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HomeMy WebLinkAbout2012-COH-A Technical Assistance Report Evaluating Property Tax Policies and Administrative Practices in Hawaii CountyCounty of Hawaii seal Colleen M.Schrandt Legislative Auditor Mailing address Hawaii County Building 25 Aupuni Street Hilo, Hawaii 96720 Business Address 1266 Kamehameha Avenue Ironworks Building, Room A-1 Hilo, Hawaii 96720 OFFICE OF THE LEGISLATIVE AUDITOR Telephone (808) 961-8386 Facsimile (808) 961-8905 Date.: March 12, 2012 To: Dominic Yagong, Chairman And Members of the County Council From: Colleen Schrandt Legislative Auditor Re: A Technical Assistance Report Evaluating Property Tax Policies and Administrative Practices in Hawaii County dated March 5, 2012 This letter transmits for your review, deliberation, and acceptance, A Technical Assistance Report Evaluating Property Tax Policies and Administrative Practices in Hawaii County dated March 5, 2012 as prepared by the International Association of Assessing Officers (IAAO) This study was performed between November, 2011 and December, 2011. We would like to request time for an IAAO representative to present the report and to answer any questions you may have at the Finance Committee meeting scheduled on April 3, 2012. Appropriate department head(s) or their representative(s) will also be asked to attend the meeting. In the meantime, please feel free to contact me should you require further information. Enclosures CS/map (Note: The attached report, due to its size is not made a part of the duplicate copies, but is on file in the Office of the County Clerk.) Comm. No. 641 Ref. To: FC Ref. Date: March 16, 2012 Serving the Interest of the People of our Island Hawaii County is an Equal Opportunity Provider and Employer IAAO International Association of Assessing Officers Promoting Innovation and Excellence in Property Appraisal and Tax Policy Research and Technical Assistance A TECHNICAL ASSISTANCE REPORT EVALUATING PROPERTY TAX POLICIES AND ADMINISTRATIVE PRACTICES IN HAWAII COUNTY March 5, 2012 314 W 10th St., Kansas City, Missouri 64105-1616 USA (816) 701-8100 Fax (816)701-8149, (800) 616-4226, www.iaao.org . IAAO International Association of Assessing Officers 314 W 10th St., Kansas City, Missouri 64105-1616 USA (816) 701-8100, (800) 616-4226 Fax (816)701-8149, www.iaao.org CAE AAS CMS RES PPS Professional Designations March 5, 2012 Colleen Schrandt, Legislative Auditor Office of the Legislative Auditor County of Hawai`i 1266 Kamehameha Avenue Ironworks Building, Suite A-1 Hilo, Hawaii 96720 Re: Evaluation of Property Tax Policies and Administrative Practices Dear Ms Schrandt: As you requested through the contract between the County of Hawaii and the International Association of Assessing Officers (IAAO) we have completed our study of certain policies and administrative practices of the County of Hawaii. The study was performed between November, 2011, and December, 2011. Our findings, conclusions and recommendations can be found in the attached report. During the study we reviewed documents, manuals, records, electronic files, procedures, and studies. Statistical and other analyses were performed on data gathered electronically and in person. We greatly appreciate the assistance provided to us by the County especially the Finance Department, the Real Property Tax Division, and your office. This report includes recommendations for consideration by the County in improving its property tax policies and in improving the operation of its real property tax system. Alan Dornfest, AAS, and Richard Almy were our consultants on this assignment. If you have any questions about this report please feel free to contact Mr. Dornfet or Mr. Almy directly or call me. We appreciate the opportunity to work with you and look forward to assisting you in the future. Please let us know if we can be of any additional assistance. Sincerely, Lisa Daniels Executive Director Certification and Limiting Conditions We certify that, except as otherwise noted in this report: All work performed in conjunction with this report was conducted in compliance with the International Association of Assessing Officers' Code of Ethics and Standards of Professional Conduct. The findings and recommendations were benchmarked against the Standards of the International Association of Assessing Officers. The participants in this consulting assignment are all members in good standing of the International Association of Assessing Officers (IAAO) and have no personal interest or bias with respect to the subject matter of this evaluation report or the parties involved. Employment or compensation of any of the consultants is not dependant on the reporting of a predetermined conclusion or the attainment of a stipulated result from the contents or conclusions of this report. To the best of our knowledge and belief, the statements of fact contained in this report, upon which the analysis, conclusions, and opinions expressed herein are based, are true and correct. We assume no responsibility for invalid data or misinformation provided to US. The consultants are not attorneys and any references made to legal issues are for guidance and not intended as legal research of the issues or existing case law or code requirements. Use or dissemination of the contents of this report for other than the purpose and function intended could lead to improper use or misinterpretation of its contents and should not be done without the express consent of the International Association of Assessing Officers. The consultants conducted interviews, obtained information, prepared the analysis, conclusions and opinions concerning the assessing practices and policies of the jurisdiction that are set forth in this report. All opinions and conclusions expressed in this report are the sole responsibility of the consultants on behalf of the International Association of Assessing Officers. iii Table of Contents Certification and Limiting Conditions...........................................................................iii Listof Figures...................................................................................................................vi Listof Tables...................................................................................................................vii Executive Summary List of Recommendations..............................................................................................xxi 1. The Technical Assistance Project................................................................................ 1 1.1 Background and Introduction ................................................................................... 1 1.2 Scope of the Technical Assistance Project............................................................... 2 1.3 Limitations................................................................................................................ 3 1.4 Methodology of the Project ...................................................................................... 3 1.5 Report Format........................................................................................................... 4 2. Economic, Fiscal, and Institutional Setting................................................................5 2.1 Background............................................................................................................... 5 2.2 Workload................................................................................................................... 7 3. Fiscal Analysis...............................................................................................................9 3.1 The County's Approach to Fiscal Analysis.............................................................. 9 3.2 Additional Dimensions of Tax Analysis................................................................... 9 3.3 Analysis of Exemptions and Tax Relief Measures................................................. 11 4. Legal Framework........................................................................................................ 16 4.1 Main Features of the County's Real Property Tax System..................................... 16 4.2 Organization and Clarity of the Code..................................................................... 18 4.3 Calendar.................................................................................................................. 19 5. Management of the Real Property Division .............................................................21 5.1 Introduction............................................................................................................. 21 5.2 Planning, Budgeting, and.Resource Requirements................................................. 22 5.3 Organization of the Division and External Organizational Relationships.............. 26 5.3.1 Organization..................................................................................................... 26 5.3.2 External Relationships.....................................................................................27 5.4 Work Management.................................................................................................. 27 5.5 Technical Competence............................................................................................ 28 5.6 Use of Technology.................................................................................................. 29 5.7 Quality Assurance Practices ................................................................................... 31 5.7.1 Ratio Studies.................................................................................................... 31 5.7.2 Standards of Performance................................................................................ 32 5.7.3 Limitations of Ratio Studies ............................................................................ 33 5.7.4 Observations on the County's Ratio Study Process and Results..................... 34 5.7.5 Documentation and Staff Involvement............................................................ 37 5.7.6 Supervisory Review of Appraisals................................................................... 37 5.7.7 Oversight.......................................................................................................... 38 5.7.8 Internal Controls, Security Procedures, and Data Edits............................... 40 6. Cadastral Data Collection and Management Procedures.......................................43 6.1 Maintenance of Ownership and Sales Data............................................................ 43 iv 6.1.1 Initial Processing ofConveyance Information ................................................ 43 6.1.2 Sales Data Processing ---------------------------- 44 6.2 Cadostrol Maps and Parcel Numbering System......................................................44 6.3 Maintenance of Property Records...........................................................................45 6.3.1 Building Permit Processing..............................................................................46 6.3.2 Other Inspections-------------------------------46 6.4 Contents of Property Records................................................................................. 46 7. Real Property Valuation.............................................................................................48 7.1 Appraisal Cycle and Frequency..............................................................................48 7.2 Valuation Methods.................................................................................................. 50 7.2.1 Land ------------------------------------- 51 7.7.2 Single-family Reaidental Buildings--------------------- 51 7.2.3 Multi-family Properties---------------------------- 53 7-2.4 Commercial and Industrial Property................................................................ 54 8. Administration of Exemptions and Relief Mechanisms..........................................55 8.1 Classification System................................................................. ............................ 56 8.2 Specific Exemptions------------------------------- 56 8.2.1 Agricultural Use Value---------------------------- 57 8.2.2 Homeowners Exemption-------------------------- 54 8.2.3 Other Relief Measures—The 3% Assessment Increase Cap--------- 60 8.2.4 Alternative Relief Mechanisms........................................................................ 63 9. Determination of Levies and Tax Rates....................................................................64 10. Assessment Appeal....................................................................................................65 10.1 Current System...................................................................................................... 65 10.2 Evaluation ............................................................................................................. 67 11. Tax Billing, Collection, and Enforcement...............................................................69 12. Public Information and Taxpayer Assistance........................................................ 71 12.1 General Information and Outreach ....................................................................... 71 12.2 Assistance with Exemption Application-------------------- 72 12.3 Programs for Responding to Complaints and Inquiries........................................ 72 12.4 Conclusions and Recomendations..................................................................... 73 13. Summary....................................................................................................................74 Appendix A: Working Interview Document...............................................................79 Appendix B: Frequency of Various State Property Tax Assistance Activities........83 Appendix C: References................................................................................................84 Appendix D: Benchmarked Assessment Districts.......................................................86 Appendix E: County Ratio Study ..............89 Appendix F : Examples Illustrating Level and Uniformity Statistics Based on Ratio Studies.......................................94 Appendix G: A Distribution-free Method for Locating Outliers and Extreme Outliers.........................96 Appendix H: Common Reappraisal Cycles and Property Inspection Practices......98 Appendix I: Elements that Contribute to Valuation Equity......................................99 v List of Figures Figure 1: Selected Trends in Hawaii County.................................................................... 6 Figure 2: State of Hawaii Local Government Revenue Sources.................................... 10 Figure 3: Use-value Assessment Programs, 1944............................................................ 12 Figure 4: Residential Property Tax Relief....................................................................... 12 Figure 5: Examples of Tax Expenditures------------------------ 14 Figure 6: Example ofTax Shifting ---------------------- 15 Figure 7: Ratio Study Standards ...................................................................................... 33 Figure 8: Holdout Samples ------------------------------- 41 Figure 9: Excerpt from Standard Tax Policy............................................... 61 vi List of Tables Table 1: Parcel Breakdown of Hawaii County 2011 - 2012.............................................. 8 Table 2: Property Tax Calendar....................................................................................... 20 Table 3: Funding and Staffing Benchmarks .................................................................... 23 Table 4: Pro Forma Staffing Analysis ............................................................................. 25 vii Executive Summary This report is a review of property tax policies of the County of Hawaii and the administative and assessment practices used to implement these policies. The purpose of this review is to draw conclusions regarding whether the property tax system used in Hawaii County comports with IAAO standards, and standards and best practices elsewhere in the U.S. In cases where the authors believe this not to be true, recommendations are made for achieving such standards and practices. Although this report comments on strengths of the current system as well as weaknesses, recommendations designed to identify and correct weaknesses represent the bulk of the report. This should not be taken to imply overall weakness in the current system, but is intended to focus attention on areas that should be considered for change, given the stated goals of the project. The Hawaii County real property taxation system has the essential underlying features in terms of the Code and general administration that are expected in U.S. county property tax systems. Processes are in place to find and value real property, to update values, to provide for exemptions, to administer appeals, and to collect property taxes. Although final, taxable values may be subject to constraint, for the most part the goal of the valuation system is market value, a desirable feature. Certain quality control procedures, such as ratio studies and internal data queries, are used to check the accuracy of the valuation system and real property transfers are subject to a conveyance tax and disclosure of sales prices—a very positive and important feature. Many of the elements expected to contribute to valuation equity are found in the County assessment system. Further description of these elements is outlined in the table in Appendix I. Another overarching impression is the comparatively low level of real property taxation. As measured by effective property tax rates (property tax obligations as a percentage of property values), residential property taxes in Hawaii County are low from a national perspective. Whereas property taxes on owner-occupied residences typically are about 1.3 percent of property value, property taxes in Hawaii County generally are less than 0.2 percent of property value. The low effective property tax rates for residential properties are the result of several policy measures designed to favor owners of agricultural land, principal residences, and low-rent housing. Under the County's property tax rate classification system, properties in the homeowner class have a nominal (officially adopted) property tax rate of 0.555 percent of net taxable value (estimated market value minus exemptions, etc.), whereas the highest nominal rate is 0.985. Moreover, owner-occupied principal residences are eligible for a home exemption that completely exempts properties valued at $40,000 or less and exempts 20 percent of the value above that threshold to a maximum of $80,000. Taxpayers over sixty years of age are eligible for additional amounts depending on their age bracket. Certain other taxpayers (victims of Hansen's Disease; blind, deaf, or totally disabled persons; and totally disabled veterans, their spouses, and unmarried widows) are eligible for viii further exemptions, some of which may be applied to properties other than their principal residence. In 1990, a "non-speculative residential use dedication" program was created under which an owner could petition to have the land on which his principal residence was located dedicated to residential use for ten (later five) years, in return for which the assessment would be frozen. New applicants are no longer permitted to participate in this program, but current properties with this dedication retain frozen taxable values. A replacement program, instituted in 2004, provides limits under which assessment increases cannot exceed 3 percent in any year. The complexity of eligibility criteria can make enforcement expensive. As is typical nationally, agricultural and forest land is valued on a current-use basis instead of a highest and best use-basis, which is the basis used in the estimation of market values. Use values are lower than market values when there is a potential to use land more intensively. Although the nominal property tax rate for agricultural property is comparatively high (at 0.835 percent), "dedicated" agricultural land is assessed at 50 percent of use value, while non-dedicated agricultural land is assessed at its use value. Other properties, such as golf courses, are to be valued in their current use, not highest and best use. The uniformity in effective tax rates potentially afforded by annually valuing property at its market value is undercut by the effects of the relief measures on net taxable values. Based on the limited information available to us, there is remarkable variation in effective property tax rates among similarly situated properties. The average variation in average effective property tax rates among census designated places is more than 300 percent. This project was undertaken in response to concerns expressed by Council members that the underlying policies found in the Code or the implementation of these policies by the Department of Finance Real Property Division have led to confusion, over-complexity, especially with regard to exemptions, and unequal treatment of similarly situated properties. Much of the public's concerns about the fairness of the property tax system can be attributed to a shortage of accessible information about why neighboring taxable values vary so greatly and about the rationale for and tax allocation effects of the various features of the system. Although taxpayers credit the staff of the Real Property Tax Division with providing helpful explanations to questions, there is little evidence of anticipating questions about appraisal procedures or about all the various relief mechanisms. The required quired annual report to the mayor is not very informative. The property record search function on the website is cumbersome to use. Difficulties in getting information can naturally lead to suspicions of misconduct. After reviewing both the policies and the administration and implementation of these policies, the authors of this report find the following major areas for concern: • No regular "cyclic" reappraisal, including physical inspection, of all real property. This is a concern because records of physical characteristics that contribute to market value become increasingly out of date over time. This in ix turn can contribute to the allegations of unequal valuation of similar properities. • Lack of use of regional building cost modifiers. While land is valued based on sales and the values therefore reflect location influences, this is less true with regard to building values. Especially for residential property, it is very unlikely that similar buildings in the resort and non-resort areas of the County would either cost or sell for the same amount. Merely adjusting the land values does not produce equitable building values, even if the overall property values are equitable. This is especially problematic since either of the values (land or improvement) is subject to appeal. • Lack of ability to use the income approach to value. There are three recognized approaches to valuing property--cost, sales comparison, and income. All three are important and, for income producing property, such as commercial enterprises, the income approach, in which net operating income is capitalized into value, is considered the approach most likely to reflect the market value of the property. While staff recognizes this, and even prepares valuations based on this method in appeals, the County Code does not allow the method to be used in the initial valuation process. This is a significant impediment. • Limited review of agricultural and other exemptions. While the Code and forms provide for taxpayers who no longer qualify for agricultural land valuation and various exemptions to report such changes, there is no automatic or periodic review of properties granted agricultural use value or homeowner's and other exemptions. The Code also calls for income based qualification requirements with respect to agricultural land, but these, apparently, have not been regularly implemented. While we know of no specific abuses, the underlying system is rife for such and added controls and implementation of requirements already found in the Code are important. • Limited grounds for appeals on equity grounds. Valuation related appeals are based on the taxpayer's interpretation of whether or not the property value reflects market value. While this is intrinsic within any appeals system, there is limited provision for appeals based on inequitable treatment between similarly situated properties. According to the Code, if the subject property were valued at market value, but all the surrounding properties were below market value, the subject property would have no appeal rights. This is not an administrative issue, but should be addressed by revising the Code to bring it into line with decisions by the United States Supreme Court. • Overly complex exemption system making it difficult to understand who benefits and how much they benefit. With minimum taxes and multiple tiers of agricultural and residential valuation and taxation, combining different tax rates with capped values and various exemption criteria, it is at best difficult x to ascertain whether benefits received from these programs apply as intended by the Council. Furthermore, although the value of the exemptions is reported, there is no attempt to convert this value into an overall analysis of how much tax benefit (incorporating rate differentials as well as exemption type) accrues to any particular type of property or ownership situation. This is a serious gap that could be addressed by Code changes to require extensive analysis of these tax effects. • Lack of ongoing, regular analysis of effects of exemptions. Regardless of the outcome of the analysis indicated in the preceding bullet, ongoing, annual analysis of exemption effects, expressed in overall and individual (say, per $100,000 of market value) properties should be undertaken. This too requires direction from the Council in the form of Code changes. • Complex multi-tiered tax rates. Similar to the complex exemption system, use of multi-tiered tax rates, with different rates applying to different types of property, leads to questions about how much benefit is accruing to particular low rate types and how much added cost is being shifted to high rate types. We found no evidence of any analysis of the effects of these multiple tax rates. • Lack of formal complaint investigation and reporting system. Part of the reason for undertaking this report was the appearance that complaints are not thoroughly reviewed and resolved. Since there is no higher (i.e. State) investigative authority, it is important to have an effective internal control system under which complaints are not only investigated and issues resolved, but these processes are adequately tracked and documented. • Limited documentation about sales validation and ratio studies. While staff appear to understand sales validation and ratio study principles, there is little documentation and this could lead to inconsistencies as various staff analyze sales. • Limited opportunities for consistent ongoing communication between staff. Although managers have periodic meetings to review activities, it appears that staff are not directly involved and do not meet regularly. Such contacts and communications can promote cohesiveness and encourage effective problem solving, as well as common understanding and consistent application of policies and procedures. • Limited training opportunities for staff. Currently, there are no requirements for ongoing, continuing appraisal related education for staff. This is a serious gap and makes it more difficult to improve appraisal techniques or implement new, technologically advanced, mass appraisal processes. xi • Vague property class definitions and an over-reliance on zoned use rather than actual use in determining property class. How a property is classified can affect its tax class and its valuation. Yet neither the Code nor the Appraisal Manual provides a clear definition of the tax classes in Section 19-53(e)(1), and the Manual does not reconcile those nine classes with the nine main "PITT" code classes. Some areas of the County have long been urbanized, yet the land is zoned agricultural, which can lead to seemingly inconsistent land values. • Limited use of digital maps and photographic images. Digital vertical photographic images are helpful in understanding land use and spatial relationships, and they, together with oblique, and street-level photographic images are helpful in determining whether improvements are correctly described. We were informed that the County has a geographic information system (GIS) and has acquired oblique imagery of buildings. Yet we were informed that the Division does not routinely use these technologies and has no plan to implement them. • Lack of analysis of workloads, productivity, and standards against which to evaluate performance. Current budgeting and management practices do little to ensure that the County is receiving value for money for the funds and staff resources that are allocated to property tax administration. The County should consider our specific recommendations in the above areas. It also could make a self-assessment of the strengths of its administration of the real property tax and of opportunities for improving the accuracy of valuations, the fairness of assessments, efficiency in operations, and greater public understanding and acceptance of the real property tax. The IAAO's Assessment Practices: Self-Evaluation Guide could be used in this evaluation.1 We believe that many of the issues that we have identified can be rectified, wholly or partially, without major budget or resource implications (apart from upgrading the CAMA system). For example, efforts to better train staff and better communicate with them could serve the secondary goal of empowering staff. This could lead to more uniform appraisals and, in conjunction with a cyclic property and exemption inspection program, could lessen complaints and build or strengthen the positive image of the Division. We hope that this analysis and report will provide impetus toward promoting and reinforcing positive goals that will lead to greater equity for all the taxpayers in Hawaii County. Our specific recommendations, which are discussed in detail in the body of the report, are listed below. It is not our expectation that the County implement these recommendations immediately or even, in some cases, in short order. Rather the recommendations are in- tended to provide a roadmap for changes that ultimately will facilitate the overriding goal of increasing fairness and equity in property tax policies and assessment administration. 