In July 2006, the Texas Comptroller of Public Accounts (Comptroller) identified Jefferson Independent School District (Jefferson ISD), located in Marion County, as one of 28 Texas school districts meeting the criteria that initiate an Appraisal Standards Review (ASR) of the appraisal district that serves them. In November 2006, the Comptroller's Property Tax Division (PTD), with assistance from contractors, began its review of the Marion Central Appraisal District (Marion CAD).
School Districts, the Property Value Study and Appraisal Standards Reviews
Texas funds public education by a combination of state and local funds. 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 that can be raised locally on the total taxable property value within each school district. The state's funding formula sends more money to districts that are less able to raise money locally because of insufficient taxable property value.
Each school district in the state is served by a county appraisal district charged with appraising its property at market value. The chief appraiser of each appraisal district, with ARB review and approval, determines the property values its school districts will use to set tax rates, which allocates the tax burden among taxpayers.
The Comptroller's PTD conducts an annual Property Value Study (PVS) that assigns a value to all taxable property within each school district for state funding purposes. The PVS, an independent estimate required by the Texas Legislature, is designed to ensure equitable school funding. The PVS ensures equity by detecting instances in which school property values are inaccurate and adjusting them to market value in the state's funding formula.
The Comptroller's values do not directly affect local values or property taxes. However, when study statistics give the Comptroller 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 expected. Districts can contest the state values though an appeals process. But understanding the reasons for the differences in valuations nevertheless can be critical for school districts and the appraisal districts that serve them.
In 2003, the Texas Legislature enacted a law to grant a grace period for school districts affected by PVS findings. During the two year grace period, school districts are given an opportunity to work closely with the appraisal district to correct any identified inaccuracies on inconsistencies, before state funding is lost. To aid in that process, the Comptroller's ASR provides the appraisal district and the local taxing units, including the school districts, an independent assessment of the appraisal district's operation.
By law, to be eligible for this 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.
Appraisal Standards Reviews
The Comptroller's office performs appraisal standards reviews when a school district is eligible for the grace period. By conducting ASRs, the Comptroller's office helps school districts understand the reason for the invalid finding so they can work with their appraisal districts to correct problems and ensure that all properties in the district are valued fairly and accurately. ASRs help appraisal districts identify problems and recommend changes in procedures or methods for improving appraisal accuracy and compliance with state law and appraisal standards.
In conducting an ASR, the Comptroller's office examines and evaluates appraisal practices including planning, procedures and methodology, and the application of and adherence to appraisal standards. The Property Tax Code and Comptroller Rules are the major criteria used to measure appraisal district performance.
The Property Tax Code dictates the use of certain appraisal procedures or standards such as the Uniform Standards of Professional Appraisal Practice (USPAP), specifically Standard 6: Mass Appraisal, as well as the International Association of Assessing Officer's (IAAO's) Technical Standards.
The two principal focuses of the ASR are determining why the local value is invalid and recommending improvements to appraisal practices. Upon completing the review process, the Comptroller issues a report of findings that includes commendations for exemplary appraisal practices and recommendations for improvements. The law requires appraisal districts to comply with these recommendations within one year of the report's release.
If the CAD fails to comply with the recommendations and the Comptroller finds that the CAD's board of directors failed to take remedial action within a year of the report's issuance, the Comptroller is required by law to notify the judge of each district court in the county. The district judge(s), in turn, must appoint a five-member board of conservators to implement the recommendations. This board of conservators supervises and controls the CAD's operations until each school district has a valid local value in an annual PVS. The CAD must bear the costs for this supervision and the board of conservators.
Marion CAD faces challenges in achieving and maintaining current market valuations as listed in the Key Findings and Recommendations below.
Key Findings and Recommendations
Revise the reappraisal plan to include specific details on items such as the properties involved in the reappraisal costs, staffing, management and other details necessary to complete an effective reappraisal. The Marion CAD reappraisal plan is general in nature and does not have the necessary information to outline the processes and planning needed for completing appraisal activities as specified in Property Tax Code Section 25.18. Lack of an accurate reappraisal plan can hinder staff from performing an effective reappraisal. By revising the reappraisal plan, the CAD can improve its reappraisal planning and practices, helping it to more equitably appraise all properties.
