The guilty pleas have trickled out in dribs and drabs: three in August, two in February, and another in March.
Slowly, a federal investigation has mapped a confluence of desperation and profit, inattention and daring in one of New Jersey's most extensive if low-key real estate markets, the sale of municipal liens for unpaid taxes.
In recent months, six regular purchasers of the liens have pleaded guilty to rigging the bidding system in a scheme that began operating at least as far back as 1998. So far, two lawsuits filed by property owners have alleged that participants and associated companies have defrauded them.
Investigators have acknowledged little beyond the bare-bones admissions in the pleas, but a spokeswoman for the U.S. Department of Justice intimated there are more to come. "This is a continuing investigation," she said.
In municipal offices around the state, however, some officials have already heard enough to conclude that fraud may not be the only thing that is unraveling. The state's low-cost but virtually unsupervised system for collecting delinquent taxes also could be coming unglued, creating a sticky situation for dozens if not hundreds of towns.
"Potentially, this could have implications across the entire state and maybe beyond," said William Dressel, executive director of the state League of Municipalities.
"Every town could take a hit on it," said Vincent Belluscio, executive director of the Tax Collectors and Treasurers Association of New Jersey.
After all, he said, some members have contacted the association to report that some of those targeted by the federal investigation, already have resumed bidding on municipal liens, apparently not barred from doing so by their guilty pleas.
For towns looking for advice from the state on how to handle the tricky situation, "there hasn't been any direction that I'm aware of," Dressel said.
"Unfortunately, with all these pronouncements about individual pleas, we're not hearing a lot about what's going on," he said.
Local tax collectors bring in money for many entities besides their towns: school districts, counties, fire districts, libraries and so on. The towns owe them their full shares, even if not every property owner has paid. So state law provides for a steady revenue stream even when some taxes are in arrears.
The current system dates to the Great Depression, when hard times caused many property owners to fall behind on payments, undermining already strained municipal collections. The law was changed to allow towns to auction off their liens, tax sale certificates, to third parties. A successful bidder pays the arrears and related costs to the town, then can collect from the delinquent owner or eventually foreclose on the property.
"That's why this current law works so well," said Richard Cushing, an attorney for many municipalities and other public entities in Hunterdon and Warren counties.
"The idea is to have third parties collect from the delinquent taxpayers," Cushing said. "Otherwise, a small town would have to use its own resources, resources it might not have, to go after them," spending more tax money to collect tax money already due.
Towns must hold at least one annual public auction of tax sale certificates. The system offers plenty of incentives for bidders. They are able to charge the property owner interest on the tax debt plus a premium. Historically, these were no more than 8 percent. But that had to change in the 1980s, "when interest rates were at 18 and 20 percent" on other types of investments, Belluscio said.
So the legislature raised the allowable interest rates on tax sale certificates to as much as 18 percent, while the premium can add as much as 6 percent more. If the property owner is unable to pay off the arrears and interest, as well as keep other payments current, the lien holder can foreclose after just two years.
That's why in some investment circles, tax sales certificates have been touted as safe bets, never more so than in recent years when interest rates plummeted elsewhere.
"Where else are you going to get an 18 percent return these days?" asks Michael Perle, a Secaucus-based lawyer who has a stake in the federal investigation.
For an investor going into an auction, though, that top rate is not guaranteed. The system assumes municipalities have an interest in avoiding future hiccups in payments, and a delinquent taxpayer likely will find it harder to pay high interest. Since any winning bidder must pay the town, the question is, how little is he willing to charge the property owner? That bidder who sticks at 18 percent will lose to one who offers 17 percent, or 10 percent or even zero percent interest.
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