In July 2005, the Texas Comptroller of Public Accounts identified Highland Independent School District (ISD), located in Nolan County, Texas, as one of 34 Texas school districts meeting the criteria that generate an Appraisal Standards Review (ASR) of the appraisal district that served them. In January 2006, the Comptroller's Property Tax Division (PTD), with assistance from consultants, began its review of the Nolan County Appraisal District (Nolan CAD).
School Districts, the Property Value Study and Appraisal Standards Reviews
Texas public education is funded by a combination of state and local funds. Local funding comes from property taxes levied by a school district's Board of Trustees. State funding is based on the amount of money that can be raised locally on the total taxable property value within each school district. Each school district in the state is served by a county appraisal district that is charged with appraising property in the school district at market value. The chief appraiser of each appraisal district determines the property values that are used by the school to set tax rates, which allocates the tax burden among taxpayers.
The Texas Comptroller's Property Tax Division annually conducts a Property Value Study (PVS) that assigns a value to all property within each school district for state funding purposes. This study, an independent estimate mandated by the Legislature, is designed to ensure equitable school funding. The study ensures equity by detecting instances where school property values are inaccurate, and adjusting property values to market value in the state's funding formula. The state's formula sends more money to those school districts that are less able to raise money locally because of lower taxable property value.
The Comptroller's values do not directly affect local values or property taxes, which are set by local authorities. However, when local values are more than 5 percent below state values, the school district could receive fewer state dollars because the formulas will use state values to calculate funding. Through an appeals process, a school or appraisal district can contest the state values, but understanding the reasons for the differences in the valuations is critical for school districts and the appraisal districts that serve them.
In 2003, a new law, recommended by the Comptroller's Property Tax Division Technical Advisory Committee, was enacted to grant a "grace period" for schools negatively impacted by PVS findings. The Comptroller does not believe that schools should be punished for the actions or inaction of their appraisal districts. The "grace period" permits schools to receive full state funding while ASRs are performed by the Comptroller.
By law, to be eligible for this state funding "grace period," a school district must have an invalid local value in the current year, valid local values in the two preceding years, and an aggregate local value in the current year that is not less than 90 percent of the lower limit of the margin of error.
If the aggregate local value is less than 90 percent of state value, the school district is not eligible for a grace period and the state value will be used to determine financial aid.
Appraisal Standards Reviews
Appraisal standards reviews of CADs are conducted by the Comptroller's office when one or more school districts within the CAD are 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 the appraisal district to correct problems and insure that all properties in the district are fairly and accurately valued. ASRs identify problems and recommend changes in procedures or methods to improve appraisal accuracy and compliance with state law and appraisal standards.
An ASR examines and evaluates appraisal practices including planning, procedures and methodology and the application of and adherence to appraisal standards. The Texas Property Tax Code and Comptroller Rules are the major criteria used to measure appraisal district performance.
The Texas Property Tax Code dictates certain appraisal procedures or standards such as the Uniform Standards of Professional Appraisal Practice (USPAP), specifically Standard 6: Mass Appraisal and Standard 7: Personal Property. The International Association of Assessing Officer's (IAAO) Standards on Assessment Practice also is used as the professional and industry standard.
The two principal focuses of the ASR are to determine why the local value is deemed invalid and to recommend improvements in appraisal practices. The review evaluates five functional areas of operations: governance and management; generally accepted appraisal practices; resources and management; information processing and data collection; and assessment administration.
Upon completion of the review process, the Comptroller issues a report of findings that includes commendations for exemplary appraisal practices and recommendations for change. The appraisal district is required by law to comply with the recommendations within one year of the release of the report.
Under Section 5.102 of the Tax Code, if the CAD fails to comply with the recommendations in the report and the Comptroller finds that the board of directors of the CAD failed to take remedial action within a year from when the report was issued, the Comptroller is required to notify the judge of each district court in the county for which the CAD is established. The district judge is required to appoint a board of conservators consisting of five members to implement the recommendations. The board of conservators shall exercise supervision and control over the operations of the CAD until each school district is determined to have local value in an annual PVS. The CAD shall bear the costs related to the supervision and control of the CAD by the board of conservators.
