HomeMy WebLinkAbout2022-05 Department of Finance Real Property Tax Division Revenue Cycle ManagementCounty of Hawaii Seal
County of Hawai'i
Office of the County Auditor
Department of Finance Real Property Tax Division Revenue Cycle Management
Report No. 2022-05
September 14,2022
Top Picture is of West Hawaii Civic Center.
Bottom Picture is of a Letter from Department of Finance - Real Property Tax to a homeowner.
Tyler J. Benner County of Hawai'i
County Auditor Office of the County Auditor
County of Hawai'i 120 Pauahi St., 309 Hilo, HI 96720 F
Office of the County Auditor F 808.961.8905
Ph 808.961.8386 +'•.
www.hawai`icounty.gov
September 14, 2022
Honorable Maile Mederios David, Council Chair
and Members of the Hawaii County Council
Hawaii County Council
25 Aupuni Street
Hilo, Hawaii 96720
Dear Chair David and Council Members,
In accordance with generally accepted government auditing standards and the Hawaii
County Charter Section 3-18(d)(2), the Office of the County Auditor conducts or causes
to be conducted: Performance and/or financial audits of the funds, programs, services,
and operations of any county agency, executive agency, or program, as set forth by the
county auditor in an annual audit plan that shall be transmitted to the county council and
the mayor and filed with the county clerk as a public record.
The Real Property Tax Division (RPT) has done a commendable job managing a vast
array of parcels with limited staff resources averaging a collection rate of between 97%
and 99%. However, the accumulative effect of accruing uncollected accounts is
consuming more time, effort, and resources, with each subsequent billing cycle.
To maintain an efficient workflow, RPT has created several definitions for the parcels they
manage. Compartmentalization in and of itself is not a problem, however, the division
must develop workflows for each definition to ensure an equitable process.
We have worked with the division to offer eleven (11) recommendations.
The division has expressed general agreement with our findings. If you have any
questions or concerns about the status of the findings and recommendations discussed,
please feel free to contact me at 808-961-8386.
Respectfully,
Tyler J. Benner
County Auditor
County of Hawaii
cc: Mitchell Roth, Mayor
Lee Lord, Managing Director
Jon Henricks, County Clerk
Deanna Sako, Finance Director
Lisa Miura, Real Property Tax Division Administrator
Table of Contents
Executive Summary ...............................................................................1
AboutUs.................................................................................................5
Chapter 1 Introduction
Objective.........................................................................................6
Scope and Methodology.................................................................6
Definitions.......................................................................................8
Background ................................................................................10
Noteworthy Achievements ..........................................................11
Audit Results
Chapter 2 General Approaches to Collection
Overview.....................................................................................12
Five Main Actions a Municipality Might Take...............................13
Table 1: Community Goals ...........................................................14
Best Practices for Tax Collection Programs................................15
Chapter 3 Division Performance
Historical Performance................................................................16
Industry Performance Standards (IAAO).....................................17
RPT Performance Metrics...........................................................18
Recommendation 1: Key Performance Indicators .......................19
Chapter 4 Delinquent Debt and Collection Practices
In-State Debt...............................................................................20
AllDebt.......................................................................................21
DataAnalysis..............................................................................23
Timelines ....................................................................................25
Chapter 5 Active Parcels.....................................................................27
Recommendation 2: Payment Arrangements..............................29
Recommendation 3: Owner Exemption.......................................31
Chapter 6 Government Parcels ..........................................................32
Recommendation 4: Civil Remedies ...........................................34
Recommendation 5: Write-Offs...................................................34
Chapter 7 Unactionable Parcels.........................................................35
Recommendation 6: Foreclosure Calculations............................36
Recommendation 7: Due Diligence.............................................37
Recommendation 8: Deed Unsold Titles to the County...............38
Recommendation 9: Lowering the Upset Price ...........................38
Chapter 8 Temporary Stay Parcels ....................................................39
Recommendation 10: Status Scrubbing......................................40
Recommendation 11: Foreign-Owned ........................................42
Chapter 9 Fraud, Waste, and Abuse ..................................................43
Conclusion............................................................................................44
Chapter 10 Management Response ..............................................46
Executive Summary
Overview
The Real Property Tax Division (RPT) is tasked with assessing, managing, and collecting from
approximately 140,698 parcels. Real property tax collections are the primary source of revenue
for the County of Hawaii, generating over $355 million and accounting for nearly 70% of General
Fund revenues in FY2021*. While most assessments are straightforward with billing and
subsequent collection taking place every six months, an increasing number of delinquencies are
requiring more of RPT's finite time and attention.
Sometimes, taxpayers are unable to meet their immediate tax obligations. In those cases, RPT
needs to have flexibility to help the taxpayer recover. Alternatively, sometimes taxpayers are
unwilling to meet their tax obligations. In those cases, RPT should have graduated
consequences to incentivize participation. RPT's collection system will function most effectively
when it can distinguish the difference between unable and unwilling and has developed tools to
handle either scenario.
To further complicate matters, large numbers of delinquent parcels are state-owned properties.
The county can send tax bills to government lessees, but RPT is unable to foreclose.
Before 1981 all real property tax collections were assessed and collected by the State Department
of Taxation. When authority was delegated to county governments in 1981, RPT acquired debts
dating back to 1976, some of which still show as actively owing. $9.4 million in delinquent
outstanding taxes are owed from a period between FY1976 to FY2011. Graph 1 below illustrates
the year-over-year collections (Green) against delinquent taxes outstanding (orange).
Current Tax Collections and Running Total Delinquencies
Running Total Delinquent Taxes ■Current Tax Collections
Axis Title 400,000,000
350,000,000
300,000,000
250,000,000
200,000,000
150,000,000
100,000,000
50,000,000
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Vertical Grouped Bar Chart.
Current Tax Collections and Running Total Delinquencies.
Running Total Delinquent Taxes in Orange.
Current Tax Collection in Green.
Y - Axis: $50,000,000; $100,000,000; $150,000,000; $200,000,000;$250,000,000; $300,000,000; $350,000,000; and $400,000,000.
X - Axis: 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, and 2021.
2012: 9,829,701 running total delinquent taxes; 204,457,906 current tax collection.
2013: 10,283,899 running total delinquent taxes; 196,588,866 current tax collections.
2014: 10,808,630 running total delinquent taxes; 216,745,094 current tax collection.
2015: 11,425,128 running total delinquent taxes, 232,639,421 current tax collections.
2016: 12,148,670 running total delinquent taxes; 243,343,668 current tax collections.
2017: 12,991,370 running total delinquent taxes; 265,555,651 current tax collections.
2018: 14,498,575 running total delinquent taxes; 300,981,070 current tax collections.
2019: 16,467,316 running total delinquent taxes; 314,443,022 current tax collections.
2020: 19,109,781 running total delinquent taxes; 326,940,296 current tax collections.
and
2021: 23,508,807 running total delinquent taxes; 351,149,669 current tax collections.
RPT FY2021 Statistical Information Table 7 Update Eff 18 May 22., Graph 1 Courtesy County Auditor
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While Chapter 19 of the Hawaii County Code would lead most to conclude that there are two
distinct paths for collections: on-time and delinquent, with clear remedies for both, in practice,
collections are much more complex. Some factors are beyond RPT's control, while others are not
effectively addressed through policy or procedure. Based on these conditions, we worked with
the division to offer the following eleven (11) recommendations addressing specific functional
areas of operations, problematic parcels, and Chapter 19 of the Hawaii County Code to
strengthen RPT's effectiveness. Our recommendations are as follows:
*Total revenues recorded$50819501959 p34 ACFR,Statement of Revenues,Expenditures,and Changes in Fund Balances provided
courtesy Department of Finance.
**RPT FY2021 Statistical Information Table 7 Update Eff 18 May 22.
**Hawai`i County Tax Calculation Summary Report 2019 Assessment Valuation and Rate Result Comparison.
We offer the following recommendations
Key Performance Indicators
1. RPT should develop additional qualitative and quantitative key performance indicators
(KPIs) for each of its functional business areas to inform stakeholders.
Payment Arrangements
2. We recommend that RPT establish payment arrangements to resolve delinquent
property-tax debts as one of its primary activities and develop a system to ensure
effective management.
Owner Exemptions
3. We recommend RPT amend Hawaii County Code Chapter 19 to include language that
suspends homeowner exemptions for tax delinquencies that are outstanding over a year,
except where:
a. An agreed-upon payment arrangement has been established.
-or in rare cases-
b. When the Director of Finance, has reviewed a case and granted an exception.
Civil Remedies
4. We recommend RPT develop procedures to obtain and collect through civil judgment.
Write-Offs
5. We recommend RPT identify and prepare a record of debts that it determines to be
uncollectible and to write those debts off annually to ensure the accuracy of tax rolls.
Foreclosure Calculation
6. We recommend RPT develop a new calculation for advancing a foreclosure property,
specifically to replace the 2x multiple.
Due Diligence
7. We recommend RPT work with the Office of Corporation Counsel to amend Chapter 19-
40 and subsections, improving options to satisfy"ascertaining ownership" and "notification
requirements," assuming no third-party title company is meaningfully involved.
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Deed Unsold Titles to the County
8. We recommend RPT add provisions to the Hawaii County Code Chapter 19 to allow the
conveyance of unsold properties to the County. RPT should evaluate the property,
neighborhood characteristics and pursue an appropriate tax foreclosure strategy.
Lowering the Upset Price
9. RPT should revise Chapter 19 to allow for a bid on tax sales for less than the upset price
to return the property to tax rolls.
Status Scrubbing
10. We recommend that RPT establish a schedule to scrub parcels in special statuses.
Foreign Owned
11. We recommend RPT develop a decision tree and workflow by country, prioritizing those
with the most significant debt holdings first.
Conclusions
When our recommendations are implemented in good faith, the department can expect the
following benefits:
Key Performance Indicators
1. Introducing a more comprehensive list of key performance indicators will help educate
stakeholders on successes, challenges, and resources needed.
Payment Arrangements
2. Implementing a payment arrangement program will build relationships, improve taxpayers'
ease of access, ensure program equity, and provide the taxpayer with permanent solutions.
Management gains oversight and close to real-time analysis while increasing revenues.
Exemptions
3. Setting aside tax exemptions for unwilling delinquent owners borrows the best elements of
the neighbor island code while preserving flexibility to work with individual situations.