1 When the County is satisfied with its assessment operations, it could consider applying for lAAO's Certificate of Excellence in Asscssrnent Administration. xii With this in mind, these recommendations should be considered, addressed deliberatively, and, to the extent possible and practical, implemented over time, involving stakeholders in the entire process. In reviewing the recommendations, note that those referring to policy or Code changes require action of the Council, while those referring to administration can be undertaken by the Finance Department without Code changes, although sometimes additional resources may be needed. The Recommendation Action Summary Table is intended as a guide to help administrators and policy makers understand whether any given recommendation can be initiated by the Finance Department, acting independently, or whether Council action is required before the Finance Department will be able to consider implementation. Recommendation Number Council Action Needed to Initiate Finance Department Action Needed to Initiate Recommendation Number 1 Council Action Needed to Initiate Recommendation Number 2 Council Action Needed to Initiate Recommendation Number 3 Finance Department Action Needed to Initiate Recommendation Number 4 Council Action Needed to Initiate Recommendation Number 5 Finance Department Action Needed to Initiate Recommendation Number 6 Finance Department Action Needed to Initiate Recommendation Number 7 Finance Department Action Needed to Initiate Recommendation Number 8 Finance Department Action Needed to Initiate Recommendation Number 9 Finance Department Action Needed to Initiate Recommendation Number 10 Finance Department Action Needed to Initiate Recommendation Number 11 Council Action Needed to Initiate Recommendation Number 12 Finance Department Action Needed to Initiate Recommendation Number 13 Finance Department Action Needed to Initiate Recommendation Number 14 Finance Department Action Needed to Initiate Recommendation Number 15 Finance Department Action Needed to Initiate Recommendation Number 16 Finance Department Action Needed to Initiate xiii Recommendation Number Council Action Needed to Initiate Finance Department Action Needed to Initiate Recommendation Number 17 Finance Department Action Needed to Initiate Recommendation Number 18 Finance Department Action Needed to Initiate Recommendation Number 19 Council Action Needed to Initiate Recommendation Number 20 Finance Department Action Needed to Initiate Recommendation Number 21 Finance Department Action Needed to Initiate Recommendation Number 22 Council Action Needed to Initiate Recommendation Number 23 Finance Department Action Needed to Initiate Recommendation Number 24 Finance Department Action Needed to Initiate Recommendation Number 25 Council Action Needed to Initiate Recommendation Number 26 Council Action Needed to Initiate Recommendation Number 27 Council Action Needed to Initiate Recommendation Number 28 Finance Department Action Needed to Initiate Recommendation Number 29 Council Action Needed to Initiate Recommendation Number 30 Council Action Needed to Initiate Recommendation Number 31 Council Action Needed to Initiate Recommendation Number 32 Council Action Needed to Initiate Recommendation Number 33 Council Action Needed to Initiate Recommendation Number 34 Council Action Needed to Initiate Recommendation Number 35 Council Action Needed to Initiate Recommendation Number 36 Council Action Needed to Initiate Recommendation Number 37 Council Action Needed to Initiate Recommendation Number 39 Council Action Needed to Initiate xiv Recommendation Number 40 Council Action Needed to Initiate X Finance Department Action Needed to Initiate When the above table denotes action needing to be initiated by the Council, once such action is initiated, the expectation implicit in the recommendation is that the Finance Department will be involved in implementation and administration. Recommendation 1: The Council should require the Finance Department to conduct annual analysis of the tax shifting and allocation effects of multiple tax rates in comparison to a single rate system to determine if the intent of the policies underlying the multiple rate system is being realized. Recommendation 2: The Council should implement Code changes to require the Finance Department to analyze tax loss, shifting, and other effects of property tax exemptions, including the cap on assessed value increases for certain residential property. Such analysis should be conducted on an annual basis with the results, including a review of the intent of each exemption or limitation policy, reported to the Council and made available to the public. Recommendation 3: The Finance Department and Corporation Counsel should review Chapter 19 of the Code for the reasons given in report Section 4.2 (i.e. improve clarity and eliminate unused provisions) and to implement our other recommendations that would need or benefit from a legal authorization. Recommendation 4: The Council should consider Code amendments implementing requirements for annual ratio studies, periodic review of properties granted full or partial exemptions, physical inspection of property on a regular basis, and acceptability of the income approach to value. Training and certification requirements should also be addressed. Recommendation 5: The Department of Finance and the Real Property Tax Division should consider a strategic planning exercise as a way of formally addressing opportunities for improvement, setting priorities for their achievement, and committing the necessary resources. In addition, management should look for ways to increase staff involvement with planning. xv Recommendation 6: The Real Property Tax Division should consider justifying its funding requests on a program or activity basis to better enable expenditures to be related to results. 2 Recommendation 7: The Real Property Tax Division should prepare an estimate of the number and allocation of the staff it needs. 3 Recommendation 8: The Real Property Tax Division should deploy its appraisers on a task, property type, and a market area basis, rather than the current geographically based zone basis. Recommendation 9: The Real Property Tax Division should state performance expectations clearly and institute the necessary internal controls to provide assurance that performance is in line with standards. Recommendation 10: The Real Property Tax Division should assess the interest and needs of appraisers in further education in mass appraisal and property tax administration and develop a program to offer courses designed to meet those needs. Consider establishing continuing education programs for appraisers. Recommendation 11: The Council should provide the Real Property Tax Division with funds to upgrade the current version of the ias system. That the Division develop a plan to fully incorporate spatial analyses and other GIS capabilities in its operations and that oblique imagery be reviewed as part of the Division's property inspection program. Recommendation 12: The Council should require the Finance Department to conduct a review of IAAO ratio study performance standards and adopt standards for appraisal level and both horizontal and vertical uniformity. Consider dedicating appraisal staff resources to correcting deficiencies when they are discovered. Recommendation 13: The Real Property Tax Division should consider and implement a more definitive system for reviewing sales deemed invalid. This is needed to ensure consistent decision-making regarding determination of sales validity. 2 See Assessment Practices: Self-Evaluation Guide, pp. 13-14. 3 See Assessment Practices:Self-Evaluation Guide, pp. 11-13. xvi Recommendation 14: Ratio studies conducted by the Real Property Tax Division should include procedures for identifying and, possibly, trimming outlier ratios. Such procedures may be modeled after those found in the IAAO Standard on Ratio Studies. Recommendation 15: Except when too few sales are available, the Real Property Tax Division should do ratio study analysis by market area and by each appraisal area or appraiser. Results should be discussed with all appraisal staff and plans of action developed to correct deficiencies. Ratio studies should also be considered and attempted for commercial properties. Recommendation 16: The Division should add missing statistical and graphical elements, such as histograms, lists of trimmed sales, and reliability statistics to enable proper interpretation of results. Recommendation 17: The Real Property Tax Division should develop a ratio study procedure and explanatory manual separately from the Appraisal Manual. Staff should receive training in conducting and understanding ratio studies. Recommendation 18: The Real Property Tax Division should consider formalizing supervisory review of some or all appraisals done by staff. They should incorporate a broader role for valuation analysts, including running queries on a regular basis to look for sales chasing and building permit chasing. Findings should be reported as part of an annual ratio study report. Recommendation 19: The Council should consider ways by which a body independent from the Real Property Tax Division could be formed to review the quality of appraisals and the techniques, such as ratio studies, currently employed by the Division to report on this quality. Code should be changed to reflect this new process. xvii Recommendation 20: The Real Property Tax Division should implement holdout samples or use subsequent sales not part of the appraisal model to provide an independent test of the quality of the values generated by the CAMA system. To the extent such queries are not routine under the current system, the Division should develop routine queries to compare market value changes on selling and non-selling parcels by market area, neighborhood and other relevant strata. The Division should develop a systematic approach to reviewing unusual value or ratio issues incorporating both office review and field review procedures. Recommendation 21: The Division should review current data entry edits and security procedures to ensure that they meet industry standards as outlined in IAAO references and elsewhere. Recommendation 22: The Council should request all counties in the State of Hawaii to approach the State Bureau of Conveyances about amending the Conveyance Tax Certificate or attaching a supplemental declaration that attempts to elicit the information needed to evaluate the usability of each conveyance. 4 Recommendation 23: Until the Conveyance Tax Certificate (CTC) is improved, as recommended in Section 6.1.2 of this report, the Division should routinely send sale confirmation letters to buyers and sellers, especially when there are few transfers in the area or of the type of property in question and when the property that was sold received an exemption or other form of preferential assessment. Recommendation 24: The Division should develop and implement a plan for verifying the accuracy of each property record at least once every six years. Recommendation 25: The Council should require a regular property inspection cycle. Every property should be inspected at least once every six years. 4 See Section 2.2 and Appendix A of Standard on Verification and Adjustment of Sales. xviii Recommendation 26: The Council should consider Code changes to permit the use of the income approach, especially for multi-family and commercial properties, in addition to the other recognized approaches to value,when appropriate on the basis of data availability and type of property under consideration. The Division should review data gathering methods to try to maximize available income and expense information. Recommendation 27: The County should implement the updated agricultural land values developed by the Division. If the effects of implementing the proposed values do not comport with the County's agricultural land preservation policy, the values should be changed appropriately or changes in Section 19-53, County Code, should be considered. If so, the Division should provide such recommendations to the Council. Recommendation 28: The Division should consider developing different building cost location modifiers to reflect differences in material and labor costs between the east and west sides of the island. Recommendation 29: Before moving to combined land and building valuation, the County should review this decision with a broad array of stakeholders to eliminate unanticipated problems. Recommendation 30: The Council should consider Code changes to institute a review cycle or requiring re-application for exempt property. Recommendation 31: The Council should require the Division to conduct more frequent inspections and inclusion of proof of eligibility and income information as part of the application process for agricultural use value assessment. A stakeholder committee should be established to review the intent of underlying policies and allegations of abuse. This committee should also look into the possibility of consolidating agricultural use eligibility options, weighing the benefits of a simpler, more transparent system against specific tax shifts. Recommendation 32: The Council should consider working with state legislators to obtain residency information from income tax returns and death certificates to prevent abuse of homeowner's exemptions. In addition, the Division should institute procedures to verify residency using drivers' licenses and voter registration records. xix Recommendation 33: The Council should require the Finance Department to analyze the effects of the 3% assessed value increase cap to determine if the underlying policies are being fulfilled. In addition, although no new claims can be made for the non-speculative residential use dedication, the Council should review the underlying policies for retaining this value freeze for properties remaining under the dedication. Both programs should be reviewed with respect to the different tax treatment that results for similarly situated properties with and without the dedication or the 3% cap. Recommendation 34: The Council may wish to consider incorporating sunset provisions into exemptions to force periodic review of underlying policies. Recommendation 35: The Council should consider establishing a stakeholder committee to identify problems related to tax relief and review options. Recommendation 36: The Council should consider establishing a stakeholder committee, including taxpayers, to determine specific ways to make the relationship between taxes and value changes more transparent. Recommendation 37: The Council should revise Section 19-93 of the Code. Specifically, it should reduce the 20 percent value-difference threshold to no more than 10 percent, at least for residential property. The current non-uniformity ground should be revised to permit non-uniformity appeals based on valuation practices generally. The filing fee requirement should be eliminated, at least on principal residences. Appellants should not be allowed to appeal only the land value or the improvement value without contending that the sum of the land and building values exceeds the over-valuation threshold that is adopted. Recommendation 38: The Council should make the first stage in the appeal process an informal appeal to the Division. Recommendation 39: The Council should require the Finance Department to undertake an analysis of the cause of the increase in the gap between delinquencies and delinquent tax collections to determine whether there is weakness in billing and collection procedures. xx Recommendation 40: The Council should require the Finance Department to undertake a review of staff public relations related training and may need to update this training. A public relations manual should be developed. Outreach should be expanded to be certain that issues driving public complaints are being addressed. Complaint handling procedures should be formalized. Outreach should include an expansion of publicly available general information, including documents describing valuation methods and results of tests of the quality of appraised values, such as ratio studies. A citizens' committee should be organized to conduct periodic review of brochures and forms to make sure they are easily understandable. List of Recommendations Recommendation 1 -----------------------------------11 Recommendation 2 ........................................... 15 Recommendation 3 ............................................ 19 Recommendation 4 ............................................. 19 Recommendation 5 ..... ....................................... 22 Recommendation 6 ............................................... 22 Recommendation 7 ----------------------------------- 24 Recommendation 8 ----------------------------------- 26 Recommendation 9 ----------------------------------- 28 Recommendation 10 ----------------------------------- 29 Recommendation 11 ----------------------------------- 30 Recommendation 12 ----------------------------------- 33 Recommendation 13 ............................................. 35 Recommendation 14 ----------------------------------- 36 Recommendation 15 ----------------------------------- 37 Recommendation 16 ----------------------------------- 37 Recommendation 17 ---------------------------------- 37 Recommendation 18 ----------------------------------38 Recommendation 19 ------------------------------------39 Recommendation 20 ............................................ 42 Recommendation 21 -----------------------------------42 Recommendation 22 ............................................ 43 Recommendation 23 .............................................. 44 Recommendation 24 ----------------------------------46 Recommendation 25 ........................................... 50 Recommendation 26 ........................................... 50 Recommendation 27 ----------------------------------51 xz| xxi Recommendation 28 ......................................................................................................... 53 Recommendation 29 ......................................................................................................... 53 Recommendation 30 ......................................................................................................... 57 Recommendation 31 ......................................................................................................... 59 Recommendation 32 ......................................................................................................... 60 Recommendation 33 ......................................................................................................... 62 Recommendation 34 ......................................................................................................... 62 Recommendation 35 ......................................................................................................... 63 Recommendation 36 ......................................................................................................... 64 Recommendation 37 ......................................................................................................... 68 Recommendation 38 ......................................................................................................... 68 Recommendation 39 ......................................................................................................... 70 Recommendation 40 ......................................................................................................... 73 xxii Report Evaluating Property Tax Policies and Administrative Practices in Hawaii County 1. The Technical Assistance Project 1.1 Background and Introduction As a result of a constitutional amendment enacted through the Constitutional Convention of 1978 and ratified by vote of the people of Hawaii, the State of Hawaii transferred the property tax program to each of the four county governments, effective July 1,1981. 5 This change is incorporated in the Constitution of the State of Hawaii, which contains the statement that the: ...taxing power shall be reserved to the State, except so much thereof as may be delegated by the legislature to the political subdivisions, and except that all functions, powers, and duties relating to the taxation of real property shall be exerercised exclusively by the counties....6 This change and the property tax structure that has developed is significant in several ways, most notably in that the state oversight role fulfilled to some extent by every other state except Delaware does not exist in Hawai`i. 7 Although every state except Montana and Maryland vests much or all of the assessment, appraisal, and tax collection aspects of property tax administration with local governments (primarily municipalities, counties, towns, and townships), underlying statutory guidance as well as varying degrees of oversight are granted by or occur at the state levels In Hawaii there is far greater responsibility for local property tax policies than is typical throughout the U.S. State oversight can include many activities, such as: • A framework of legislation for exemptions and favored treatment of selected property types or uses. • Coordination of education and certification requirements and programs. • Quality assurance through independent ratio studies and performance audits and standards. • Appraisal references, publications, and guidelines or administrative rules. • Assessment administration software or guidance and assistance in the procurement of such software. • Assistance or guidance with regard to assessment related mapping. 5 Ooka, Stanley,CAE. Hawaii's Decentralization of Real Property Tax Functions Assessment Digest May/June, 1982. IAAO 6 Article VIII, Section, 3. The Constitution of the State of Hawaii. 7 Dornfest, Alan S., Steve Van Sant, Rick Anderson, and Ronald Brown. State and Provincial Property Tax Policies and Adminatrative Practices (PTAPP): Compilation and Report. Journal of Property Tax Assessment & Administration Volume 7, Number 4. 2010. p. 15. 8 Ibid. In addition to oversight per se, states provide numerous types of assistance to local assessors. The full array of the number of states and Canadian provinces providing various services to local governments is found in Appendix B, which is extracted from the recently conducted PTAPP survey. Given the absence of a state oversight function and a desire to understand and evaluate the quality of assessment practices in the County of Hawai'i, the county legislative auditor contacted the International Association of Assessing Officers (IAAO) at the request of the County Council to enlist the aid of IAAO in reviewing both the underlying property tax polices established by the Council in the forin of County Codes and Regulations and the consistency and effectiveness of assessment administration designed to implement these policies. The mission of IAAO is to promote innovation and excellence in property appraisal, assessment administration, and property tax policy through professional development, education, research, and technical assistance. The organization accomplishes this mission by developing, promoting, and offering professional appraisal and assessment education programs, publications, and technical standards, all of which are specifically tailored to property tax and property tax assessment operations. IAAO also participates in property tax policy debates to inform the process in an objective and professional way. 1.2 Scope of the Technical Assistance Project This report is designed to provide an analysis of the underlying property tax policies in Hawaii. County and the administration and implementation of these policies. Specifically, this investigation includes the following components, addressed in the indicated report sections: 1. review and analysis of the current assessment processes, procedures, and methodologies for the County (report Sections 2 through 12). 2. on-site situational review and interview of relevant personnel as to their processes, workloads, and conformance with local laws and office procedures (report Section I and Appendix A). 3. a thorough review of local laws, practices, and procedures that address property tax laws and tax exemptions, and their associated timelines (Sections 2 through 12). 4. a review of local property tax exemption laws and provisions, as well as the procedures in place to both enforce and protect said exemptions. Compare local exemption laws and practices with those of other U.S. jurisdictions and provide the County with an objective opinion as to the practical implementation of the exemptions, as well as the ability of current personnel to enforce the laws regarding exemptions that are in place (Section 8). 5. provide standard performance recommendations related to sound assessment practice (Sections 5 through 12). 6. compare local tax policies and procedures to similar jurisdictions and to published best practices (Sections 5 through 12). 2 7. examine local laws, procedures, and practices with regard to tax policy and administration with regard to their comparison to IAAO Standards (Sections 2 through 12). In terms of analyzing these components, findings are to: a. Render an opinion and offer recommendations as to the local property tax assessment processes and procedures. b. Summarize the current local situation with regard to adherence to and utilization of exemptions and compare to other jurisdictions. Make recommendations to the County as to whether the laws currently in place can reasonably be enforced and how those laws compare and contrast with similar laws elsewhere. If appropriate, suggest changes in practices, procedures, and/or legislation that might help to resolve impracticalities. c. Report on local staffing adequacy relative to jurisdiction size and valuation complexity. Using IAAO Standards as a guide, make recommendations regarding whether the staff size is adequate to maintain the property tax system currently in place. d. Offer other information and analysis of common jurisdictional ad valorem property tax law and the comparison of the norm to the rules and procedures in place in Hawai'i. 1.3 Limitations The report and its findings are limited to information learned in the course of interviews, a review of pertinent material provided by the County, and a review and comparison with pertinent IAAO literature and contextual information based on the experience of the authors. There was no attempt to audit assessment records for accuracy or to perform independent ratio studies, sales verification, or other performance evaluation procedures. In addition, the report does not attempt to critique individual staff and management performance mance. Where we feel that current practices may have lead to less than optimal assessments or assessment equity, observations and recommendations are provided. 1.4 Methodology of the Project To conduct this review, the County of Hawai'i retained the International Association of Assessing Officers (IAAO). The IAAO organized a team of experts, including Alan Dornfest, AAS and Richard Almy, both of whom have extensive experience reviewing property tax policies and assessment administration systems throughout the U.S. The report was reviewed by Jeffery Spelman, CAE. Mr. Dornfest and Mr. Almy, who are the primary authors of this report, met with the Finance Director, attorneys from the Office of the Corporation Counsel, staff of the Department of Finance Real Property Tax Division, the Managing Director, whose office oversees the Department of Finance, a Council member, an aide to another Council member, and several citizen / stakeholders. Meetings were held on site, mostly in the Hilo or Kona areas, during the week of November 14, 2011. Additional meetings were held via conference call prior to the on-site visit with the Legislative Auditor, who facilitated scheduling all the meetings. The Legislative Auditor 3 also was in attendance at the on-site meetings. As a follow up, there was an additional conference call meeting in December with another stakeholder. The Real Property Tax Administrator provided a substantial amount of detailed analytical information regarding ratio study results and the amount of property subject to various exemptions. Appraisal manuals, tax rate information, mapping information, and brochures and application forms or other information relating to homeowner's, agricultural, and other exemptions and appeals processes were also provided. The County property tax code and pertinent rules and regulations were provided as well. All the individuals with whom we met cordially responded to our questions and assisted Lis in understanding both the current system and their concerns. Staff also provided several recommendations for improvements that are addressed in this report. Staff and other stakeholders who participated in interviews appear dedicated to providing a system that will facilitate improving taxpayer equity. Staff and stakeholders who were interviewed were informed that their discussions with us would remain confidential, so a complete list of interviewees and interview notes is not included in this report. As part of this review in addition to materials provided by the County, we drew upon a number of IAAO publications (see Appendix C and the footnotes throughout the report). 1.5 Report Format The report has been divided into several major topic areas, as outlined in the Table of Contents. Additional minor topic areas will be found under some of the major headings. Although these may not specifically match items found in the scope, this format is designed to provide the most comprehensive analysis practical and to encompass the concepts addressed in the scope. Recommendations will be presented under the topic area to which they are pertinent. Some may be found in summary sections at the end of certain major topic areas. All recommendations are repeated in the Executive Summary, but supporting discussion is found only in the report body. To facilitate the review and the project, a basic framework was developed for interview questions. This framework is found in Appendix A. 4 2. Economic, Fiscal, and Institutional Setting The economic, fiscal, and institutional setting of a property tax system influences its development and evolution. 9 An understanding of the background of Hawaii County's real property tax system also is helpful in evaluating it. 2.1 Background The current local system of real property taxation is an outgrowth of the centralized system that existed from before statehood until the Hawaii Constitution was amended in 1978 to devolve responsibility for property tax policy and administration to the counties in 1981. Longstanding features of the real property tax system include low levels of taxation (partly achieved by relief measures) and considerable authority accorded to administrators. Regarding the level of property taxation, we reviewed an analysis of data compiled by the National Association of Home Builders on median housing prices and median real estate taxes in Hawaii County's census designated places from the 2005-2009 American Community Survey of the U.S. Census Bureau. The median residential effective property tax rate (property taxes as a percent of property value) was 0.147 percent. According to data provided by the U.S. Census Bureau and compiled by the Idaho State Tax Commission, 10 the State of Hawaii ranked 36th in property taxes per capita (at $1,016) in 2009 and 42nd in property taxes in comparison to income. In the income based comparison, property taxes in Hawaii were 30.7 percent below the U.S. average. There are several other distinctive features of Hawaii County and its real property tax system. As with the systems in other Hawaii counties, there is no state oversight of property tax administration. 11 However, the county real property tax administrators cooperate and have brought in IAAO instructors for training. There are no overlapping local governments. Some functions normally provided by local governments and funded from property taxes, such as public education, remain provided by the state (perhaps this feature best explains the low level of property taxation). Nevertheless, real property taxes account for nearly 60 percent of the County's revenues, according to the County's 2010 Comprehensive Annual Financial Report. The report also succinctly describes the economic situation: "The Big Island is the most diversified of the neighbor island economies. As a result it is buffered to some extent when any one industry lags. Although 9 In addition to information obtained from county officials, this section draws from Advisory Commission on Intergovernmental Relations, 1963, The Role of the States in Strengthening the Property Tax,Volume 2, pp. 34-40; Lonely Planet, 2011, Discover Hawaii, The Big Island; and Wikipedia. 10 http://tax.idaho.go v/reports/EPB00074_01-06-2012.pdf, last accessed January 21, 2012 11 This is also true of Delaware (with only three counties), the District of Columbia, Maryland and Montana (both have state-administered systems), and Puerto Rico (which still has a territorial system). Oversight is negligible in Connecticut, Pennsylvania, and Rhode Island. 5 2009 proved to be a challenge for most of the major sectors of the island's economy, the end of fiscal year 2010 and beginning of fiscal year 2011 showed the early signs of an impending economic recovery." Although available statistics show that the County has not escaped from tlae Great Recession, it benefits from its economic and ecological diversity and high levels of government employment, as the trends in Figure 1 suggest. Although statistics on the County's fiscal situation are not readily available, the declining trend in property tax revenues could signal the distress that led to the Furloughs that were mentioned. Other statistics suggest that housing prices on the island are lower than in Hawai`i's other counties. Figure 1: Selected Trends in Hawaii County graphic Sources: County of Hawaii, City and County of Honolulu, and Zillow. The County of Hawaii has a mayor-council form of government. For administrative purposes (including real property taxation), the County is organized into nine zones. County employees are unionized. The Real Property Tax Division (the Division) is a unit of the Department of Finance, the director of which is officially responsible for property taxation under the County's code. As will be discussed, the Division relies on data and services from other agencies. It receives information on property transfers from the Bureau 6 of Conveyances of the State Department of Land and Natural Resources. The Division receives building permit data from the Public Works Department and cadastral maps from the Planning Department. It receives support from the Corporation Counsel and the Data Systems Department. It also has arrangements to receive Multiple Listing Service data and data from escrow firms. Hawaii has a dual system of land tenure. That is, there is a "regular" deed recordation system. There also is a title registration (the Land Court). The state has a high level of multiple ownership of property. The transfer tax has progressive rates, but the rates overall are low (the rate is 0.1 percent on houses worth $600,000 or less if the purchaser is eligible for a homeowner's exemption). The interplay between land-use zoning, actual land use, the Division's determinations of tax class and highest and best use for valuation purposes is unclear (as will be discussed in Section 6). However, "urban" land zones (residential, commercial, resort, and industrial constitute 1.3 percent of total land area, while urban land uses constitute 1.5 percent. Mixed land uses constitute 22.5 percent of total area. Insularity is unsurprising both on an island and in property taxation generally—most policymakers and property tax administrators perforce are intimately familiar with their situation and scarcely aware of systems elsewhere. In addition, bureaucrats can exhibit insularity in their day-to-day activities. It seems apparent that greater openness in the operation of the real property tax system would be desirable to address pervasive suspicions of irregularities. 