Remembering Ray's War Chest

Ongoing legal contests over tax auction profits take me back to the days of delinquent-tax-fueled quarter billion dollar surpluses in the Wayne County Treasurer's office

A legal watershed and its fallout

Though the annual tax foreclosure auctions in Wayne County and across Michigan have shriveled in recent years, the consequences of the 2010’s massive auctions continue to reverberate through the legal system.

A watershed moment came in a US Supreme Court ruling earlier this year, concerning a case in Minnesota. There, the court ruled that county treasurers keeping proceeds from a tax auction sale in excess of the tax debt, interest, and fees owed (sometimes called “windfall profits”) is unconstitutional.

Now, court cases in Michigan are fighting for the ability to make retroactive claims on windfall profits. If that happens, it could expose Michigan counties to tens of millions in claims from one-time property owners who saw their property sell at a tax auction for more than the debt owed.

In the past, I’ve looked at Wayne County’s windfall profits and found around $90 million-worth produced in the 2012 - 2019 tax auctions:

The “Perverse Incentive”

I’ve been somewhat suspect of these legal challenges over the years and think they often seem like sympathetic-sounding Trojan Horses primarily concerned with expansions of property rights.

More to the point, and as I’ve said repeatedly, if you really wanted to go after the “perverse incentive” in the tax foreclosure system (as all these cases claim), you wouldn’t go after the auctions — you’d go after the interest rates property owners must pay when they owe delinquent taxes.

None of the cases that took on the tax foreclosure system challenged the interest, penalties, and fees assessed by county treasurers on delinquent taxes — in fact they all conceded that’s part of what the county is due.

I mean, which one of these looks like the source of a “perverse incentive”:

If you spend too much time reading bond filings you can make charts like this, too

There’s Always Money in the Banana Stand

For me, all the talk of retroactive claims on windfall auction profits reminds me of a mostly-forgotten chapter in Wayne County’s tax foreclosure history: Former Wayne County Treasurer Ray Wojtowicz’s war chest.

The short version of the story is this:

In the mid-2010’s, Wayne County was facing a bankruptcy of its own on the heels of Detroit’s. Per the County’s 2015 Recovery Plan, it had accumulated a $150 million deficit by 2013. How did it fill a $150 million hole? A series of massive transfers of delinquent tax & tax auction proceeds from the Wayne County Treasurer’s Delinquent Tax Revolving Fund.

From the Recovery Plan:

Did the transfers indeed stop at $150 million, as the Recovery Plan insisted they must? No they did not. By 2017, $421 million had been transferred from the Wayne County Treasurer’s office to the county general fund to plug budget holes. Transfers dropped after that as delinquency declined and auctions shrank, but I imagine at this point transfers have exceeded $500 million.

I guess you can say it worked. The County avoided bankruptcy and by last year it had received an A credit-rating from Standard and Poor’s.

But then-Treasurer Wojtowicz resisted the transfers for years, as reported back in 2017 in Bridge Magazine’s excellent reporting on the County’s use of delinquent tax profits to avoid bankruptcy:

At one point, a few years ago, Wojtowicz controlled a fund that was worth nearly a quarter billion dollars. The money could have cushioned a county-wide financial emergency, argued [former Wayne County Executive] Ficano, who lost re-election after fiscal and corruption scandals.

“We had one hand tied behind our back financially because we never had complete access to that fund,” Ficano said. “I always had to go hat-in-hand to ask for more.”

After Ficano lost re-election, Wojtowicz transferred more than $80 million to the county’s general fund.

The Bank of Delinquent Taxes

I don’t know why Treasurer Wojtowicz amassed such a large war chest and refused, for a time, to transfer any of it to the county general fund. Perhaps it’s apocryphal, but someone told me years ago that he wanted to self-finance the delinquent tax system.

Instead of going to the bond market and selling what used to be known as “delinquent tax anticipation notes” to front cities their uncollected property tax revenue, the story goes, Treasurer Wojtowicz wanted to be able to run the whole thing out of the Treasurer’s office. I have no idea if that’s true, but The Bank of Delinquent Taxes would have been something to behold.

Treasurer Wojtowicz passed away a few years ago, so perhaps we’ll never know.

Now, as court cases seek to open up those retroactive claims on windfall profits, I can’t help but think that given the huge imbalance between high-interest delinquent tax payments and windfall profits’ contribution to county treasurer profits, had that bank materialized and that money remained in the Wayne County Treasurer’s office, maybe those windfall profit claims could have been snuffed out with the interest earned on $500 million in delinquent tax profits alone.

(I mean, the county probably would have gone bankrupt. I’m not advocating for the Bank of Delinquent Taxes. I’m not endorsing the transfers either. But sometimes you just have to look back at things that seemed nuts at the time but the ongoing spiral into even deeper craziness somehow brings around to “actually that might have been grotesquely useful.”)