearing down the house.
I agree that throwing money into tax auctions every three years is a band-aid. However, there is certainly an 8-figure opportunity here for whoever can come up with a more permanent solution.
Perhaps instead of paying $500 each to boot out poor grandmas to the streets, some low-income apartments could be built for those grandmas based on the expected values of flipping their houses and a govt tax break promise.
The upside for a flipped home in Detroit is about zero. There's a reason these homes are (barely) selling for $500. And buying a home for that and booting granny is a lot cheaper than building granny a new apartment. Not sure where the eight figure upside is going to come from.
If the current residents can't afford the property taxes, they need to relocate. On a personal level is very unfair, if its unfair at a societal level, we can debate. But the reality still stands- If you can't pay your property taxes, you need to move. It is a financial imperative.
For Detroit in general, these pejoratively described "gentrifiers" could be the best thing to happen in a long time. What kind of failing community would not welcome an influx of affluent skilled workers--- A boom of these kind of folks could even ignite the local services industry and provide jobs for the remaining lower skill workers.
I feel for these people on a personal level, I really do. But I don't see how ignoring economic realities is going to help them or their community long term.
>On a personal level is very unfair, if its unfair at a societal level, we can debate.
This has already been debated many times. The right answer is: property taxes on improvements are a malign disincentive, but property taxes on location/land value are a beneficial incentive for greater development. Detroit's location value is basically zero.
> If you can't pay your property taxes, you need to move.
I would argue you are talking in the wrong tense.
Detroit has suffered from resident and employer flight for 40 years. About A MILLION people took your advice before you gave it. It has caused a tremendous downward pressure on property values and gutted employee mobility.
Those people that are currently living in Detroit who can't or can just barely pay their property taxes are unlikely to be able to afford to leave and/or probably have too much hope / faith / pride (the regular irrational actors) to face the hard reality. I would bet that a lower intelligence and/or education level is likely to correlate highly with people who stick around despite the city crumbling around them.
Also, if residents can't afford to pay $500 to buy their own house at county auction, they also can't afford to move and start new somewhere else. Even if they could manage to leave before foreclosure, that does not absolve them of their obligation to pay property taxes on a property they still own and likely can't sell. People that can't afford property tax bills likely also have bad credit, which is another impediment to being able to afford a move, rent / buy a new place elsewhere, and even being able to apply for a new job.
I would argue that people who can't pay this month's bills don't worry about "long term". That's why there are more short term ("PayDay") loan centers than there are McDonald's restaurants nationwide.
Not trying to absolve them of their bad economic sense, just pointing out some likely reasons they haven't already moved elsewhere.
He had made a previous purchase in the yearly tax foreclosure auction.
His coup turned less appealing as he was confronted with the reality of
removing the owner and then-occupant from her home. Goldenberg sold the
house back to its occupant for the bargain price of $7,000 – twice what
he had paid for it, but half what she had owed in property taxes.
Meaning why isn't there a protection agency or service that buys houses from these foreclosure auctions and sells them back to their owners at a bargain???
I agree. This seems like a no brainer. Barring any legal barriers that might arise in the implementation of such a scheme, it seems like the main bottlenecks would be
(1) verifying that the current occupant was indeed the original title holder
(2) transferring the purchased title to said previous occupant without incurring substantial fees
From a the technology standpoint it seems to me like everything else could be fairly standard CRUD. There might be a bipartite graph between lenders and the foreclosed upon, simplified by averaging the resources of the former across all nodes.
Can anyone keen on the Detroit scene pipe in on the legal aspects?
"One of the things linking them: lack of information. Low-income homeowners are eligible for tax exemptions. While many residents would meet the requirements, they must file requests before their taxes are due, neither of which are readily known pieces of information, Mullane says. Owners can buy their homes back with debts cleared at auction for $500 as a solution of last resort."
It seems the problem is a lack of communication. It seems they don't know how much trouble they are in until they receive the foreclosure notice. The homeowner is welcome to bid on their house at auction, but if they are outbid then they are out of luck.
From the city's point of view it is better to try to get as much money back on the debt by auctioning the house instead of trying to settle at some arranged value with the debtor, which may be less than what they could get from two people trying to outbid one another. For example at the end of the article the debtor could only budget $1,400 for repurchasing his home, but he was outbid at $3,000.
> From the city's point of view it is better to try to get as much money back on the debt by auctioning the house instead of trying to settle at some arranged value with the debtor,
Which is the kind of sociopathic behaviour I'd expect from a sleazy corporate. It's meant to be public service, not public pillaging.
I understand your point of view, but given the city is not a corporation but an entity that is supposed to provide basic municipal services to all of its citizens, services which it has struggled to provide due to a disastrous financial situation, I can't really agree with it. Detroit has struggled to provide such services for years now and just recently emerged from bankruptcy proceedings. It's not really in a position to just take what it can get when police, fire, and EMS response times are well above the national average and public transit can't meet its posted schedules.
From what I read in the article, at the very least Detroit needs to do a lot better job at communicating what is owed by property owners and working with them on payment plans. If the property owner can't pay, then Detroit should get whatever it can out of the property however the government sees fit.
On the other hand, the money foregone to help the debtor is money that will be missed in schools, homeless shelters, road repairs, etc.
Barring corruption, which I never rule out but I have no idea if it's an incentive here, it isn't fair to say there's a right and a sociopathic choice. It's a hard trade-off.
Probably because of beauracracy and paperwork. The 'random person' both knew how and was willing to deal with the hassle of the city's tax auction. The owner probably didn't know they could, didn't know how, was unwilling, or otherwise unable. Arbitrage works :-)
Certainly his time and capital are worth something. He's probably out of pocket for at least a few lawyer fees. And if he intended to live there, he's now set back 2-3 months rent while he finds another permanent solution. All in all, still seems really generous to me.
Why should homeowners lose their homes to non-payment if their streets are falling apart, their schools are sub-par, their personal safety is non-existent, their water pipes are 100 years old, and their government declares bankruptcy?
Selling off in tax delinquency court, homes with deeds that are free and clear, is an insult worthy of sustained organized protest. The fact that it doesn't happen is remarkable.