In July 2006, the Texas Comptroller of Public Accounts identified Houston Independent School District (Houston ISD), located in Harris County, as one of 28 school districts meeting the criteria that automatically initiate an Appraisal Standards Review (ASR) of the appraisal district that serves them. Due to extensive damage caused to the Houston area by Hurricane Rita in September 2005, the Comptroller's office delayed certification of the 2005 values to allow affected school districts time to prepare appeals of the 2005 Property Value Study (PVS). The Comptroller's office certified final values for Houston ISD in September 2007.
Because the Harris County Appraisal District (Harris CAD) was outside the statutorily set margin of error in the 2005 PVS, state law required the Comptroller's office to perform an ASR. The ASR for any large appraisal district–Harris CAD is the second largest appraisal district in the country, appraising about 1.4 million parcels annually–is complex and time consuming. Therefore, the Comptroller's office sought the services of a highly experienced and diverse professional services firm with a background in large organizational, managerial and performance reviews to conduct the ASR of Harris CAD.
Through a competitive procurement, the Comptroller's office hired McConnell Jones Lanier and Murphy, LLP (MJLM), a 130-person consulting and public accounting firm based in Houston, to conduct the ASR. Ranked among the 12 largest professional services firms in Houston, MJLM serves both a Texas and a national clientele in industries such as real estate, government, education, energy, finance, health services and entertainment. MJLM has conducted performance and process reviews of state and local governments, school districts, higher education institutions and other private- and public-sector clients, including more than 40 performance reviews for the Comptroller's office. To assist with appraisal issues, MJLM hired two subcontractors who also had extensive experience. One subcontractor is a respected Houston appraisal firm familiar and experienced with the types of properties Harris CAD appraises. The other subcontractor previously served as chief appraiser for the Manhattan appraisal office, has contributed to the International Association of Assessing Officers (IAAO) appraisal textbook and has conducted nine ASRs for the Comptroller's office.
School Districts, the Property Value Study and Appraisal Standards Reviews
Texas funds public education by a combination of state and local funding. Local funding comes from property taxes assessed by a school district's board of trustees. The state bases its funding on the amount of money per student that a local school district can raise. The state funding formula sends more money to school districts that are less able to raise money locally because of insufficient taxable property value.
A county appraisal district (CAD) charged with appraising its property at market value serves each school district in the state. The chief appraiser of each appraisal district determines the property values that, after approval by the appraisal review board (ARB), its school districts will use to set tax rates.
As mandated by the Texas Legislature, the Comptroller's Property Tax Assistance Division (PTAD) conducts the PVS annually to assign a value to all taxable property within each school district for state funding purposes. The PVS, intended to help the state ensure equitable school funding, is an independent estimate required by the Legislature. The PVS ensures equity by detecting instances in which school property values are not at market value and adjusting them to market value for use in the state's funding formula.
The Comptroller's property values do not directly affect local values or property taxes. However, when study statistics give the Comptroller's office a high degree of confidence that the aggregate local value for property categories tested in the study is lower than the state's estimate of the correct value, and that aggregate local value is more than 5 percent below the state's estimate, the school district may receive less state funding than it expected. School districts may protest the state's preliminary determination of their property value through an appeals process. Understanding why the differences in valuation occur, however, can be critical for school districts and the appraisal districts that serve them.
The Legislature grants a two-year grace period for school districts whose state funding the PVS adversely affects. During this grace period, school districts can work with their appraisal districts to correct any inaccuracies or inconsistencies before state funding is lost. To aid this process, the ASR provides the appraisal district and its local taxing units with an independent assessment of their appraisal standards.
By law, to be eligible for the grace period, a school district must have an invalid local value that does not exceed the state value; valid local values for the two preceding years; and a current aggregate local value for tested property categories that is at least 90 percent of the lower limit of the margin of error.
PTAD performs ASRs when a school district is eligible for the grace period. ASRs recommend changes in procedures or methods that can improve appraisal accuracy and compliance with state law and appraisal standards. The results can help school districts understand the reason for the invalid finding so that they can work with their appraisal districts to correct problems and ensure all property in the school district is valued fairly and accurately.
In conducting an ASR, PTAD examines and evaluates appraisal practices including methodologies, planning and procedures and the application of and adherence to generally accepted appraisal standards and practices. The Property Tax Code and Comptroller rules provide the major criteria used in the review.
The Property Tax Code requires appraisal districts to use certain generally accepted appraisal procedures or standards. These include the Uniform Standards of Professional Appraisal Practice (USPAP), specifically Standard 6: Mass Appraisal, Development and Reporting, as well as the IAAO's Technical Standards. In addition, ASRs rely on other generally accepted standards when reviewing appraisal procedures and methods.
The two principal purposes of the ASR are to determine why the local value is invalid and to recommend improvements to appraisal practices. Upon completing the review process, the Comptroller's office issues a report of findings that includes commendations for exemplary appraisal practices and recommendations for improvements. The law requires appraisal districts to comply with the Comptroller's recommendations concerning appraisal methods and procedures within one year of the report's release.
As part of its review process, PTAD identifies best practices used by each CAD under review. These commendable practices improve efficiency, address past operational weaknesses and provide other appraisal districts ideas for improving their operations. Following are Harris CAD's commendable practices the review team identified.
Using aerial photography with Pictometry to gather property data, Harris CAD is able to overcome the challenge of reappraising 1.4 million parcels in the statutorily required three-year cycle.
Harris CAD effectively uses state-of-the art integrated workflow management software to keep affected staff abreast of changes required to improve the appraisal processes.
Harris CAD improved efficiencies in handling protests by developing and implementing electronic means to allow property owners to file protests via the Internet, including online systems called iFile and iSettle, and a system that permits tax agents to do the same via compact disc.
Harris CAD conducts workshops to educate and assist businesses about property rendition requirements and provides businesses with a convenient way to file renditions electronically via the Internet.
Harris CAD's experienced and credentialed executive leadership assists the board of directors in establishing and completing critical long-range goals to ensure continuous progress within its appraisal operations.
Key Findings and Recommendations
Below is a summary of the ASR's key recommendations that address the appraisal problems and challenges PTAD identified as facing Harris CAD.
Due to the size of the Harris CAD, and the large number of protests filed each year, the informal and formal protest procedures of the CAD and the ARB should be reviewed on a regular basis to ensure that market value and equity appraisal determinations are made properly. This regular review of procedures is particularly important because of the increasingly innovative and novel approaches to value that are presented by property owners or their agents and accepted by ARBs.
Complete revisions to software and verify, edit and time-adjust sales data for changing market conditions as necessary to ensure compliance with USPAP Standard 6 on mass appraisal and to help ensure accurate property values.
Develop and use land tables consistently in commercial land valuations.
Calibrate cost and income approaches using non-linear regression in addition to the existing process.
Complete planned review of commercial depreciation table and update and test it to ensure correct values.