Perform an automated search of real property records to update instances of omitted year built, and use CAMA-automated calculations for percent good. Marion CAD does not use the computer-assisted mass appraisal (CAMA) system's potential for automated features. Without year built or effective year built (age) for improvements, a computer-generated (standardized calculation) building depreciation factor cannot be applied to improvements. By adding year-built data in property records, Marion CAD can reduce the subjectivity of appraisers' opinions in the calculation of age factors for property improvements because an annual computer adjustment for depreciation will be possible.
Identify market areas and neighborhoods within the CAD by major property categories and include this information in the CAD's reappraisal plan. The CAD does not perform market analysis to identify market areas (neighborhoods) within the CAD by property categories and the CAD's reappraisal plan lacks such information. Without identifying market areas or neighborhoods, the CAD cannot identify property characteristics that affect value based on a property's location within the CAD. By analyzing price variation by location (neighborhoods) and identifying such differences in the appraisal model, the accuracy of the resulting appraisals may be increased and valuations may be more consistent and accurate.
Eliminate use of the RES-8 property quality classification to delineate the historic district. The CAD misuses a high-quality property classification (RES-8) to delineate a neighborhood (historic district), which inappropriately classifies both rehabilitated and dilapidated residential property in one category. As a result of using property classification codes only to identify one historic area, the CAD's ability to set unit values in the classification system and its ability to delineate neighborhoods are limited and cause inaccurate appraisal values. By making full use of classifications and physical, functional and economic depreciation, Marion CAD will be able to differentiate rehabilitated from dilapidated residential buildings in the historic district and create a wider range of value classifications with accurate market values.
Expand the appraisal manual to include comparable sales data and develop a reasonable, consistent and accurate mass appraisal model per Standards Rules 6-4 and 6-5 of the Uniform Standards of Professional Appraisal Practice. Marion CAD's appraisal manual lacks key appraisal processes necessary to build an accurate mass appraisal model. Without accurately developed depreciation tables and land and improvement schedules, the CAD's mass appraisal model is inconsistent and causes errors in field appraiser's calculations. By developing accurate schedules and tables and applying them through use of its appraisal manual, Marion CAD will achieve a mass appraisal model that results in equitable and uniform valuations and provides credible support for the defense of values.
Develop written procedures for sales verification used in internal ratio studies and correctly apply results as indicated. Marion CAD lacks sales validation procedures for use in ratio studies. Without gathering data and expanding the CAD's sales file, the accuracy of the results of the ratio studies cannot be tested and calibrated. By providing guidance to appraisers in collecting sales data with written instructions in an appraisal manual, an expanded sales database of residential properties increases the accuracy of ratio studies.
Develop procedures for using ratio studies based on comparable sales data to incorporate land values into the cost approach to value. Marion CAD primarily uses the cost approach to value, but does not annually adjust land values in an organized process. Without individual property records that show information on lot size such as dimensions, square feet or fractional acres, no relationship can be established between unit value and residual improvement. By building land schedules based on sales data for comparable tracts, more accurate unit cost schedules for improvements become possible.
Apply all three approaches to value according to the Property Tax Code and generally accepted appraisal practices. The Marion CAD chief appraiser needs to consider three approaches to value due to the age factors of many of the improvements within the CAD and to comply with Property Tax Code Section 23.01. Lack of written instructions limits the use of the income approach within the CAD since only the chief appraiser uses the income approach for valuation of bed and breakfast properties while staff appraisers value other commercial properties with the cost approach. Written guidelines for applying the income approach will provide the appraisal staff with a consistent process to follow if the need arises, as well as comprise ordered work steps that can be broken down into specific activities that can be measured, modeled and improved.
In addition to the recommendations directly linked to the appraisal process, the report makes the following management-related recommendations for the CAD's consideration. Several of these recommendations include compliance with existing laws. As Texas governmental entities, appraisal districts must comply with all applicable existing laws.
Prepare written, standardized bidding and contract monitoring procedures as recommended by the IAAO's Standard on Contracting for Assessment Services.
Prepare the 2008 budget in compliance with Property Tax Code Section 6.06.
Annually perform financial audits in the first quarter of the calendar year for the prior year's operations.
Develop a board policy manual to address local policies and procedures in compliance with the Comptroller's Appraisal District Director's Manual.
Prepare a comprehensive operations procedures manual.
Update job descriptions to accurately reflect qualifications and performance responsibilities.
Conduct a staffing analysis that establishes staffing guidelines to ensure that staffing resources are suitable and adjusted annually to meet reappraisal plan needs.
Prepare comprehensive disaster recovery procedures; secure an alternate business facility by contract or memorandum of understanding; and ensure business continuity through quick recovery of vital records.