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.

Mission

It is our mission to serve the Council and citizens of Hawaiʻi 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

Hawaiʻi 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.

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 Hawai’i 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 Hawaiʻi 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).
  • This report includes each billing cycle, for each parcel, in the data set

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 Hawaiʻi 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.

Table 1, Data provided by LocalHousingSolutions.org, Compiled Courtesy County Auditor

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 Hawaiʻi, 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.

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

Historical Performance

  

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 Hawaiʻi 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 9.7% 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 Hawaiʻi County.

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.

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

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.

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 arrangements 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.

In-State Debt

Table 3 describes property tax debt owed to Hawaiʻi County by year and where the primary mailing address is in-state. For example, a property owned on Hawaiʻi island, where the primary mailing address is on the island of Oahu. Figures in table 3 include principal, interest, and fees.

 Table 3 - 316 report, Data provided by RPT December 09, 2021, Compiled Courtesy County Auditor.

All Debt

Table 4 describes property tax debt owed to Hawaiʻi County by year, location type, and mailing address. For example, a property is owned on Hawaiʻi island, where the primary mailing address is in California (Mainland) or Canada (Foreign). Figures in table 4 include principal, interest, and fees.

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.

Figure 1, data provided by RPT December 09, 2021, compiled courtesy OCA.

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, 510 - Accounts Receivables Report

Visuals A1, 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 Hawaiʻi 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 Hawaiʻi 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)
  • Japan, 53.15%
  • 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:
  • Of 6,582 parcels, 1,178 parcels in the total population, 17.9% exceed the market value by division calculation
  • Of 2,910 parcels, 172 in the “active” category population, 5.9% exceed the market value by division calculation
  • Of 120 parcels, 98 in the “unsold at prior auction” category population, 81.7% exceed the market value by division calculation
  • Of 464 parcels, 70 in the “foreign” category population, 15.1% exceed the market value by division calculation
  • Of 224 parcels, 35 in the “time and cost” category population, 15.6% exceed the market value by division calculation
  • Of 224 parcels, 189, in the “time and cost” category, population, 84.4% do not exceed the market value by division calculation

Figure 2, timelines provided by RPT, compiled courtesy OCA.

Regular, Delinquencies, and Post-Closing Timelines 

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

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) 

 Older parcels are prioritized

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:

• 2^nd 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

Figure 3, data provided by RPT, compiled courtesy OCA.

RPT’s Category Definitions

• Less than two years - Parcels formerly delinquent greater than two years, which are still 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 Hawaiʻi 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

Overview

Together, the three categories comprise 36.85% by dollars. 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.

Table 5, compiled courtesy OCA.

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.

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.

Some examples include:

Figure 4, Table 7, compiled courtesy OCA.

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.

Figure 5, data provided by RPT, compiled courtesy OCA.

RPT’s Category Definitions

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 Hawaiʻi State Data Book (2017)
• Reviewed Chapter 19 of the Hawaiʻi County Code
• Reviewed 208 of the Hawaiian Homes Commission Act, and Kuleana Lands HB2113

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.”

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 cases.
• Longstanding, defunct business tax debts where the owner on record is the government.
• Longstanding, deceased owners, where address and next of kin are unknown.

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
• Reviewed internal documents
  • 316 Report - Aged Parcel Detail Report
  • 510 Report - Accounts Receivables Report

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:

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. Over time, 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 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:

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 a 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.

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 Hawaiʻi 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.

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

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:

Table 7, compiled courtesy, OCA.

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 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. 

Audit Standards require that we remain mindful and document all instances of waste fraud 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 waste, fraud, or abuse as it relates to this audit.

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 divisionʻs 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.

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.hawaiicounty.gov/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