2.2 Workload Workloads express legal requirements in numerical terms so that resource requirements and efficiency measures can be estimated (see section 5). Of course, an assessor's work load always is a moving target as new development occurs and property prices change. However, snapshots of parcel counts and transaction or event statistics such as sales, new construction, exemption applications and appeals provide an indication of workloads. Unfortunately, the County does not produce an accessible compilation of such statistics. Nor does it produce statistics on work accomplished or on productivity rates. However, fragmentary statistics can be found in scanned documents in the County of Hawai'i Current Data Book and in data compiled by the Real Property Assessment Division of the City and County of Honolulu. 12 At the time of our review there were approximately 140,000 taxable parcels of real estate in the County. Table I provides a breakdown. Although definitions of the County's classes were not in the material we received, it appears that there are at least 56,000 residential properties as they are usually defined and that there are about 14,000 commercial and 12 http://records.co.hawaii.hi.us/Weblink8/Browse.aspx?dbid=1&startid=27952 and http://www.realpropertyhonolulu.com/portal/rpadcms/Reports;jsessionid=8D0BFB306E415 IAC990EE70BE13BAA8F?parent=REPORTS. 7 industrial properties (including apartments and hotels and resorts). In addition, there are more than 50,000 exempt properties in thirty-five categories. It should be noted that the County's policy for determining assessment classes (discussed below) can result in a misleading picture of actual property use. Table 1: Parcel Breakdown in Hawaii County: 2011-2012 Property Class Parcel Count Residential 20,359 Homeowner 35,741 Affordable Rental 1,142 Apartment 9,832 Commercial 2,061 Industrial 1,215 Hotel/Resort 672 Agricultural/Native Forest 67,896 Conservation 1,090 Total 140,008 Source: City and County of Honolulu In 2009, more than 3,000 building permits were monitored. In addition to inventorying and valuing new construction, the Division staff processed more than 2,400 conveyances. Also, a large number of exemptions and other relief program participants were monitored. 13 Because the income approach is not used, no income and expense statements were processed. In addition, the Division dealt with more than 1,000 appeals. As noted in the discussion of the property tax calendar, there is a time dimension to appraisal and assessment work. The deadlines associated with finishing annual assessments before the deadline for certifying the roll require field inspections of building permits and construction in process. Sales analysis is concentrated in the latter part of a year. Appeals begin to be processed in July, and they are concluded in November. 13 Not including preferentially assessed properties,there are about 51,000 exempt parcels in thirty-five categories, according to a report issued by the City and County of Honolulu. 8 3. Fiscal Analysis Fiscal analysis includes the numeric description of the property tax, typically including reports of total valuation, taxable or assessed value, value of exemptions, tax rates, and the tax consequences of exemptions. 3.1 The County's Approach to Fiscal Analysis The County provided various reports showing: 1. Cross, net, and exempt value by land use class; 2. The number of properties subject to various exemptions,by exemption type, and the value exempt under these provisions; 3. The number of records by land use class; 4. 2010 and 2011 property tax rates by property class and the amount of property tax revenue to be levied within each class; 5. General statistics, including building permits, labor and tourism information, population, overall tax collections, and the Honolulu consumer price index; 6. A comparison of property tax rates with other counties within the State of Hawaii. This information is useful in trying to understand the scope and breadth of property taxes in the County. However, it stops short of providing some important elements that increase the transparency of the property tax and associated exemptions. 3.2 Additional Dimensions of Tax Analysis More complete tax analysis would include the following: 1. Use of the property tax. If it can be distinguished from other revenue sources, the amount of property tax revenue used for various County purposes should be identified. This helps fulfill the assessing officer's roll as: "...a very important inforation clearinghouse." 14 2. How much property tax is paid by each type of property relative to its share of totol value. This addresses the otherwise complex issue of understanding the effect of different tax rates and different exemption amounts for different property classes or uses. 14 Dornfest, Alan S., AAS. Overcoming Property Tax Demons and Mysteries. Fair & equitable. January, 2003. Volume 1, Number 1. p. 11. 9 3. The extent of importance of the property tax in funding in the County. In this analysis, it would be useful to compare are the relative importance of property tax as a funding source to frees, intergovernmental revenue sharing, grants, and other sources. 4. Tax expenditures resulting from exemptions quantified to the extent possible in terms of taxes shifted to other taxpayers or tax revenue lost. An example demonstrating, the relative importance ofthe property tax in funding local government would be the following, taken from the latest U.S. Census Bureau analysis of state, and local revenue sources, See Figure 2. Although this chart reflects revenue for all. local governments within the State of Hawai`i, it at Least demonstrates the importance of the property tax for localgovernments in general. 15 Information more specific to the County would be preferable. Figure 2: State of Hawai`i Local Government Revenue Sources Notable in analysis of previous years' versions of this table is the predominance of property tax as as a local government funding sounrce in Hawaii in comparison to other states. In FY 2005, for example, 43.3%, of own source tax revenue came from property taxes in Hawai'i, as opposed to the U.S. average of 27.9%, Local governments in Hawaii ranked 7th in the U.S. in this measure at that time. 15 http://www2.census.gov/govs/estimate/09sIsstab1a.xls Last accessed December 29, 2011. 16 U S. Census Bureau as cited in: Almy, Richard, Alan Dornfest, and Daphne Kenyon, PhD. Fundamentals of Tax Policy. IAAO 2008. pp.88-89. 10 Additional examples of important questions that may be able to be answered through analysis include 17: • How much of the tax is on business versus individuals? • How much of the tax is on high-income versus low-income taxpayers? • How much of the tax is on residents versus nonresidents? • How much of the tax is home by the agricultural sector versus other sectors? It is notable that the County uses varying nominal tax rates in addition to exemptions. In general variable tax rates, such as are in place in Hawaii, are preferred over systems that provide differing fractional assessment ratios based on property type or class. 18 However, no analysis was presented demonstrating the effects of these varying rates in terms of tax allocations among or between classes. Another interesting and useful comparison would be to analyze the amount paid by each property class under the multiple rate system in place and compare the results to the amounts that would be paid by each class if there were a single rate system. This would enable policy makers and the public to understand the true effects of the multiple rate system. Recommendation 1 Recommendation: The Council should require the Finance Department to conduct annual analysis of the tax shifting and allocation effects of multiple tax rates in comparison to a single rate system to determine if the intent of policies underlying the multiple rate system is being realized. 3.3 Analysis of Exemptions and Tax Relief Measures In addition to understanding the tax base and the tax burden as it relates to the portion of property or property value deemed taxable, it is important to fully understand the effects of exemptions. First of all it is worth noting that exemptions and relief measures abound in every property tax system in the United States. See Figures 3 and 4. Apart from the governmental and social benefit exemptions (i.e. charitable foundations, religious corporations, etc.), nearly every state includes overt exemptions or non-market valuation techniques (commonly known as "use value") for agricultural land and residential property, used as the principal residence of the owner.19 17 Almy, Richard, Alan Domfest, and Daphne Kenyon,PhD. Fundamentals of Tax Policy. IAAO. 2008. p. 143. 18 2010.Standard on property tax policy. Section 5.3.2. Kansas City,MO: IAAO. 19 Dornfest, Alan S., Steve Van Sant, Rick Anderson, and Ronald Brown. State and Provincial Property Tax policies and Administrative Practices (PTAPP): Compilation and Report. Journal of Property Tax Assessment & Administration. Volume 7, Number 4. 2010. Figure 3: Use-value Assessment Programs, 1999 Table 12. Use-value assessment programs, 1999 Number of Provinces/States Program Requirements Eligible Property Withdrawal Valuation Types Application Size Income Contract Penality Standards Canada Agricultural 3 3 2 21 2 1 1 Forest/timberland 3 2 2 01 2 1 2 Residential 1 0 0 0 0 0 1 Historic buildings 11 1 0 0 11 0 0 No response or N/A 8 United States Agricultural 34 28 171 14 4 21 22 Forest/timberland 17 16 11 2 6 14 12 Residential 6 3 3 0 0 3 4 Historic buildings 6 6 3 2 1 3 3 No response or N/A 17 Figure 4: Residential Property Tax Relief Table 11: Residential property tax relief Use of Measure Qualification Criteria 2009 PROVINCES STATES Prvs. Sts. Ttl. Age Inc. Occ. Value Age Inc. jocc. Value Circuit breaker 0 33 33 0 0 0 0 20 30 33 5 Renters' credit 0 23 23 0 0 0 0 14 23 0 1 P-tax deferral 2 26 28 2 1 1 0 17 20 21 2 Indiv, tax inc. limit 2 9 11 1 0 1 0 1 0 3 1 Assess. inc. limit 2 19 21 0 0 0 0 3 1 3 1 Partial exemption 2 30 32 0 0 1 1 13 6 27 5 Partial p-tax levy 1 13 14 0 0 1 0 4 4 9 2 Other 4 24 28 1 1 4 0 0 9 8 12 5 Note: in Figure 4, the following abbreviations are used: Prvs. —Provinces (Canadian) Sts. — States Ttl. ---Total (of provinces and states) Inc. —Income Occ. -- Occupancy (e.g. Owner occupancy requirements for some relief programs) 12 In addition, tangible business personal property is wholly or partially exempt in thirteen states, as it is in the County. 20 Qualitatively, exemptions will be covered in more detail in Section 8 of this report, which will also contain more specific references to the exemptions reviewed in the County. With regard to tax analysis, it is important to understand the "value" of each exemption in terms of tax expenditure. In other words, when exemptions are granted one or more of three things can occur with regard to total tax collections and who pays the taxes. 1. If tax rates are predetermined, and an exemption then is granted, tax collections are reduced. In this case, taxpayers receiving the exemption pay less, everyone else pays the same, and the total amount available for government services is reduced. 2. If tax rates are based on overall revenue needs and the rates can be increased to compensate for any exemption, tax revenue may remain the same, but tax burden is shifted to taxpayers not enjoying the exemption in the form of higher rates. 3. Otherwise lost or shifted property tax revenue may be paid by some substitute, such as higher fees, alternate taxes, or an increase in intergovernmental revenue sharing. The purpose of this report is not to advocate for or against exemptions as such or to suggest any preference among the preceding options. It is important however to analyze the effects of exemptions to enable policy makers to determine whether the intent of the policies behind the exemptions is being fulfilled, at least in terms of any expectations regarding the amount of taxes lost, shifted, or replaced. Figure 5 is an example of tax expenditure analyses of different tax types. 21 20 Dornfest, Alan S., Steve Van Sant, Rick Anderson,and Ronald Brown. State and Provincial Property Tax Policies and Administrative Practices (PTAPP): Compilation and Report. Journal of Property Tax Assessment & Administration. Volume 7, Number 4. 2010. 21 Almy, Richard, Alan Dornfest,and Daphne Kenyon, PhD. Fundamentals of Tax Policy. lAA0. 2008. p. 164. Superscripts provide additional references found in the textbook, but not included in this report. 13 Figure 5: Examples of Tax Expenditures Table 5-10. Examples of Tax Expenditures Type of Expenditure Years $ Millions U.S. Income Tax Expenditures a 2003-2007 Individual Retirement Account 94,200 Property tax deduction 97,800 Total charitable deduction 223,800 Employer contributions to medical insurance premiums 480,600 Capital gains on residence 107,600 Capital gains 293,900 Step-up basis of capital gains on death 155,500 Oregon Property Tax Exemptions b 1997-1999 Charitable, literary, and scientific 45.2 Religious organizations 63.0 Arizona Sales Tax Exemptions c 2000-2001 Legal services 92.7 Telemarketing bureaus 12.1 Computer system design 31.6 Temporary help 67.5 Auto repair shop 87.9 Hair, nail, skin care 13.7 Sale of stocks and bonds 92.7 Prescription drugs and eyeglasses 143.0 Food 431.1 Lottery tickets 13.6 14 Figure 6 is another example more specific to property tax and an analysis of the amount of tax shifted between property categories as a result of a partial homeowner's exemption follows: 22 Figure 6: Example of Tax Shifting; analysis Comparisons like the one shown in Figure 6 could he between types of property in the County or could demonstrate tax burden and shifting patterns between counties in the State of Hawai`i. Because there are no overlapping taxing districts, analysis within the County would be more meaningful, Nevertheless, external comparisons to other counties would add a useful dimension. Some value and exemption comparisons are reported currently, but we recommend expanding this type of study. Recommendation 2 Recommendation: The Council should implement Cede changes to require the Finance Department to analyze tax less, shifting; and ether effects of property tax exemptions, including; the cap on assessed value increases for certain residential property. Such analysis should be conducted on an annual basis with the results, including a review of the intent of each exemption or limitation policy reported to the Council and made available to the public. 22 Dornfest, Alan S. 2011 Market Values and Property Taxes and the Effects of the Homeowner's Exemption. Table from unpublished study found at: http://www.tax.idaho.gov.gov/pubs/EPB00132_12-02-2011.pdf, last accessed December 29, 2011. 15 4. Legal Framework Policies and procedures gain legitimacy through legislation. The legal framework of a property tax system should lay out policy choices clearly, provide the environment for their achievement, and assign responsibilities. Laws, regulations, and court decisions establish the legal framework. Subject to the provisions of Article VIII, Local Government, Section 3, Taxation and Finance, of the Hawaii Constitution, the laws governing real property taxation can be found in Chapter 1.9, Real Property Taxes, of the Hawaii County Code. We reviewed these laws. In addition, we reviewed pertinent Rules and Regulations of the Director of Finance as well as important decisions of the Tax Court of Hawaii that were provided by the County's Office of the Corporation Counsel. The aims of our review were to understand institutional arrangements better, identify legal requirements, identify areas of conflict between laws and practice, and identify conflicts between legislation and professional standards, particularly those of the International Association of Assessing Officers. Section 4 addresses two closely related topics: the main features of the County's real property tax system (Section 4.1) and the structure and clarity of Chapter 19 itself (Section 4.2). Detailed legal requirements are discussed in later sections. Section 4.3 outlines the current property tax calendar. 4.1 Main Features of the County's Real Property Tax System Chapter 19 erects a legal framework that covers essential elements of any sound property tax system. Among other things, it: • Establishes owners as primarily liable for real property taxes (Section 19-48; other sections deal with special situations). • Establishes the base and the basis for the tax. Pursuant to Section 19-46, the base of the tax is real property (as broadly defined in Section 19-2) except as exempted or otherwise taxed. The general basis of the tax is 100 percent of market value (Section 19-46). This basis is a hallmark of a good property tax system and tends to, .....maximize fairness and understandability in a property tax system....23 Chapter 19 also identifies exceptions to the general basis, namely current use value in the case of agricultural land, condominium units, and golf courses. • Provides for annual assessment (Section 19-53)—another feature of a good system. Section 19-53 also wisely emphasizes the use of appropriate "systematic methods suitable for mass valuation of properties for taxation purposes, so selected and applied to obtain, as far as possible, uniform and equalized assessments throughout the County." 23 2010. Standard on property tax policy. Section 4.2. Kansas City, MO: IAAO 16 • Defines classes of property that must be assessed for purposes of taxation. Section 19-2 defines "real property" broadly. Section 19-53(a) defines two subclasses of real property: (1) buildings and (2) all other real property. Section 19-53 (e) identifies nine use classes. Thus, there are eighteen potential tax classes. As discussed below, this and any classification system has some problems. • Describes how tax rates are to be set (Section 19-90). As discussed in later sections, Chapter 19 also addresses other important issues in a generally acceptable way. It sets out the powers and duties of property tax officials and the rights and responsibilities of taxpayers. It lays out a panoply of exemptions and other relief measures (see Section 8, below). It addresses assessment and collection procedures, including deadlines (as discussed in Section 11). Although Chapter 19 has many admirable features, there are some areas of concern— where changes would be desirable to conform the system to best practices. The system of valuing property annually at its market value through the use of appropriate mass appraisal methods is weakened by restricting appraisers to the sales comparison and cost approaches. The third of the generally accepted approaches to value, the income capitalization approach, is not endorsed. It is the preferred approach for commonly rented categories of properties, such as apartments, offices, and retail establishments. The rationale for this apparently is the difficulty in obtaining income and expense information. This is not a problem unique to the County. In fact, the Director's broad authority under Section 19-3 to demand information and inspect records gives her or him ample powers to employ ploy the approach. The property classification scheme is problematic in a number of respects. Neither the Code, nor the regulations, nor the Appraisal Manual produced by the Division contains detailed definitions of the nine use classes. The way real property is defined as "buildings" and "all other real property" in Section 19-53, coupled with the way standard mass appraisal methods (particularly those based on the cost approach) work, can result in a misallocation of total market value. The right of taxpayers to appeal over-valuation of either land or buildings unnecessarily jeopardizes the total property tax base and encourages appeals that otherwise would not be warranted. Best practices would be to restrict appeals to the total value of property. Assessors commonly have to allocate total market value between land and improvements. When they do, improvement value is the remainder after appraised land value is subtracted from appraised total market value. 24 The way agricultural property categories that are eligible for use-value assessment (including houses on plots with some agricultural activities) are defined seemingly gives appraisers too much latitude. As an admittedly unrealistic example, any property with "foliage" could be classified as being used for intensive agriculture. The Director's rules and regulations seem not to be successful in clarifying eligibility for preferential assessment. 24 R. Gloudemans and R. Almy, 2011, Fundamentals of Mass Appraisal, Kansas City, MO: IAAO, p. 13. 17 A problematic aspect of the County's market value standard for assessment in practice, if not in the law, is the weight given zoning in determining highest and best use. For example, land plots long predominantly used as dwelling sites sometimes are valued as if they were agriculturally used because they are in an agricultural zone. In fact, in an updated memorandum in the Division's Appraisal Manual, condominium projects with fewer than fifteen units are to be classified as "agricultural" if the land is zoned as agricultural. An unusual feature of the County's real property tax system is the minimum tax of $100 (Section 19-90). Although they can make the tax system more regressive, some advocate such payments on the grounds that they complete a "social contract." People who pay for government have a greater stake in its policies and administration. Others advocate excusing those whose amount due is very small (Florida authorizes counties to excuse obligations of $30 or less) on efficiency grounds. 4.2 Organization and Clarity of the Code Chapter 19's nine articles and more than a 100 sections are reasonably organized and clear. Commendably, the first section (19-1) states the purpose of the Chapter, and the second section (19-2) contains definitions (Sections 19-53.1, 19-75, and 19-90 also contain specialized definitions). However, as suggested above, there are opportunities for improving its clarity and for reforming policy and administration. Several sections of Chapter 19 deal with more than one aspect of the real property tax systems. A number of exemption and relief measures are contained within sections nominally dealing with other subjects. For example, Section 19-53, which nominally deals with valuation, contains in subsection (f) a seven-year exemption of property improvements under certain circumstances. Subsection (g) contains an assessment increase limit. The County commendably periodically reviews its laws, and Chapter 19 was comprehensively reviewed several years ago. Our review of the law suggests that a further review would be desirable. The aims of the review first would be to improve the organization and clarity of the Chapter. On important policy matters, it would be helpful to state legislative intent. Out of this review should come recommendations for recodification that clarify intent, reduce duplications and contradictions, eliminate obsolete sections, and provide the foundation for implementing our specific policy and practice recommendations. Recodification could be done in stages. The first stage could be to rewrite and reorganize existing provisions to improve their clarity but not to change the underlying policies. Redundant dundant language and clearly obsolete provisions (such as unused parts of the Code related to "returns") could be deleted. 25 During this exercise, policy issues could be flagged for consideration later. The bulk of the work could be done by a task force, perhaps drawing on volunteers. An editor should be engaged, and the expertise of the Corporation 25 We do not recommend that the authority to require returns should be repealed. In fact, a measure requiring the submission of income and expenses statements on request could be inserted. 18 Counsel's office should be fully utilized. The checklist on page 4 of Assessment Practices: Self-Evaluation Guide may be of help. Recommendation 3 Recommendation: The Finance Department and Corporation Counsel should review Chapter 19 of the Code for the reasons given in report Section 4.2 (i.e. improve clarity and eliminate unused provisions) and to implement our other recommendations that would need or benefit from a legal authorization. Recommendation 4 Recommendation: The Council should consider Code amendments implementing requirements for annual ratio studies, periodic review of properties granted full or partial exemptions, physical inspection of property on a regular basis, and acceptability of the income approach to value. Training and certification requirements should also be addressed. 4.3 Calendar An important facet of a real property tax system is its calendar. Calendars almost always are problematic in that processes that involve both administrators and taxpayers can be difficult to achieve within a single calendar (tax) year. Happily, no serious calendar issues were mentioned during our interviews (apart from a concern that some deadlines sometimes were ignored). The Division's computer-assisted mass appraisal (CAMA) system supports multi-year processing, so that Division staff can work on the current and future tax years, which in Hawai'i County run from 1 July the year in question to 30 June of the next year (Section 19-47). Table 2 contains some important dates in the County's real property tax system. 19 Table 2: Property Tax Calendar Date Event 1 January Appraisal date 15 January Deadline for submitting a return under Section 19-12. 20 February Deadline for second installment of tax bill 15 March Deadline for issuing notices 9 April Deadline for filing an appeal 19 April Deadline for certifying the roll 20 June Deadline for tax rate resolution 30 June Deadline for filing for an exemption before the first installment tax bill 1 July Date of classification for agricultural use value; tax lien date 20 July Tax billing date 20 August Deadline for first installment of tax bill 1 September Deadline for petitioning for residential dedication, etc. 30 September Deadline for filing for solar heating tax credit 15 December Deadline for deciding certain exemption applications 31 December Deadline for filing for an exemption before the second installment tax bill; deadline for filing for application affordable rental housing classification, etc. Some sections of Chapter 19 have deadlines that pertain to specific years. 20 5. Management of the Real Property Division 5.1 Introduction Management is the art of effectively and efficiently getting work done through people. As discussed below, managers strive to ensure that their staffs comply with laws and regulations, follow policies, complete work on time, maintain standards, and use resources wisely. Managers plan, budget, organize, control, and evaluate work. Communication with taxpayers and other stakeholders also is an important management activity. We evaluated management in terms of the components of a model property tax administration system. 26 We reviewed planning and budgeting, staff organization, and internal controls, focusing on quality assurance procedures designed to achieve effectiveness and efficiency goals. We considered the effectiveness of internal communications. As previously noted, the Finance Director has delegated management of the Real Property Tax Division to the Administrator. The Finance Director/Real Property Tax Administrator has unusually broad authority and discretion in the administration of the real property tax. Understandably, there is no oversight by the state in view of the limited state interest in how each county administers its property tax system and in view of the expense of creating an agency to monitor four officials in four widely separated islands. This is not to suggest, however, that the performance of the Division should not be subjected to oversight. In fact, we believe that the following statement from Government Auditing Standards applies: "Government managers are accountable to legislative bodies and the public for their activities and related results." 27 Section 19-3(10) clearly implies some oversight, and we consider local options for stronger oversight later. We also are cognizant that the County has had to contend with fiscal difficulties, staff shortages, and valuation challenges. In this situation, it is understandable that the Division has not been able to focus on management improvements. We believe, however, that practicing good management will simultaneously improve acceptance of the real property tax and increase satisfaction with County government. 26 See Almy, R., A. Dornfest, and D. Kenyon, 2008, Fundamentals of Tax Policy, Kansas City, MO: lAAO, p. 199. Also see IAAO, 2009, Assessment Practices: Self-Evaluation Guide,Third edition, Kansas City, MO: IAAO; and M.Johnson, C. Bennett,and S. Patterson,,eds.,2003, Assessment Administration,Chicago, IL: lAAO. 27 United States General Accounting Office, 2003, Government Auditing Standards,2003 Revision, Washington, DC: United States General Accounting Office (now the U.S. Government Accountability Office), p.1. 21 5.2 Planning, Budgeting, and Resource Requirements Planning is an important function of management. Three kinds of plans are used: strategic planning, annual work planning, and—when necessary—project planning. Plans can, of course, be informal as well as formal. Clearly, the Division has informal plans to make system and procedural improvement, with the plan to rely more on market modeling standing out. We saw no evidence of formal, written plans. Recommendation 5 Recommendation: The Department of Finance and the Real Property Tax Division should consider a strategic planning exercise as a way of formally addressing opportunities for improvement, setting priorities for their achievement, and committing the necessary resources. In addition, management should look for ways to increase staff involvement with planning. Provided that top management approves, we believe such an exercise is the best way to ensure that systemic issues are eventually addressed. There are many strategic planning models that could be used. If a formal, facilitated strategic planning exercise is not feasible, an informal staff-wide retreat could prove useful, if only to break down walls between different groups. Some general advice can be found in Assessment Administration, Assessment Practices: Self-Evaluation Guide (pp. 9-11), and Fundamentals of Tax Policy. Budget documents contain chiefly object classification ("line item") details. Apart from lines that deal with the Board of Tax Review and tax sales, there is no programmatic information in the budget. Thus, it is difficult to relate expenditures to results. Recommendation 6 Recommendation: The Real Property Tax Division should consider justifying its funding requests on a program or activity basis to better enable expenditures to be related to results. 28 The resources devoted to property tax administration reflect the political support for accurate and equitable assessments and for effective taxation. Resource requirements also reflect operational efficiency. We attempted to review current resources, including funding, staffing, computing support, office facilities (which appear sufficient), and services provided by other agencies. The 2011-2012 budget for the Real Property Tax Division is $3,005,779; the Division's staff complement is forty-eight (according to the organization chart that we received), although some positions are vacant. We compared these data with appropriate statistical averages. Table 3 compares Hawaii County's budget and staff to three frequently used benchmarks for a variety of U.S. local assessment districts in terms of size, valuation complexity, and agency functions (see Appendix D). 28 See Assessment Practices: Self-Evalualion Guide, pp. 13-14. 