Civil Remedies
4. The limited use of civil judgment to enforce collections when government trusts interfere
with a traditional collection approach potentially improves the division's effectiveness and
ability to negotiate payment arrangements.
Write-Offs
5. Identifying and removing truly uncollectible accounts will improve RPT's efficiency and
ensure a more accurate tax roll.
Foreclosure Calculation
6. Establishing a calculation closer to actual values will mean parcels stay actionable for
longer.
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Change Due Diligence
7. Proactively improving RPT's self-reliance will aid its capacity and ensure it can continue to
achieve core mission objectives.
Deed Unsold Titles to the County
8. Requiring unsold properties to be conveyed to the county provides an additional
opportunity to meet community development goals.
Lowering the Upset Price
9. In some cases, returning properties to tax rolls is more profitable than allowing penalties
and interest to accrue.
Status Scrubbing
10. Conducting periodic reviews of unique parcels helps ensure the accuracy of tax rolls.
Foreign-Owned Debts
11. By establishing a step-by-step decision tree, RPT can move forward with foreclosure
regardless of a nation's member-state status.
We would like to express our sincere appreciation for the Real Property Tax Divisions' unrestricted
access to sites, information, personnel, and coordination throughout the audit. Their cooperation
was exceptional.
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About Us
Mission
It is our mission to serve the Council and citizens of Hawaii County by promoting accountability,
fiscal integrity, and openness in local government. Through performance and/or financial audits
of County agencies and programs, the Office of the County Auditor examines the use of public
funds, evaluates operations and activities, and provides findings and recommendations to elected
officials and citizens in an objective manner. Our work is intended to assist County government
in its management of public resources, delivery of public services, and stewardship of public trust.
Audit Authority
Hawaii County Charter §3-18 establishes an independent audit function within the Legislative
Branch through the Office of the County Auditor (OCA).
Purpose
The purpose of this audit is to determine if services are being provided effectively, efficiently,
economically, and complies with relevant governance.
Performance Audit Definition
Performance audits provide objective analysis, findings, and conclusions to assist management
and those charged with governance and oversight with, among other things, improving program
performance and operations, reducing costs, facilitating decision-making by parties responsible
for overseeing or initiating corrective action, and contributing to public accountability.
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Chapter 1
Introduction
Objectives
The purpose of this audit is to examine the past due collections process, to determine if the
division is conducting activities effectively, equitably, and adhering to applicable governance.
Our audit was designed to answer the following questions:
1. What metrics does RPT use to determine whether performance goals are being met?
2. Is RPT adhering to Chapter 19 of the Hawaii County Code and other required
governance?
3. Is RPT's internal control framework and standard operating procedures sufficient to
ensure program success?
Scope
Our evaluation consisted of:
• Ten (10) fiscal years of taxable collections and outstanding receivables from FY2012 to
FY2021
• Delinquent receivables data 1976 to 2021 (46 years)
• The audit engagement began on December 3, 2021. Fieldwork started December 15,
2021. The audit was suspended in January 2022 and resumed in April 2022. The audit
was completed in July 2022
Methodology
To achieve our objectives, we conducted the following activities:
• Interviewed management and staff
• Reviewed Chapter 19 of the Hawaii County Code, Hague Convention (International
Treaty), management narratives, and sample documents related to the revenue cycle
processes
• Observed staff conducting collection activity
• Benchmarked industry best practices and other municipalities
• Tested RPT data: Accounts Receivables and Aged Parcel Detail Reports
Compiled and Analyzed
• 316 Report - Aged Parcel Detail Report: Detail information, including taxes, penalty, and
interest for any parcel that has outstanding amounts due as of the business date
requested. The report was run using parameters showing delinquencies in 2020 and prior.
The data set contained 133,877 rows. (Delinquencies from the first cycle of the tax year
2021 were omitted).
o This report includes each billing cycle, for each parcel, in the data set
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• 510 Report - Accounts Receivables Report: This report reflects the most accurate
delinquency as of December 9, 2021. The data set contained 13,871 unique parcels.
o This report includes the delinquent tax owed by parcel number.
*510 file includes 2021 data.316 file omits 2021 data.
Auditing Standards
• Was mindful of opportunities to improve
• Was mindful of any fraud, waste, and abuse throughout the audit
We conducted this performance audit in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
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Definitions
Audit Definitions
For the audit, parcels are categorized as one of four major types:
• Active: Delinquent parcels RPT manages and actively collects.
• Government: Parcels owned by Federal, State, or by County.
• Unactionable: Parcels with history or characteristics that make it immune to foreclosure.
• Temporary Stays: Parcels are placed aside because of court action, international law,
or treaty.
Division Definitions
RPT has provided the following parcel definitions:
• Active: Greater than two years delinquent, subject to a tax foreclosure action, does not
have restricting conditions.
• Bank Foreclosure: Properties under bank foreclosure action.
• Bankruptcy: Properties where the Division has been served notice of bankruptcy.
• Civilian Action: Properties covered under civil litigation.
• COVID: Property restricted from sale due to Mayor's Emergency Proclamation limiting
gatherings. The proclamation limited the Division's ability to conduct tax foreclosure
auctions during 2020 & 2021. Currently, the code provides for only in-person auctions
(Definition dissolved April 2022).
• Dropped Parcel: Parcels have been through consolidation action and no longer exist in
future tax years (with taxes still owing).
• Foreign: Limitations/challenges exist regarding proper notice via Hague convention
statutes.
• Government: Government-owned property (example: former lessees who have unpaid
taxes - DHHL).
• Lava: Lava inundated properties where market values are lower than the upset price
(example: Royal Gardens, Kapoho, Kalapana).
• Less than 2 years: Parcels which were formerly delinquent greater than two years,
which are currently delinquent but less than two years—this is used as a watch list.
• Low Value: The upset price is greater than 50% of the market price of the property.
• Payment Plan: Payment plan has been executed.
• Time and Cost - Title has communicated it is unable to provide a litigation guarantee
due to the inability to process the guarantee within the window of time allotted or a
complex chain of ownership exists that would contribute to an exorbitant cost to produce
a litigation guarantee.
• Unsold at Prior Auction: Unsold at prior auction with no successful bid obtained for the
upset price (inclusive of taxes, penalty, interest, and tax sale fees).
• Unspecified: Null value. Property current on all taxes or is less than two years
delinquent.
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General Definitions
Industry terminology:
• Community Development Corporation: A community development corporation (CDC)
is a not-for-profit organization that provides programs, offers services, and engages in
other activities that promote and support community development.
• Land Bank: A large body of land held by a public or private organization for future
development or disposal.
• Skip Tracing: The action or practice of locating people who are missing or have
defaulted on a debt, especially as a profession.
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Background
The role of the Real Property Tax Division (RPT) of the Department of Finance is to assess all
real property tax in the County of Hawaii in a uniform and equitable manner and collect real
property taxes assessed.
The Division has five unique sections: Administration, Appraisal, Clerical, Collections, and Tax
Maps.
Administration
Provides administrative support to the Real Property Tax Board of Review, valuation and
research support to the appraisal group, Global Information System (GIS) support, agricultural
program review, and development of valuation table and techniques while educating its staff
when introducing new software, and programs.
Appraisal
The appraisal section conducts physical inspections and is responsible for uniform assessment
based on fair market value. This group also conducts site inspections on agricultural properties
to ensure land use is appropriate.
Clerical
This section assists property owners and taxpayers with information related to assessment and
exemptions.
Collections
Collections are responsible to distribute property tax bills and collect all real property taxes
assessed. The section conducts non judicial foreclosure to enforce delinquent tax collection.
Tax Maps
The mapping section updates ownership information for real property tax assessment including
the new additions of subdivisions and property boundaries. This staff provides clerical support to
both collections and appraisal groups.
The division has two locations - Hours: 7:45 AM - 4:30 PM, Monday— Friday
East Hawaii West Hawaii
Aupuni Center 74-5044 Ane Keohokalole Highway
101 Pauahi Street, Suite 4 Building D, 2nd Floor
Hilo, HI 96720 Kailua-Kona, Hawaii 96740
Phone: (808) 961-8201 Phone: (808) 323-4880
Fax: (808) 961-8415
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Real property tax activities are encapsulated in Chapter 19 of the Hawaii County Code.
Articles of the code include:
Article 1. Administration.
Article 2. Notice of Assessments and Lists.
Article 3. Tax Bills, Payments, and Penalties.
Article 4. Remissions.
Article 5. Liens, Foreclosure.
Article 6. Rate; Levy.
Article 7. Tax Maps; Valuations.
Article 8. Dedications.
Article 9. Nontaxable Property; Assessment.
Article 10. Exemptions.
Article 11. Determination of Rates.
Article 12. Appeals.
Article 13. Tax Credits.
Noteworthy
Our assessment of evidence and review of internal communications show that RPT has
conducted numerous self-assessments, had internal discussions to incorporate its staff
member's feedback, identified most of its obstacles, and has tried in good faith to overcome its
challenges.
RPT has had success saving parcels in jeopardy from advancing into the final stages of
foreclosure. RPT provided a narrative of how it managed parcels in jeopady at it's January 2020
tax sale.
• First phase jeopardy letters included 462 mailers.
• Second phase, preliminary letters included 277 mailers, a 60% decrease.
• Third phase, final notices included 233 mailers, a further 9.6% decrease.
Letters do not reflect a one-to-one correlation with parcels as properties often have more than
one owner on record. Still, these simple and scalable communications play a large rolls in
providing ample communication to the taxpayer and keeping RPT's workload manageable.
In more recent activity, RPT completed its first post COVID tax sale June, 2022, where it sold 66
properties 100%, and generated $2.6 milllion in revenue. Counterparts from real property tax
offices in other areas of the state attended, observing a successful auction process.
Because RPT is delivering on time assessments and invoices, conducting tax sales as scheduled
(aside from COVID), and is experiencing linear growth in revenues, the program is seen as
largely successful.
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Chapter 2
General Approaches to Collection
Overview
Ideal tax foreclosure systems efficiently and equitably collect tax revenue needed to pay for
government services while promoting community stabilization and property maintenance.
