Shortchanging our schools: Part Three

Thousands shirk tax bills, and Kentucky schools pay the price

This from Bill Estep in the Herald-Leader:

Kentucky Fuel Corp., a company owned by West Virginia billionaire Jim Justice, mined millions of dollars worth of coal in Pike and Knott counties in 2013.

What the company didn't do was pay more than $660,000 in property tax bills in those counties, depriving the local school districts of more than $274,000.

In Knott County, $138,000 would have gone to the school system under the initial bill, enough to cover salaries for three starting teachers or seven classified employees, such as cooks and bus drivers, in a school system that has trimmed staff to deal with tight finances.

"It would go a long way for our county," said Greg Conn, finance director for the system.

Kentucky Fuel Corp.'s delinquent bills, some of which the company has begun paying after receiving inquiries from the Herald-Leader, are merely the biggest on a long list of delinquent taxpayers.

Every year in Kentucky, thousands of property tax bills go unpaid, shorting schools, counties, health departments and other agencies of money. It's a particular problem in Eastern Kentucky, where local officials in some of the state's poorest counties don't do all they could to make people pay up.

The delinquency rate on property tax collections topped 5 percent on real property in at least 20 counties each of the last five tax years, with some more than four times the statewide rate.

For instance, the delinquency rate on 2013 real-estate property taxes was 12.2 percent in Knott County, 9.56 in Breathitt County and 9.43 in Lee County, when the statewide rate was 1.79 percent.

In 2012, when the state delinquency rate was 1.93 percent, it was 9.3 percent in Owsley County, 8.9 percent in Magoffin County and 8.29 percent in Floyd County. Those rates were a snapshot of unpaid property taxes as of mid-April.

In many counties with high delinquency rates, local services are underfunded and schools scrape by on paper-thin budgets.

How many of your neighbors didn't pay their property tax bills?

Explore county-by-county property tax delinquency rates for the past decade. Get amounts, percentages.
 

In Leslie County, there was $1.4 million in unpaid tax revenue due to the school system as of early 2014, County Clerk James Lewis said. He calculated the total, which had piled up since 2003, for school officials concerned about a potential budget shortfall.

The starting pay for a teacher in the county is about $35,000, so the unpaid taxes, spread equally over 10 years, amounted to about four teacher salaries annually.

"In essence, when people don't pay their taxes, they're shortchanging the children in their community," said Leslie County schools Superintendent Anthony Little.

Even with relatively high delinquency rates in some places, however, property tax collections overall have improved from 25 years ago, boosted by legislative changes and by a system in which third-party investors buy delinquent tax bills, then foreclose if necessary to recoup interest and fees.

Delinquency rates topped 10 percent in 11 counties in 1989, with some well above that level, but it has been rare the last decade for counties to have non-payment rates above 10 percent.

Still, many local officials don't use the powers they've been given to collect every dollar possible.

Sheriffs rarely use their legal power to take assets of individuals and businesses to collect delinquent taxes. Most county attorneys file few, if any, foreclosure lawsuits to collect delinquent taxes, state records and interviews show.

And the sale of delinquent tax  bills doesn't eliminate unpaid taxes. Some counties attract few buyers, meaning the sales bring in little money, and in many counties, the sales still leave a majority of the delinquent bills unpaid.

Vast improvement

It wasn't long ago that property owners in some Kentucky counties could skip their civic and legal duty to pay taxes with no repercussion other than being included in the list of delinquent taxpayers printed in the local newspaper.

In 1989, as part of the Cheating Our Children series, the Herald-Leader published a photo of a list of property tax delinquents in Pike County. The printed list was more than 500 feet long.

 

In 1989, when the Herald-Leader published a photo of a printout of the list of delinquent taxpayers in Pike County, it stretched 525 feet.

"If you don't mind having your name in the newspaper, ... you don't have to pay your taxes," said Paul Patton, who was then Pike County judge-executive and later was governor for two terms.

Pike County had the highest delinquency rate in the state in 1989, at 18 percent, but Breathitt and Harlan counties topped 17 percent. Magoffin County was at 16.1 percent, and Menifee County was at 13.2 percent.

Local politicians in several counties were among those whom the newspaper found hadn't paid their taxes.

