Follow-Up on Recommendations from Report No. 12-03, Audit of the City's Real Property Tax Delinquency Collection

From Honolulu City Auditor, November 25, 2019 (excerpts)

Background The Audit of the City’s Real Property Tax Delinquency Collection (Report 12-03, issued March 2012), was a self-initiated audit that addressed concerns about projected increases in delinquent receivables and inadequate reporting regarding the city’s delinquent property tax collection program. The audit objective was to review and assess the city’s real property tax delinquency collection process. To assess the program, we evaluated the effectiveness of management practices for collecting real property delinquent taxes.

In Report 12-03, the audit identified issues that prevented the city from reducing real property tax delinquencies through effective, timely, and efficient collection. A number of long-term, large dollar amount delinquencies were caused by the city’s inability to collect from government-owned land lessees. The city received little or nothing in return for its resources and collection efforts because the city was limited in its options to collect from lessees and could not foreclose on government owned property if its lessee failed to pay the city’s assessed taxes. To facilitate collection of taxes and timely actions against lessees of government lands, the city would need to develop memoranda of agreements with other government entities for sharing lessee and lease information.

The audit also concluded that delinquent tax collection amounts for private properties were increasing because land owners were allowed to remain on payment plans indefinitely. We also found that the chronically delinquent knew how to avoid the foreclosure process by paying the minimum property tax amount necessary to avoid triggering the foreclosure process. In addition, improvements in city policies and procedures could improve delinquent tax collections and the accuracy of delinquency tax data. Establishing categories for written-off and uncollectible accounts and moving these accounts to a separate list could improve the accuracy of the delinquent tax totals. Establishing a list of written-off and uncollectible accounts could be used by city staff to deny city services and benefits to delinquent taxpayers and serve as an incentive to pay delinquent taxes, provided that due process, administrative, and appeal procedures related to the denial are in place.

The audit made 11 recommendations to improve delinquency collections. Since the original report was issued in 2012, our office has periodically monitored the status of the report’s recommendation by requesting the Department of Budget and Fiscal Services (BFS) to report on the status of the audit recommendations. In the FY 2012, FY 2014 and FY 2017 status recommendation reports, we noted that BFS had not-started any of the 11 recommendations. Based on this and the period of time that has transpired since the audit was completed, we determined that a follow-up audit should be performed to verify that status of the outstanding recommendations….

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Recommendation 1 – In Process

Negotiate a Memorandum of Agreement with the State of Hawai‘i that provides for the timely exchange of lessee information on government lands and permits the city and county access to State of Hawai‘i databases that allow the city staff to take timely actions in filing liens against delinquent lessees.

STATUS UPDATE

Management made efforts to obtain information from the state. On September 19, 2012, the former governor issued an Executive Memorandum requesting that the state provide the city with timely information regarding non-residential leases with commercial tenants that have a term in excess of one year. The memorandum specifies that all state agencies that issue leases, licenses, permits, or other dispositions for non-residential real property to tenants who will use the property for commercial purposes, where the lease continue a period of one year or more, shall provide the city and counties worksheet information on an annual basis by September 30th of each year. According to BFS, since 2013, the state has not upheld its commitment to provide annual worksheets and timely information to the city.

NEXT STEPS

We recommend that BFS work with the state to ensure compliance with the memorandum. Absent timely and accurate delinquency information, the city remains unable to effectively collect back payments and penalties from government-owned land lessees….

Response from City Managing Director Roy Amemiya:  “Budget and Fiscal Services considers Recommendation 1 resolved and will not take further action as an Executive Memorandum of Agreement by the former Governor was issued September 19, 2012.  BFS continues to pursue resolutions with various State Agencies regarding the timely information on non-residential leases with commercial tenants whose lease terms are in excess of one year. “ ….

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