Eviction and seizure of an occupied property are generally viewed as the worst possible outcome
in a tax collection scenario and should be avoided to the extent practicable. In certain
circumstances it is necessary and occasionally beneficial. Municipalities can use dispositioned
properties to achieve a range of different goals. Often, communities prioritize the dollars
associated with the recuperation of delinquent taxes, but the process can also serve to repurpose
selected tax-delinquent properties to advance affordable housing or community development
goals.
An effective tax collection program seeks to balance the property owners' circumstances with
the taxing authority's needs to ensure uniform and fair administration.
Properties become delinquent when property owners do not pay the total amount of property
taxes assessed against the property's value.Aside from routine invoicing, one compelling activity
to incentivize payment involves placing liens on the tax-delinquent property.
When this happens, one of two outcomes usually follow:
• The back taxes are paid, and the property is kept
• The property is foreclosed through a tax lien sale, and the property is transferred to a
lien purchaser
The upset price is the total taxes owed plus penalties, interest, and fees. In some places, deeds
are transferred to the winning bidder immediately, while in other areas, a 1-year redemption
period allows the original owner to repay their tax debt plus interest to the deed purchaser to
redeem the property. Hawaii County transfers the deed at time of purchase and recognizes a 1-
year redemption period where the old owner may satisfy the debt obligation and reacquire the
property. RPT advises deed purchasers not to develop property until the redemption period has
expired.
While foreclosures generate tax revenue, it is essential to consider all possible outcomes that
can be advanced through the disposition of delinquent properties.
Currently, Chapter 19 of the Hawaii County Code does not include provisions allowing unsold
properties to be conveyed to the County. In municipalities where this does exist, community
development can be advanced by developing infrastructure to make depressed neighborhoods
more attractive, increase affordable housing stock in areas of higher demand, or using tax
abatement to stabilize neighborhoods and keep long-time residents sheltered.
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Five Main Actions a Municipality Might Take for Properties with Tax Debt
1. Take no action allowing the property tax debt to increase over time as penalties and
interest are added to the taxes owed. As tax debt grows, the property owner has less
incentive to maintain and pay off back taxes, while the property becomes increasingly
risky for potential private buyers to acquire, and the County loses tax revenue.
2. Sell tax deeds and liens to the highest bidder, allowing the government to receive
immediate revenue. Purchased properties are typically rehabbed or resold.
3. Convey tax liens to the municipality or land bank. Municipalities can decide to directly
transfer tax liens on a property to a municipal authority or land bank. These entities may
also transfer tax liens that remain unsold after public auctions.
4. Foreclose on the property and transfer title to the municipality, land bank, or a community
development corporation (CDC). The municipality can convert the property for public use
or convey it to a land bank or CDC to achieve community development goals.
5. Use tax abatement and relief programs to reduce the current tax burden.
RPT currently sells to the highest bidder with an upset price based on actual costs of prior
delinquent balances, fees, penalties, and interest. When a property does not sell, or if a
complicated scenario exists the division regularly classifies the property as one of several
categories, and the property is set aside. RPT's foreclosure dispositions includes practices 1 and
2.
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Neighborhood conditions and the property's occupancy status are two primary factors that can
help determine a proper strategy for tax-delinquent properties. The following table outlines the
relationship between conditions, foreclosure strategies, and potential outcomes:
MATCHING A FORECLOSURE SYSTEM TO ACHIEVE COMMUNITY GOAL.
Property and Tax Foreclosure Potential Outcomes
Neighborhood Strategy
Characteristics
Sell lien or deed to the Property lien or deed doesn't sell, and
Vacant property in a highest bidder property is conveyed to the municipality.
lower-cost neighborhood
with sufficient affordable Convey property to land Property is demolished and converted
housing bank, Municipality, or into a community garden or public
CDC building.
Occupied property in a Sell lien or deed to the The purchaser gains title rehabs the
lower-cost neighborhood highest bidder property and attempts to sell or occupy
with sufficient affordable it.
housing
Convey property to land The parcel is packaged along with
bank, Municipality, or adjacent parcels for larger- scale
CDC development, such as multifamily or
retail/commercial development.
Tax abatement or Owners can maintain homeownership;
deferral the municipality prevents a potential
vacancy.
The developer gains the property's title,
Sell lien or deed to the evicts tenants, demolishes the structure,
highest bidder and builds new market-rate housing
that rents or sells at unaffordable levels.
Occupied property in a
higher-cost neighborhood
without sufficient Convey property to land Land bank sells property at a low cost to
affordable housing bank, Municipality, or developers who commit to affordable
CDC housing production.
Owners can maintain homeownership;
Tax abatement or the municipality
deferral prevents displacement.
Table 1,Data provided by Local HousingSolutions.org,Compiled Courtesy County Auditor
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To leverage tax-delinquent properties for these purposes, municipalities should consider what
goals they desire through the foreclosure process and add procedures to achieve them. Ideally,
each unsold tax-delinquent property would be screened in advance of a sale to determine the
appropriate disposition.
Best Practices for Tax Collection Programs
• It is important that when multiple government entities are involved, they align their policies
and priorities to minimize potential conflicts. In the case of Hawaii, county and state
actors have overlapping interests in property which create obstacles and nuances that
complicate procedures and affect outcomes. Both can advance their interest by adopting
policies in concert with one another that strengthens cooperation and understanding.
• Add delinquent parcels back to the tax rolls by establishing criteria to allow the sale of
delinquent tax property for less than the upset price.
• Enable municipalities to have more discretion on how to deal with tax-delinquent
properties. For example, a tax sale at a public auction is an option, rather than a
mandatory step, to be considered alongside other alternatives, such as retaining the
properties for public use or conveying them to a land bank for management and
disposition.
• Create plans to establish priorities in the disposition of tax-foreclosed properties.
Disposition plans lay out a preferential order for sales and conveyances. The top
three are as follows:
1. Convey to the County for public use
2. Sell back to previous owners in cases of financial hardship
3. Sell to adjacent property owners
• Take steps to ensure that properties are maintained during the process and don't
contribute to property value decline or safety risks.
• Ensure the equitable treatment of residents, including a periodic review of foreclosure
data to see if specific categories of residents are foreclosed upon more often than others.
Analysis should consider impacts on different socioeconomic groups, seniors, people
with disabilities, and low-income homeowners. Analysis should answer whether their
property assessments are fair, especially for owners of lower-value properties.
• Keep homeowners in their homes using property tax abatement or deferral programs.
Programs structures should consider income eligibility requirements that, when met, may
reduce the amount of delinquency and offer repayment plans to pay back taxes.
• Property tax exemption and relief programs reduce the likelihood of a homeowner
becoming delinquent on their taxes, to begin with. Property tax relief programs can cap
the property tax homeowners must pay as a share of their income.
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Chapter 3
Division Performance
Audit Activity
To verify the division performance section, we conducted the following activities:
Analyzed:
• The ACFR table 7 historical performance figures
• Division's tax calculation summary report
• The 316HI Aged Parcel Detail Report
• RPT COH Technical Assistance Report Evaluating Property Tax Policies.
• IAAO category standards
• IAAO sales ratio study
• Study on the coefficient of dispersion
• 6 Month and Final Program Objectives
• Key performance indicator definition and examples
County of Hawai'i
Property Tax Levies and Collections
10 Fiscal Years FY2012 - FY2021
Total Outstanding
Fiscal Current Tax Current tax Percent of Delinquent Total tax Collections as Outstanding Delinquent
Year Levy Collections Levy Tax Collections Precent of Delinquent Taxes as
Collected Collections Current Levy Taxes Precent of
Current Levy
2012 204,868,717 198,274,186 97% 6,183,720 204,457,906 100% 410,811 0%
2013 197,043,064 191,154,491 97% 5,434,375 196,588,866 100% 454,198 0%
2014 217,269,825 211,711,407 97% 5,033,687 216,745,094 100% 524,731 0%
2015 233,255,919 227,211,277 97% 5,428,144 232,639,421 100% 616,498 0%
2016 244,067,210 237,882,513 97% 5,461,155 243,343,668 100% 723,542 0%
2017 266,398,351 259,074,405 97% 6,481,246 265,555,651 100% 842,700 0%
2018 302,488,275 292,626,959 97% 8,354,111 300,981,070 100% 1,507,205 0%
2019 316,411,763 308,509,000 98% 5,934,022 314,443,022 99% 1,968,741 1%
2020 329,582,761 322,150,258 98% 4,790,038 326,940,296 99% 2,642,465 1%
2021 355,548,695 346,368,351 97% 4,781,318 351,149,669 99% 4,399,026 1%
ACFR Table 7,provided Courtesy,Department of Finance,updated May 2022 compiled Courtesy County Auditor
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The table above shows only the levy and collections for the corresponding year. In addition to
the table data above, from the period between 1976 to 2011, approximately $9.4 million in
outstanding delinquent taxes is owed*.
RPT was delegated the duties of real property taxation through Article VIII, section 3 of the
Hawaii State constitution, effective July 1, 1981. Some of the oldest debts on record result from
this delegation (1976-1981).
As of Dec 09, 2021, approximately 9.9% of the 140,698 parcels were in some form of
delinquency.
Industry Performance Standards
In March 2012, the Office of the County Auditor contracted with the International Association of Assessing
Officers (IAAO) on behalf of RPT to conduct a special study, A Technical Assistance Report Evaluating Property
Tax Policies and Administrative Practices in Hawaii County.
IAAO Image
c0
IAAO is an industry authority that provides guidance, practices, and standards to real
property taxing authorities.
The study goes well beyond the scope of this audit, and produced forty (40) recommendations,
twenty-one (21) of which required council action to initiate and nineteen (19) of which required
Finance Department action needed to initiate. RPT stated that they enacted most of what they
could independently initiate. However, where council action was required, most items remain
outstanding. IAAO said performance measures might be centered around the criteria of its
technical standards.
1. Assessment Appeal
2. Automated Valuation Models
3. Contracting for Assessment Services
4. Data Quality
5. Digital Cadastral Maps and Identifiers
6. Manual Cadastral Maps and Parcel Identifiers
7. Mass Appraisal of Real Property
8. Oversight Agency Responsibilities
9. Professional Development
10. Property Tax Policy
11. Public Relations
12. Ratio Studies
13. Valuation of Personal Property
14. Valuation of Properties Affected by Environmental Contamination
15. Verification and Adjustment of Sales
The IAAO standards are advisory, and the use of, or compliance with, standards is purely
voluntary.
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RPT Performance Metrics
RPT uses some International Association of Assessing Officers (IAAO) standards to convey its
success.