Politics played a key role in the relatively poor collections in some counties, as local officials trying to win favor with voters let them slide on tax payments.

"A big part of it was politics," said former state Rep. Roger Noe, a Democrat from Harlan County. "They just didn't want to ruffle feathers if they didn't have to. It was understood that it wasn't going to be enforced."

When Noe and other legislators worked to push through landmark school reforms and companion bills in 1990, tax collections were part of the debate.

Lawmakers from affluent districts being asked to support more state aid for poorer districts wanted to make sure that all local officials did their part to correctly assess property values, set tax rates and collect the bills.

As a result, one of the measures passed that year gave state revenue officials more power to intervene in local property tax collections. It was the first in a series of changes lawmakers approved in the ensuing 25 years to boost collections.

The changes included allowing taxpayers to set up payment plans for delinquent taxes, rather than having to pay a lump sum; shortening the time county attorneys have to wait to force the sale of property; and creating incentives for third parties to buy delinquent bills.

The statewide delinquency rate dropped for several years beginning in 2003, hitting a low of 0.91 percent in 2007, according to calculations by the state Department of Revenue.

The percentage of unpaid taxes shot up to 2.53 percent in 2009 during the recession, but collections have since improved statewide as Kentucky and the nation recovered.

The sharp downturn in Eastern Kentucky coal jobs since early 2012 has hurt tax payments in some counties, but overall, collections reached 98.21 percent for the 2013 tax year. That rate was calculated in April, so it doesn't reflect additional payments made since then on delinquent 2013 bills.

"Collection rates, I think, are very good," said Thomas S. Crawford, the state Revenue Department division director who advises local officials on collections. "We're pretty confident we get nearly every dollar on real estate."

Unpaid bills

Still, thousands of property tax bills go unpaid annually in Kentucky.

Most are small — $100 or less in many cases. But a Herald-Leader review of delinquent tax rolls in more than 20 counties found numerous instances of relatively large outstanding bills on real property, including land and houses, and on tangible property, such as business equipment.

This store owes more than $29,000 in delinquent taxes.

  Some examples:

* In Bell County, a company called G&M Oil has a delinquent tangible-tax bill from 2013 on a busy convenience store and a delinquent bill from 2010 on real property, totaling more than $29,000 with penalties and interest. Of that, more than $9,000 would go to the county school system, according to county Clerk Debbie Gambrel's office.

* The Raintree Group, which is based in Lexington, owes more than $20,000 on delinquent bills from 2010 and 2013 in Knox County, with nearly $3,000 due in school taxes, according to county Clerk Mike Corey's office. * In Floyd County, Reformation Publishers, which prints religious books, has not paid a 2013 tangible-property tax bill. The original bill of $5,308 — which would have meant nearly $2,300 for the school system — now totals more than $9,200 with penalties and interest.

Those companies did not return calls seeking comment.

Kentucky Fuel, the mining company with delinquent bills topping $660,000 in Pike and Knott counties, didn't pay on time mostly because of anemic cash flow caused by the sharp downturn in coal production in Eastern Kentucky, said Steve Ball, senior vice president of operations at Kentucky Fuel's parent company.

Records show that Kentucky Fuel has three active surface mines in Pike County, but that its mines and other properties in Knott and other counties are idle or non-producing.

Ball said the company would make good on its tax debts.

After the Herald-Leader asked the company about its delinquent bills in early December, Kentucky Fuel set up a plan to pay a delinquent 2013 tax bill in Pike County that totaled $572,000 with penalties and interest.

But in Knott County, assistant county attorney Randy Slone said Kentucky Fuel didn't follow through on an inquiry about setting up a plan to pay a delinquent bill that totaled nearly $600,000 with penalties and interest.

Slone sued the company Jan. 15 to collect.

"It's not our intent to harm their business, but it's an obligation" that the company owes, Slone said.

'Afraid of the politics'

Long before such lawsuits are contemplated, state law gives sheriffs considerable power to collect taxes, including authority to seize and sell taxpayers' personal property to satisfy a delinquent bill — a procedure known as distraint. They also can intercept money due to a delinquent taxpayer from someone else.

Sheriffs rarely use their power, however.

Crawford, who has been with the state Revenue Department since 1985, said he couldn't recall a sheriff distraining property since then-Johnson County Sheriff Bill Witten did it 15 years ago.

