Tax buyers, politicians benefit from tax sales

News-DemocratJanuary 14, 2011 

Former Madison County Treasurer Fred Bathon.

STEVE NAGY/BND

Business wasn't very good for Virgil Straeter in 2006.

Straeter, an auctioneer, landlord and seller of steel buildings in the Highland area, says he didn't always get paid on time, leading to a cash-flow problem. When it came time to pay almost $12,000 in property taxes on four parcels, he didn't pay it.

So his property tax debt went to the annual tax sale, conducted by the Madison County treasurer's office. The tax sale is where somebody else - either a person or a company - pays your taxes. The buyer is essentially buying a debt, and makes money by collecting interest from the property owner when the property owner makes good on his taxes. If the property owner doesn't eventually pay his taxes, plus interest, the tax buyer gets the property.

Straeter knew he'd have to pay interest on his tax bill. But 18 percent astounded him.

"It's kind of like those payday loans," he said. "There's no way that anybody who's forced to do business there, because they're strapped for cash, can ever come out of it. There's no way in the world that you can catch up to that unless you get caught up fairly quickly, because it just keeps compounding."

Straeter managed to make good on his taxes, but he had to pay a hefty sum to the company that bought his tax debt. On just one parcel of property, for which the property tax was $6,040, he had to pay $4,348 in interest. The interest rate compounds every six months.

Such was Straeter's introduction into the secretive and lucrative world of property tax sales.

It's a world that growing numbers of metro-east property owners are being forced into because of hard economic times that have led them either to pay their taxes late, or to quit paying altogether - decisions that often end up costing them much more money than they ever anticipated.

For example, Madison County property owners paid a little more than $2 million in interest in 2009 to tax buyers. Three of the tax buyers each received more than $200,000 in interest that year.

The metro-east has become a magnet for tax buyers from across the state and elsewhere. The high rates of tax delinquencies in Madison and St. Clair counties have meant a huge pool of property owners in financial trouble - many of whom hang on to their houses and farms only by paying interest penalties to tax buyers that can eventually exceed 100 percent.

Despite the large amounts of money involved - and the extreme financial vulnerability of the property owners involved - tax sales go virtually unregulated in Illinois.

The closest form of oversight is the county treasurers, who are expected to police the very people - tax buyers - who are allowed to give them unlimited campaign donations.

That practice should change, said Champaign County Treasurer Dan Welch, who called for a state law to ban tax buyers from giving campaign funds to county treasurers.

"You should be above reproach in dealings with taxpayers' money and taxpayers' property," said Welch, the incoming president of the Illinois County Treasurers Association.

`Trailing bids'

How is the interest rate determined? At tax sales, which occur annually, tax buyers make bids based on the owner's likelihood of redeeming the taxes. Generally, the higher the likelihood of redemption, the lower the interest penalty.

That's how it's supposed to work. But a News-Democrat investigation shows that during the last three years of former Madison County Treasurer Fred Bathon's tenure, the average interest rate awarded to tax buyers was either 18 percent - the highest rate allowed under state law - or 17 percent.

The average fell to 9 percent after Bathon left office.

Many of these same tax buyers contributed heavily to Bathon's re-election committee. The tax buyers contributed thousands of dollars at a time to Bathon, for a total exceeding $140,000 during Bathon's tenure as treasurer, from 1998 to 2009.

Bathon received more than half the total donations from tax buyers to county treasurers statewide during that nine-year period, the newspaper's investigation showed. Indeed, Bathon raked in far more in political contributions from tax buyers than any other county treasurer in Illinois, records show.

Bathon conducted the tax sales in a fashion that some have described as a "bid opening" - where the interest rate started at 18 percent, and tax buyers were not allowed to undercut each other with lower, or trailing, bids.

Bathon's system differed from the way other county treasurers contacted by the newspaper - including current Madison County Treasurer Frank Miles - run their tax sales. Most conduct a reverse auction, in which the bidders are allowed to undercut each other, driving the interest rate down.

The auction method used under Bathon doesn't sound right to Straeter.

"Something's rotten in Denmark," he said. "That's a farce. They called it an auction, but it's not."

Bathon, who retired in October, did not return numerous calls seeking comment. Nor did he respond to written requests for an interview sent to his home.

Critics say Bathon's system assured that tax buyers received the maximum profit.