RPT outlined five performance measures in the Six-Month and Final Progress Report on
Program Objectives for FY2021 — FY2022 and used two IAAO-based performance standards (1
and 2). Where RPT uses these measures, tolerances are consistent with the standards.
1. Maintain sales assessment ratio +/- 10% from the 100% assessment (IAAO standard)
2. Maintain a co-efficient of dispersion at +/- 15% of the mean ratio (IAAO standard)
3. Conduct field inspections of 95% for all new construction
4. Maintain an active educational and informational program on real property taxation
5. Initiate proceedings for two real property tax foreclosure sales to reduce the number of
delinquent accounts and dollar amount of delinquent taxes owed to the County
RPT stated these outcomes relative to performance metrics
1. Sales ratio/assessment ratio for tax year is 97% which is within the +/- 10% range
2. The overall ratio for Tax Year 2021 is 9.6% which is within the +/- 15% range
3. RPT was not able to determine if it was meeting the ratio of field inspections to new
construction as a percentage because it was reliant on the permitting system used before
the implementation of Electronic Processing and Information Center (EPIC)
4. RPT completed four training presentations to public organizations via zoom
5. The last tax sale was conducted in January 2020 and was suspended due to COVID. A
plan to move forward with a June 2022 virtual sale has been replaced with an in-person
sale (Completed)
In considering our first audit objective and understanding RPT's stated performance measures,
it is essential to consider whether the metrics selected inform executive, legislative branches of
government, and the public sufficiently to allow them to make informed decisions. RPT uses
some performance measures within the tolerances recommended by the IAAO. However, based
on the five functional areas of department activity, we find the metrics insufficient to educate
stakeholders on program success.
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Cause and Condition
RPT's performance measures do not align with its stated mission or provide enough information
about its overall activity.
Effect
Stakeholders and decision-makers are left unable to make informed decisions.
Recommendation 1
Key Performance Indicators
RPT should develop additional qualitative and quantitative key performance indicators (KPIs)for
each functional business area to inform stakeholders.
Key Performance Indicators (KPI) should identify the following:
1. Whether goals align with the vision
2. What could cause variances
3. What information RPT already has access to
4. What are unique aspects of its operations, and how should they be measured
5. How frequently will RPT measure each KPI
6. What are RPT's short, long-term goals, lagging, and leading KPIs
7. Who are the responsible parties for developing and maintaining KPIs
8. Who can benefit from this information, and how will it be shared
Example KPI for the collection's group:
• Letters mailed resulting in a payment arrangement- A qualitative measurement of
communication effectiveness.
• Percentage of outbound calls resulting in a payment arrangement. —A qualitative
measurement of how effective the employee is as a negotiator.
• Average call handling time compared to goal —A quantitative measurement of
productivity.
• Lapse Time (time between calls)—A quantitative measurement of downtime
productivity.
• Total payment arrangments managed (month-over-month) —A quantitative
measurement of trends and program effectiveness.
These examples are for reference only and are subject to RPT's goals, priorities, and ability to
access data. The list is not exhaustive.
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Chapter 4
Delinquent Debt and Collection Practices
In-State Debt
Table 3 describes property tax debt owed to Hawaii County by year and where the primary
mailing address is in-state. For example, a property owned on Hawaii island, where the primary
mailing address is on the island of Oahu. Figures in table 3 include principal, interest, and fees.
County of Hawai'i
In-State Delinquencies by Year by Island
Island All Owing Prior 2016 2017 2018 2019 2020 Total
(1976-2014)
Hawaii 5,886,441 829,226 1,235,293 1,635,284 2,559,773 3,620,906 15,766,923
Oahu 2,790,874 181,448 274,936 371,989 484,752 651,225 4,755,224
Molokai 630,798 18,865 17,636 12,472 10,887 10,996 701,653
Maui 127,288 7,661 16,013 33,488 41,933 80,745 307,128
Kauai 9,863 1,228 3,291 12,576 20,237 24,210 71,405
Lanai 0 0 0 0 0 0 0
Total 9,445,264 1,038,428 1,547,168 2,065,809 3,117,581 4,388,082 21,602,333
Table 3-316 report, Data provided by RPT December 09, 2021, Compiled Courtesy County Auditor.
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All Debt
Table 4 describes property tax debt owed to Hawaii County by year, location type, and mailing
address. For example, a property is owned on Hawaii island, where the primary mailing address
is in California (Mainland) or Canada (Foreign). Figures in table 4 include principal, interest, and
fees.
County of Hawai'i
All Delinquencies by Location
Island All Owing Prior 2016 2017 2018 2019 2020 Total
(1976-2014)
Hawaii 9,445,264 1,038,428 1,547,168 2,065,809 3,117,581 4,388,082 21,602,333
Mainland 2,861,897 388,055 774,031 1,082,988 1,204,260 2,200,248 8,511,479
Unknown 1,186,171 59,356 442,235 444,821 306,827 364,195 2,803,605
Foreign 910,381 98,859 150,359 151,207 189,662 250,959 1,751,427
Total 14,403,712 1,584,698 2,913,793 3,744,826 151,207 7,203,484 34,668,843
Table 4-316 report, Data provided by RPT December 09,2021,Compiled Courtesy County Auditor.
Additional information can be accessed on our website, where we house an interactive
dashboard, Auditor Dashboard (Ctrl + Click) compiled courtesy of the Office of the County
Auditor.
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Real Property Tax Data
Picture of interactive dashboard of all Real Property Tax Delinquency Data as of December 9, 2021.
Data Analysis
An interactive dashboard is accessible at Auditor Dashboard (Ctrl + Click), compiled courtesy Office of the
County Auditor. The audit includes some notable data trends below.
Tax Debt by Category Type, 510 -Accounts Receivables Report
Visuals Al, A2, and A3
• Average balances are just over $3,000. Billing cycles average 7.36, or 4.17 years. When adjusting and
removing active and less two years categories, the amounts grow to approximately $8,000 owed and
16.63 cycles, or 8.78 years
• Lava represents the longest average outstanding type of debt, 21.8 years on average.
• Process bottlenecks force accounts into the time and cost category when looking at debts historically and
over time
In-state Tax Debt 316 -Aged Parcel Detail Report
Visuals B2, B3
• Over time more of Hawaii Island's outstanding delinquent debt has come to be owed by its residents
• In 2006, outstanding delinquencies began to take on exponential growth trajectories rather than linear
ones. That is, amounts are rapidly increasing rather than growing at a constant rate of change
All Tax Debt by Location 316 -Aged Parcel Detail Report
Visuals C1
• Over time, more of Hawaii Island's outstanding delinquent debt has come to be owed by mainland
interests, 24.6% (all years)
• California ownership represents the largest portion of mainland owed debt, 39% (all years)
• Japan and Canada represent the largest portion of the foreign owed debt, 75% (all years)
o Japan, 53.15%
o Canada, 21.85%
• Between 1976 and 2010, foreign debt was 6.39% of the total debt owing
• Between 2010 and 2020, foreign debt decreased to 4.6%, indicating a slow down relative to other debt
types
Debt-to-Valuation
Visuals D1
• Using 13,871 parcels and $41.8 million as a point in time baseline - subtracting "less than two years"
parcels, a remaining total totaling 6,582 parcels and $36.1 million, and using the division's time and cost
calculations:
o Of 6,582 parcels, 1,178 parcels in the total population, 17.9% exceed the market value by division
calculation
o Of 2,910 parcels, 172 in the "active" category population, 5.9% exceed the market value by
division calculation
o Of 120 parcels, 98 in the "unsold at prior auction" category population, 81.7% exceed the market
value by division calculation
o Of 464 parcels, 70 in the"foreign" category population, 15.1% exceed the market value by division
calculation
o Of 224 parcels, 35 in the "time and cost" category population, 15.6% exceed the market value by
division calculation
o Of 224 parcels, 189, in the "time and cost" category, population, 84.4% do not exceed the market
value by division calculation
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Timeline of Regular, Delinquent, and Post Closing procedures.
Regular procedures.
On-time payers are assessed, billed, and monies collected every six months as described below.
July, August, September.
July 1, Tax calculations and billing extract.
August 20, 1st 1/2 installment due.
October, November, December.
December 31, Exemption Deadline.
January, February, March.
January 1, Date of assessment.
February 20, 2nd 1/2 installment due.
April, May, June.
April 9, Appeal deadline.
June 30, Exemption deadline.
Delinquency Procedures.
If an owner(s) ignores assessment deadlines, and a parcel ages to over 2 years past due, the division will begin the foreclosures process (Chapter 19).
Month 0, 365 Days
Auction site is selected.
Month 1, 330 Days; Month 2, 300 Days; Month 3, 270 Days; Month 4, 240 Days; Month 5, 200 Days; Month 6, 180 Days.
Accounts are scrubbed and jeopardy letters are mailed.
Month 7, 150 Days; Month 8, 120 Days;
Preliminary letters are mailed certified (domestically)
Month 9, 90 Days.
Order a litigation guarantee.
Month 10, 60 Days.
Property posted at 45 days. Litigation updated is ordered.
Month 11, 30 Days.
Advertises in three newspapers 28 days prior to sale.
Month 12, 0 Days.
Tax auction is held.
Post Closing Procedures.
If an owner(s) ignores assessment deadlines, and a parcel ages to over 2 years past due, the division will begin the foreclosure process.
14 Days post sales 2nd litigation update is ordered.
Month 13, -30 Days.
Past sale owner & lienholder notice.
Month 24, -365 Days.
Deadline lienholder surplus claim.
Month 36, -730 Days.
Deadline former owner surplus claim.
End.
Regular, Delinquencies, and Post-Closing
Timelines
1. On-Time Procedures
On-time payers are assessed, billed, and monies are collected every six months according
to schedule, as illustrated in Figure 2 above. The taxpayer receives an assessment notice
and tax bills.
2. Past-Due Procedures
Delinquent parcels receive tax bills and interim notices four (4) per year. When a parcel
ages over two (2) years past due, the division will begin the foreclosure process.
