March 18, 1999

Thank you madam chair. I am Jeff Reno, the Research Director for the Hudson Institute’s Lansing Operation. Hudson Institute is a nonprofit research institute based in Indianapolis, Indiana. This project, however, has deep roots in Michigan. I have lived in Michigan my entire life, growing up in the Detroit area, attending college at the University of Michigan, and moving to Lansing in 1994 to attend graduate school at MSU. Our project has benefited from the cooperation of the Governor’s office, the Michigan Senate, and the superb leadership of the House Bi-Partsan Urban Caucus as well as the Urban Core Mayors and numerous other organizations. However, our project has been fully funded by private grants. No party with a direct financial or political interest has paid for our research, and so we have enjoyed the freedom to seek conclusions based solely on principles of good policy.

Hudson began its Michigan research project in the spring of 1997. Originally we were focusing solely on the concept of urban homesteading—allowing families to rehabilitate vacant property. However, we quickly learned that the property that would be available for a homestead program was trapped for an extended period of time in the tax reversion process, frequently emerging in a condition that was beyond repair. Ultimately we realized that it was equally, if not more important, that the system be overhauled if homesteading, along with the many other redevelopment programs run by municipalities and nonprofit organizations were to enjoy the greatest possible success.

 Anatomy of the Problem:

Michigan's current tax reversion process is lengthy and complicated. It was intended to give property owners facing financial difficulties ample time to pay their taxes before losing their property. Instead, it affords inadequate protection to property owners and often results in a title of questionable legal value. Furthermore, it permits unscrupulous individuals to exploit both families and the government. In short, it creates a circuit of blight, which undermines neighborhood stability and weakens Michigan's neighborhoods.

Consider a parcel that is abandoned by its owner. It generally goes unnoticed until its taxes go delinquent. Then it passes through the reversion process—moving from city to county to state; from the Department of Treasury to the DNR—ultimately to be returned to the city six years later. What is left? Little that is salvageable. In the meantime, cities are left with the expense of maintaining abandoned structures as well as managing both the legal and social liabilities abandoned structures attract.

Yet the problem goes much deeper than this: Consider a parcel occupied by a renter whose landlord, knowing that it takes six years for the system to run its course, decides to pocket the rent and skip the taxes. This jeopardizes the tenancy of that family even as they fulfill the obligations of a lease in good faith. Consider a family that has simply fallen behind on taxes. When it comes to help, our lengthy and complicated process responds with a series of perhaps well-intentioned delays and complicated handoffs whose net result increases the existing debt with interest and penalties. This is no more beneficial than a credit card company that responds to a customer who overspends by raising his or her credit limit.

 How did we end up in this mess?

Let us remember that we are dealing here with a procedure designed in 1893, when most of Michigan’s economy was agricultural in nature.

Old does not automatically mean outdated—the U.S. Constitution is much older than the GPTA, yet it still serves us well today. But as the founders understood, where the law is general and fundamental, such as a Constitution, there is less need for innovation and modernization. The same does not hold true for statutory law. When dealing with a matter as sensitive and specialized as this one, there needs to be parity between the law and the local economy.

There is evidence that the 1893 law was inadequate after we made the transition to an industrial economy. As the world grew more complicated the tax reversion process grew more inadequate. It became unable to handle the high volume of delinquent parcels and the terrific complexity of title in an age where many different parties often hold interests in a particular piece of property. Ultimately we began to see failures: People were losing their property without receiving notification and the opportunity to redeem; property rights were, and remain today, in jeopardy under such circumstances.

On more than one occasion, the courts pointed out the problem of poor notification—and then recommended a remedy: additional time prior to foreclosure. Thus emerged a pattern of legislative responses to judicial challenges. Yet we must ask ourselves, if the problem lies in the poor title search and notification procedure, is it logical to respond by extending the time allowed for redemption? The answer is No! All the time in the world would be meaningless in due process terms if a person is not notified of the problem in the first place. The logical response would be to improve the notification system.

 Principles for Reform:

With this in mind, Hudson Institute has recommended a set of principles that should guide the reform of tax reversion. We adopt these principles seeking neither the convenience of one party nor with malice directed toward another. As I stated earlier, our only interest is good public policy. In this case, that means developing a reformed system that is focused on the property and the property owner every step of the way. It can actually be boiled down to three points: Shorter, Simpler, and Secure. 

• Shorten Time (Due Process rests in quality of notification more so than length of redemption period)
• Simplify the Steps: Reduce the number of handoffs by eliminating unnecessary steps such as lien sales and unnecessary state involvement.
• Secure the Title: Move from Administrative to Judicial Foreclosure to insure good title.

Finally, let me say a word about the role of the private sector in the tax reversion process.

Currently the private sector participates through the lien sale. Remember, a lien sale does not convey an automatic ownership to property, but only an investment interest that later may be converted into an ownership interest. This was a necessary role in the 1893 scenario when units of government would otherwise have had to carry delinquent taxes as debt. However, in the late 20^th century Michigan counties operate revolving funds that render the lien sale extraneous. Today the lien sale is an extra step adding time and complexity to the process, increasing the number of parties entitled to notification in future delinquencies, and therefore contributing to the problem of bad title. In short, it is an artifact of historical inefficiency.

If government continues to operate in an inefficient manner even when a more efficient system is available, only out of deference to an industry which requires government to insure its existence, that is hardly worthy of the terms "private sector" and "free market".

Fortunately, far from closing the door on the private sector, it is possible to meet our recommendations in a way that actually blows the door wide open for the private sector. What can be more attractive to real private sector investment than the opportunity to bid on, and acquire property that actually has good title and is more likely to be structurally sound?

 How best to accomplish this:

Let me close by drawing your attention to the next steps for Hudson Institute’s involvement. Based on the principles I have just outlined, and in cooperation with the county treasurers, a proposal is currently making its way through the senate. Several groups have endorsed it either fully or in concept. It has also benefited from the leadership of the Michigan Municipal League and Scott Schrager who has shared his wisdom along the way. There may still be work to be done, but general consensus is that it is a useful framework in the least.

At pleasure of the chair, I will be happy to return when legislation reaches the committee for a fuller discussion of the way it might serve as a framework for the principles discussed today. In the meantime, I would be pleased to entertain questions.