When Witten took office in 1999, some people hadn't paid taxes in 10 years, and he found six people who owed more than $100,000 each, he said at the time.

Witten froze the bank accounts of more than 500 taxpayers to try to force them to pay delinquent taxes. More than 100 paid up in just two days, according to reports from the time.

Crawford includes information about distraint in training for sheriffs, but there are practical problems in trying to seize property or money, according to state and local officials.

A taxpayer might not have enough money in a bank account to cover a bill, for instance, and taking equipment would bring costs to transport, store, safeguard and sell it.

"It kinds of puts some undue hardship on us," Knott County Sheriff Dale Richardson said.
He has heard of distraint, but he said he has never used it.

 

Many rural sheriffs' offices also are short-staffed, so it would be hard to track down and confiscate equipment, said Libby Pickard, who helped with tax collections for her husband, Knox County Sheriff John Pickard, before he left office at the end of the year.

The office had six deputies to patrol a county of 32,000 residents, Libby Pickard said in an interview late last year.

 

"We just don't have enough officers to do that," she said of seizing equipment to satisfy taxes. "They run from call to call."

Dennis Miller, who retired after more than three decades with the state Revenue Department, said he's convinced that sheriffs could use asset seizures more often to collect delinquent tax bills. They don't because they fear it would cost them votes, he said.

"They're afraid of the politics," Miller said.

Worth pursuing?

When people don't pay their real estate taxes to the sheriff, a lien is placed against the property that is enforceable for 11 years. The taxes get collected if someone buys the property during that time.

Short of that, however, collection options are limited for property tax bills that aren't bought by third-party collectors. Either the owner finally pays up or the county attorney sues.

But most county attorneys file few, if any, foreclosure complaints, according to reports filed with the state Revenue Department.

Those documents show that in 2012 and 2013, county attorneys filed no property tax lawsuits in more than 70 of the state's 120 counties. In many others, there were only a handful of lawsuits, including in counties with relatively high delinquency rates.

For instance, after a 2010 delinquency rate of 8.15 percent, Magoffin County Attorney Greg Allen's office reported filing eight property tax lawsuits in 2012, the earliest a foreclosure lawsuit would be allowed. The office did not report filing any collection foreclosures in 2013, after a 2011 delinquency rate of 9.32 percent.

Leslie County Attorney Leroy Lewis' office reported filing four tax foreclosures in 2012, after a 2010 delinquency rate of 6.33 percent. State reports did not indicate that the office filed any collection foreclosures in 2013, after a 2011 delinquency rate of 7 percent.

Rockcastle County Attorney Billy Reynolds said he thinks some county attorneys are reluctant to sue because it could alienate voters.

"A lot of county attorneys look at it as a vote," Reynolds said.

Jerry Coleman, an Elizabethtown attorney who does legal work for a company that buys delinquent tax bills, said third-party buyers try to cherry-pick the bills that would be easiest to collect, but the buyers don't get all the bills worth suing over.

And if county attorneys showed greater willingness to sue, it would motivate people to pay their taxes, Coleman said.

"I still think there's a beneficial effect for the county attorneys to bring some of these" collection suits, he said. "I think the county attorneys need to be more aggressive."

But several county attorneys said the bills left behind after third-party investors comb through the delinquent-tax roll would cost more to go after than they're worth in most cases.

"You're gonna spend more money on the sale than you'll collect," Bell County Attorney Neil Ward said.

County attorneys have a number of jobs, including advising fiscal courts, handling district court cases and collecting child support, leaving little time to pursue foreclosures, Ward said.

He said he stopped filing foreclosure lawsuits after investors started buying tax bills, but the county protects its interest with liens.

"We don't just give up and say you get a free pass," he said.

The costs of appraising a property, advertising the sale and paying the fee on selling it can total $2,500, Johnson County Attorney Michael Endicott said.

The last two times he sued to foreclose for delinquent taxes, the sale brought in less than the costs. Endicott's office had to make up the difference.

"Sometimes the property is really not worth pursuing," he said. "There's just a percentage you're not going to collect."

Related story

As schools face deep cuts, Leslie County begins unprecedented effort to collect back taxes. Read the story.