Kurt Prenzler, an accountant who is the Republican candidate for Madison County treasurer, called for a state investigation of Bathon's handling of the tax sales in light of the donations Bathon received from tax buyers.

The four biggest donors to Bathon's campaign - Dennis Ballinger, of Decatur, at $29,100; Scott McLean, of East St. Louis, at $27,950; Barrett Rochman, of Carbondale, at $27,200; and John A. Vassen, of Belleville, at $25,025 - declined comment or did not return calls seeking comment.

Little or no regulation

State law says little about how the tax sales should be conducted. The law states only:

"The person at the sale offering to pay the amount due on each property for the least penalty percentage shall be the purchaser of that property. No bid shall be accepted for a penalty exceeding 18 percent of the amount of the tax."

Miles, who was appointed treasurer after Bathon retired, agreed that an 18 percent interest rate can swallow people.

"It would be difficult to get out of a hole at that interest rate," he said.

Miles has made multiple changes in the way his office conducts the sale, even its location.

The sales had been held in the County Board room, which has a stadium-type seating arrangement. Some people had complained that buyers in the front row - the ones at eye level with the people conducting the auction - got better treatment. Now, seating is on a first-come, first-served basis.

Miles also videotapes the tax sales.

"We videotape the whole process, in case anyone has a question, a problem," he said.

Perhaps most importantly, he now allows what he calls "trailing" bids: allowing bidders to undercut each other, the way it's typically done in a reverse auction.

"I'm not sure what the method was for the prior treasurer," Miles said. "The bids were awarded differently, yes."

`The bid was the bid'

Madison County Clerk Mark Von Nida, who is required by law to be present at the tax sale or have a representative there to record the winning bids, described how the tax sales worked under Bathon:

"Instead of it being a kind of reverse auction where somebody starts at 18 percent and it finished at 3, it would be more like a bid opening. Basically, the bid was the bid," he said.

The auctioneer would ask for a bid, then everyone would yell out a number. The treasurer's staff would try to decide who yelled the lowest number first.

"The idea that somebody could come in after the bid is opened and try to undercut the other people who had placed their bid at the same time, was considered wrong," Von Nida said. "So basically, it was conducted, in one sense, like a bid opening, period. What you bid is what you bid, and if you didn't bid low enough, somebody else would get it."

Many times, the lowest bid was 18 percent, yelled by multiple bidders. In deciding which person yelled the bid first, the treasurer's office appeared to try to "spread it around a little bit" among the buyers, Von Nida said.

"They'd make sure that everybody who's yelling at the same time would kind of get their due," he said.

Von Nida said individual buyers would sometimes complain that they weren't being awarded enough bids by the treasurer's spotter. Von Nida compared the spotter to an umpire. Bidders, he said, sometimes tried to "work the ump."

Sometimes, the buyers didn't think the winning bids were being handed out appropriately.

"If somebody argued, everything would grind to a stop," Von Nida said.

Employees would then summon Bathon from his office, and he'd straighten the buyers out.

"There'd be peer pressure from the other tax buyers to just move on," Von Nida said. "It would cost them money to be there for days and days."

Witnesses say there was a memorable dust-up at the sale in November 2008 involving Bathon and tax buyer Robert Luken of Alton.

"Bob Luken thought that it should be run like an auction-type thing, where they're allowed to bid it down. The treasurer didn't think that's how it should be done," Von Nida said.

Luken left the sale and didn't return. "He left for the last day and a half of the thing," Von Nida said.

Luken declined to comment for this article.

Records of political donations show that Luken routinely gave contributions of $500 to $1,000 to Bathon. Luken's biggest contribution to Bathon was $1,500 in September 2006, but he never gave to him again.

U.S. Rep. John Shimkus, R-Collinsville, who served as Madison County treasurer from 1990 to 1996, said he conducted the tax sale in the fashion of a reverse auction.

"Our interpretation was, the lowest bid wins, and we used the reverse auction process," Shimkus said. "If we had numerous people bid at 18, we would wait until somebody bid 17. If three people wanted it at 18, surely one of them wanted it at 17."

When asked whether it would raise red flags to him if a treasurer did not allow trailing bids, and received thousands of dollars in donations from tax buyers, Shimkus paused for several seconds.

"Obviously, I'm not answering that," he said. "I'll let people draw their own conclusions."

Sangamon County Treasurer Thomas Cavanagh also uses the reverse-auction method.