22 Table 3: Funding and staffing Benchmarks Benchmark Hawai`i County (2009-2010) Number of observations Low Median High Budget as a percent of total property tax revenues Hawai`i County (2009-2010) 1.33 Number of observations 26 Low 0.02 Median 0.89 High 2.30 Budget per parcel ($) Hawai`i County (2009-2010) 23.50 Number of observations 47 Low 8.84 Median 22.34 High 68.09 Parcels per staff Hawai`i County (2009-2010) 3,781 Number of observations 50 Low 1,454 Median 2,889 High 6,933 Sources: "1999 Major Assessment Jurisdiction Survey," Cook County Assessor's Office, with subsequent updates through 2010 by authors, and Hawai`i County. In principle, values of the first benchmark (assessment expenditures as a percentage of property tax revenues) should be minimized so that the funds available for other government services are maximized while at the same time providing sufficient funding for effective assessment administration. Determining an optimal level of funding obviously requires judgment. At typical levels of property taxation in the U.S., it is generally believed that between 1.0 and 1.5 percent of property tax revenue is needed for effective assessment administration. As can be seen, Hawaii County is inside that range. Moreover, the figure for the County includes the costs of tax collection, while most of the observations in the sample are for assessment only. Interpretation of the second benchmark (budget per parcel) should take into account the fact that the data for fifteen of the forty-seven districts analyzed date from 1999, and costs of assessment administration undoubtedly have increased since the 1999 survey. Thus, Hawaii County's level of expenditure seems reasonable. Regarding the third benchmark (parcels per staff member), a comparatively low number indicates (everything else being equal) a light workload, while a large number indicates a heavy workload. In comparison to the median of 2,889 parcels per staff member in the fifty districts analyzed, several earlier IAAO studies have suggested that 2,500 parcels per staff member is typical overall, while larger districts typically had about 3,500 parcels per staff member. 29 Although, Hawaii County is larger than a typical U.S. assessment district, it is among the smaller districts (in terms of parcels) in the sample, and only sixteen districts (all but one were larger) had higher ratios. On the basis of these overall benchmarks, a strong case cannot be made that the Division has insufficient personnel or inadequate funding. 29 Almy R., et al.,1978, Improving Real Property Assessment: A Reference Manual, Chicago, IL: IAAO, p. 323, and Langhoff, G, 1988, Assessment Jurisdictions and Agency Resources in the United States: Summary Report of the 1986 Survey, Research and Information Series No. 6, Chicago, IL: IAAO, p.43. 23 In order to evaluate resource needs further, we attempted to examine the Division's staffing needs in more detail. Table 4 provides a pro forma estimate of staffing needs (full-time equivalent positions or FTEs). The assumed workload statistics (column 2) are based on estimates drawn from available statistics on Division workloads (the Division does not ordinarily maintain workload statistics). The productivity rates (column 3) are notional and are based on rates achieved, or believed to be achievable, in other jurisdictions. The days of work estimates (column 4) simply arc the workload estimate divided by the productivity rate. The indicated FTE need (column 5) is based on an assumed work year of 220 days. Given the lack of workload data and other limitations, some individual FTE estimates inevitably are incorrect. One hopes that there are some compensating errors. Were they to be developed, better figures on workloads and achievable productivity rates could be used to refine the estimates. Nevertheless, the estimates suggest that the staff is sufficiently large to conduct comprehensive inspections over a five year cycle. That is, the activities identified as "field data verification" are not now carried out because the staff spends its time on other activities. The estimates also suggest that additional resources could be allocated to non-residential properties (and fewer are needed in residential property appraisal). Notably, the indicated staffing requirement of forty-eight in Table 4 is consistent with the current complement and with the benchmark data presented in Table 3. The estimates suggest that, with reorganization and training, the staff could be used more effectively. However, the analysis in Table 4 is illustrative, not conclusive. Recommendation 7 Recommendation: The Real Property Tax Division should prepare an estimate of the number and allocation of the staff it needs. 30 30 See Assessment Practices: Self-Evaluation Guide, pp. 11-13. 24 Table 4: Pro Forma Staffing Analysis Assumed Workload Productivity rate/day Days Indicated staffing need (FTEs) Current FTE; Position/activity (1) (2) (3) (4) (5) (6) Executive 3.0 3 Administrator 1.0 Assistant Administrator 1.0 Executive & technical support 1.0 Real Estate Clerical Operations 20.3 28 Conveyances 2,000 50 40 0.2 Map changes 1,000 30 33 0.2 Permits received 4,000 50 80 0.4 Homeowners 36,000 50 720 3.3 Collection operations 140,000 50 2,800 12.7 Exemptions 5,000 20 250 1.1 Customer service 20,000 80 250 1.0 Appeals logged 1,000 10 100 0.5 Notices reviewed/mailed 140,000 750 187 0.8 Non-residential property appraisal 13.4 5 Screen sales 20 20.0 1 0.0 Inspect sales 20 15.0 1 0.0 I&E questionnaires 400 15.0 27 0.1 Modeling building/QA 10 0.5 20 0.1. New work (permits) 1,000 2.0 500 2.3 Change reviews (desk) 15,000 25.0 600 2.7 Field data verification 2,380 12.5 190 0.9 Appeal defense 800 0.5 1,600 7.3 Residential property appraisal 6.3 12 Screen sales 2,000 30.0 67 0.3 Inspect sales 2,000 15,0 133 0.6 Modeling building/QA 8 0.5 16 0.1 New work (permits) 3,000 10.0 300 1.4 Change reviews (desk) 56,100 100.0 561 2.6 Field data verification 10,220 35.0 292 1.3 Appeal defense 300 10.0 2.0 0.1 Sub-total 42.9 48 Overhead Relevant staff Hours per year 4.7 Professional development 26 20.0 520 2.6 Other 46 10.0 410 2.1 Total 47.6 48 25 5.3 Organization of the Division and External Organizational Relationships 5.3.1 Organization According to the organization chart that we were given, the Division's organization plan reasonably includes functional and geographic elements. Its functional elements include, in addition to the Administrator and Assistant Administrator, staff support to the Tax Appeals Board (one clerk), appraisal (fifteen positions), tax mapping (five positions), general clerical operations (twelve positions), and tax collection (eleven positions). In addition, there are two analyst positions. The geographic element of the plan that is obvious from the chart is an east-west divide. As noted above, we consider the total complement of forty-eight to be sufficient. Given the island's geography, having a main office in Hilo and a satellite office in Kona makes sense from a work and taxpayer convenience standpoint (although having two offices may add to administrative overhead). We did not have sufficient information to opine on the reasonableness of the allocation of appraisal and clerical positions between East Hawaii and West Hawaii. A strength of the current organization is the existence of the two analyst positions. Such positions are crucial to market modeling and effective use of the CAMA system. The necessity of dividing the staff between two offices raises issues that management needs to address through better training, standardization of practices, and internal communications, as discussed below. As suggested in the previous section, there may be an imbalance between residential and non-residential appraisers. It was difficult to evaluate this because of vacancies and the unavailability (for interviews) of appraisal specialists. However, we believe that the organization plan currently envisages only two specialists: a commercial appraiser and commercial/condominium appraiser (not including the appraisal supervisor, whose actual responsibilities are unclear). In other words, the remaining twelve appraisal positions seem dedicated to maintaining data on residential and agricultural properties and on updating residential land values. There is another facet of the current office that we believe needs further consideration: the assignment of appraisers to the island's nine historical zones on a more or less exclusive basis. This organizational design could result in uneven workloads, non-uniform work practices, and attendant morale problems. Recommendation 8 Recommendation: The Real Property Tax Division should deploy its appraisers on a task, property type, and a market area basis, rather than the current geographically based zone basis. 26 Assessment offices largely have abandoned the assignment of appraisers to districts on an individual basis in order to improve efficiency, performance, and internal control. 31 5.3.2 External Relationships The uncomplicated nature of government in Hawaii simplifies the Division's external relationships. The State's Bureau of Conveyances monthly sends the County CD-ROMs containing images of deeds and conveyance tax certificates. This seems satisfactory (although in an ideal world, conveyance information would automatically be transmitted to the County's CAMA system). The Division does receive building permit information automatically from the Public Works Department. Also as noted, the Division has online access to MLS data. The only problem that was pointed out was the fact that the State Department of Health has discontinued sending the counties information about deaths. Notice of deaths is important in determining whether properties should receive exemptions based on ownership age, etc., as discussed in Section 8. 5.4 Work Management The Real Property Tax Division has had to confront two issues recently. One is the effect of the global recession on the nature of valuation, assessment, and collection tasks. An additional related effect is that of fiscal stress on staffing: Many seasoned staff members retired recently. Replacements have had to be found, hired, and trained. Succession planning is rare in assessment offices, and managing a series of successions during a crisis would challenge any manager. Nevertheless, several issues need to be addressed: Training new members of the staff (discussed below) and deploying staff more effectively. As previously discussed, a dispassionate analysis of the current system and the development of coherent strategies for transcending the current crisis are needed. This will require timely information about workloads, productivity rates, and performance. The current posture of Division managers is that appraisers are professionals and that it would be discourteous to question their performance. We cannot concur. Under current professional appraisal standards, appraisers are always held to high standards of performance, and they are expected to document the basis for their opinions.32 Moreover, good public administration requires internal controls to ensure that resources are used wisely, the law is followed, and real property taxation is fair. Managerial responsibility should 31 Elements of a district organizational structure may still exist in Philadelphia and New York City, two districts plagued with accusations of corruption. New Orleans recently abandoned a district structure for the same reason. 32 See Appraisal Standards Board, 2010, Uniform Standards of Professional Appraisal Practice, 2010-2011 edition, Washington, DC: Appraisal Foundation. 27 not be completely delegated to the individual staff member. Each member of the staff should not have unfettered discretion. 33 Recommendation 9 Recommendation: The Real Property Tax Division should state performance expectations clearly and institute the necessary internal controls to provide assurance that performance is in line with standards. Elements of this effort could include all those things discussed in Section 5.6. 5.5 Technical Competence The knowledge, skills, and attitudes of assessment agency employees obviously are important factors in the quality of property tax administration. Others' perceptions of those qualities also are important. This section considers the professional development needs of appraiser and analyst positions in the County. "Professional development" is used here to encompass education, training, and competency testing and certification. Although there is not a clear-cut distinction, "education" is the acquisition of general knowledge and skills (such as, the knowledge of the economics and statistics needed in mass valuation), usually through formal schooling, and "training" is the acquisition of the specific knowledge and skills needed for a particular job, usually on the job or through specialized programs. The better educated a person is, the less training he or she will need. "Competency testing" includes the testing inherent in obtaining a diploma, degree, or other certificate from an educational institution; civil service examinations; course examinations; professional designations, such as the Certified Assessment Evaluator (CAE); which is one of the designations conferred by IAAO, and professional licenses, such as the licenses private-sector appraisers in the U.S. must now possess. Of course, experience also will be considered. In recognition of the importance of technical competence, the introduction to the lAAO Standard on Professional Development states: "Assessing officers require detailed knowledge related to their specific responsibilities in the assessment office. In-service training and continuing education of assessment personnel are essential parts of an effective program of assessment administration." Currently, Hawaii County's appraisal position descriptions require "a combination of education and experience substantially equivalent to graduation from an accredited college or university with major work in real estate, business or public administration, economics, or a related field." In addition higher positions require progressively greater experience. Statements of required skills do not specifically mention mass appraisal skills. "For an interesting discussion of the risks of excessive discretion in property assessment, see D. Paul, 1975, The Politics of the Property Tax, Lexington, MA: Lexington Books, pp. 7-9. 28 As noted, several appraisers are newly hired, although some are licensed appraisers, and others may have similar qualifications and experience. Nevertheless, there is a perception that some appraisers have insufficient background and preparation for their jobs. At present, new hires begin by working with an appraiser-mentor (another zone appraiser), which is an acceptable way of providing on-the-job training if the mentors themselves enthusiastically embrace their mentoring responsibilities and if they provide consistent instruction. It would be better to have formal in-service training covering prepared materials by appraisers with an aptitude for teaching than relying solely on mentoring. Division top managers clearly appreciate the value of formal training. They mentioned past inter-island programs in which an instructor was brought over to provide instruction in market modeling (among other things). Such an approach is a more cost-effective way of providing education than sending students to the mainland (although there would be some benefit in learning about experiences elsewhere). We believe that such educational opportunities would be popular with some appraisers, and the Division's training budget seems sufficient. 34 Recommendation 10 Recommendation: The Real Property Tax Division should assess the interest and needs of appraisers in further education in mass appraisal and property tax administration and develop a program to offer courses designed to meet those needs. Consider establishing continuing education programs for appraisers. Background information on educational curricula can be found in the appendix to the 2000 IAAO Standard on Proftssional Development and in Assessment Practices: Self Evaluation Guide (pp. 14-15). Both make distinctions between types of positions and career stages. Consideration also should be given to rewarding achievements in professional develop, such as obtaining a professional designation, through a salary bonus. A number of U.S. assessment districts have taken this approach. 5.6 Use of Technology Modem assessment agencies rely on several categories of computer technologies: a computer-assisted mass appraisal (CAMA) system, digital maps and a geographic information system (GIS), computerized workflow management, and a variety of document imaging systems. Increasingly, they use oblique aerial photography. This section addresses the Division's use of these technologies. The discussion will be general because we were not given a detailed picture of how the Division uses its CAMA system and because the technologies themselves are complex. 35 34 The IAAO has several programs that provide support to persons with financial needs. 35 Information on these technologies can be found in Assessment Practices: Self-Evaluation Guide and Fundamentals of Mass Appraisal. 29 The Division has an "ias" (integrated assessment system) developed by Tyler Technologies, Inc. (Tyler, formerly Cole Layer Trumble or CLT). Tyler is one of the leading developers of CAMA systems in the United States. The ias system sits atop an Oracle relational database management system. The database holds the data needed for both assessment and taxation. The Tyler ias system has applications for applying the three basic approaches to value. We believe the Division uses two cost approach applications (which are discussed further, below). One is a building costing application. The other is a "computer-assisted land pricing" (CALP) application. Both are longstanding features of CLT/Tyler CAMA systems. The ias system also has an income approach application and applications applying the sales comparison approach via direct market models and via a computerized comparable sales algorithm. It also has an analytical application that can be used to make ratio studies. It is likely that rather than using the limited analytical capabilities of the ias, the Division administrator and appraisers use a spreadsheet program (Excel (R) to make ratio studies and to develop update factors for costing buildings and updating land values. At present, the ias CAMA system does not appear to be linked to other systems, such as the County's geographic information system (GIS) and the County's Pictometry oblique aerial photography system (Pictometry is a leading provider of such imagery). The imagery can be used to detect un-assessed improvements, and to verify measurements. Basically, the software computes dimensions from a series of low-level photographs taken at about a 45 degree angle from the vertical, which is the angle at which typical aerial photography used in making maps is taken. The reasons for the Division's surprising lack of interest in GIS and oblique aerial imagery are not clear. There can be cost, licensing and database compatibility issues. (The Division.) vision is interested in upgrading its ias system, which reportedly would cost $1.5 million However, both systems could be used to identify potential data and valuation issues. Happily, the Division plans to use direct market modeling in residential property valuation, which potentially can result in more accurate values. Recommendation 11 Recommendation: The Council should provide the Real Property Tax Division with funds to upgrade the current version of the ias system. That the Division develop a plan to fully incorporate spatial analyses and other GIS capabilities in its operations and that oblique imagery be reviewed as part of the Division's property inspection program. Desirable investments in training and technology would facilitate discovering improvements that were not on the roll and discovering classification anomalies. In addition to producing more equitable assessments and to improving perceptions of fairness in property taxation, the investments could result in increased property tax revenues. 30 5.7 Quality Assurance Practices Quality assurance measures include data integrity review, assessment level and uniformity analysis, and CAMA system performance testing. 36 It is beyond the scope of this project to conduct a review of data integrity, which would include reviewing edits and cross checking procedures used throughout the assessment administration program. However, because a major responsibility of the assessor is to estimate market value of the taxable properties, it is crucial to understand the underlying quality of these market value estimates by understanding the level and uniformity of the market value appraisals. 5.7.1 Ratio Studies The process used to determine the market value for the thousands of properties needing to be appraised or assessed each year is known as "mass appraisal." Such a process is accomplished: "...using standard methods, employing common data, and allowing for statistical testing. " 37 The main tool for the statistical testing of the quality of mass appraisal results is the ratio study. This is a mathematical study based on the comparison of market values determined by the mass appraisal model to the sales prices of selling properties, with such sales prices time adjusted to reflect what the selling price would have been on the appraisal date. Mr. Sitko, the Real Property Tax Administrator, supplied us with the ratio study description and results shown in Appendix E. In addition, supporting documentation demonstrated development of time adjusted sales prices in accordance with the principles found in IAAO guidelines. The ratio study is intended to measure appraisal level and uniformity. In the context of Hawaii County, level means how close appraisals are to 100% of market value as of the appraisal date, irrespective of partial exemptions or assessment caps. Level is measured by one of several statistical measures of central tendency. The ratio study provided by the County shows computation of the median ratio, which is the most widely recommended and appropriate for evaluating the results of the County's mass appraisal. Uniformity refers to the degree to which properties are appraised at equal percentages of market value. In other words, by measuring uniformity we can answer two questions: 1. Regardless of how close the overall level of appraisal is to market value, are properties tending to all be close to that level? 2. Regardless of the overall level of appraisal, are lower and higher priced properties appraised at the same percentage of market value? The first of these issues is commonly known as horizontal equity and typically is measured with the Coefficient of Dispersion (COD), while the second provides a measure of vertical equity, typically using the Price-related Differential (PRD). The ratio study found in Appendix E shows that the County computes both of these measures. 36 2010. Standard on ratio studies. Part 1, Section 1. Kansas City, MO: IAAO. 37 Glossary for property appraisal and assessment. 1997. Kansas City, MO: IAAO 31 Level and uniformity statistics are illustrated by examples found in Appendix F. 5.7.2 Standards of Performance The ratio study provides information about the level of assessments, by allowing determination of how close to or far from market value a neighborhood or county is on an overall basis. The goal of"market value" is achieved on an overall basis when a representative ratio study indicates a median ratio of about 100%. The IAAO Standard on Ratio tio Studies suggests that a range of ±10% around this measure should be considered acceptable. This is widely misunderstood as it does not mean that every individual property ratio in a sample may differ from the median by no more than 10%. Instead, the range given is to be applied to the statistical measures of level, such as the median. The occurrence of a small number of ratios that differ significantly from the median is not conclusive, unless these sales represented a particular neighborhood or other stratum under review. In addition, ratio studies provide valuable information about taxpayer equity within a neighborhood or Jurisdiction by providing statistical measures of uniformity or variation. If uniformity is good, few parcels will be found to differ widely from indicated measures of level and taxpayer equity within the tested area will be good. Depending on the homogeneity of properties in a given neighborhood, the IAAO Standard on Ratio Studies suggests that good unifonnity exists when there is a COD of 10% or I ess (for the most homogeneous areas), 15% or less (less homogeneous areas), 20% or less (vacant land and most income producing properties), and sometimes higher amounts for unusual properties or market conditions. A further caveat in the Standard notes that CODs less than 5% indicate implausibly good uniformity and may not be representative. Part of measuring uniformity is determining whether high and low priced properties within a given neighborhood or jurisdiction are being treated similarly, with respect to level of assessment. Vertical inequity is said to exist if, for example, $200,000 homes were assessed at $150,000 (75%), while $80,000 homes were assessed at $80,000 (100%). In this sample case, if $2,000 in property taxes were levied, and these two properties were the only ones subject to the tax, the more expensive home would pay $1,304 and the less expensive would pay $696. If both had been assessed at the same ratio with respect to full value (even if it were not 100%), the more expensive one would have paid $1,428 and the less expensive one $571. The degree of this type of inequity is measured in ratio studies with a statistic known as the Price Related Differential (PRD). When the PRD is between 0.98 and 1.03 vertical inequity is considered minimal. Figure 7 is adapted from Table 2-3 found in the IAAO Standard on Ratio Studies 38 38. 2010. Standard on ratio studies. Table 2-3. Kansas City,MO: IAAO. 32 Figure 7. Ratio Study Standards Ratio study uniformity standards indicating acceptable general quality* General Property Class Residential improved (single family dwellings, condominiums, manuf. housing, 2-4 family units) Jurisdiction Size/Profile/Market Activity Very large jurisdictions/densely populated/newerproperties/active markets COD 10.0 Large to mid-sized jurisdictions/older&newer properties/less active:markets COD 15.0 Rural or small jurisdictions/older properties/depressed market areas COD 20.0 Income; producing properties (commercial, industrial, apartments) Very large jurisdictions/densely populated/newer properties/active,markets COD 15.0 Large to mid-sized jurisdictions/older&newer properties/less active markets COD 20.0 Rural orsmall Jurisdictions/ older properties/depressed market arenas COD 25.0 Residential vacant land Very large jurisdictions/rapid developping/active markets COD 15.0 Large to mrd-sized jurmsdictions/slower development/less active markets COD 20.0 Ruraloesmall jurisdictions/little development/depressed markets COD 25.0 Other (non-agricultural) vacant land Very large jurisdict,ions/rapid development/active markets COD 20.0 Large to mid-sized jurisdictions/slower development/less active markets COD 25.0 Rural or small jurisdictions/little development/depressed markets COD 30.0 Theses types of propertyare provided for general guidance onlyand may not represent jurisdictional requirements. * The COD performance recommendations are based upon representative and adequate sample sizes, with outhers trimmed and a 95%level of confidence. * Appraisal level recommendation for each type of propertyshown should be between 0.90 and 1.10. * PRD's for each type ofpropedyshould be between 0.98 and 1.03 to demonstrate vertical equity. PRD standards are not absolute and may be less meaningful when samples are small or when wide variation in prices exist.in such cases,statistical tests of vertical equity hypotheses should be substituted. *CODs lower than 5.0 may indicate sales chasing or non-representative samples. Although staff involved with ratio studies are aware: of IAAO performance standards, there has beenno formalmove to adopt these or alternate standards. Without standards by which to gauge mass appraisal performance consistently, it is difficult for staff and those outside the Division to fully appreciate the quality of the appraisal work whether adequate or inadequate and how to best use available resources to remedy areas of concern. Recominendation 12 recommendation: The Council should require the Finance Department to conduct a review of IAAO ratio study performance standards and adapt standards for appraisal level and both horizontal and vertical uniforinity. Consider dedicating appraisal staff resources to correctin deficiencies when their are discovered. 5.7.3 Limitations of patio Studies Provided sales are properly screened to identify arm's length transactions, sale prices are considered to: "...provide the most objective estimates of market values and under normal cirucumstances should provide good surrogates of market value." 39 Ratio studies are, statistical tests and, as such, rely on sufficient; numbers of market value sales to produce meaningful results. "While a singles sale may provide an indication of 39. 2010. Standard on ratio studies. Part 1 Section 2.1. Kansas City, MO: IAAO. 33 the market value of the property in question, it cannot form the basis for a ratio study, which provides information about the market values of groups of properties." 40 Finally, to be meaningful and valid, ratio study samples must be representative of the class or property or area being analyzed. Reflecting on this issue, the IAAO. Standard on Ratio Studies states: "Operationally, representativeness is improved when the following occur: 1. Appraisal procedures used to value the sample parcels are similar to procedures used to value the corresponding population, 2. Accuracy of recorded property characteristics data for sold property does not differ substantially,from that of unsold propert, 3. Sample properties are not unduly concentrated in certain areas or types of property whose appraisal levels differ from the general level of appraisal in the population, 4. Sale prices provide valid indicators of market value. 41 Small sample sizes are always a concern in doing meaningful ratio studies and interpreting the results correctly. Small samples are inherently less reliable than large samples, meaning that sample medians and CODs and PRDs may be less likely to reflect underlying population results, known as parameters. This problem can be overcome, to an extent, by use of longer time periods, with proper time adjustments. In addition, each ratio study performed at any stratification should include statistical measures of reliability. These enable proper interpretation of the results. 5.7.4 Observations on the County's Ratio Study Process and Results By requiring a conveyance tax certificate, which includes a statement of the price paid for the property being transferred, sales are subject to the equivalent of mandatory disclosure. This is a strong point enabling the County to obtain the sales data necessary to perform quality mass appraisal and to evaluate the results using ratio studies. Seven states have neither mandatory disclosure of sales prices nor transfer taxes to rely upon to estimate sales prices.42 The availability of this information is an important advantage and element of a good mass appraisal system. Obtaining sufficient numbers of valid arm's length property transactions can be a challenge, especially in slow markets. According to staff, this has made it nearly impossible to consider ratio studies on commercial property, so the focus of this review is on residential properties, including vacant land, residential condominiums, and improved residential 40. Ibid. 41. 2010.Standard on ratio studies. Part 1, Section 4.5. Kansas City, MO: I AAO. 42 IAAO Technical Standards Committee. 2009. State and provincial ratio Study practices: Results of the 2008 survey. Journal of Property Tax Assessment & Administration 6 (2): 29-82. 