The review team found that Nolan CAD faces several challenges in achieving and maintaining consistent valid findings, including:
- planning reappraisals;
- developing written procedures; and
- improving management practices.
Key Findings and Recommendations
- Adopt a detailed reappraisal plan. Nolan CAD has not prepared a detailed reappraisal plan to ensure the execution of timely and accurate reappraisals. Lack of a reappraisal plan may have compromised the CAD's ability to produce accurate and equitable appraisals. By drafting and adopting a comprehensive reappraisal plan, Nolan CAD can formalize a strategy for capturing more current and accurate appraisal data and for complying with Sections 6.05(i) and 25.18(b) of the Tax Code, which require the Nolan CAD board of directors to develop biennially a written reappraisal plan by September 15, 2006.
- Adopt a written project timeline and plan for integrating the current mapping system with the new appraisal software. Nolan CAD has not developed a written timeline and plan to integrate its mapping and appraisal software. The lack of an integrated mapping and appraisal system impedes appraiser productivity, increases workload and increases the possibility of errors by staff having to manually convert data. By developing a plan and timeline, the CAD will formalize its strategy for the conversion, monitor the progress of the project and set percent-of-completion benchmarks for integrating the appraisal and GIS mapping systems.
Develop Written Procedures
- Develop written operating policies and procedures for managing the contract process, and comply with the procedures for competitive sealed bids and proposals. Nolan CAD has not put procedures in place to maintain or monitor its contracts and agreements. In the absence of written operating policies and procedures, which can define purchasing and contracting procedures, Nolan CAD did not conduct a competitive sealed proposal process for the recent procurement of a $77,000 appraisal software system. By developing a written policies and procedures for CAD operations and for the board of directors, the CAD ensures consistency in performing daily functions, while the procedures serve as an internal control mechanism.
- Develop procedures for managing the information processing systems. Nolan CAD lacks written standard operating procedures for managing its information processing software system and has had difficulties with its current appraisal software since 2003. In one instance, the appraisal staff attempted to adjust schedules to reflect market changes after reviewing a ratio study, and when the appraisal notices were mailed out, the staff discovered that the adjustments did not update the notices. By developing procedures for managing its information processing systems, Nolan CAD can better manage its information technology systems and put checks in place to prevent problems like these from occurring in the future.
Improve Management Practices
- Begin the budget cycle with board-level planning, and comply with the Tax Code by expanding the budget format to insure that resources are appropriately dedicated to critical appraisal functions. The Nolan CAD budget does not demonstrate that resources are being dedicated to critical appraisal needs because the document does not comply with Section 6.06 of the Tax Code. As a result, neither the board nor the taxing units can determine, because of differences in the appraisal and collections budgets, whether a salary increase in the appraisal budget was the result of pay increases or the hiring of additional staff or whether the CAD has placed the collection clerk position in the appraisal budget in error. By beginning the budget cycle with board-level planning and complying with the Tax Code, the CAD will insure that resources are appropriately dedicated to critical appraisal functions.
- Develop, perform and document an annual evaluation of the chief appraiser. The Nolan CAD board of directors does not perform an annual performance evaluation of the chief appraiser. In the absence of a written evaluation based on measurable performance criteria neither the chief appraiser, the board of directors or the public have any documentation or indication of performance progress of the chief appraiser who is entrusted with achieving the CAD's goals. By having a written evaluation system in place, the board of directors ensures agreement between itself and the chief appraiser on what is expected of the chief appraiser and, in this way, the board of directors will base its evaluations on actual performance.
In addition to the recommendations directly linked to the appraisal process, the following non-binding but related management level recommendations are presented here for consideration by the CAD:
- Develop policies and procedures and update existing operating manuals.
- File a records retention schedule with the Texas State Library.
- Develop, implement and test a written plan for disaster recovery.