The following activity takes place 180 days before the tax sale
• Jeopardy letters are mailed to every listed owner on record (Courtesy and not
required by code)
The following activities take place 120 days before the tax sale
Preliminary tax letters are mailed certified to every owner on record except for those the
division determines it will not act on (Preliminary letters are a courtesy to the taxpayer,
cost $6 in postage, and are not required by code)
• Bankruptcy parcels are removed
• Bank foreclosure parcels are removed
• Dropped parcels are removed
• Civil action parcels are removed
• Time and cost parcels are removed
• Foreign parcels are removed
• Unsold at prior auction are removed
• Low-value parcels are removed
• Government parcels are removed
• Payment plan parcels are removed
Older parcels are prioritized
• Foreign properties do not receive a preliminary letter as international mailing is
$16, dictated in some cases by international law, and the letter is a courtesy
• The title company has a 45-day turnaround. The title company may decline to
proceed based on:
o Time -An inability to process the guarantee in the window allotted
o Cost-A complex chain of ownership that would contribute to an exorbitant cost
• RPT may remove accounts based on the following:
o The upset price of taxes, penalties, fees, and interest multiplied by two (x2)
exceeds the market value of the parcel
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o A list that would exceed the title vendor's capacity. Contractually, the vendor is
expected to produce 200 preliminary reports for each tax sale, or 400 annually.
The following activities take place 45 - 60 days before the tax sale:
• Property is posted
• Final registered letter is mailed
• Litigation update is obtained to ensure no changes have taken place
The following activity takes place 30 days before the tax sale:
• Advertising in three newspapers with a significant audience
The following activities take place on the day of the tax sales:
• Auction is held (tax sale)
• Unsold properties remain with the non-paying fee owner
3. Post-Closing Procedures
The following activities take place 14-30 days post-sale:
• 2nd litigation update is ordered to ensure no changes have taken place on day 14
• Past sale owner and lienholder notice on day 30
The following activities take place 1-year post-sale:
• Lienholder surplus deadline 1-year post-sale
• Redemption deadline 1-year post-sale
The following activities take place two years post-sale:
• Owner surplus claim deadline
• Unclaimed surplus goes to the general fund
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Chapter 5
Active Parcels
PAYMENT FLAN
Active Parcels.
Bar Chart.
1st Bar: 9.2 Million in Active,
2nd Bar: 5.7 Million in less than 2 years, and
3rd Bar: 0.5 Million in payment plan.
Pie Chart.
Active, 59.91%;
Less than 2 years, 36.94%; and payment plan, 3.15%.
Status, Parcel Count, and Dollars Owed.
Active Parcels.
Active, 2910 parcels, $9,238,529.18;
Less than 2 years, 7289 parcels, $5,695,660.60; &
Payment Plan, 51 parcels, $485,777.63.
Total: 10250, $15,419,967.41.
Figure 3,data provided by RPT,compiled courtesy OCA.
RPT's Category Definitions
• Less than two years - Parcels which were formerly delinquent greater than two years,
which are currently delinquent but less than two years —this is used as a watch list
• Active - Greater than two years delinquent, subject to a tax foreclosure action, does not
have restricting conditions
• Payment Plan - Payment plan has been executed
Audit Activity
To verify the active parcel section, we conducted the following audit activities:
• Interviewed staff
• Reviewed the 316 Report- Aged Parcel Detail Report
• Reviewed the 510 Report -Accounts Receivables Report
• Reviewed Chapters 19-7 to 19-9 and 19-23 of the Hawaii County Code
• Reviewed Section 3.48 of the Maui County Code
• Interviewed Maui County Real Property Tax Administrator
• Benchmarked industry practices for revenue cycle management
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Overview
Less than two years parcels represent the earliest stage of delinquency, with more chronically delinquent payers falling into the active category.
The division stated it discourages payment arrangements because the plan agreements are rarely kept. This is evidenced by the small number
of property owners in a payment plan, 1.2% of delinquencies by percentage, 51 parcels, totaling $485,777.63.
Payment arrangements are a good faith tool used to work with struggling debtors when payment-in-full isn’t an option by offering smaller, frequent,
and more manageable payments. The practice establishes mutual accountability between the division and taxpayer by setting expectations both
parties acknowledge. The process works best when based around a date where the taxpayer fulfills the tax debt obligation, also known as a satisfaction date.
Another essential component is monitoring and oversight. Monitoring monthly payment arrangements and those at risk of default provide closer to real-time
feedback than the insight a twice-per-year billing cycle can provide. RPT staff communicates by USPS mail.
BENEFITS/DRAWBACKS OF TELEPHONE COMMUNICATIONS VS. MAILERS
Advantages Disadvantages
Can scale to multiple people The tone of voice is lost
at one time
Mailers Recipients can reply at their Easier to ignore than phone calls
leisure
Ideal for sending simple Can use up valuable time with
messages back-and-forth communication
Personality and tone of voice Potential to disrupt someone's
are easier to showcase workflow or schedule
Ideal for relationship building Requires more skill than mass
Telephone mail
Able to explain complex ideas Need for quiet space to conduct
and establish two-way the conversation
communication
Table 5,compiled courtesy OCA.
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Competing priorities of maintaining and invoicing active parcels, skip tracing new addresses on mail returns, and going to sites to post property,
do not leave staff time to conduct robust, proactive community outreach to resolve longstanding delinquencies. The volume of delinquencies in
aggregate has reached numbers that call into question whether the staff can provide quality management on each communication.
Table 6 assumes the division wants to work each account once per month, and collectors working these parcels can commit their full time and
attention to collection efforts without multitasking.
County of Hawai'i
13,871 Delinquent Parcels
Calculations Collector "A" Collector "B" Collector "C"
Divide by three employees 41624 41624 41624
Divide by 4 weeks 11156 11156 11156
Divide by 5 days 231 231 231
Divide by 8 hours 29 29 29
Divide by 60 minutes 2 accounts 2 accounts 2 accounts
per minute per minute per minute
Table 6,compiled courtesy OCA.
While RPT has a category devoted to payment arrangements, it does not have an effective
strategy, including income or payment matrices, an outreach strategy, or the ability to manage
secured monthly payments.
Cause and Condition
The RPT collection process is designed for invoicing and collecting taxes. Proactive community
outreach to establish, monitor, and maintain payments is not being prioritized.
Effect
RPT has an ineffective system to manage payment arrangements which cannot ensure ease of
access and lacks a uniform approach.
Recommendation 2
Payment Arrangements
We recommend that RPT establish payment arrangements to resolve delinquent property-tax
debts as one of its primary activities and develop a system to ensure effective management.
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Some examples include:
• Acquire and train employee(s) to conduct the activities:
o Federal Debt Collection Practices Act (FDCPA)
o Telephone Consumer Protection Act (TCPA)
o State and local law as relevant
o Others as required
• Establish goals and performance measures to track success
• Establish production goals to justify long-term staffing needs. Monitor and conduct
marginal product of labor analysis when RPT believes staffing should increase
Marginal Product of Labor Analysis
Table on Marginal Product of Labor Analysis
Line Graph.
Total Output. Total Input.
Productive Phase: At the start every unit of input leads to the productive gains.
Point of Diminishing Returns.
Diminishing Returns: Upon hitting the point of diminishing returns, every additional input will give you a slower gain in output.
Point of Maximum Output.
Negative Returns: If you reach this phase, every additional input will give you negative returns.
Formula.
Marginal Product of Labor = Change in Production Output divided by Change in Input Labor.
Marginal Product of Labor = Y divided by L.
Marginal Product of Labor = (Y1 subtract Y2) divided by (L1 subtract L2).
Figure 4,Table 7,compiled courtesy OCA.
• Tailor arrangements to taxpayers of various income brackets
• Implement systems to capture, monitor, and maintain payment arrangements
• Incorporate promissory notes into payment arrangements that allow RPT the flexibility to
take judgment in the event of taxpayer default
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Owner Exemption Overview
RPT does not always have the leverage to negotiate with taxpayers who are non-committal. We
reviewed the Maui County Tax Code and found:
Section 3.48.450 (G) of Maui County Tax Code states, “No homeowner exemption
is allowed if taxes on the property are delinquent for more than one year.”
Hawaiʻi County has no equivalent language in its tax code. We interviewed the Maui County Real
Property Tax Administrator, who attested to the effectiveness of the policy. Properties become
delinquent after one year, and homeowner exemptions are removed one year after delinquency.
This is commensurate with a 3-year foreclosure timeline. There are downsides to the Maui policy
as written. A challenge noted is the prospect of increasing tax significantly by removing
exemptions on those already delinquent. While very clear, the all-or-none language in the code
is also inflexible.
Previously, RPTʻs foreclosure timeline was based on three years. More accounts qualify for
foreclosure than RPT can process. The more restrictive timeline adds pressure to a process that
is already impossible for RPT to comply with, given current constraints.
Cause and Condition
RPT lacks language in code to incentivize participation early in the delinquency cycle.
Effect
Some taxpayers ignore initial notifications, prolonging collections and satisfaction of the debt.
Recommendation 3
Owner Exemptions
We recommend RPT amend Hawaiʻi County Code Chapter 19, to include language that suspends
homeowner exemptions when a parcel is delinquent for more than one year, except where:
a. An agreed-upon payment arrangement has been established.
-or in rare cases-
b. When the Director of Finance has reviewed a case and granted an exception.
Exceptions should include a process of significant review, oversight, and transparency to ensure
the equity of exceptions granted. RPT should evaluate its historical three and current two-year
foreclosure timelines to determine if the addition of a gradual incentive structure is more
conducive under a longer timeframe to working with distressed taxpayers than the current two-
year timeline.
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Chapter 6
Government Parcels
Government Parcels.
Bar Chart, 8.1 Million, Government.
Pie Chart, Government 100%.
Status, parcel count, and dollars owed.
Government, 551 parcels, and $8,054,114.56.
Total: 551 parcels and $8,054,114.56.
Figure 5,data provided by RPT,compiled courtesy OCA.
RPT's Category Definitions
• Government - Government-owned property (example: current or former lessees who
have unpaid taxes - DHHL)
Audit Activity
To verify the government parcels section, we conducted the following audit activities:
• Interviewed staff
• Interviewed management
• Reviewed the City and County of Honolulu Audit of the City's Real Property Tax
Delinquency Collection.