34 properties (see Appendix E). In this study, analysis is provided by geographic zone, building class, and age of building. The summary sheet shows that level and horizontal and vertical uniformity statistics have been computed for each of the major types of property and sample sizes appear to be sufficient for these groupings. Results reported by building class, zone, and age include medians and CODs, but not PRDs, so vertical equity issues have not been evaluated for these strata. (Based on interview responses, this information may be available in other reports.) While we cannot test the representativeness of the County's ratio study, the mass appraisal system they use and information suggesting that most properties' appraisals change to some extent each year indicate that there is a very low likelihood of selective reappraisal of selling parcels, which can often distort ratio study representativeness and validity. In fact, the uniformity statistics reported by the County provide strong evidence that no such selective reappraisal is occurring. This issue aside, we did not undertake to test the sales verification procedures used by the County to ascertain whether the information reported on the conveyance tax certificates is accurate. It was noted that not all selling properties were inspected, but that Tax Map Key services were used to help validate information. Some concerns were expressed about lack of sufficient testing for excessive invalidation. However, if that were occurring, reported CODs and PRDs would be expected to be better, so it is unlikely that there is much distortion due to excessive invalidation. Because the current system does not include outside oversight or many internal controls, additional quality assurance processes, including supervisory cross checking of properties deemed invalid by appraisers or the mapping department, which enters the data, would be advisable. Recommendation 13 Recommendation: The Real Property Tax Division should consider and implement a more definitive system for reviewing sales deemed invalid. This is needed to ensure consistent decision-making regarding determination of sales validity. One aspect of ratio study representativeness that was discussed was trimming. It is likely that some otherwise valid sales have ratios that are not representative and may distort statistical results if retained in the ratio study. The use by the County of the median to test appraisal level lessens the need to identify such ratios as the median resists the influence Of Outliers. However, this is not true of the COD or PRD. Currently, there is no formal procedure to identify and trim sales that may be outliers in ratio terms. The Division indicated use of a protocol under which ratios <50% or >200% are eliminated. Six states reported use of similar fixed asymmetric points in 2008. 43 Although no single protocol is prescribed, the IAAO Standard on Ratio Studies suggests that outliers should be identified, scrutinized to validate the information, and trimmed if necessary to improve sample representativeness.44 Although there are numerous methods of doing so in the literature, one method is outlined in the Standard and is reproduced in Appendix G. 43 lAAO Technical Standards Committee. 2009. State and provincial ratio study practices: Results of the 2008 survey. Journal of Property Tax Assessment & Administration 6 (2): 29-82. 44 2010.Standard on ratio studies. Part 1, Section 5.2. Kansas City, MO: lAA0. 35 Recommendation 14 Recommendation: Ratio studies conducted by the Real Property Tax Division should include procedures for identifying and, possibly, trimming outlier ratios. Such procedures may be modeled after those found in the IAAO Standard on Ratio Studies. It is important to conduct ratio studies on as many strata as practical, recognizing limitations in the number of usable sales. In this way, neighborhood and appraisal district deficiencies can be discovered and corrected quickly. This lends additional credibility to the entire appraisal system and to the staff and administration of the Real. Property Tax Division. It is also important to consider ways of evaluating appraisal performance with regard to commercial properties. While we understand that the property types may be more diverse and few sales are available, that does not necessarily entirely preclude doing ratio studies on this type of property. Without such studies or other performance review means it is likely that any underassessment of commercial property could escape detection. The IAAO Standard on Ratio Studies states that: "In general, the period should be as short as possible and, ideally, no more than one year. A longer period may be required to produce a representative sample for some strata within a jurisdiction. To develop an adequate sample size, the sales used in ratio studies can span a period of as long as jive years provided there have been no significant economic shifts or changes to property characteristics and sales prices have been adjusted for time as necessary." 45 Statistical measures computed for level and uniformity generally comport with those recommended by IAAO. However, the studies we reviewed were missing the following elements identified in the IAAO Standard on Ratio Studies: 46 • Graphs, histograms, and similar data displays that show the distribution of the ratios; • Reliability measures that enable population parameters to be estimated and depict the degree of certainty in the results; • Lists of sales trimmed based on outlier review procedures. 45 2010. Standard on ratio studies. Part 1, Section 4.4. Kansas City, MO: IAAO. 46 2010. Standard on ratio studies. Part 1, Section 5. Kansas City, MO: IAAO. 36 Recommendation 15 Recommendation: Except when too few sales are available, the Real Property Tax Division should do ratio study analysis by market area and by each appraisal area or appraiser. Results should be discussed with all appraisal staff and plans of action developed to correct deficiencies. Ratio studies should also be considered and attempted for commercial properties. Recommendation 16 Recommendation: The Division should add missing statistical and graphical elements, such as histograms, lists of trimmed sales, and reliability statistics to enable proper interpretation of results. 5.7.5 Documentation and Staff Involvement In addition to the appraisal manual, it would be useful to have a manual dedicated to ratio studies and ratio study procedures. This could enable staff to better understand and take more ownership over this important mass appraisal evaluation tool. Staff should also be trained to better understand all aspects of ratio studies. IAAO has a recently revised workshop, Fundamentals of Assessment Ratio Studies, which is tailored toward appraisers understanding and use of the studies. This may be worth considering. Recommendation 17 Recommendation: The Real Property Tax Division should develop a ratio study procedure and explanatory manual separately from the Appraisal Manual. Staff should receive training in conducting and understanding ratio studies. 5.7.6 Supervisory Review of Appraisals Based on discussions with staff and managers, there does not seem to be a cohesive, conistent approach to appraisal review. One common approach is for supervisors to review properties with unusually large year-to-year changes in appraised value. In addition, properties with no annual adjustment could be reviewed. Interviewees indicated that managers did this type of query as well as queries to test for sales chasing. Reports we received did not indicate the results or provide interpretation of any such tests. We understand that the CAMA system being used re-computes market value and that appraisers' primary emphasis is on analyzing land sales and updating appraisals on properties with new building permits. This probably creates less opportunity for sales chasing, but too much focus on building permits can lead to equity issues with other properties. Regardless, an annual routine that incorporates supervisory review would add an important and missing check and balance to the system. An important part of supervisory review consists of ensuring that professional appraisal practices are applied broadly to all properties and that automated models (CAMA) have proper checks and balances. Because a major focus of reappraisal has been on properties with building permits, concerns were expressed that appraisers may be too focused on 37 building permit values, allowing these to over-influence appraisal decisions. As there has been no complete reappraisal (i.e. re-inspection) since 1980, this can lead to equity issues when physical characteristics change without building permits or when building permit values do not reflect market value. The appraisal cycle issue will be addressed in a later section. However, there may be an opportunity for the valuation analyst position to play a greater role in checking for inordinate appraisal adjustments made selectively to sales (e.g. sales chasing) or properties with building permits (e.g. building permit chasing). Recommendation 18 Recommendation: The Real Property Tax Division should consider formalizing supervisory review of some or all appraisals done by staff. They should incorporate a broader role for valuation analysts, including running queries on a regular basis to look for sales chasing and building permit chasing. Findings should be reported as part of an annual ratio study report. 5.7.7 Oversight The most atypical aspect of the Hawaii real property tax system is the absence of an idependent oversight body, such as the state. Even though a few other states, such as Pennsylvania, exercise very limited independent oversight of local assessments and appraisals, the complete absence of such oversight is found only in Hawai'i and Delaware. In conducting oversight operations, states typically use several methods to monitor the practices and performance of local assessors. "These methods range from informal, unstructured contacts with local assessors, to requirements that localities submit copies of rolls or abstracts of rolls, to ratio studies, to detailed performance audits." 47 In addition, IAAO recommends that oversight agencies: "...maintain operating procedures for investigating taxpayer complaints about the assessment process." 48 Perhaps the most common oversight function is the performance of ratio studies that are, at least to some extent, independent of those done by the local assessing Jurisdiction. At least 44 states report doing such ratio studies on an annual basis. 49 It is beyond the scope of this project to review all of the reasons the State of Hawaii and its citizenry did not pursue this model. However, we believe the need for independent oversight of the assessment process or at least the involvement of some independent review body is still necessary for proper checks and balances on the appraisal system. In 47 Dornfest, Alan S., Steve Van Sant, Rick Anderson,and Ronald Brown. State and Provincial Property Tax Policies and Administrative Practices (PTAPP): Compilation and Report. Journal of Property Tax Assessment & Administration. Volume 7, Number 4. 2010. 48 2010. Standard on oversight agency responsibilities. Section 8. Kansas City, MO: lAAO. 49 lAAO Technical Standards Committee. 2009. State and provincial ratio study practices: Results of the 2008 survey. Journal of Property Tax Assessment & Administration 6(2): 29-92. 38 saying this, we do not mean to disparage current staff or management or their attempts to fill this gap with ratio studies and various management processes. Nevertheless, we suggest that the County consider additional ways to incorporate independent oversight into the process. Three models developed by states, but potentially transportable to the local level may be worth considering: I. Texas and Kansas have independent technical advisory boards that periodically on a regular basis review the ratio study practices in each state and provide the state agency responsible for the studies with advice for changing and improving the studies. In some cases (notably in Texas) the advice has included suggestions for legislation. In these two states the boards include local real estate professionals, assessors, and representatives of the academic community (usually from business or statistical areas); 2. Texas and, at times, Florida, Missouri, and New Hampshire, have retained statisticians to review their ratio study procedures for technical accuracy and to teach classes to staff, 3. Local assessors in Idaho have formed a committee that meets regularly with state ratio study staff to review standards and procedures and proposed changes. A potential analogue of this process in Hawaii would be meetings with other counties in the State. These meetings do occur now, but it is not clear that ratio study or other performance evaluation issues are the main topic of the meetings. Recommendation 19 Recommendation: The Council should consider ways by which a body independent from the Real Property Tax Division could be formed to review the quality of appraisals and the techniques, such as ratio studies, currently employed by the Division to report on this quality. The Code should be changed to reflect this new process. As discussed in Section 10, the Board of Tax Review could be given greater review powers. An alternate model that may also be considered would be to have a separate division within the County responsible for formally reviewing the work of the assessor's office annually. This could be accomplished by mandating the Auditor's office, for example, to review final ratio studies, provided following completion of the annual assessments. The Auditor could also be provided with information on ongoing reassessments, investigations of taxpayer complaints, review of exemptions, and other areas of potential concern. As an example of this approach, District of Columbia law requires the Office of the Inspector General to arrange periodically for an independent audit of the Office of Tax and Revenue for the purposes of examining the District's management and valuation of commercial real property assessments. 50 There is no reason to restrict a performance audit to the assessment of commercial properties. A further modification of this approach would be to emulate the requirements in the States of Indiana and Oregon and the Province of Alberta, wherein assessors are required to submit auditable ratio studies annually, backed 50 Real Property Assessment Improvements Act of 2010, D.C. Code §§47-821(e) and (f). 39 up by copies of (or access to) real property data files, so that auditors can verify both the ratio studies and test for evenhanded treatment of sold and unsold properties. 5.7.8 Internal Controls, Security Procedures, and Data Edits Internal controls consist of reviewing estimated market values for unusual or unexpected results, such as those that would occur if data used to develop the CAMA model was not representative of all areas or types of property for which values were being generated. Queries that show both dollar and percentage changes would be useful and can also detect data entry errors. 51. A combination of such office reviews and field reviews is recommended. In this model, office reviews: "...check the validity of the various ratios which illustrate how various factors have influenced value in different areas over time. " 52 Once this is done, review should focus on under-represented properties; those found in the population, but not in sales used in the valuation model. Such properties "...become candidates, for special review." 53 Following this review, review of properties with unusual value changes, and review of other flagged properties, tentative value estimates can be developed and appraisal field review undertaken. 54 In discussion with Division representatives, it appears that field reviews are limited to properties with building permits and, perhaps, those that have sold recently. Admittedly, only "abnormal" sales are physically inspected. Queries and edits are run by office staff to look for large changes. However, these tend to not be routine and so have not been fully integrated as part of standard annual practice. This suggestion of an ad hoc query system is not optimal and will not consistently catch valuation problems. In addition, a simple series of tests could be added to procedures used to check the results of the CAMA system. When sales are entered into the system, some otherwise valid sales can be randomly selected and purposely excluded from the initial analysis. After the model computes new values and is tested with a preliminary ratio study, an additional ratio study can be perfon-ned using the sales that were not included in the development of the model. This additional sample is known as a "hold out sample" and is recommended in IAAO standards and literature. The following section from the Standard on Automated Valuation Models would apply equally to CAMA Systems. 55 51 Johnson,M.,C. Bennett, and S. Patterson,eds. 2003.Assessment administration. Chicago: IAAO. Pp. 342 -343. 52 Ibid. p. 343. 53 Ibid. 54 Ibid. 55 2003. Standard on automated valuation models (AVMs). Section 8.7. Kansas City, MO: IAAO 40 Figure 8: Holdout Samples 8.7 Holdout Samples Holdout samples represent groups of valid sales selected in a manner that guarantees their group characteristics match those of the population of properties covered by the automated valuation model. Such samples should be accumulated at the same time sales, are collected for model calibration, but used for testing the calibrated model. Inerent in the definitionof holdout samples is the premise that the sales not be used in developing the original model. Sales that occur after model calibration can also be used in testing and validating the model, and this method may be preferable when few sales are available. The Valuation Review section of the Quality Control chapter in Assessment Administration contains an even stronger statement, indicating that the: "...preeminent method employed to review values when sales data are adequate is to conduct an assessment ratio study on a holdout sample of the data. Ratios of model estimates to sales prices are computed for sales that were not part of the model-building sample, and the results are tested for accurate levels of appraisal, acceptable dispersion of appraisals from sales prices, and lack of biases in the patterns of appraisal errors.... It should be noted that performing an assessment ratio study using the same data as used in model development does nothing to guarantee that other, unsold properties have been as accurately appraised as the statistics would indicate. Ensuring uniformity of treatment between the sold and unsold properties, in fact, is a major function of quality control. 56 Recognizing that some property classes may not have sufficient numbers of sales to permit such holdout samples, an alternative is offered: "...a second-best alternative is the use of subsequent sales in a similarly structured assessment/ratio study. When this is done, care must be taken to factor the subsequent sales to a prior effective date to remove the effects of inflation and other factors that will have affected market values since the reference date assumed by the model developers." 57 56 Johnson, M.,C. Bennett, and S. Patterson, eds. 2003. Assessment administration. Chicago: IAAO. P. 343. 57 Ibid.pp. 343-344. 41 Recommendation 20 Recommendation: The Real Property Tax Division should implement holdout samples or use subsequent sales not part of the appraisal model to provide an independent test of the quality of the values generated by the CAMA system. To the extent such queries are not routine under the current system, the Division should develop routine queries to compare market value changes on selling and non-selling parcels by market area, neighborhood and other relevant strata. The Division should develop a systematic approach to reviewing unusual value or ratio issues incorporating both office review and field review procedures. It is also important to automate data entry verification and processing to the greatest extent practical. Although we did not specifically review the data entry software, the Division should note the following advice in the IAAO literature. "Data entry software can incorporate edits that require the data being entered to be consistent with allowable entries (such as requiring only specified alphabetic or numeric characters) and entries that are consistent with the data entered in other fields. Similar edits can be performed after data entry. Apparent problems are noted in a report as error or warning messages." 58 We also did not specifically analyze security procedures, which can be used to restrict access to manual and computerized records to protect various aspects of these records. Security procedures should be clearly defined so there is an audit trail that shows all changes made to a record and that helps to establish responsibility for work. Recommendation 21 Recommendation: The Division should review current data entry edits and security procedures to ensure that they meet industry standards as outlined in IAAO references and elsewhere. 58 Almy, Richard, Alan Dornfest,and Daphne Kenyon, PhD. Fundamentals of Tax Policy. IAAO. 2008. p. 212. 42 6. Cadastral Data Collection and Management Procedures "Cadastre" is a term for a land and building record system. Cadastral data collection and management typically account for the bulk of expenditures for assessment administration in the United States. In this context, four broad issues are relevant: data adequacy (that is, whether the Division collects and maintains the data needed for modem mass appraisal systems), accuracy, security, and accessibility. A full evaluation of these issues was outside the scope of our review, but is important and should be considered. 6.1 Maintenance of Ownership and Sales Data In this section, we evaluate the processing of real property conveyances, plats, and other documents used in updating ownership records, cadastral maps, and sales files. 6.1.1 Initial Processing of Conveyance Information Section 19-11 authorizes the County to request "abstracts of titles" for the purpose of arriving at a correct valuation of property, and the "registrar of conveyances" is commanded to comply with the request as often as required by the County. Happily, the State Bureau of Conveyances monthly supplies the Division with CD-ROMs containing images of deeds and of conveyance tax certificates (Form P-64A, or "CTC"). 59 Short of supplying this information electronically, this arrangement is satisfactory. The certificate form itself is not wholly satisfactory. Importantly, it identifies the parties to the conveyance, and it identifies the property by Tax Map Key (TMK) number or other identifier. It also requires the parties jointly to declare the full consideration, which is crucial in ad valorem property taxation. Apart from information about any personal property included in the sale and about assigned leases, the form does not elicit sufficient information from the participants for analysts to decide whether the transaction meets the criteria of an open-market, arm's-length transaction. Only Such transactions are fully usable in appraisal and ratio studies. Recommendation 22 Recommendation: The Council should request all counties in the State of Hawai'i to approach the State Bureau of Conveyances about amending the Conveyance Tax Certificate or attaching a supplemental declaration that attempts to elicit the information needed to evaluate the usability of each conveyance. 60 Based on the brief description of the processing of conveyance information that we had, it seems that the processing of ownership and map changes is sound. Initially, abstractors in the Tax Mapping Section screen incoming conveyance information. They decide which actions need to be taken, input ownership change and sale information into the 59 Information in the Appraisal Manual suggests that the CDs are supplied to the County under a contract with Title Guaranty of Hawaii. 60 See section 2.2 and Appendix A of Standard on Verification and Adjustment of Sales. 43 CAMA system, make a cursory check of existing exemptions, and prepare map-change orders if applicable. 6.1.2 Sales Data Processing Complete and accurate information on sales prices, the circumstances of sales, and the attributes of the properties that were sold are crucial to the effective use of all three approaches to value and to using sales in ratio studies. As previously noted, the Division automatically receives conveyance data from the State Bureau of Conveyances, and it has access to multiple listing service (MLS) data as a supplemental data source. However, we were unable to evaluate fully bow the Division processes and uses the sales data that it receives. To compensate for shortcomings in CTC data, we were told that the Division has a standard sale confirmation letter. However, the impression was given that it is not routinely used. Recommendation 23 Recommendation: Until the Conveyance Tax Certificate (CTC) is improved, as recommended in Section 6.1.1, the Division should routinely send sale confirmation letters to buyers and sellers, especially when there are few transfers in the area or of the type of property in question and when the property that was sold received an exemption or other form of preferential assessment. For sales of major tracts of land, large residential properties, and commercial and industrial properties, it is desirable to follow-up with non-respondents. In person interviews may be necessary with major properties. Zone appraisers are responsible for screening the sales that they will use, chiefly in land valuation and in market modeling. The Division's Appraisal Manual contains instructions on sales screening. Screening seems discretionary. It is clear that there are sale usability codes in the CAMA system, but a list of them was not made available for our review. The manual provides guidance on identifying related-party sales, which would be considered unusable in valuation. The manual also discusses evaluating the reasonableness of the sale price in relation to the information about the property in property records both in terms of correcting the descriptive data and in terms of qualifying the sale. We think that screening procedures should be clarified, particularly with respect to using objective criteria to identify unusable sales and with respect to sending first and second requests to buyers or sellers. 6.2 Cadastral Maps and Parcel Numbering System As previously noted, the County's Planning Department maintains the TMK maps that the Division uses, and the Department assigns parcel numbers (TMKs). We did not review their procedures. The Division regards the maps as sufficiently up-to-date, and the task of keeping them current should not be difficult if statistics on year-to-year changes in 44 parcel counts are any gauge of workloads. Apparently, the Planning Department also is creating a parcel layer for its GIS, but no information was provided on this project. However, scanned images of hand-drawn maps are available over the Internet. We looked at some of these maps. Some date from territorial times. Although technical details may not meet current IAAO standards, they appear to be appropriately scaled. 61 Since the GIS parcel layer was not reviewed, we refrain from making a mapping recommendation. As previously noted, the parcel numbering system in Hawal'i is known as the "tax map key" (TMK). It is composed of the following components: • Division or County—one digit. Hawai'i County is division 3. • Zone—one digit (1 through 9). The zone number designates one of the nine previously described zones. • Section—one digit. The section number designates a defined subarea within a zone. • Plat---three digits. The plat number designates a platted area within a section. • Parcel—three------three digits. A number assigned by the Planning Department to each mapped parcel. • CCCC or CPR—four digits. In a condominium, this number identifies the unit. This structure is acceptable. It appears, however, that when a parcel is divided, a part of the parcel can retain the parent parcel's parcel number, violating the uniqueness criterion of an acceptable parcel numbering system.62 As with the TMK maps themselves, until we can review current practices regarding the assignment of parcel numbers, we refrain from making a recommendation regarding parcel numbering (any recommendation would be on a going-forward basis). 6.3 Maintenance of Property Records It is axiomatic in assessment administration that land and buildings must be accurately described for valuations to be accurate and for properties to be properly classified for purposes of taxation. Generally accepted practice in the United States has been to send inspectors to properties periodically to measure and describe them or to ensure that existing descriptions are correct. Properties need to be inspected when there is a physical change; they should be inspected soon after they are sold or when their assessments are appealed. In addition, best practice is to periodically re-inspect all properties to ensure that changes are not made without official notice (it has been estimated that a substantial percentage of properties on Hawai'i have unpermitted construction). Fortunately, Section 19-3(8) of the Code gives the Division broad powers to inspect properties. 61 See Standard on Manual Cadastral Maps and Parcel Identifiers. 62 See Standard on Manual Cadastral Maps and Parcel Identifiers, p. 12. 45 6.3.1 Building, Permit Processing Building permits are automatically entered into the CAMA system by the Building Division of the Department of Public Works. Although we were not able to look into permit processing procedures in detail, on the surface they seem acceptable. Several times a year, an "abstract" of outstanding pert-nits is made. The clerical section "extracts" building descriptions on hard copy to give to appraisers. Appraisers inspect properties in their assigned areas (as discussed below, the Division's Appraisal Manual contains instructions on inspecting properties). A "C" flag is added to the pen-nit record in the CAMA system when the appraiser is finished. The appraisal supervisor oversees this process. As noted, there apparently is no permit backlog, as new properties increase the tax base. 6.3.2 Other Inspections Based on information in the Appraisal Manual, appealed properties are to be inspected if the appeal deals with valuation (photographs also are to be taken). A recently sold property may be inspected or MLS data may be consulted if the price seems out of line with information in property records, but verifying the descriptions of sold properties is not standard practice. More problematically, the Division currently does not have a program for periodically re-inspecting all properties. This is of particular concern in light of beliefs that much construction occurs without proper permits. The Division also does not use the oblique aerial photography that the County has acquired; it is not clear whether this is due to a lack of convenient access to the system. Recommendation 24 Recommendation: The Division should develop and implement a plan for verifying the accuracy of each property record at least once every six years. See Standard on Mass Appraisal, Section 3.3.4. Note that Section 3.3.5 recognizes that imagery, such as oblique aerial photography can be used. It is even possible for software to detect changes between successive flights. Nevertheless, as previously noted, we believe that the Division has sufficient staff to make more on-site inspections than is currently the practice. Aside from improving the quality of property records, a properly publicized inspection program could remove one of the incentives taxpayers have for not complying with permitting regulations. If more people voluntarily took out permits, permit revenues would increase, which could be used to cost justify the costs of acquiring imagery. 6.4 Contents of Property Records Regarding data adequacy, data are needed for basic property identification, classification, valuation, and determining ownership and taxability. Data on use, size, location, and distinctive features are needed for valuation and classification. For recent discussions of data needs, see Fundamentals cif Mass Appraisal, pp. 46-49 and pp. 92-93. 46 We were not given access to representative parcel records. However, on the basis of our familiarity with Tyler CAMA systems in other jurisdictions, the illustration of a residential data collection sheet in the Appraisal Manual, and an online inspection of several property records, we believe residential property records generally should contain sufficient information for applying the cost approach to buildings using the CLT costing application. Newer buildings also contain digital perimeter sketches. It is likely that there is little information about land plots other than area and zoning, limiting the ability to develop accurate land models. We can express no opinions on the adequacy of non-residential property records. Our review also suggests a few general areas of concern. First, qualitative variables such as physical condition and class/grade are to be categorized relative to neighborhood rather than island-wide norms. Several problems can be associated with this practice. In the absence of evidence of neighborhood or land value maps, we assume "neighborhoods" are the groupings of properties that each zone appraiser uses to update the CALP tables used in land valuation (as discussed in Section 7). The Appraisal Manual suggests that each subdivision should be a separate neighborhood. As a result, CALP neighborhoods tend to be too small for there to be sufficient sales for statistically reliable analyses and valuation models. In general, a neighborhood should be sufficiently large to have at least fifteen and preferably more than thirty sales per year. 63 Of course, neighborhoods can be grouped, as previously mentioned. In terms of classifying things like construction quality and condition, a neighborhood standard implies that physically similar buildings could have substantially different values. That is, an average-quality house in a poorer neighborhood could be classified as "above average," while an identical house in a better neighborhood could be classified as "below average." In bricks and mortar terms, the house in the poorer neighborhood would be worth more than an identical house in a better neighborhood, a dubious assumption. In addition, without careful training and supervision, the various zone appraisers could have different classification standards. Apparently contradicting the instruction to rate buildings according to neighborhood standards, the Appraisal Manual contain construction quality illustrations that apparently apply island-wide. Another area of concern is the effect of the "PITT" coding policy on land values (see the Appraisal Manual). By emphasizing land-use zoning over actual use, coupled with the tendency to zone urbanized land as "agricultural," there is a danger that some land will be undervalued. Aside from our concerns about data accuracy in general and about how data coding policies could bias values, we heard of no other inadequacies in the data. However, we believe future needs related to market modeling and the income approach should be taken into account. 