"Absolutely. I don't know how else you could do it," Cavanagh said. "The lowest bid wins. They get driven down all the time. It's a real auction."

Bids usually low elsewhere

The county and other taxing bodies don't really have a stake in the interest rates. They just want the original tax amount they're owed.

The interest rate really only affects the property owner and the tax buyer. The higher the interest rate, the more the property owner has to pay, and the more the buyer makes.

Tax buyers are investors, out to make as much money as they can. Many borrow money from banks at low interest rates, then buy delinquent taxes at higher interest rates. The difference is their profit.

"Ultimately, taxpayers who might have fallen behind during the recession were the beneficiaries of the changes made by Mr. Miles, " Von Nida said.

When Miles conducted this year's tax sale, held in March for unpaid taxes from 2008, the average interest rate dropped to 9 percent. The average rate for the four previous years under Bathon was 18 percent at the 2009 sale for taxes payable in 2007, 18 percent for taxes payable in 2006, 17 percent for taxes payable in 2005 and 15 percent for taxes payable in 2004.

At Madison County's sale in 2008, where 2,568 tax bills were sold, the winning bid was 18 percent on all but eight pieces of property.

In St. Clair County, the average interest rate for the 2009 sale, held in November, was 9.6 percent. In previous years' sales, the interest rate was 17.3 percent in 2008, 16.5 percent in 2007, 8.9 percent in 2006 and 9.4 percent in 2005.

In Sangamon County, the averages for the past five tax sales were: 8 percent in 2009, 11 percent in 2008, 12 percent in 2007, 16 percent in 2006 and 7 percent in 2005.

Cavanagh, the Sangamon County treasurer, said the interest rate has probably dropped somewhat statewide because of lower interest rates offered by banks.

"It's probably a function of what interest rates are doing in the general marketplace, I guess," he said.

In Champaign County, the average interest rate was 5 percent for the 2008 taxes, 3.5 percent for 2007, 1.3 percent for 2006, 1.7 percent for 2005 and 1.1 percent for 2004.

Bathon's contributions

In Illinois, there are a handful of tax buyers who are considered the major players. They go to tax sales at counties across the state. They include the Sabre Group, based in Carbondale and headed by Barrett Rochman.

Since 2000, Rochman and his company donated $27,200 to Bathon.

The company's other top recipients of political donations are the St. Clair County Democratic Central Committee with $5,950; St. Clair County Treasurer Charles Suarez, $3,500; and Kane County Treasurer David Rickert, $4,500. Sabre also has donated $1,000 to Miles.

Sabre Group's donations are typical of several tax buyers, in that the money flows heaviest to the metro-east. Sabre's donations to all other campaigns in Illinois totaled $13,750 and were scattered to various candidates, mostly for state-level offices.

A News-Democrat review of political donations from tax buyers across the state shows that since 1998, they have given $141,125 to Bathon. Suarez, the St. Clair County treasurer since 1994, has received $21,050. Since 1994, the tax buyers have donated $48,880 to all other St. Clair County candidates or campaigns and $33,970 to all other Madison County candidates or campaigns.

Miles, the Madison County treasurer since December, also has been accepting political donations from tax buyers, about $18,500 so far. A Democrat, Miles is running for election to the treasurer's post in November.

Miles said citizens shouldn't be concerned about his donations from tax buyers.

"I don't see any conflict. I take contributions from individual people and corporate donations, but they're not getting anything in return for that donation," Miles said. "I think my record speaks for itself. My goal was to get that interest rate as low as possible."

Suarez, the St. Clair County treasurer, said tax buyer donations to his re-election campaign do not have any influence on the tax sales he oversees.

"I got donations from a whole bunch of people who don't participate in the sales," Suarez said. "I get donations from buyers. I get donations from all sectors of society."

As for Cavanagh, the Sangamon County treasurer, state records don't show any donations from tax buyers to his political fund.

"I have not gotten a thousand dollars total from tax buyers in eight years," he said.

Straeter, the Highland property owner, thinks the law needs to be changed.

"It's enough to make you want to leave the United States," he said. "That's how ticked off you get about this stuff."

Story published 9/26/10. Contact reporter Brian Brueggemann at bbrueggemann@bnd.com or 239-2511. Contact reporter Mike Fitzgerald at mfitzgerald@bnd.com or 239-2533.

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