• Reviewed RPT's 316 Report -Aged Parcel Detail Report
• Reviewed RPT's 510 Report -Accounts Receivables Report
• Reviewed the Hawaii State Data Book (2017)
• Reviewed Chapter 19 of the Hawaii County Code
• Reviewed section 208 of the Hawaiian Homes Commission Act, and Kuleana Lands
HB2113
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Civil Remedies Overview
As of 2017, government entities own approximately 1.5 million acres on Hawaiʻi Island. At 19.25%
by dollars, government debt is the second-largest category owed and averages 7.46 years
outstanding.
Complicating Criteria
Hawaiian Home Lands (DHHL)
The legal basis for establishing the Department of Hawaiian Home Lands (DHHL) is the Hawaiian
Homes Commission Act, 1920, as amended (HHCA). The HHCA provides for the rehabilitation of
the native Hawaiian people through a government-sponsored homesteading program. Native
Hawaiians are defined as individuals having at least 50 percent Hawaiian blood. DHHL provides
direct benefits to native Hawaiians through 99-year homestead leases at an annual rental of $1.
In 1990, the Legislature authorized DHHL to extend leases for an aggregate term not to exceed
199 years. Lessees occupying the property for homestead purposes have an initial seven-year
property tax exemption.
Kuleana Land
Kuleana land is those lands granted to native tenants under, An Act to Amend an Act Granting to
the Common People Allodial Titles for Their Own Lands and House Lots, and Certain Other
Privileges and as further amended by subsequent legislation. Property in residential, agricultural,
or vacant land designated as kuleana land pays the minimum real property tax outlined in
subsection 19-90(e).
Industrial and Commercial Activity
Commercial activity on government-owned parcels makes delinquent tax collections particularly
complicated. It is RPT’s practice to credit the oldest delinquencies first. Outstanding balances
stay with the property and not the owner. When lessee’s (business) on government parcels do
not pay, RPT has no recourse for collection. When one company goes defunct and new
businesses take over the lease, the new tenants are held technically responsible for the debt of
the prior lessee.
Chapter 19 has provisions in sections 8 and 10 that allow RPT to have cases heard by the third
circuit for purposes in part to obtain a civil judgment utilizing in-house counsel as its attorney of
record but does not exercise the option.
Chapter 19, Section 8 of the Hawaiʻi County Code states, “Except as otherwise provided in this
chapter, the district court judges for the Third Circuit Court for the State, shall have jurisdiction to
…”
“hear and determine all civil actions and proceedings for the collection and enforcement of
collection and payment of all taxes assessed thereunder, and all actions or judgments obtained
in tax actions and proceedings, notwithstanding the amount claimed.”
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Chapter 19, Section 10 states, “The corporation counsel or the prosecuting attorney may proceed
to enforce payment of delinquent taxes by any means provided by law. Any legal proceeding may
be instituted in the name of the director or the director’s deputy….”
Cause and Condition
Government-owned parcels create unique obstacles. RPT does not exercise all options provided
in Chapter 19.
Effect
Historically, government lessees benefit through the County’s limited option to enforce collection.
Recommendation 4
Civil Remedies
We recommend RPT develop procedures to obtain and collect through civil judgment.
Write-Off Overview
Where RPT has determined that accounts are uncollectible, it is not updating its parcels through
enforcement of section 10 to prepare and delete as part of a special record.
Chapter 19 Section 9 states, “The department may from time to time prepare lists of all taxes
delinquent which in its judgment are uncollectible. Uncollectible(s) shall be entered in a special
record and be deleted …. and the department shall thereupon be released from any further
accountability.”
RPT has not routinely prepared and submitted lists of these parcels, as evidenced by lava-
inundated tax debts that remain part of parcels from as old as 1976.
Cause and Condition
RPT does not sufficiently enforce Chapter 19 Section 10.
Effect
RPT keeps uncollectible accounts on record for years.
Recommendation 5
Write-Offs
We recommend that RPT identify and prepare a record of debts that it determines to be
uncollectible and write those debts off annually to ensure the accuracy of tax rolls.
Examples include:
• Longstanding, lava-inundated parcels that have effectively lost all use case.
• Longstanding, defunct business tax debts where the owner on record is the government.
• Longstanding, deceased owners, where address and next of kin are unknown.
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Chapter 7
Unactionable Parcels
Bar Chart.
1st Bar: 7.7 Million in Time & Cost,
2nd Bar: 1.4 Million in Lava,
3rd Bar: 0.7 Million in Low Value, and
4th Bar: 0.5 Million in Unsold at prior auction.
Pie Chart.
Time & Cost: 74.9%, Lava 13.08%, and Low Value 7.08%.
Status, Parcel Count and Dollar Owed.
Time & Cost, 224 parcels, $7,747,953.96;
Lava, 449 parcels, $1,352,828.88;
Low Value, 397 parcels, $732,748.94;
&
Unsold at prior auction, 120 parcels, $511,252.77;
Total: 1190 parcels, $10,344,784.55.
Figure 6,data provided by RPT,compiled courtesy OCA.
RPT's Category Definitions
• Time and Cost- Title has communicated it is unable to provide a litigation guarantee due
to the inability to process the guarantee within the window of time allotted or a complex
chain of ownership exists that would contribute to an exorbitant cost to produce a litigation
guarantee.
• Lava - Lava inundated properties where market values are lower than the upset price
(example: Royal Gardens, Kapoho, Kalapana)
• Low Value - The upset price is greater than 50% of the market price of the property
• Unsold at Prior Auction - Unsold at prior auction with no successful bid obtained for the
upset price (inclusive of taxes, penalty, interest, and tax sale fees).
Audit Activity
To verify the unactionable parcels section, we conducted the following audit activities:
• Reviewed foreclosure process notes
• Reviewed the Vendor Contract
• Reviewed Chapter 19 of the Hawaii County Code
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• Reviewed internal documents
0 316 Report -Aged Parcel Detail Report
0 510 Report -Accounts Receivables Report
Foreclosure Calculation Overview
While unactionable parcels continue to be invoiced, they are not actively pursued for foreclosure.
In these cases, either the title company has determined the title history to be convoluted and
cannot fulfill the contractual obligation of a 45-day turnaround, or the division has determined that
two times the upset price is more than expected at a tax sale.
The county contracts with a statewide title company to pull title abstracts. RPT compiles a gross
file of between 500 — 1000 delinquent owners. The title company is expected to produce 200
reports per land sale, or 400 reports annually. If the parcel is challenging to process, it is set aside
and backlogged. Late payers are assessed a penalty of 10% of the net taxable value of the
property. Additionally, parcels accrue interest at a rate of 1% per month or 12% per annum,
calculated from one month to the next.
RPT uses the following formula to determine if it will move a parcel to tax sale:
Formula Picture.
Tax Sale = Taxes Owed + Penalties + Fees + Interest multiply by 2, then divide by Market Value.
Where Taxes Owed = TO, Penalties = P, Fees = F, Interest = I and Market Value = MV:
Market valuations can be volatile, while taxes, fees, and penalties are constant. RPT calculation
of time and cost cannot ensure equity because the volume ready to proceed is greater than the
division's capacity. Overtime, parcels wait longer and longer to become a priority. Once a property
has been in the queue for approximately ten years, it may exceed the department calculation and
no longer be actionable.
Cause and Condition
RPT's formula and bottlenecks in the process are problematic to its foreclosure process.
Effect
As backlogs compound, parcels will fall more frequently into time and cost categories.
Recommendation 6
Foreclosure Calculation
We recommend that RPT develop a new calculation for advancing a foreclosure property,
specifically to replace the 2x multiple.
Due Diligence Overview
RPT deals with complex, convoluted titles. Given time and cost, processing a foreclosure does
not always make financial sense. RPT stated that while they have a dialogue with the vendor
regarding capacity, the current expectation of 200 preliminary title searches is about the maximum
the vendor can reasonably commit to. Additionally, RPT has not been able to diversify the vendor
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list despite extensive outreach. Title companies generally view the work as high-risk-reward and
low-margin. RPT has also attempted to recruit in-house abstractors who can perform title
searches inhouse but has been unable to acquire the highly specialized skillset. RPT stated that
while they value the title company's role in helping to demonstrate due diligence, changes in the
business environment could threaten RPT's current standard operating procedures.
To address the changes in the business environment, RPT must either:
• Develop alternatives
• Increase external capacity
• Develop internal capacity
Because of the challenges cited above, developing alternatives is the most achievable outcome
and is mainly within the division's control. The item paramount to the issue is the notification to
the taxpayer and what constitutes proper due diligence. Chapter 19 has significant variance in
what constitutes reasonable due diligence and is written around specific activities. For example,
the RPT administrator may require owners to produce returns to form the basis of a sound
appraisal and for assessment purposes. Notification of this activity is fulfilled in section 12 by
public notice through publication, compelling a response from "every person owning, or having
possession, custody or control of, real property whether entitled to exemption or not."
By contrast, Chapter 19 Section 16, Notices, how given. Are deemed to be sufficiently recognized
according to the date on the notice and when properly mailed to the address "at the addressee's
last known address or place of business."
Contrasted again, Chapter 19 Section 40, par (b), (2), "If the address of the owner is known
or can be ascertained by due diligence, including an abstract of title or title search, the director
shall send to each owner notice of the proposed sale by registered mail, with request for
return receipt. If the address of the owner is unknown, the director shall send a notice to the
owner at the owner's last known address as shown on the records of the department of
finance."
Cause and Condition
RPT's tax foreclosure procedures enumerated in Chapter 19 depend on financial constraints, title
company's ability, capacity, and risk tolerance.
Effect
If the current title company discontinues its services in this sector, RPT cannot perform one of its
core functions.
Recommendation 7
Due Diligence
We recommend that RPT work with the Office of Corporation Counsel to amend Chapter 19-40
and subsections, improving options to satisfy "ascertaining ownership" and "notification
requirements, " assuming no third-party title company is meaningfully involved.
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Deed Unsold Titles to the County Overview
In some instances, parcels go unsold. In those cases, the property stays with the delinquent
owner. The delinquent owner is then informally exempt from future foreclosure activity. This
disposition undermines the process and includes over 120 parcels and $511,252 owed as of
December 2021.
Cause and Condition
Relinquishing unsold properties to the delinquent owner defeats the purpose of a foreclosure
process.
Effect
RPT allows some properties to be sold and acquired while unsold properties are returned to the
previous owner, creating disparate outcomes.
Recommendation 8
Deed Unsold Titles to the County
We recommend RPT add provisions to the Hawaii County Code Chapter 19 to allow the
conveyance of unsold properties to the County. RPT should evaluate the property, neighborhood
characteristics and pursue an appropriate tax foreclosure strategy.