63 Advice on delineating market areas (neighborhoods) for modeling purposes can be found in Fundamentals of Mass Appraisal, pp. 140-141. 47 7. Real Property Valuation In theory, real property valuation consists of applying economic principles of supply and demand to the market that determines the value in exchange of such property. It is the appraiser's job to estimate what the market value would be for properties, many of which have not sold recently, and to do so in a uniform manner so that like properties, subject to the same market influences, are appraised similarly. To do this, the appraiser must identify the nature of the property being appraised, the rights being valued, the market in which value is determined, the economic forces and principles within that market, and must represent the market in a model that can be applied broadly. 64 From discussion with interviewees, it appears that, except for agricultural property, which is subject to special use value considerations, the standard industry definition of market value is used. The IAAO Glossary provides the following definition. 65 "The most probable price (in terms of money) which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby. The buyer and seller are typically motivated; Both parties are well informed or well advised, and acting in what they consider their best interests; A reasonable time is allowed for exposure in the open market; Payment is made in terms of in United States dollars or in terms of financial arrangements comparable thereto; The price represents the normal consideration for the property sold unaffected by special or creative financing, or sales concessions granted by anyone associated with the sale. 7.1 Appraisal Cycle and Frequency Section 19-53, Hawaii County Code, requires the "...market value of all taxable real property to be determined and annually assessed by the market data approaches to value using appropriate systematic methods suitable for mass valuation of properties for taxation purposes, so selected and applied to obtain, as far as possible, uniform and equalized assessments throughout the County". 66 To do this, the Division probably uses the batch update procedures built into the ias CAMA system. Because it is impractical to physically inspect each property annually, 64 Eckert, J.K., R.J. Gloudernans, and R.R. Almy, eds. 1990. Property appraisal and assessment administration. Chicago: International Association of Assessing Officers. P. 36. 65 Glossary for property appraisal and assessment. 1997. Kansas City,MO: IAAO 66 Article 7. Section 19-53. Hawaii County Code. Supp. 5, 1/2008. 48 building permits and sales data are used to update the inputs to the valuation model. In particular, appraisers physically inspect properties with building permits and analyze land sales. Improved property sales are analyzed more uniformly by Hilo staff. Many sales are not subject to physical inspection or field review. The principle of annual assessment established by County Code is admirable and supported by lAAO standards, which also acknowledge that current "...market value implies annual assessment of all property. " However, this "...does not necessarily mean that every property must be reappraised each year. In annual assessment, the assessing officer should consciously re-evaluate the factors that affect value, express the interactions of those factors mathematically, and use mass appraisal techniques to estimate propeproperty values. The County's system clearly is in line with this guidance and it would be impractical to suggest annual physical review and reappraisal (including physical inspection). However, there is no established cycle for physically re-inspecting all property. As a result some property has not been physically inspected since 1980 and typical properties have not been re-inspected in about 10 years. The absence of a reappraisal cycle is very unusual, with Hawaii and Pennsylvania the two most notable states without either statutory or locally established regular reappraisal cycles. 68 IAAO standards recommend: "...that assessing officers consider establishing regular reappraisal cycles or at least appraisal level and uniformity (vertical and horizontal equity) thresholds that trigger reappraisal. 69 The Standard on Mass Appraisal elaborates further. "Analysis of ratio study data can suggest groups or strata of properties in need of physical review. In general, trending factors can be highly effective in maintaining equity when appraisals are unijbrm within strata. However, such factors are not a substitute for physical reviews and individual reappraisals, which are required to correct lack of uniformity within strata." This Standard goes on to recommend that: "...properties should be physically reviewed and individually reappraised at least every four to six years." 70 Common reappraisal cycles and property inspection practices are found in the tables in Appendix H. 67 2010. Standard on property tax policy. Section 4.2.2. Kansas City, MO: IAAO. 68 Dornfest, Alan S., Steve Van Sant, Rick Anderson, and Ronald Brown. State and Provincial Property Tax Policies and Administrative Practices (PTA PP): Compilation and Report. Journal of Property Tax Assessment & Administration. Volume 7, Number 4, 2010. 69 2010. Standard on property tax policy. Section 4.2.2. Kansas City, MO: lAAO. 70 2011. Standard on mass appraisal of real property. Section 4.7. Kansas City, MO: IAAO. 49 Recommendation 25 Recommendation: The Council should require a regular property inspection cycle. Every property should be inspected at least once every six years. 7.2 Valuation Methods There are three recognized approaches to appraising the market value of property, provided that is the goal of the appraisal system. Section 19-53, Hawaii County Code requires the determination of market value, with some exception for agricultural property. This Code, however, identifies the cost and market data (comparable sales) approaches and is silent on the third professionally recognized approach, the income approach to determining market value. Traditionally, all three approaches are considered (they may not all be applicable in a given circumstance) and the results are reconciled into one value for the property. While it is not unusual to give added weight to one or another of the approaches, it is unusual to systematically eliminate one of the approaches. Because the County Code does not indicate the use of the income approach (an approach in which net income is capitalized into value using a market determined capitalization rate), and possibly because of some court decisions, staff does not use the income approach, except in a modified way in determining the value of agricultural land. This means that a widely used approach in determining the value of commercial property is not considered. The IAAO Standard on Mass Appraisal comments: "In, general, for income-producing properties the income approach is the preferred valuation approach when reliable income and expense data are available, along with well-supported income multipliers, overall rates, and required rates of return on investment. SuccessAl application of the income approach requires the collection, maintenance, and careful analysis of income and expense data." 71 Although these data requirements may appear daunting, they are well recognized and intrinsic parts of appraisal and mass appraisal programs. Interviewees further indicated that, on appeal, the income approach may be considered. If this is true, then failure to consider the approach in the original valuation system is an even more significant gap that should be remedied. Recommendation 26 Recommendation: The Council should consider Code changes to permit the use of the income approach, especially for multi-family and commercial properties, in addition to the other recognized approaches to value, when appropriate on the basis of data availability and type of property under consideration. The Division should review data gathering methods to try to maximize available income and expense information. 71 Ibid. Section 4.4. 50 7.2.1 Land Except for agricultural land, the sales comparison approach dominates the valuation of this class of property, and this is appropriate based on IAAO standards. A modified income approach is used for agricultural land valuation, as is typical in many states. This "use-value" methodology incorporates information about types of crops, yields, expenses, and capitalization rates, features that are familiar in agricultural land valuation elsewhere in the U.S. Section 19-53 of County Code requires that agricultural land values be updated at least once every five years. It does not appear that this is being implemented. For non-agricultural property, local sales influences are taken into account in developing specific land values. This means that the effect of view, for example, is entirely reflected in the land value. Building base rates and cost trending factors are uniform regardless of location. The computer-assisted land pricing (CALP) application contains tables for each "neighborhood" (usually a subdivision) or group of neighborhoods containing standard prices per square foot, acre, or plot. The application allows these base prices to be adjusted for such things as how the plot is serviced (paving, water, sewer, etc.), topography, and "land type" (typical CALP land types are primary, secondary, residual, waterfront, water view, undeveloped, and common area), but we do not know what site data have been collected by the County. In addition, the application makes use of a neighborhood group table that allows an overall adjustment factor to be applied to each neighborhood, whether or not it contained sufficient sales to analyze (which generally is the case in urbanized areas). CALP tables provide a convenient mechanism for updating land values on a mass basis. We do not know when and how they were developed. Typically, available vacant land sales and indicators of land values obtained from subtracting indicators of depreciated replacement costs from improved sales prices are analyzed. We also do not know whether appraisers maintain the base rate and adjustment factor tables. It is likely, however, that appraisers do try to maintain the overall neighborhood adjustment factor tables (based on the section on land valuation in the Division's Appraisal Manual). Recommendation 27 Recommendation: The County should implement the updated agricultural land values developed by the Division. If the effects of implementing the proposed values do not comport with the County's agricultural land preservation policy, the values should be changed appropriately or changes in Section 19-53, County Code, should be considered. If so, the Division should provide such recommendations to the Council. 7.2.2 Single-family Residential Buildings In principle, with regard to applying the cost approach based cost model to buildings, the essential elements are (a) tables of replacement cost rates (per square foot or other measure) and adjustment coefficients for qualitative differences in building features and (b) an 51 algorithm (sometimes referred to as a "cost ladder"). The tables then allow the resulting cost estimate to reflect each building's characteristics. It appears that the County uses the costing application developed by CLT some years ago. (Many assessment districts use data from a cost service, such as Marshall & Swift. A few develop their own cost models by making detailed studies of local construction practices and costs, but this approach seldom is cost-effective.) This application contains tables of purported replacement costs that depend on such factors as the number of stories, whether the house has a basement, physical condition, construction quality grades (low- quality, fair, average, good, very good, excellent, superior, and luxury), and other features. The Appraisal Manual contains specifications for the various construction quality grades. Deductions are possible if standard features are absent. It is unclear whether the cost tables have been updated since they were developed by CLT. However, it appears that the Division annually develops a countywide index factor based on an analysis of sales. The final steps in the application of the cost approach are (1) apply depreciation to the replacement cost estimates of buildings to bring them into line with current market values and (2) apply any final adjustment factors to the land, building, or both estimates to bring the total value estimate via the cost approach into line with market values. Regarding ordinary scheduled depreciation, we assume that the Division uses the depreciation tables that are installed in ias. The Appraisal Manual also mentions a composite CLT factor known as "condition, desirability, and utility" (CDU), which appraisers can use to bring the system's estimate of depreciated replacement cost into line with the value they desire. They are supposed to rate each building in terms of CDU in relation to its age and grade relative to its neighborhood. There are seven CDU categories, but the manual does not provide information on the factors associated with each (which also is the case with condition and construction quality ratings). Thus, we cannot opine about the use of CDU other than to say that a poorly maintained property in a good neighborhood probably would receive less depreciation than normal because it is in a good neighborhood, but would receive increased depreciation because of its poor maintenance. In other words, the CAMA system presumably has a set of CDU tables reflecting what is typical for the neighborhood, each indexed by actual age and the eight individual CDU ratings. If this is correct, it is important for appraisers to be consistent in assigning CDU ratings. Improved sales are used to develop uniform building base rates and cost trending factors which then are implemented county-wide. Ratio studies indicate that overall results generally reflect good appraisal level, moderate horizontal unifon-nity as measured by the COD, and some tendency to under-appraise higher priced properties, as indicated by the PRD. Although total property values are adequately reflected (i.e. good appraisal level), it is not clear whether building components are properly valued. In recognition of this possibility, "overrides" have been used to put additional value on some custom homes. Similarly, although land values are adjusted locally to compensate, it is doubtful that unifonn building values prevail across the County, given the diversity and greater recreational emphasis 52 in West Hawaii. In Idaho, for example, where the Sun Valley recreational area consists mostly of a narrow 11 mile valley, running from North to South, residential building costs alone have varied by as much as 100% depending on proximity to the recreational influence (ski resorts in that case). Hence, it has been necessary to consider special building valuation modifiers routinely, based on location. The only way to prove whether this is an issue in Hawai'i would be to do area-by-area ratio studies on improved residential properties where the sale consists of land and a building. The Division indicated that it is considering models that develop one value for the property, rather than separate values for land and buildings. This would eliminate the need to deal with these separate land and building adjustments and may well be worth considering. There is limited IAAO guidance on this issue, and it should be noted that each of the 45 states and the District of Columbia that responded to recent questions about this practice indicated that land and buildings each had separate value estimates. 72 If the Division implemented overall property valuation models and followed standard practice, it would continue to value land separately. It would then either model total property value and subtract land value to arrive at improvement value or it would subtract its land values from sales prices of improved properties to arrive at an indication of building value, which would then be modeled. Recommendation 28 Recommendation: The Division should consider developing different building cost location modifiers to reflect differences in material and labor costs between the east and west sides of the island. Recommendation 29 Recommendation: Before moving to combined land and building valuation, the County should review this decision with a broad array of stakeholders to eliminate unanticipated problems. 7.2.3 Multi-family Properties These properties typically are appraised using sales and income, depending on the number of units in each and the availability of sales and income data. Properties with larger numbers of units more typically are appraised using the income approach. However, because of limitations in County Code, the Division does not use the income approach. The rationale is that necessary data are not available. The County should reconsider this approach and review data gathering procedures to see if sufficient data could be gathered (see Recommendation 26). 72 But see Fundamentals of Mass Appraisal, p. 13. 53 7.2.4 Commercial and Industrial Property As has been indicated elsewhere, the County should consider Code changes to specify that the income approach can be used to appraise these properties. IAAO and professional appraisal guidance indicate that this approach generally is most applicable. 54 8. Administration of Exemptions and Relief Mechanisms Every property tax system in the U.S. includes specialized measures to relieve the burden of the tax on certain groups of taxpayers. As it pertains to this report, such measures include: • Full and partial exemptions, • Classification (in this case, tax rate classification), • Caps on assessed value growth, • Use value assessment of agricultural land, forest land, and golf courses. Exemptions take many forms. Some, such as those provided to government property and public schools avoid taxing tax-supported functions. Others, such as Hawai`i's homeowner's exemption, encourage a specific use. Still others facilitate economic or public objectives. Special appraisal treatment of agricultural land would fall into this category. Finally, there are exemptions designed to case administrative burdens. Many states have used this reason to eliminate property tax on all or some personal property (as is the case in Hawai`i). As was discussed under tax expenditures, exemptions often result in increased tax rates, through narrowing the tax base. They may also result in lower revenue. 73 In principle, exemptions should be narrowly construed and "...no exemption should be granted unless it will be beneficial to a substantial segment of the affected population and unless all similar properties or similarly situated taxpayers are accorded the same treatment." 74 The non-speculative residential use dedication program clearly fails these criteria. It applies only to properties that qualified prior to 2004 and remain in the program. In addition, given that different residential properties would be expected to experience different changes in market value over time, properties with frozen taxable values can expect to be treated differently in comparison to similarly situated properties without such frozen values. To control exemptions and prevent abuses, IAAO recommendations include: • Construe each exemption narrowly; • Have specific criteria for eligibility; • Place burden of proof on claimant; • Review exempt property frequently to ensure criteria are still met; • Incorporate sunset provisions in statutory exemptions to ensurer periodic, review by policy makers; • Track amount of value that is exempt under each provision and number of parcels receiving exemption; 73 Almy, Richard, Alan Dornfest, and Daphne Kenyon, PhD. Fundamentaty of Tax Policy. lAAO. 2008. pp. 188 - 189. 74 2010. Standard on property tax policy. Section 5.3.1. Kansas City, MO: IAAO. 55 • Determine amount of taxes shifted or lost, and track these amounts over time. 75 When exemptions are overly complex or numerous, benefits tend to be clouded and administrative costs can be high. Especially with regard to full exemptions, the IAAO Standard on Property Tax Policy recommends annual application when practical. When numbers are large, as in the number claiming agricultural use value or homeowner's exemptions, less frequent review is expected for practical reasons. In general there are two major issues regarding the use of exemptions by the County. First, there is a question about eligibility; whether the intended properties are getting the benefit of the exemptions and whether formerly eligible or ineligible properties are properly excluded. Second, there is the issue of whether there are so many options for exemption or agricultural use valuation that stakeholders find it difficult to know whether their choices are the most beneficial or applicable. We will further explore these issues under the discussion of specific exemptions, at least in regard to homeowner's exemptions and agricultural use value options. Regardless of these implementation and administration issues, it is of paramount importance that there be annual ongoing analysis of the tax shifting and loss implications of exemptions, especially the residential and agricultural exemptions which are so numerous. 8.1 Classification System Traditional classification systems provide different fractional assessment ratios (i.e. levels of assessment) for different classes of property. These systems tend to produce hidden benefits, not related to need or even the original purpose and tend to lend too much importance to classification systems and assignments. Hawaii uses tax rate classification, which has some of the same effects, but does not use the more common value classification. Rate classification is preferred because it does not distort the underlying tax base. Ten states and the District of Columbia indicate use of differing rates. 76 8.2 Specific Exemptions Although there are many exemptions, including the de facto partial exemption granted by the agricultural land use value system in place in Hawaii, this report looks mostly at the following: 1. agricultural use value, 2. homeowner's exemption, 3. assessed value increase limitation (i.e. 3% cap). 75 Almy, Richard, Alan Donfest, and Daphne Kenyon, PhD. Fundamentals of Tax Policy. lAAO. 2008. pp. 191. 76 Dornfest, Alan S., Steve Van Sant, Rick Anderson, and Ronald Brown. State and Provincial Property Tax Policies and Administrative Practices (PTAPP): Compilation and Report. Journal of Property Tax Assessment & Administration. Volume 7, Number 4. 2010. 56 We are aware of other exemptions in the County. There were discussions during some interviews questioning the need for Credit Union exemptions, for example. There are also partial exemptions for the disabled and disabled veterans, and exemptions for charitable organizations. LAAO has not conducted surveys on credit union exemptions, although these are known to be used in some other states, possibly because of non-profit organizational status. Exemptions based on need (e.g. disabled persons) are quite common and generally are supportable under the premise that they target relief to selected identifiable groups. Charitable exemptions are widespread, with 44 states reporting full exemptions, five reporting partial exemptions, and nine reporting that this exemption is a local option. 77 The County's approach to these exemptions appears reasonable, based on the application forms, brochures, and underlying laws. County Code even includes a provision for a "carve out" of income producing portions of property otherwise eligible for the Charitable property exemption. This is an excellent feature found in some other states' exemption laws (e.g. Idaho). The major concern we would have about many of the exemptions is whether there is frequent enough review of these properties to ensure that they still qualify. IAAO standards stop short of suggesting a review period. Nevertheless, the general guidance that suggests physical inspection for all properties that are taxable on a four to six-year cycle may well be applicable to exemptions such as the Charitable exemption. In the absence of review cycles, the County has established provisions under which owners moving or no longer qualifying for an exemption, such as the disability exemption, must notify the County of the change. This signified awareness of the potential for abuse and clearly is an attempt to limit granting the exemption to ineligible property. However, awareness alone is not sufficient to prevent abuses, without implementation of regular review cycles initiated by the assessor's office. Recommendation 30 Recommendation: The Council should consider Code changes to institute a review cycle or requiring re-application for exempt property. 8.2.1 Agricultural Use Value Nationally, agricultural partial exemptions or "use value" systems that lower assessed value of agricultural land below market value are extremely common. It is difficult to find a state where such favored tax treatment is not granted for this type of property. The underlying policy is that agricultural use, while desirable in certain areas, is not economically sustainable without some sort of assistance. In addition, politically, it is often considered unpalatable for large tracts of land to pay what might be high overall tax amounts, when, arguably, the land uses few of the services normally provided with the property tax. Regardless of the commonness of favored tax treatment, the County should undertake 77 Dornfest, Alan S., Steve Van Sant, Rick Anderson, and Ronald Brown. State and Provincial Property Tax Policies and Administrative Practices (PTAPP). Compilation and Report. Journal of Property Tax Assessment & Administration. Volume 7, Number 4. 2010. 57 take to review the underlying policies and make sure that land currently enrolled for such favored treatment is land for which the policies were designed. In Hawaii County, there are various provisions under which agricultural land may be valued at less than market value, under what is commonly termed "use value." Dedicated agricultural land generally is committed to commercial agricultural use for 10 years. $2,000 annual gross income per farm operation is required and there is a rollback tax penalty imposed if use changes during the dedicated period. Non-dedicated land is assessed at a higher value, but does not have the multi-year use requirement. Non-dedicated land continues in agricultural use (at this higher value) until the owner notifies the County of changes that presumably would preclude such use. There are no income requirements to be met for non-dedicated land. The inclusion of income requirements is important in reducing improper claims of agriculture use. Unfortunately, no proof is required to accompany applications. Similarly inspection of dedicated agricultural land occurs during the first year of such dedication, but not subsequently during the dedication period. The rollback (recapture) provision is a very good provision, recommended in the IAAO Standard on Property Tax policy. 78 Ten states have similar provisions. 79 Many states incorporate size restrictions, with the presumption that small tracts are less likely to be agricultural and more likely to be speculative in purpose. We explored this with many interviewees, but, as there was no consensus, and states have mixed reissue sponses, it would be necessary for stakeholders and County policy makers to consider whether size plays a part in agricultural use being supported by lower assessments. In general we are concerned with the number and complexity of options available under the agricultural use value provisions. We would ask the County to examine whether taxpayers clearly understand the nuances between the different options and are therefore reasonably able to make the best decisions about what is most applicable to them. Although some complaints were related to possible ineligible properties (see discussion below), some appeared related to the complexity and number of choices. As part of our recommendation to do tax expenditure analysis, the County should consider whether and how much tax shifting would occur given a smaller number of agricultural use value options. There were many complaints suggesting abuses of the agricultural use value provisions. More frequent inspections and inclusion of income information as part of the application process would be beneficial. Eligibility criteria should be reviewed to ensure that loopholes don't allow extension of benefits beyond what is contemplated by policy makers. A stakeholder committee could be formed to review the policy and specific instances of alleged 78 2010. Standard on property tax policy. Section 5.3.1.1. Kansas City, MO: lAAO. 79 Dornfest, Alan S., Steve Van Sant, Rick Anderson, and Ronald Brown. State and Provincial property Tax Policies and Administrative Practices (PTAPP). Compilation and Report. Journal of Property Tax Assessment & Administration. Volume 7, Number 4. 2010. 58 abuse. This should lead to improved policy that strengthens the use value provision as it applies to its original purpose. Recommendation 31 Recommendation: The Council should require the Division to conduct more frequent inspections and inclusion of proof of eligibility and income information as part of the application process for agricultural use value assessment. A stakeholder committee should be established to review the intent of underlying policies and allegations of abuse. This committee should also look into the possibility of consolidating agricultural use eligibility options, weighing the benefits of a simpler, more transparent system against specific tax shifts. 8.2.2 Homeowner's Exemption Properties used as the primary residence of the owner are eligible for a basic exemption of $40,000, with additional exemptions for older homeowners. Although amounts vary widely, similar partial exemptions are found in at least 30 states. 80 This number would be larger if states with favorable fractional assessment of such residential property were included. Nominally, the laws and application process appear in line with similar processes around the nation. There is a provision that the assessor must be notified within thirty days after the claimant ceases to qualify for the exemption. If this notice is late or if the assessor determines the claimant does not qualify any longer, two years back taxes can be recaptured. This is similar to the agricultural exemption rollback provision and strengthens the program. In a state like Hawaii, with significant recreational property, there are always questions about whether a property truly is the "primary residence" of an owner. One way some states, such as Idaho, have of helping assessors make this determination is by providing residency information from income tax returns. Although such returns are confidential, the state legislature in Idaho was able to pass legislation permitting the limited release of information indicating whether a tax filer was also filing a resident or non-resident income tax return. This information is released to the assessor on request to the state. A similar provision could be considered in Hawaii. Similarly, death certificates are filed with the State of Hawaii and not released to the assessor. Death certificates should result in new applications for homeowner's exemptions, unless (perhaps even it) there is a surviving spouse. This information would be useful in preventing inheritors from receiving benefits for properties they do not occupy as principal residences. It may be worth considering legislation to obtain this information as well. Even if such information cannot be obtained, periodic, ongoing reviews of drivers' licenses and voter registration records can be useful in helping to establish the likelihood 80 ibid. 59 that a property is the primary residence of its owner. These types of reviews should be instituted to prevent or control abuses of homeowner's exemptions. Along these lines, it may also be worthwhile to review properties with undeliverable mail and to institute periodic inspection of such residential property (this may be accomplished by the general recommendation to subject all property to periodic re-inspection—see Recommendation 25). Recommendation 32 Recommendation: The Council should consider working with state legislators to obtain residency information from income tax returns and death certificates to prevent abuse of homeowner's exemptions. In addition, the Division should institute procedures to verify residency using drivers' licenses and voter registration records. 