Executive Summary

In July 2006, the Texas Comptroller of Public Accounts (Comptroller) identified Goldthwaite Independent School District (Goldthwaite ISD), located in Mills 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 August 2006, the Comptroller's Property Tax Division (PTD), with assistance from contractors, began its review of the Mills County Appraisal District (Mills 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 a school district can raise 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.

A county appraisal district 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 value of all taxable property in each school district. That value, as approved by the appraisal review board, is the property value its school districts will use to set tax rates and allocate the tax burden among taxpayers.

PTD conducts an annual property value study (PVS) that estimates the value of all taxable property within each school district for state funding purposes. The PVS is an independent estimate required by the Texas Legislature to ensure equitable school funding. The PVS ensures equity by detecting instances in which overall school property values are above or below market value, 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.

The Texas Legislature enacted a new law, granting a two-year grace period for school districts whose state funding is adversely 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 inaccuracies or 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 with an independent assessment of the appraisal district's operations.

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 an appraisal standards review 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 all properties in the district are valued fairly and accurately. ASRs help appraisal districts identify problems and recommend changes in procedures or methods to improve appraisal accuracy and ensure 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 an appraisal district's performance.

The Texas 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 Officers (IAAOs) Technical Standards.

The two principal focuses of the ASR are determining why the local value is invalid and recommending improvements in appraisal practices. The review evaluates five areas of operations: generally accepted appraisal practices, governance and management; resources and management; information processing and data collection; and assessment administration.

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 the appraisal practices recommendations within one year of the report's release.

If the CAD fails to comply with these 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 law requires the Comptroller 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 valid local values in an annual PVS. The CAD must bear the costs for this supervision.

While the review team identified commendable practices implemented by appraisal district employees, Mills CAD faces challenges in achieving and maintaining current market valuations as listed in the key findings below.

Key Findings and Recommendations

Develop and distribute to appraisal staff a comprehensive appraisal manual that includes locally developed procedures for appraisals. Mills CAD does not have a comprehensive appraisal manual that includes locally developed procedures for appraisals. Goldthwaite ISD received an invalid finding in the 2005 PVS because of poor appraisal performance. By developing and using a comprehensive appraisal manual, the CAD can help ensure that all appraisers are using the same standards for arriving at uniform and consistent market values.
Apply current methods of using ratio studies to adjust cost schedules that reflect market values. Ratio studies conducted by Mills CAD are not being used effectively to improve appraisal performance. In the 2005 PVS, Goldthwaite ISD received invalid findings due to its appraisal performance in Category A (single-family residences), Category D (rural land & improvements), and Category F1 (commercial real). By improving ratio study methods, the Mills CAD can ensure it makes necessary adjustments to produce values at or near the market.
Develop methods for obtaining data on income-producing properties and consider income when appraising commercial property. Mills CAD does not consider income when appraising commercial properties as required by the Property Tax Code, USPAP and IAAO. By failing to recognize all approaches to value when appraising commercial property, the CAD risks producing commercial appraisals that do not accurately reflect current market value. While it is true that not all commercial properties lend themselves to the income approach, properties that generate income from rents, leases and fees do, as well as some retail establishments.
Attempt to inspect all business personal property accounts each year and develop an independent valuation method as provided by law. Mills CAD does not annually inspect business personal property. Lack of annual inspections and independent valuation of all properties regardless of size and value could result in inaccurate and inequitable appraisals. Because personal property by nature is moveable, a physical inspection is critical to ensure appraisal accuracy from year to year.
Expand the reappraisal plan to include a tax calendar, staff assignments and technical properties. Mills CAD's reappraisal plan lacks specific data required by the Property Tax Code Section 25.18 and recommended by USPAP. Without a detailed reappraisal plan, Mills CAD does not have a step-by-step explanation of how the CAD will accomplish its reappraisal activities. A detailed reappraisal plan, if executed properly, provides a roadmap to ensure that school districts receive valid values in the PVS and precludes a school district from receiving less than the expected amount of funding from the state.
Establish written procedures based on IAAO Standard 6 for gathering and analyzing sales data. Mills CAD does not have written procedures for gathering and analyzing sales. Without common guidelines for determining how to verify, confirm and adjust sales, the CAD risks using sales for appraisal and appraisal maintenance that do not accurately reflect current market value. Written procedures can ensure that market analyses are done consistently, regardless of changes in personnel. By establishing procedures, the CAD will know what analysis needs to be done, when to perform the analysis and how to conduct the analysis, which is key to maintaining continuity and a high level of appraisal performance.

Commendable Practices

The review team identified commendable practices in Mills CAD that other county appraisal districts should adopt as appropriate.

Mills CAD has a personnel handbook that is updated regularly and informs personnel of their rights and responsibilities. Mills CAD has a well-written and informative personnel handbook. The Personnel and Policy Handbook for Mills County Appraisal District provides a comprehensive set of guidelines and instructions on personnel polices affecting CAD employees. All staff members have a copy of the handbook and receive regular updates. The handbook ensures that the staff is aware of its responsibilities to the CAD, as well as the CAD's responsibilities to staff.
Mills CAD successfully participates in the Comptroller's electronic program for submission of appraisal rolls. Mills CAD successfully participated in the Comptroller's 2006 electronic appraisal roll submission (EARS) program. In selecting a new automated appraisal system, Mills CAD made sure any system under consideration was capable of participating in EARS. Electronically generated reports are less susceptible to human error and eliminate paper reports.

Other Recommendations

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 are required to comply with all applicable existing laws.