Upset Price Overview
In some instances, parcels go unsold. In those cases, the property stays with the delinquent
owner. The delinquent owner is then informally exempt from future foreclosure activity. This
disposition undermines the process and includes over 120 parcels and $511,252 owed as of
December 2021. We have recommended these properties be conveyed to the County. Once a
parcel is conveyed, RPT should have the flexibility to disposition the parcel. This may include
entertaining bids for less than the tax lien to return the parcels to productive tax rolls.
Cause and Condition
RPT does not have the flexibility built into Chapter 19 to adapt to changing market conditions.
Effect
RPT lets billing cycles accumulate in hopes of future payments, foregoing actual current
collections
Recommendation 9
Lowering the Upset Price
RPT should revise Chapter 19 to allow for a bid on tax sales for less than the upset price to
return the property to tax rolls.
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Chapter 8
Temporary Stay Parcels
Bar Chart.
1 Bar: 3.46 Million in COVID,
2nd Bar: 1.99 Million in Civil Action,
3rd Bar: 1.67 Million in Foreign,
4th Bar: 0.6 Unspecified,
5th Bar: 0.12 Million in Bankruptcy,
6th Bar: 0.07 Million in Dropped parcel, and
7th Bar: 0.02 Million in Bank Foreclosure.
Pie Chart.
COVID, 43.19%;
Civil Action, 24.75%;
Foreign, 20.85%;
Unspecified, 8.55%.
Status, Parcel Count, and Dollars Owed.
COVID, 1315 Parcels, $3,464,201.05;
Civil Action, 46 Parcels, $1,985,309.33;
Foreign, 464 Parcels, $1,672,134.53;
Unspecified, 37 Parcels, $685,882.45;
Bankruptcy, 10 Parcels, $119,546.16;
Dropped Parcels, 5 Parcels, $69,600.18;
&
Bank Foreclosure, 3 Parcels, $24,924.59.
Total 1880 Parcels, $8,021,598.29.
Figure 7,data provided by RPT,compiled courtesy OCA
RPT's Category Definitions
• Bank Foreclosure - Properties under a bank foreclosure action
• Bankruptcy - Properties where the Division has been served notice of bankruptcy
• Civilian Action - Properties covered under civil litigation
• COVID - Property restricted from sale due to Mayor's Emergency Proclamation limiting
gatherings. The proclamation limited the Division's ability to conduct tax foreclosure
auctions during 2020 and 2021. Currently, the code provides for only in-person auctions.
(Definition dissolved April 2022)
• Dropped Parcel -Parcels that have been through consolidation action and no longer exist
in future tax years (with taxes still owing)
• Foreign - Limitations/challenges exist regarding proper notice via Hague convention
statutes
• Unspecified - Null value. Property current on all taxes or is less than two years delinquent
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Audit Activity
To verify the temporary stay parcels section, we conducted the following audit activities:
• Interviewed Management
• Reviewed Hague Convention on the Service abroad of judicial and extrajudicial
documents in civil or commercial matters Concluded 15 November 1965
• Reviewed memorandum of Hague Convention requirements re: serving
• 316 Report-Aged Parcel Detail Report
• 510 Report-Accounts Receivables Report
• Tested Bankruptcy accounts using the Public Access to Court Electronic Records
Status Scrubbing Overview
Several debt types are problematic to the collection process. Primarily, they include either legal or
courtesy stays because arbitration connected to a civil proceeding, bankruptcy, or similar situation
interferes with the division's ability to collect.
During the audit, we tested the ten accounts, or 100% of the population, in bankruptcy status. We
found four parcels had a standard discharge, dismissal, or conversion as old as 2018 but had not
been updated in RPT's collection management software system. Because accounts are allowed
to accrue and remain idle for long periods, parcels in these categories have the potential to surpass
time and cost calculations. To maintain an accurate database, it is important to periodically audit
parcels by type of debt.
Cause and Condition
RPT is leaving temporary stay parcels suspended for long periods.
Effect
Parcels that should proceed to foreclosure are artificially stalled.
Recommendation 10
Status Scrubbing
We recommend that RPT establish a schedule to scrub parcels in special statuses.
Foreign-Owned Overview
Foreign-owned parcels with delinquent tax debt are the most resource-intense for RPT staff to
contact and notify. Foreign debt is particularly complicated because some countries, including the
United States, abide by the Hague Convention. The Hague Convention, named after the city where
discussions took place, Hague, Netherlands, was a series of international conferences and treaties
beginning in 1899.
Among the topics adopted were conventions related to the force for the recovery of contract debts.
In 1965, member states adopted the Convention on the Service Abroad of Judicial and
Extrajudicial Documents in Civil or Commercial Matters. The intent was to give litigants reliable
and efficient means of serving documents on parties living, operating, or based in another country
by adopting standardized documents and recognized authority for receipt of service papers. The
Hague Convention does not dictate all aspects of the collection procedure leading up to and
through foreclosure. Its existence does create three distinct paths for foreclosure:
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• Traditional domestic path as outlined in Chapter 19
• Foreign non-participating member-state path
• Participating member state path
NOT HAGUE PARTY VS. HAGUE PARTY PROCEDURE
Not Hague - Ex. Canada Hague - Ex.Japan
1) For states not a party to the Hague Service
Convention, diplomatic channels are
generally used to serve legal documents. It is 1)The Hague Service Convention established a
usually affected by a letter rogatory, a formal simpler means for parties to effect service in
request to issue a judicial order from a court other contracting states.
where proceedings are underway to a court
in another state.
2) This procedure generally requires 2) Under the Convention each contractingstate
transmission of the document to be served must designate a central authority to accept
from the originating court to the foreign incoming service requests.
ministry in the state of origin.
3) The foreign ministry in the state of origin 3) A judicial officer competent to serve in the
forwards the request to the foreign ministry state of origin is permitted to send a service
in the destination state. request directly to the central authority of the
state where service is to be made.
4) Upon receiving the request, the central
4)The foreign ministry then forwards the authority in the receiving state arranges for
documents to the local court. service in a manner permitted within the
receiving state, typically through a local court.
5 The local court then makes an order to 5) Once service is effected, the central authority
allow for the service. sends a certificate of service to the judicial
officer who made the request.
6) Once service is made a certificate of 6) Parties must use three standardized forms: a
service would then pass through the same request for service, a summary of the
channels in reverse. proceedings (similar to a summons), and a
certificate of service.
7) Under a somewhat more streamlined
procedure, courts can sometimes forward
service requests directly to the foreign
ministry or the foreign court, cutting out one
or more steps in the process.
Table 7,compiled courtesy,OCA.
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Cause and Condition
Foreign-owned properties have created confusion for RPT because notification processes differ
from the status quo.
Effect
Foreign delinquent tax debts are allowed to accrue while domestic tax debts are enforced.
Recommendation 11
Foreign-Owned
We recommend RPT develop a decision tree and workflow by country, prioritizing those with the
most significant debt holdings first.
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Chapter 9
Fraud , Waste, and Abuse
Audit Standards require that we remain mindful and document instances of fraud, waste and
abuse.
We noted certain issues that we communicated directly to the Finance Director. We appreciate
their commitment to resolving these matters.
RPT did not report any instances of fraud, waste, or abuse as it relates to this audit.
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Conclusion
We appreciate the Department of Finances Real Property Tax Division's commitment to continual
improvement, providing services fairly and equitably, consistent with public expectations. We
would also like to express our sincere appreciation for the Real Property Tax Divisions'
unrestricted access to sites, information, personnel, and coordination throughout the audit. The
cooperation was exceptional.
When our recommendations are implemented in good faith, the department can expect the
following benefits:
Key Performance Indicators
1. Introducing a more comprehensive list of key performance indicators will help educate
stakeholders on successes, challenges, and resources needed.
Payment Arrangements
2. Implementing a payment arrangement program will build relationships, improve taxpayers'
ease of access, ensure program equity, and provide the taxpayer with permanent solutions.
Management gains oversight and close to real-time analysis while increasing revenues.
Exemptions
3. Setting aside tax exemptions for unwilling delinquent owners borrows the best elements of
the neighbor island code while preserving flexibility to work with individual situations.
Civil Remedies
4. The limited use of civil judgment to enforce collections when government trusts interfere
with a traditional collection approach potentially improves the division's effectiveness and
ability to negotiate payment arrangements.
Write-Offs
5. Identifying and removing truly uncollectible accounts will improve RPT's efficiency and
ensure a more accurate tax roll.
Foreclosure Calculation
6. Establishing a calculation closer to actual values will mean parcels stay actionable for
longer.
Change Due Diligence
7. Proactively improving RPT's self-reliance will aid its capacity and ensure it can continue to
achieve core mission objectives.
Deed Unsold Titles to the County
8. Requiring unsold properties to be conveyed to the county provides an additional
opportunity to meet community development goals.
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Lowering the Upset Price
9. In some cases, returning properties to tax rolls is more profitable than allowing penalties
and interest to accrue.
Status Scrubbing
10. Conducting periodic reviews of unique parcels helps ensure the accuracy of tax rolls.
Foreign-Owned Debts
11. By establishing a step-by-step decision tree, RPT can move forward with foreclosure
regardless of a nation's member-state status.
We have developed a recommendations tracker tool where all recommendations can be viewed.
The tracker tool is located on our audit website at:
https://www.hawaiicounty.gov/our-county/legislative/office-of-the-county-auditor.
We encourage RPT to contact OCA as work is completed on open recommendations so items
can be independently confirmed and marked as implemented.
In closing, County employees and members of the public are always invited to address concerns
over the misuse of County resources or positions through our fraud and whistleblower hotlines.
The improper use of government resources or positions is often discovered thanks to employees
and the public. Submit confidential tips to deter improper conduct by:
Fraud and waste hotline: (808) 480-8213
Whistleblower hotline: (808) 480-8279
Email: concern@hawaiicounty.gov
Fax: (808) 961-8905
Mail: Office of the County Auditor, 120 Pauahi St., 309 Hilo, HI 96720
To access the complaints directory, visit:
https://www.hawaiicountygov/departments/office-of-the-county-auditor/whistleblower
Submit a claim: https://www.hawaiicounty.gov/our-county/legislative/office-of-the-county-
auditor/inquiry-and-complaint/intake-form
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Chapter 10
Management
Mitchell D. Roth, Mayor.