8.2.3 Other Relief Measures — The 3% Assessment Increase Cap Section 19-53(g) of the County Code provides a 3 percent limit or cap on the amount by which assessed values of homeowners can increase annually. This limit appears to have been implemented to replace the non-speculative residential use dedication that froze taxable values, was available prior to 2004, and remains in use by properties that qualified at that time. The amount of value or tax foregone as a result of either cap is not indicated in the report of exemptions that we received, so it is difficult to evaluate the magnitude or effects of these exemptions. With respect to the 3 percent annual increase limit, approximately 19 states have similar provisions, either statewide or in specific localities through local option provisions. One state, Minnesota, allowed such a provision to expire as a result of a statutory "sunset" provision and analysis indicating that it was not helping those intended to be helped. The IAAO tax policy textbook and the Standard on Property Tax Policy take strong positions opposing assessed value caps. It is worth reprinting the germane section from the Standard." See Figure 9. 2010. Standard on property tax policy. Section 5.4.3. Kansas City, MO: IAAO. 60 Figure 9: Excerpt from Standard on Property Tax Policy 5.4.3 Valuation Increase Limits Limits that constrain changes in assessed or appraised value of property may appear to provide control but actually distort the distribution of the property tax, destroying property tax equity and increasing public confusion and administrative complexity. Owners whose properties are increasing in value more rapidly than the permitted rate of increase (say, 5 percent) receive a windfall at the expense of those whose properties are decreasing in value or are increasing at lower rates. in addition, value increase limits typically tend to reduce taxes the most for the small number of properties with the largest increases. As a results, some properties, which would have increased in value more than the constraint, are held to lower assessed values yet would pay higher taxes with the constraint. This effect is invisible to the taxpayer and therefore especially deceptive. In effect, valuation increase limits results in lower effective property tax rates for owners of desirable property and higher effective property tax rates for owners of less desirable property. Similarly, when state funds are distributed to school districts or other taxing jurisdictions based on taxable property value (indirect equalization), funding will tend to shift from poorer areas to wealthier areas with rapid appreciation - an illogical and undesirable result. Legislators and the public should be made aware of the inequities resulting from valuatoin increase limits and be actively discouraged from pursuing such limitations. Any other control is preferred. Valuation increase limits create the most distortion in horizontal equity because similarly situated properties no longer pay proportionately equal taxes. Vertical equity issues are less certain, especially if return to market value occurs only on condition of sale and if owners of low-value properties have lower income and are less mobile. 61 The conclusions mentioned in Figure 9 were confirmed in independent analyses conducted in Minnesota and Idaho (which does not have assessment caps, but has had nurnerous legislative attempts to impose caps). The Idaho analysis tested hypothetical caps on more than 120,000 residential parcels in two counties and identified many homeowners with lower assessed values who paid higher taxes, due to tax shifting (the Idaho study assumed the same overall tax revenue would be generated). 82 There are two types of assessed value increase caps, one that requires assessed value to be reset to market value on sale and one that does not. Arizona, Iowa, and Oregon are the only states with caps that remain in place, regardless of ownership changes. Although all caps lead to distortions with similarly situated properties (i.e. similar market value and location, and paying tax to the same governmental entities) paying different tax amounts, systems that use more of a "base year" approach (i.e. Oregon) arguably have less distortion (with market value as a reference point). The system in place in Hawaii County resets assessed values to market value on sale, so has the potential for greater disparity in taxes paid per dollar of underlying market value. In discussions with interviewees, it was noted that the County maintains and reports both the market and the "capped" value to taxpayers that received the benefit. This is a very good feature and makes the effects of the cap more transparent and analysis of effects more practical. Caps tend to be considered or implemented by states when market values of homes are increasing rapidly. Several interviewees pointed out that when values are declining, capped assessments do not necessarily follow downward because the diminished market value still exceeds the capped assessment value. This adds another element of confusion within the system. Recommendation 33 Recommendation: The Council should require the Finance Department to analyze the effects of the 3% assessed value increase cap to determine if the underlying policies are being fulfilled. In addition, although no new claims can be made for the non-speculative residential use dedication, the Council should review the underlying policies for retaining this value freeze for properties remaining under the dedication. Both programs should be reviewed with respect to the different tax treatment that results for similarly situated properties with and without the dedication or the 3% cap. Recommendation 34 Recommendation: The Council may wish to consider incorporating sunset provisions into exemptions to force periodic review of underlying policies. 82 Dornfest, Alan S. Effect of taxable value increase limits, fables and fallacies. Journal of Property Tax Assessment & Administration. Volume 2, Issue 4. 2005. 62 8.2.4 Alternative Relief Mechanisms Often, caps and other similar exemptions related to homeowners are put into place because of concerns over those on limited income not having the ability to pay property taxes, especially if those taxes increase as a result of higher taxable values. lAAO recognizes this very real concern and suggests two different approaches: deferrals and credits, which will be addressed in this section, and levy or budget based determination of tax rates, which will be discussed in Section 9. Section 3.3 of this report includes a table that identifies the number of states with tax deferrals and circuit breaker and other tax credit programs. Of these programs, tax deferral is the least likely to be used by those eligible for the benefits. Often requirements for equity interests and dislike of accruing liens are blamed. Regardless, such programs can form a safety net and directly benefit the most needy— something that is not true of more broad-brush caps on value increases. Circuit breaker programs more commonly are run by states as grants that reduce local property taxes for eligible homeowners. In Virginia, however, the program is entirely locally cally funded, although it is run more as a local income tested tax credit. 83 One of the interviewees indicated that two Hawal'i counties (but not the County of Hawaii) use circuit breaker tax credit programs. Circuit breaker programs are distinguished by having income limits, so they may be difficult to administer by a county without direct access to income information. This could be rectified by requiring applicants to sign IRS release forms so that income information could be verified. An advantage to circuit breaker programs is that they can and typically do apply to renters using a percent of rent formula. Tax credits are similar to circuit breakers. If there are statewide concerns over lower income homeowners and renters being able to pay their property taxes, the circuit breaker option would be worth considering. State legislation would be necessary for consistent treatment, although programs are not necessarily run consistently in each state (this is the typical model however in most of the 33 states with such programs). Recommendation 35 Recommendation: The Council should consider establishing a stakeholder committee to identify problems related to tax relief and review options. 83 Baer, David. State handbook of economic, demographic, and fiscal indicators. AARP. 2008. 63 9. Determination of Levies and Tax Rates Property tax systems generally can be driven by the amount to be levied (i.e. the budget of the taxing entity) or by the tax rate, which may be fixed or relatively rigid. In levy or budget driven systems, the dollar amount to be raised overall or by class of property is established first; then the rate is computed. This type of system is preferred over systems with fixed rates or rates set independently from budget needs. The main reason for the preference is that windfalls associated with reappraisals are avoided if budgets are set first. As a corollary, when values decline, as in many markets during the current economic situation, rates may float upward, and tax revenue needed for government services does not decline. Approximately 32 states report the use of either levy or rate limitations. 84 An alternate approach is to use "Truth in Taxation" systems instead of strict limits. Sixteen states have such provisions, under which assessment notices include estimates of property tax amounts, and taxpayers are thereby encouraged to participate in the budget approval process of the underlying taxing districts or counties. At the very least, truth in taxation is an attempt to make the property tax system more transparent and enable taxpayers to better understand the effect of property value changes on their taxes. Tax rates in Hawaii. County appear to be set as rates. Interviewees suggest that the rates and changes in rates may reflect political rather than purely budgetary issues. This is not meant to imply that the rates are improper;just that they are more likely to result in increased or decreased revenue depending on taxable value changes as opposed to the amount of revenue needed to provide services. We suspect also that the 3% cap on taxable value increases is misinterpreted as a 3% tax cap and this may not always be true, especially when market value declines but "capped" values do not. Recommendation 36 Recommendation: The Council should consider establishing a stakeholder committee, including taxpayers,to determine specific ways to make the relationship between taxes and value changes more transparent. 84 Dornfest, Alan S, Steve Van Sant, Rick Anderson, and Ronald Brown. State and Provincial Property Tax Policies and Administrative Practices (PTAPP): Compilation and Report. Journal of Property Tax Assessment & Administration. Volume 7, Number 4. 2010. 64 10. Assessment Appeal An appeal system is an integral part of a property tax system. A right of appeal allows taxpayers to review the reasonableness of their assessments and to challenge them if they so wish. An appeal process ideally results in more accurate valuations and in greater equity in property taxes. The interests of taxpayers in receiving an impartial hearing and fair (or lower) property tax obligations need to be balanced against the interests of the property tax administration in achieving finality in each year's taxation cycle and in not bogging administration down with unmerited appeals. From the taxpayers' perspective, initiating an appeal should not be unduly burdensome. From the administration's perspective, taxpayers should have grounds for appealing over and above wanting to pay less in taxes. The features of good appeal systems are the focus of several works, including the IAAO's Standard on Assessment Appeal and the American Bar Association's 1983 Model State Assessment Appeal Act. The subject also is treated in Fundamentals of Tax Policy (pp. 258-261). We use these features in Our evaluation of the system in Hawaii County. At the outset it should be mentioned that the volume of assessment appeals is not a gauge of the quality of assessment, nor are the percentages of appeals granted or denied a gauge of either the quality of assessments or the performance of the appeal system. Too many extraneous factors can come into play, particularly when comparing systems. Nevertheless, rate of appeals is an enduring area of interest. In its 1999 survey of property tax policies icies and administrative practices, IAAO asked state supervisory officials about appeal in reappraisal and non-reappraisal years (every year is a reappraisal year in Hawaii County).8" Typically in a reappraisal year, between 3 percent and 5 percent of assessments were appealed in contrast with a rate of 2 percent or less in a non-reappraisal year. By these benchmarks, the rate of appeals to the Tax Board of Review is comparatively low. After spiking in 2008 and 2009 at just over I percent, the rate in more recent years has dropped below I percent. 10.1 Current System Hawaii County's property tax appeal system is spelled out in Chapter 19, Article 12, of the Code. It lays out essentially a two-stage process. Initial appeals are to the Tax Board of Review. From there, one may appeal to the State Tax Appeal Court (and conceivably to the Supreme Court). The law establishes a right of appeal in Section 19-91. It addresses who has standing to appeal (in Section 19-92). Section 19-93 establishes the following grounds for appeal: (1) assessment of the property exceeds by more than 20 percent the assessment of market value used by the director, or See IAAO, 2000. Property Tax Policies and Administrative Practices in Canada and the United States, Chicago, IL: lAAO, p. 16, Exhibit 6-1. 65 (2) lack of uniformity or inequality, brought about by illegality of the methods used or error in the application of the methods to the property involved, or (3) denial of an exemption to which the taxpayer is entitled and for which the taxpayer has qualified, or (4) illegality, on any ground arising under the Constitution or laws of the United States or the laws of the State or the ordinances of the County in addition to the ground of illegality of the methods used, mentioned in clause (2). As previously noted, taxpayers can appeal land and building assessments separately. That is, in the appeal of an assessment, the taxpayer can choose to challenge either the land value or building value or they can contest both values. Sections 19-96 and 19-97 establish the composition and powers and duties of the Board of Tax Review. The Board is a five-member lay board appointed by the Mayor and confirmed by the Council. Basically, the Board is an appeal board rather than a review board, which its name implies. Although the terms "review" and "appeal" commonly arc used interchangeably, they have different technical meanings. Appeal refers to the process whereby taxpayers challenge their assessments. An appeal agency has the power only to alter assessments that have been appealed. Review refers to the power another government agency—such as an appeal or supervisory agency—may have to examine assessments and revise them on its own initiative. However, as will be discussed below, Section 19-97(e) gives the Board a limited review authority. Section 19-97(e) requires the Board to prepare an annual report. Among other things, the Board is to"note instances in which, in the opinion of the board, the director, in the application plication of the methods selected by the director, erred as to a particular property or particular properties not brought before the board by any appeal, whether the error is deemed to have been by way of underassessment or overassessment." Prior to this phase of its work, the Board is to hold a "complaint hearing," at which taxpayers can complain about assessments that were not subject to an appeal. Complaints are to be in writing and must be with reference to a particular property, and the complainant must state the grounds for the complaint. The Director is to give "due consideration" to the recommendations made in the report. Some seemingly sensible and doable recommendations regarding outreach and the Web site seem not to have been addressed. The County's appeal system has three other notable features. First is a filing fee requirement (Sections 19-100 and 19-101). The fee is $50, which at current residential effective tax rates implies a valuation dispute in excess of $30,000. Few assessment districts require the payment of a fee to lodge a first-level appeal. State-level appeal agencies and courts often require a filing fee. Second, when parts of a property are assigned to different tax classes (such as a property partly classified for tax purposes as commercial and partly as agricultural) the owner must file a separate appeal for the assessment of each part. The rationale for this is unclear, particularly in view of the potential subjectivity in the classification process. 66 The third noteworthy feature is the provision in Section 19-91 related to condemnation proceedings. Basically, it makes the taxpayer's claimed market value for property tax purposes admissible in evidence in any subsequent condemnation proceedings. This could discourage appeals from people who were ignorant of professional valuation standards, which hold that an appraisal made at one time for a certain purpose is not necessarily indicative of the value for another purpose and another time. The County appears to follow many sound practices in the administration of appeals. It requires appeals to be in writing and on a standard form (the form itself could be daunting to the non-expert). The Division encourages appraisers to contact appellants to find out if there are factors affecting the value of the property that are not in the Division's records and to explore whether a "settlement" can be reached with the taxpayer, if data corrections result in an assessment satisfactory to the taxpayer. Sometimes the communications with the taxpayer will result in the appeal being formally withdrawn. Appraisers have some discretion over contacting appellants and pursuing settlements. Proposed settlements are not pre-approved by management, although they have to be approved by the Board. Written procedures suggest that the Appraisal Supervisor manages appeals that go to the Board. Perhaps because members of the Board do not need to have relevant experience, the Board holds orientation sessions, and it has administrative support from both the Division and the Corporation Counsel's Office. The Division has established procedures for handling appeals both by the support staff and by appraisers. We were unable to evaluate how effectively appraisers defend assessments. The Board has recommended that appraisers present defenses in a more standardized way. The Division has instituted an "appeal data worksheet" as a step toward standardization. The Board still believes better preparation and presentation of cases would improve the process. 10.2 Evaluation Our review of the appeal system essentially was limited to the provisions of the Code, materials provided by the Finance Department, and information obtained from the Division's web site. We had no opportunity to observe the Board in action, although we were provided with copies of recent annual reports. We did not see any case files or talk to appraisers who had defended appeals. As the previous section's description of the process suggests, the appeal system has strengths and weaknesses. Some of the "weaknesses" that we have identified might seem esoteric. Despite general satisfaction with the status quo and the somewhat esoteric nature of the issues, we believe that: (1) Although the Board may entertain appeals that fail to meet this test, the 20 percent hurdle in Section 19-93 is excessive. For a typically priced house of $200,000, this means that the difference of opinion must exceed $40,000, which jeopardizes only about $60 in taxes. The valuation tolerances inherent in IAAO ratio study performance standards suggest that such hurdles should vary with the type of property and with market conditions. The current hurdle might be 67 acceptable for vacant land and some non-residential properties, but it is excessive for most residential properties. (2) The second (non-uniformity) ground for appeal in Section 19-93 is contrary to a key U.S. Supreme Court decision, which ruled that uniformity was more important than simple deten-nination of market value. (See Sioux City Bridge Co v. Dakota County, 260 U.S. 441 (1922).) A taxpayer should be able to challenge discrimination in assessment practices. Although we were told that the Board ignores the narrow grounds in the current law, we believe the second ground should be revised. (3) The filing fee requirement and the condemnation threat in Section 19-91 have an unnecessary chilling effect on appeals; they should be repealed. In a multi-use property, it should not be necessary to file a separate appeal of the assessment of each use class. (4) Valuation appeals should be with reference to the total market value of a property, not the land component alone, the building component alone, or the value of any particular use of a multi-use property. Of course, use classification should continue to be a ground for appeal. Recommendation 37 Recommendation: The Council should revise Section 19-93 of the Code. Specifically, it should reduce the 20 percent value-difference threshold to no more than 10 percent, at least for residential property. The current non-uniformity ground should be revised to permit non-uniformity appeals based on valuation practices generally. The filing fee requirement should be eliminated, at least on principal residences. Appellants should not be allowed to appeal only the land value or the improvement value without contending that the sum of the land and building values exceeds the over-valuation threshold that is adopted. Recommendation 38 Recommendation: The Council should make the first stage in the appeal process an informal appeal to the Division. Making the first-level of appeal infonnal makes it more accessible. Simple misunderstanding and data errors can be addressed. The Board can concentrate on cases in which there is a genuine difference of opinion as to a correct and fair assessment. We are unable to estimate the costs of making the first level of appeal informal, because of insufficient data on how resources are spent and on the outcomes of current appeals to the Board—no statistics seem to exist on appeals that are settled, are granted or are denied. Not counting expenditures of time by the Division, appeals to the Board currently cost an incredibly low $20 based on budgeted amounts for the Board. 68 11. Tax Billing, Collection, and Enforcement One of the responsibilities of the Real Property Tax Division is billing real property taxes, collecting payments, and taking steps to enforce payment of past due amounts. From a systems perspective, collection is the last major phase of property tax administration. If billing, collection, and enforcement procedures are not effective, all the work on assessment is for naught. It is uncommon in the United States for assessment and collection to be the responsibility of a single agency. There is nothing intrinsically wrong with this. That assessment and collection are commonly separated probably is more a legacy of history than a principled decision. When the Country was settled, functions were part-time, and officials tended to be elected. However, the separation of functions usually is Justified on the basis that the separation constitutes a control on misfeasance or malfeasance on the part of the assessor, but given the mechanical nature of collection, such a "control" is weak at best. Provisions related to tax billing, collection, and enforcement can be found in several articles of Chapter 19 of the Hawaii County Code. They provide for notice and for mailing bills to the last known owner's address. When there are multiple owners, only one bill needs to be sent. The law calls for two installments, which seem adequate given low effective tax rates (presumably many taxpayers effectively make monthly payments as part of their monthly mortgage payments to escrow companies). Taxpayers also can pay taxes on line. The law also allows for partial payments and specifies how they are to be credited. When a taxpayer is late in making a payment, a penalty of 10 percent is assessed. In addition, interest of 1 percent per month is charged. In the current economy, the interest charge probably is a greater incentive to pay timely than the penalty. A paramount lien for unpaid taxes attaches to a property on 1 July of the year in which the taxes are assessed. The lien continues until the taxes are paid or foreclosure proceedings are completed, provided that proceedings are initiated within six years of the incetion of a lien. After three years, the Division can sell property by way of foreclosure without Suit at public auction to the highest bidder. The law specifies how these proceedings are to be conducted. Normally, two auctions per year are held. All of the legal provisions seem appropriate. We are not aware of any collection issues, and we assume that financial audits would detect any serious weaknesses. We noted that several trays of mail (notices and bills) had been returned because the mail could not be delivered to the addressee. We do not know whether the returned mail signifies a problem with weaknesses in ownership records. 69 We also noted from Table 7 in the 2010 Comprehensive Annual Financial Report that delinquencies are mounting, as might be expected in the current economy. 86 The current collection rate recently dropped 2 percentage points from 98 percent to 96 percent. Delinquent collections have ranged in recent years between $2,100,000 and $3,400,000. Outstanding delinquencies climbed from under$300,000 in 2006 to more than $3,000,000 in 2009. It is unclear whether the increase in the gap between delinquencies and delinquent collections can be attributed to weaknesses in billing and collection procedures or just to economic issues. We believe further review of delinquent collection procedures is warranted to ensure that economic conditions, not procedural deficiencies, are the cause. Recommendation 39 Recommendation: The Council should require the Finance Department to undertake an analysis of the cause of the increase in the gap between delinquencies and delinquent tax collections to determine whether there is weakness in billing and collection procedures. 86 The data in the table were substantially revised in the 2011 report, presenting a picture of better performance. 70 12. Public Information and Taxpayer Assistance As a matter of general tax policy IAAO strongly recommends active and effective public relations. In this way, "...the property tax becomes more visible, and misunderstandings that may lead to unwarranted appeals and misguided complaints may be prevented The assessing officer can build trust and confidence in both valuation and taxation systems and can demonstrate willingness to work toward reform in areas perceived to be inequitable. 87 A public relations program should include the following core components: 88 • research to determine public perception of the assessor's office and to provide meaningful data; • positive, courteous, and educational communications; • use of current and cost-effective information distribution means; • an evaluation process to determine where improvements are needed. Part of communicating with the public is working with and training employees so they will understand how to answer taxpayer questions and will do so consistently and in a positive manner. IAAO recommends developing an employee procedure manual that focuses on effective communication measures and helps employees understand how best to deal with taxpayer complaints. 12.1 General Information and Outreach While we did not specifically review correspondence with taxpayers, we did access and review information on the County's Web site. Forms for exemption application, brochures describing exemptions and other general information were readily available and easily downloadable. Information and forms for appeals were available as well. There also was a good description of the role of the Division and appropriate contact information was shown. There was a fonn to file valuation related complaints as well. Despite the general availability and accessibility of this information, brochures tend to be written in a fairly technical/ legal manner. The benefits of a program are not always clearly stated. Important things like filing deadlines are not always provided. While this probably is appropriate for application forms, brochures are intended to inform the public and, perhaps, to provide some guidance regarding completing an application or filing an appeal. We wonder whether there was much external input to the verbiage in the brochures. Regardless, the County could benefit from a public relations and transparency standpoint from opening these documents up for public review periodically. Regarding the Web site, IAAO provides the following general guidance: 2010. Standard on property tax policy. Section 6. Kansas City, MO: IAAO. 2011. Standard on public relations. Section 2.3. Kansas City, MO:IAAO. 71 "Assessment agency Web sites should be content-driven, so information can be quickly accessed, retrieved, and reviewed. Web site data should be accessible by multiple search criteria. 89 The Standard further recommends a series of desirable features. Frequent review and updating is necessary to have the most usable information and format. It is common for assessment agencies to review Web sites maintained by other assessors around the nation to better understand and incorporate effective design features. The Division administrator spoke of a desire to upgrade the Web site, and we agree that both in terms of content and ease of navigation, improvements could be made. Although the Web site contains a lot of information, it is not easy to find without a background in the real property tax system. One cannot search for assessment records by owner name (for "privacy reasons"—a concern not shared by other counties). Once one locates a record, one has to open several rather cryptic pages, whereas other counties can provide as much information in a single page. Only the current market value is shown, making it impossible to compare rates of change. The County maintains offices in both Hilo and Kona. This is an important service given the distance between these two major parts of the island. It is also important and positive that exemption forms show contact information for both offices. However, we think it advisable for mailed applications to be sent to one location and, if the County agrees, the forms should be revised to so indicate. 12.2 Assistance with Exemption Applications We did not review this area and were not able to observe taxpayers interacting with staff. No complaints were received in this area. 12.3 Programs for Responding to Complaints and Inquiries The concern that we heard frequently in interviews was that, apart from the appeals process, there was no clear and consistent approach to investigating complaints regarding unequal treatment or failure to follow up and review questionable exemptions. It is beyond the scope of this report to investigate specific complaints. However, the apparent lack of a cohesive and consistent approach to reviewing complaints casts a negative light on what may be a perfectly adequate program that suffers from inadequately standardized procedures and an appearance of limited concern about reviewing problems and reassuring those concerned enough to complain. 