County of Hawaii Seal.
County of Hawai'i
Finance Department
25 Aupuni Street, Suite 2103
Hilo, Hawai'i 96720
(808) 961-8234
Fax (808) 961-8569
Deanna S. Sako, Director
Diane Nakagawa, Deputy Director
September 7, 2022
Mr. Tyler Benner
County Auditor
County of Hawaii
Office of the County Auditor
120 Pauahi Street, #309
Hilo, HI 96720
Re: Audit - Department of Finance Real Property Tax Division, Revenue Cycle Management;
Report#: 2022-06;
Dated: June 30, 2022.
Aloha Mr. Benner,
The audit of the Real Property Tax Division's Revenue Cycle Management has brought a useful
outside perspective to the system as it currently stands. We appreciate the time and effort your
office has put into this review and recommendations. The Real Property Tax (Division) will begin
working on several of your recommendations while other recommendations are constrained by
fiscal or legal considerations which are outside the control of the Finance Department.
We are in agreement with your report and findings as we are open to new ideas. However, further
analysis by the Department will be required, including staffing and fiscal considerations, in order to
determine if benefits outweigh the cost of implementing recommendations.
I would like to take this opportunity to specifically address each recommendation to provide some
input from the Department of Finance and Real Property Tax Division.
Recommendation 1 - RPT should develop additional qualitative and quantitative key performance
indicators (KP/s) for each function business area to inform stakeholders.
The Division understands the stakeholders as noted in this recommendation are part of the
Administration which include the Finance Director, Budget Division and Mayor as they prepare the
annual budget and allocate resources. The Division will look into additional valid and useful KPI's.
Recommendation 2 - RPT establish payment arrangements to resolve delinquent property tax debts as
one of its primary activities and develop a system to ensure effective management.
The Division acknowledges we have been unsuccessful at payment arrangements and the system in
place is time and staff exhaustive. Combined with minimal success from taxpayers on keeping the
agreed upon arrangement active, this has been a difficult task to maintain momentum. We will look
continue to next page.
Hawai'i County is an Equal Opportunity Employer and Provider
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Mr. Tyler Benner September 7, 2022
Page 2
to other Counties to see what they have in place for an effective payment arrangement system. We
will also review the trainings suggested and options to track success as noted. A supplemental
budget request for the FY 2023-2024 will be submitted as needed. To date, the most effective
collection method has been the foreclosure of property, including a notification process that
provides specific dates of pending foreclosure action.
Recommendation 3 • RPT amend Hawaii County Code Chapter 19, to include language that suspends
homeowner exemptions when a parcel is delinquent for more than one year, except where.....
The Division acknowledges Maui County does utilize this method to encourage homeowners to pay
their delinquent taxes and the program does succeed due to this. The concern of both the Division
and Finance Department is regarding homeowners which are already struggling to pay their taxes,
this will increase their taxes by at least 40% (parcels which have been receiving the benefit of the
3% CAP will pay considerably higher. Maui County does not have a 3% assessment CAP). We
strongly disagree with the one year delinquency being the start to suspend. Some unintended
consequences are listed that may not have been taken into a consideration (this list is not all
inclusive):
1) Mortgage companies have entered in a wrong digit in the parcel# and ends up paying on
the wrong parcel or even to the wrong county. As a tax year has only 2 billing cycles, we
have instances where one mortgage company pays on the wrong parcel#, then sells the
loan and while we get the original mortgage company to correct their data, the new
mortgage company has the old information. In other cases, a taxpayer may refinance a
property and the new mortgage company is paying the incorrect parcel. Both are
unbeknown to the taxpayer.
2) Spouse who handled the finances passes away. While this is a very unfortunate situation in
itself, we would compound it by removing a homeowner exemption which includes the 3%
assessment CAP which would keep the taxes lower which would allow widow/widower to
remain in the home.
3) Change in ownership resulting in an incorrect mailing address. Address issues have
increased since COVID. Sometimes an owner places the property into a Trust, does a
Transfer on Death Deed or keeps a Life Interest. Bills are then sent to the family member
who is aiding the aging family member who remains in the house but they don't end up
paying it (for whatever reason). Should the aging homeowner be penalized for this?
4) An analysis conducted by the Division identified that 12.7% of all delinquencies are for
properties with a home exemption. The average age of the individuals in this category is 64
years of age (57% are over the age of 62). The unintended consequence of removing a home
exemption on our aging population would be inconsistent with current tax policy of
providing additional tax benefits as individuals enter into retirement age and beyond.
While we are hesitant at doing this recommendation, we understand your theory based on Maui
County to utilize this option in getting delinquencies down. There are currently other exemptions
beside just the homeowner that should be considered as well, for example the Affordable Rental
Housing Program. We would prefer if this was done at the 2 year delinquency point or later rather
than earlier as this affects primary housing occupants. While we would speculate this is also the
lower income bracket, we cannot confirm this with the data we currently have access to. Our
County currently struggles with sufficient affordable housing, this recommendation could have a
continue to next page
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Mr. Tyler Benner
September 7, 2022
Page 3
very drastic impact on our community, which may be different from the objectives of other
jurisdictions including Maui County.
Recommendation #4 - RPT develops procedures to obtain and collect through civil judgement.
We welcome the assistance especially where there are industrial or commercial leases on State
owned property. The Division's concern is how realistic is this option to have Corporation Counsel
or the Prosecuting Attorney's offices staff open and available to work on this. Both offices are
overloaded with work and are short staffed. Our understanding is that none of the four counties in
Hawai'i have been able to successfully pursue a civil judgement. Cost and resource allocations
make this the least desirable option to recoup unpaid property taxes.
Recommendation #5 - RPT identify and prepare a record of debts that it determines to be uncollectible
and write those debts off annually to ensure the accuracy of tax rolls.
The Finance Department is very concerned at how to maintain fairness and equity to those
taxpayers that have been paying taxes. The RPT Administrator is meeting with the City and County
of Honolulu Treasury Division which handles RPT collections in September 2022 to review and
discuss their procedures. Given the paramount lien status of real property taxes and the ability to file
additional liens as needed, write-offs may prevent the Division from collecting debts through
future sales of property. In order to preserve this ability in the future, the Division would be
required to maintain a set of two different books leading to added complexity and confusion when
escrow companies conduct a review of taxes prior to closing.
Recommendation #6 - RPT develop a new calculation for advancing a foreclosure property,
specifically to replace the 2x multiple.
Understood and agree. Especially in light of the higher values, this should be reviewed. Perhaps the
division needs to start looking at the total upset price being at 80% or less of value instead of 2x OR
a specific dollar threshold when properties are valued at more than a specific amount RPT will
work on this recommendation before December 2022.
Recommendation #7 - RPT work with the Office of Corporation Counsel to amend Chapter 19-40 and
subsections, improving options to satisfy "ascertaining ownership" and "notification requirements,"
assuming no third-party title company is meaningfully involved.
Currently individuals who purchase property at a tax sale are already having difficulty obtaining
title insurance/warranty. Eliminating the title report/litigation guarantee will most likely make
obtaining title insurance/warranty impossible. Should the current title companies in Hawaii no
longer be willing to bid on the contract, then we would definitely agree that a "Plan B" is needed
if/when that occurs.
Recommendation #8 - RPT add provisions to the Hawaii County Code Chapter 19 to allow the
conveyance of unsold properties to the County. RPT should evaluate the property, neighborhood
characteristics and pursue an appropriate tax foreclosure strategy.
Not only would the code need to change and be approved by County Council and the Mayor, a
Division or Department would need to be responsible to maintain the properties including the
continue to next page
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Mr. Tyler Benner
September 7, 2022
Page4
liability of the property. Assigning duties to other agencies is not within RPT's structure and
currently no Division or Department within the County is staffed to handle this task. Need to
address how the code change would handle the inequity of these properties conveyed to the County
as there would be no surplus amounts to cover liens or refunds to the seller. Would the County
write off the taxes as uncollectible? Would another county fund cover any costs?
Many parcels unsold at auction are located within undesirable areas of the island. These areas may
also be unsuitable for redevelopment due to their remote location, lack of services and may be in
conflict with the General or Community Development Plan goals.
Recommendation #9 - RPT should revise Chapter 19 to allow for a bid on tax sales for less than the
upset price to return the property to tax rolls.
Agree. RPT to work with Corporation Counsel on amending the Code. This would align with
Recommendation #6. RPT will work on this recommendation before December 2022 for a possible
2024 tax sale as the budget would need to reflect not all tax sale fees to be recouped.
Recommendation #10 - RPT establish a schedule to scrub parcels in special statuses.
Agree. RPT will work on this recommendation before December 2022.
Recommendation #11 - RPT develop a decision tree and workflow by country, prioritizing those with
the most significant debt holdings first.
Foreign delinquencies account for approximately 5% of the total delinquencies. Due to the high cost
and additional resources (staff time and Corporation Counsel staff time) we do acknowledge
these have not been a priority. We also recognize it is not fair that taxpayers living in foreign countries
are getting what appears to be more time to pay their delinquent taxes than those living in the
United States.
We appreciate your efforts of the report and reviewing our Collections procedures, documents and
your discussions with RPT and Finance Department staff. Your review has identified several areas
that we would like to work on. The other recommendations will take coordination among
additional departments including Corporation Counsel and the Mayor's Office. In addition, code
changes will require the support and will of the County Council and Mayor. Where additional
resources such as staff and software or vendor support are required, this will take funding which
will need to be submitted as a supplemental budget request. Any changes to the tax policies are
important and each warrant thorough and thoughtful review and collaboration.
Thank you for this opportunity to provide input on this audit.
Sincerely,
Deanna S. Sako, Director.
4
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Tyler J. Benner County of Hawaii
County Auditor Office of the County Auditor
120 Pauahi St., 309
Hilo, HI 96720
808.961.8386
www.Hawai`icounty.gov
The Office Office of the County Auditor is tasked with promoting accountability, fiscal integrity, and openness in
local government.Our work is intended to assist County government in its management of public resources,
delivery of public services, and stewardship of public trust. Copies of this audit report can be obtained by
contacting the Office of the County Auditor or visiting our website:
https://www.Hawai`icounty.gov/our-county/legislative/office-of-the-county-auditor/audit-reports
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