89 2011. Standard on public relations. Section 12. Kansas City, MO: IAAO. 72 12.4 Conclusions and Recommendations The County should provide Division staff with training in effective public relations. Training and controls should be implemented to ensure consistency in appraisals, public relations, and complaint handling. A manual should be developed informing staff how best to deal with public and media inquiries. The manual should also address and formalize a procedure for dealing with complaints, other than formal appeals (which have their own procedure). To be sure that concerns of all stakeholders are recognized, there should be an attempt to invite stakeholders in to the process of improving this aspect of the assessor's office. This could be done through focus groups, public forums at which staff make presentations about appraisal activity, participation with real estate professionals, and other means of increasing the visibility of the assessor in positive ways. As part of these guidelines, it is important to provide as much transparency as possible. This means publishing, whether in paper or electronically, documents that demonstrate the quality of appraisal and assessment operations. For example, information describing valuation methods and tests of the quality of valuation results, such as ratio studies, can be produced and made available on the County's Web site. Recommendation 40 Recommendation: The Council should require the Finance Department to undertake a review of staff public relations related training and may need to update this training. A public relations manual should be developed. Outreach should be expanded to be certain that issues driving public complaints are being addressed. Complaint handling procedures should be formalized. Outreach should include an expansion of publicly available general information, including documents describing valuation methods and results of tests of the quality of appraised values, such as ratio studies. A citizens' committee should be organized to conduct periodic review of brochures and forms to make sure they are easily understandable. 73 13. Summary The Hawaii County real property taxation system has the essential underlying features in terms of the Code and general administration that are expected in U.S. county property tax systems. Processes are in place to find and value real property, to update values, to provide for exemptions, to administer appeals, and to collect property taxes. Although final, taxable values may be subject to constraint, for the most part the goal of the valuation system is market value, a desirable feature. Certain quality control procedures, such as ratio studies and internal data queries, are used to check the accuracy of the valuation system and real property transfers are subject to a conveyance tax and disclosure of sales prices—a very positive and important feature. Many of the elements expected to contribute to valuation equity are found in the County assessment system. Further description of these elements is outlined in the table in Appendix I. Another overarching impression is the comparatively low level of real property taxation. As ineasured by effective property tax rates (property tax obligations as a percentage of property values), residential property taxes in Hawaii County are low from a national perspective. Whereas property taxes on owner-occupied residences typically are about 1.3 percent of property value, property taxes in Hawai'i County generally are less than 0.2 percent of property value. The low effective property tax rates for residential properties are the result of several policy measures designed to favor owners of agricultural land, principal residences, and low-rent housing. Under the County's property tax rate classification system, properties in the homeowner class have a nominal (officially adopted) property tax rate of 0.555 percent of net taxable value (estimated market value minus exemptions, etc.), whereas the highest nominal rate is 0.985. Moreover, owner-occupied principal residences are eligible for a home exemption that completely exempts properties valued at $40,000 or less and exempts 20 percent of the value above that threshold to a maximum of $80,000. Taxpayers over sixty years of age are eligible for additional amounts depending on their age bracket. Certain other taxpayers (victims of Hansen's Disease; blind, deaf, or totally disabled persons; and totally disabled veterans, their spouses, and unmarried widows) are eligible for further exemptions, some of which may be applied to properties other than their principal residences. In 1990, a "nonspeculative residential use dedication" program was created under which an owner could petition to have the land on which his principal residence was located dedicated to residential use for ten (later five) years, in return for which the assessment would be frozen. New applicants are no longer permitted to participate in this program, but current properties with this dedication retain frozen values. A replacement program, instituted in 2004, provides limits under which assessment increases cannot exceed 3 percent in any year. The complexity of eligibility criteria can make enforcement expensive. As is typical, agricultural and forest land is valued on a current-use basis instead of a highest and best use-basis, which is the basis used in the estimation of market values. Use values are lower than market values when there is a potential to use land more intensively. Although the nominal property tax rate for agricultural property is comparatively high 74 (at 0.835 percent), "dedicated" agricultural land is assessed at 50 percent of use value, while non-dedicated agricultural land is assessed at its use value. Other properties, such as golf courses, are to be valued in their current use, not highest and best use. The uniformity in effective tax rates potentially afforded by annually valuing property at its market value is undercut by the effects of the relief measures on net taxable values, Based on the limited information available to us, there is remarkable variation in effective property tax rates among similarly situated properties. The average variation in average effective property tax rates among census designated places is more than 300 percent. Much of the public's concerns about the fairness of the property tax system can be attributed to a shortage of accessible information about why neighboring taxable values vary so greatly and about the rationale for and tax allocation effects of the various features of the system. Although taxpayers credit the staff of the Real Property Tax Division with providing helpful explanations to questions, there is little evidence of anticipating questions about appraisal procedures or about all the various relief mechanisms. The required quired annual report to the mayor is not very informative. The property record search function on the website is cumbersome to use. Difficulties in getting information can naturally urally lead to suspicions of misconduct. The major concerns we have can be summarized as follows: • No regular "cyclic" reappraisal, including physical inspection, of all real property. This is a concern because records of physical characteristics that contribute to market value become increasingly out of date over time. This in turn can contribute to the allegations of unequal valuation of similar properties. • Lack of use of regional building cost modifiers. While land is valued based on sales and values therefore reflect location influences, this is not true with regard to building values. Especially for residential property, it is very unlikely that similar buildings in the resort and non-resort areas of the County would either cost or sell for the same amount. Merely adjusting the land values does not produce equitable building values, even if the overall property values are equitable. This is especially problematic since either of the values (land or improvement) is subject to appeal. • Lack of ability to use the income approach to value. There are three recognized approaches to valuing property—cost, sales comparison, and income. All three are important and, for income producing property, such as commercial enterprises, the income approach, in which net operating income is capitalized into value, is considered the approach most likely to reflect the market value of the property. While staff recognizes this, and even prepares valuations based on this method in appeals, the County Code does not allow the method to be used in the initial valuation process. This is a significant impediment. 75 Limited review of agricultural and other exemptions. While the Code and forms provide for taxpayers who no longer qualify for agricultural land valuation and various exemptions to report such changes, there is no automatic or periodic review of properties granted agricultural use value or homeowner's and other exemptions. The Code also calls for income based qualification requirements with respect to agricultural land, but these, apparently, have not been regularly implemented. While we know of no specific abuses, the underlying system is rife for such and added controls and implementation of requirements already found in the Code are important. • Limited grounds for appeals on equity grounds. Valuation related appeals are based on the taxpayer's interpretation of whether or not the property value reflects market value. While this is intrinsic within any appeals system, there is limited provision for appeals based on inequitable treatment between similarly situated properties. According to the Code, if the subject property were valued at market value, but all the surrounding properties were below market value, the subject property would have no appeal rights. This is not an administrative issue, but should be addressed by revising the Code to bring it into line with decisions by the United States Supreme Court. Overly complex exemption system making it difficult to understand who benefits and how much they benefit. With minimum taxes and multiple tiers of agricultural and residential valuation and taxation, combining different tax rates with capped values and various exemption criteria, it is at best difficult to ascertain whether benefits received from these programs apply as intended by the Council. Furthermore, although the value of the exemptions is reported, there is no attempt to convert this value into an overall analysis of how much tax benefit (incorporating rate differentials as well as exemption type) accrues to any particular type of property or ownership situation. This is a serious gap that could be addressed by Code changes to require extensive analysis of these tax effects. • Lack of ongoing, regular analysis of effects of exemptions. Regardless of the outcome of the analysis indicated in the preceding bullet, ongoing, annual analysis of exemption effects, expressed in overall and individual (say, per $100,000 of market value) properties should be undertaken. This too requires direction from the Council in the form of Code changes. • Complex multi-tiered tax rates. Similar to the complex exemption system, use of multi-tiered tax rates, with different rates applying to different types of property, leads to questions about how much benefit is accruing to particular low rate types and how much added cost is being shifted to high rate types. We found no evidence of any analysis of the effects of these multiple tax rates. 76 • Lack of formal complaint investigation and reporting system. Part of the reason for undertaking this report was the appearance that complaints are not thoroughly reviewed and resolved. Since there is no higher (i.e. State) investigative authority, it is important to have an effective internal control system under which complaints are not only investigated and issues resolved, but these processes are adequately tracked and documented. • Limited documentation about sales validation and ratio studies. While staff appear to understand sales validation and ratio study principles, there is little documentation and this could lead to inconsistencies as various staff analyze sales. • Limited opportunities for consistent ongoing communication between staff. Although managers have periodic meetings to review activities, it appears that staff are not directly involved and do not meet regularly. Such contacts and communications can promote cohesiveness and encourage effective problem solving, as well as common understanding and consistent application of policies and procedures. • Limited training opportunities for staff. Currently, there are no requirements for ongoing, continuing appraisal related education for staff. This is a serious gap and makes it more difficult to improve appraisal techniques or implement new, technologically advanced, mass appraisal processes. • Vague property class definitions and an over-reliance on zoned use rather than actual use in determining property class. How a property is classified can affect its tax class and its valuation. Yet neither the Code nor the Appraisal Manual provides a clear definition of the tax classes in Section 19-53(e)(1), and the Manual does not reconcile those nine classes with the nine main "PITT" code classes. Some areas of the County have long been urbanized, yet the land is zone agricultural, which can lead to seemingly inconsistent land values. • Limited use of digital maps and photographic images. Digital vertical photographic images are helpful in understanding land use and spatial relationships, and they, together with oblique, and street-level photographic images are helpful in determining whether improvements are correctly described. We were informed that the County has a geographic information system (GIS) and has acquired oblique imagery of buildings. Yet we were informed that the Division does not routinely use these technologies and has no plan to implement them. • Lack of analysis of workloads, productivity, and standards against which to evaluate performance. Current budgeting and management practices do little to ensure that the County is receiving value for money for the funds and staff resources that are allocated to property tax administration. 77 The County should consider our specific recommendations in the above areas. It also could make a self-assessment of the strengths of its administration of the real property tax and of opportunities for improving the accuracy of valuations, the fairness of assessments, efficiency in operations, and greater public understanding and acceptance of the real property tax. The IAAO's previously mentioned Assessment Practices: Self- Evaluation Guide could be used in this evaluation. 90 We believe that many of the issues that we have identified can be rectified, wholly or partially, without major budget or resource implications (apart from upgrading the CAMA system). For example, efforts to better train staff and better communicate with them could serve the secondary goal of empowering staff. This could lead to more uniform appraisals and, in conjunction with a cyclic property and exemption inspection program, could lessen complaints and build or strengthen the positive image of the Division. We hope that this analysis and report will provide impetus toward promoting and reinforcing positive goals that will lead to greater equity for all the taxpayers in liawai'i County. 90 When the County is satisfied with its assessment operations,it could consider applying for lAAO's Certificate of Excellence in Assessment Administration. 78 Appendix A: Working Interview Document Working Interview Document - (format and major topic areas) Date: November 2011 Interview: The purpose of this project is to review property tax policies, and administrative and assessment practices to draw conclusions regarding whether the systems used in Hawai'i County comport with IAAO standards, and standards and best practices elsewhere in the U.S. In cases where we find this not to be true, we intend to make recommendations for improvement. Such recommendations may be in the form of changes to underlying policy (i.e. statutes or ordinances) or administrative practices used to implement policy. The project and its conclusions are not intended to criticize individuals, but rather to critique processes. Therefore, individual comments will remain anonymous and individuals will not be quoted in the report or singled out in any rccoinmendations. Specialized Issues (in addition to outline) Issue or topic Question Interview notes Statutory issues Section 19-12 Explain returns What are they? When are they required? How does rebuttable presumption work? Section 19-18 What is considered confidential? Income/expense? Cost? Sale price? Use? Other What is the lien date? Section 19-46 "MV unless otherwise noted" Need explanation Section 19-47 Assessed as of 1/1 of preceding tax year—how does this work? Section 19-53 Valuation methods (check): Ag land updated every 5 years? (g) 3% per year value increase limit for homes —goes to market value when sold (are market values kept for each property subject to the limitation, but not implemented until sold?) need explanation. In general, how often are values updated? (specify authority) 79 Section 19-53 (cont.) What is non-speculative residential use? How is it determined? Section 19-53 (cont.) Does cap on increases expire? When? Need explanation. Section 19-53 (cont.) In 1(d), re utilities —what is the effect of this valuation system vs. market value? Section 19-57 and 60 What is the difference between dedicated and non-dedicated ag use? How does this difference affect: Valuation? Tax or tax rate? Section 19-58.1 How are "breaches" of dedication requirements monitored / determined? General There appears to be annual reassessment to market value, but how often are property characteristics updated? Section 19 - 58.2 When (if true) is this section scheduled to be repealed? Section 19-59 Is there yearly filing? How is this provision enforced? Is compliance measured? Section 19-60 How often is recapture imposed? Is compliance measured? Exemptions (general) Is tax expenditure analysis conducted? Are numbers of properties granted exemption tracked/monitored? Is there annual application for use based exemptions? Is effect to shift taxes or are revenues lost? Do any exempt properties pay in lieu of fees or taxes? Exemptions (process) Does same department grant exemptions that assesses (values) Troperty? Section 19-90 How are tax rates established? Is there a mechanism for preventing windfalls when assessed values increase. Section 19-91 Regarding appeals, does "any taxpayer" include someone appealing 80 someone else's property value? Who has standing? Can exemptions be appealed? (either by taxpayer wanting exemption that is denied or by other taxpayers believing that exempt taxpayer was ineligible) Section 19-97 Is there an example of "underassessment" finding? Has this provision been used? Quality Assurance Issues (expanded) Who checks assessment quality? If checked by ratio study: a.) Need copy of latest b.) Is it by neighborhood? Countywide? c.) What categories are studied? d.) Is it part of the appraisal process or done as a separate review of the results? e.) How often done? What happens if, after completion of annual assessments, quality is determined to be poor? What if level is poor? What if horizontal equity is poor? What if vertical equity is poor? Are tests for sales chasing conducted? How often? External to appraisal staff? Are appraisers taught about inequities associated with sales chasing? Is any checking of quality done by departments outside the assessor's office? Is any checking done by staff not directly involved with appraisals? Checks for changes in assessments over time? Training and Education Is certification required? What is the certifying agency? How many (or what proportion of) 81 staff have or are actively seeking lAAO designations? What IAAO courses have staff taken (typically or required)? How much ongoing education is required of appraisal staff (i.e. hours per year)? Is staff generally aware of lAAO products: a. Standards? b. Textbooks? c. Surveys of practices'? d. Courses? General Strengths? Weaknesses? Concerns? 82 Appendix B: Frequency of Various State Property Tax Assistance Activities 91 Questions 42 and 44 - Assistance Activities Provinces States Total Reference works provided Administrative rules or regulations 6 41 47 Compilation of property tax laws 4 36 40 Compilation of important court decisions 4 23 27 Administrative procedures manual 6 30 36 Appraisal procedures manual 6 27 33 Cost and other valuation schedules 6 25 31 Nationally recognized cost manuals 5 15 20 Nationally recognized personal property price goes 0 8 8 Other 2 11 13 Services Provided Legal advice 4 25 29 Technical advice 4 39 43 Direct, on-site valuation and appraisal services 3 20 23 Computer processing 3 9 12 CAMA modeling and valuation assistance 3 20 23 Review valuation services contracts 1 12 13 Property inspections (in general) 3 11 14 Property inspections (interior) 3 9 12 Appraisal or assessment software 4 15 19 Total number of responses 7 43 50 No response count 5 8 13 91 2011 update from unpublished spreadsheet associated with PTAPP (author's note). 83 Appendix C: References Almy, R., A. Dornfest, and D.Kenyon. 2008. Fundamentals of tax policy. Kansas City, MO: International Association of Assessing Officers. Almy, R.R., R.J. Gloudernans, R.C. Dennc, and S.W. Miller. 1978. Improving real property assessment: A reference manual. Chicago: International Association or Assessing Officers. Eckert, JX., R.J. Gloudernans, and R. R. Almy, eds. 1990. Properly appraisal and assessment administration. Chicago: International Association of Assessing Officers. Gloudernans, R., and R. Almy. 2011.Fundamentals of mass appraisal. Kansas City, MO: IAAO. Gloudemans, R.J. 1999. Mass appraisal of real property. Chicago: International Association of Assessing Officers. International Association of Assessing Officers (IAAO). 2004. Standard on manual cadastral maps and parcel identifiers. Chicago: IAAO. 2009. Assessment practices: Self-evaluation guide,3rd ed. Kansas City, MO: IAAO. 2009. Standard on digital eadastral maps and parcel identifiers. Kansas City, MO: IAAO. 2000. Standard on professional development. Chicago, IL: IAAO. 2011. Standard on public relations.Kansas City,MO: IAAO. 2010. Standard on ratio studies. Kansas City,MO: IAAO. 2001. Standard on assessment appeal. Chicago, IL: IAAO. 2010. Standard on verification and adjustment of sales. Kansas City, MO: IAAO 2003. Standard on automated valuation models (AVMs). Chicago: IL: IAAO. 84 2011. Standard on mass appraisal of real property. Kansas City, MO: IAAO. 2010. Standard on property tax policy. Kansas City, MO: IAAO. 2010. Statadcird on oversight agency responsibilities. Kansas City, MO: IAAO. Technical Standards Committee. 2009. State and provincial ratio study practices: Results of the 2008 survey.Journal of Property Tax Assessment & Administration 6(2): 29-82. Glossary.for property appraisal and assessment. 1997. Kansas City, MO: IAAO. Johnson,.M.,C. Bennett,and S.Patterson,eds. 2003.Assessment administration. Chicago: IAAO. Dornfest, Alan S., Steve Van Sant, Rick Anderson, and Ronald Brown. State and Provintial Property Tax Policies and Administrative Practices (PTAPP): Compilation and Report. Journal of Property Tax Assessment&Administration. Volume 7, Number 4. 2010. 85 Appendix D: Benchmarked Assessment Districts table Agency State Year Total Property/Business Taxes Levied Total Real Property Parcels Personal Property Accounts Total Budget Total Staff Budget as a percent of total property taxes Budget/cost per parcel parcels per staff Agency Alameda County State CA Year 1999 Total Real Property Parcels 410,000 Total Budget 9,491,000 Total Staff 190 Budget/cost per parcel 23.15 parcels per staff 2,158 Agency Alleghency County State PA Year 2006 Total Real Property Parcels 550,000 Total Budget 7,000,000 Budget/cost per parcel 12.73 Agency Anchorage State AK Year 2010 Total Property/Business Taxes Levied 240,488,076 Total Real Property Parcels 95,903 Total Budget 4,581,882 Total Staff 42 Budget as a percent of total property taxes 0.019 Budget/cost per parcel 47.78 parcels per staff 2,283 Agency Broward County State FL Year 2004 Total Real Property Parcels 674,552 Total Budget 15,066,858 Total Staff 166 Budget/cost per parcel 22.34 parcels per staff 4,064 Agency Chatham County State GA Year 2008 Total Real Property Parcels 107,578 Total Budget 4,645,620 Total Staff 74 Budget/cost per parcel 43.18 parcels per staff 1,454 Agency Clark County State NV Year 1999 Total Real Property Parcels 420,000 Total Budget 10,310,000 Total Staff 178 Budget/cost per parcel 24.55 parcels per staff 2,360 Agency Contra Costa County State GA Year 1999 Total Property/Business Taxes Levied 900,000,000 Total Real Property Parcels 315,000 Total Budget 8,500,000 Total Staff 139 Budget as a percent of total property taxes 0.944 Budget/cost per parcel 26.98 parcels per staff 2,266 Agency Cook County State IL Year 2009 Total Real Property Parcels 1,830,000 Personal Property Accounts 0 Total Budget 28,395,495 Total Staff 386 Budget/cost per parcel 15.52 parcels per staff 4,741 Agency Dade County State FL Year 2009 Total Real Property Parcels 896,655 Personal Property Accounts 112,917 Total Budget 30,350,000 Total Staff 308 Budget/cost per parcel 33.85 parcels per staff 2,911 Agency Dallas County State TX Year 2010 Total Real Property Parcels 799,214 Personal Property Accounts 83,078 Total Budget 21,800,000 Total Staff 245 Budget/cost per parcel 27.28 parcels per staff 3,262 Agency Dekalb County State GA Year 2007 Total Property/Business Taxes Levied 958,767,289 Total Real Property Parcels 230,426 Total Budget 4,816,530 Total Staff 76 Budget as a percent of total property taxes 0.502 Budget/cost per parcel 20.90 parcels per staff 3,032 Agency Franklin County State OH Year 2009 Total Real Property Parcels 416,000 Total Staff 60 parcels per staff 6,933 Agency Fulton County State GA Year 2006 Total Property/Business Taxes Levied 1,818,000,000 Total Real Property Parcels 303745 Total Budget 12,000,000 Total Staff 153 Budget as a percent of total property taxes 0.660 Budget/cost per parcel 39.51 parcels per staff 1,985 Agency Harris County State TX Year 2010 Total Real Property Parcels 1,542,000 Personal Property Accounts 250,000 Total Budget 65,000,000 Total Staff 630 Budget/cost per parcel 42.15 parcels per staff 2,448 Agency Hawaii County State HI Year 2010 Total Property/Business Taxes Levied 217,150,000 Total Real Property Parcels 139,883 Total Budget 3,286,582 Total Staff 37 Budget as a percent of total property taxes 1,514 Budget/cost per parcel 23.50 parcels per staff 3,781 Agency Hennepin County State MN Year 1999 Total Property/Business Taxes Levied 1,550,000,000 Total Real Property Parcels 260,000 Total Budget 2,500,000 Total Staff 39 Budget as a percent of total property taxes 0.161 Budget/cost per parcel 9.62 parcels per staff 6,667 Agency Henrico County State VA Year 2009 Total Property/Business Taxes Levied 287,165,440 Total Real Property Parcels 111,113 Total Budget 3,024,991 Budget as a percent of total property taxes 1.053 Budget/cost per parcel 27.22 Agency Hillsborough County State FL Year 2004 Total Real Property Parcels 422,626 Total Staff 155 parcels per staff 2,727 Agency City & County of Honolulu State HI Year 2010 Total Property/Business Taxes Levied 849,560,000 Total Real Property Parcels 290,000 Total Budget 6,259,649 Total Staff 115 Budget as a percent of total property taxes 0.737 Budget/cost per parcel 21.58 parcels per staff 2,522 Agency Horry County State SC Year 2009 Total Real Property Parcels 235,450 Total Budget 3,056,981 Total Staff 62 Budget/cost per parcel 12.98 parcels per staff 3,798 Agency Jackson County State MO Year 1999 Total Property/Business Taxes Levied 509,000,000 Total Real Property Parcels 264,000 Total Budget 4,860,000 Total Staff 95 Budget as a percent of total property taxes 0.955 Budget/cost per parcel 18.41 parcels per staff 2,779 Agency Jefferson County State AL Year 1999 Total Property/Business Taxes Levied 265,000,000 Total Real Property Parcels 285,000 Total Budget 5,000,000 Total Staff 60 Budget as a percent of total property taxes 1,887 Budget/cost per parcel 17.54 parcels per staff 4,750 Agency Jefferson County State KY Year 1999 Total Real Property Parcels 290,000 Total Staff 73 parcels per staff 3,973 86 Appendix D: Benchmarked Assessment Districts Agency Johnson County State KS Year 2007 Total Property/Business Taxes Levied 666,928,615 Total Real Property Parcels 181,000 Personal Property Accounts 40844 Total Budget 5,960,315 Total Staff 99 Budget as a percent of total property taxes 0.894 Budget/cost per parcel 32.93 parcels per staff 1,828 Agency King County State WA Year 2010 Total Real Property Parcels 683,192 Personal Property Accounts Total Budget 33,190 Total Staff 224 Budget/cost per parcel 29.30 parcels per staff 3,050 Agency Lafayette Parish State LA Year 2006 Total Property/Business Taxes Levied 91,844,581 Total Budget 1,710,135 Budget as a percent of total property taxes 1.862 Agency Lancaster County State PA Year 2009 Total Real Property Parcels 187,000 Total Budget 1,900,000 Total Staff 27 Budget/cost per parcel 10.16 parcels per staff 6,926 Agency Lane County State OR Year 2010 Total Property/Business Taxes Levied 379,600,000 Total Real Property Parcels 172,000 Personal Property Accounts 13,000 Total Budget 6,776,547 Total Staff 60 Budget as a percent of total property taxes 1.785 Budget/cost per parcel 39.40 parcels per staff 2,867 Agency Lee County State FL Year 1999 Total Property/Business Taxes Levied 460,000,000 Total Real Property Parcels 441,254 Personal Property Accounts 53,144 Total Budget 3,900,000 Total Staff 77 Budget as a percent of total property taxes 0.848 Budget/cost per parcel 8.84 parcels per staff 5,731 Agency Los Angeles County State CA Year 2010 Total Real Property Parcels 2,352,255 Personal Property Accounts 308,329 Total Budget 160,162,000 Total Staff 1489 Budget/cost per parcel 68.09 parcels per staff 1,580 Agency Maricopa County State AZ Year 2010 Total Real Property Parcels 1542,155 Personal Property Accounts 136,813 Total Budget 22,816,543 Total Staff 322 Budget/cost per parcel 14.80 parcels per staff 4,789 Agency New York City State NY Year 1999 Total Real Property Parcels 965,000 Total Staff 250 parcels per staff 3,860 Agency City of Norfolk State VA Year 2008 Total Property/Business Taxes Levied 176,628,500 Total Real Propety Parcels 77,231 Total Budget 1,538,800 Total Staff 22 Budget as a percent of total property taxes 0.871 Budget/cost per parcel 19.92 parcels per staff 3,511 Agency Orange County State CA Year 2010 Total Real Property Parcels 897,547 Personal Property Accounts 168,208 Total Budget 33,500,000 Total Staff 377 Budget/cost per parcel 37.32 parcels per staff 2,381 Agency Orange County State FL Year 2004 Total Real Property Parcels 360,000 Total Staff 134 parcels per staff 2,687 Agency Orange Parish State LA Year 2009 Total Property/Business Taxes Levied 340,904,567 Total Real Property Parcels 165,000 Total Budget 2196904 Budget as a percent of total property taxes 0.644 Budget/cost per parcel 13.31 Agency Palm Beach County State FL Year 2004 Total Real Property Parcels 577,296 Total Staff 264 parcels per staff 2,187 Agency Philadelphia State PA Year 1999 Total Real Property Parcels 265,845 Total Budget 10,500,000 Total Staff 234 Budget/cost per parcel 18.56 parcels per staff 2,418 Agency Pierce County State WA Year 2007 Total Real Property Parcels 317,403 Personal Property Accounts 14,383 Total Budget 8,881,063 Total Staff 76 parcels per staff 4,176 Agency Pierce County State WA Year 1999 Total Real Property Parcels 280,000 Total Budget 4,955,000 Total Staff 85 Budget/cost per parcel 17.70 parcels per staff 3,294 Agency Pinellas County State FL Year 2007 Total Real Property Parcels 424,000 Personal Property Accounts 88,000 Total Budget 11,376,990 Total Staff 156 parcels per staff 2,718 Agency Riverside County State CA Year 2008 Total Property/Business Taxes Levied 2,361,476,571 Total Real Property Parcels 895,405 Personal Property Accounts 43,057 Total Budget 30,664,874 Total Staff 242 Budget as a percent of total property taxes 1.299 Budget/cost per parcel 34.25 parcels per staff 3,700 Agency Sacramento County State CA Year 1999 Total Real Property Parcels 437,412 Total Budget 9,272,000 Total Staff 156 Budget/cost per parcel 21.20 parcels per staff 2,804 Agency St. Louis County State MO Year 1999 Total Property/Business Taxes Levied 1,088,045,000 Total Real Property Parcels 382,000 Total Budget 8,751,000 Total Staff 146 Budget as a prcent of total property taxes 0.804 Budget/cost per parcel 22.91 parcels per staff 2,616 Agency Salt Lake County State UT Year 1999 Total Property/Business Taxes Levied 472,000,000 Total Real Property Parcels 281,114 Total Budget 9,500,000 Total Staff 109 Budget as a percent of total property taxes 2.013 Budget/cost per parcel 33.79 parcels per staff 2.579 Agency San Bernardino County State CA Year 1999 Total Property/Business Taxes Levied 635,122,000 Total Real Property Parcels 753,039 Total Budget 10,200,000 Total Staff 181 Budget as a percent of total property taxes 1.606 Budget/cost per parcel 13.55 parcels per staff 4,160 Agency San Diego County State CA Year 2010 Total Real Property Parcels 978,011 Personal Property Accounts 242,741 Total Budget 52,195,380 Total Staff 407 Budget/cost per parcel 53.37 parcels per staff 2,403 87 Appendix D: Benchmarked Assessment Districts Agency Santa Fe County State NM Year 2006 Total Property/Business Taxes Levied 106,075,777 Total Real Property Parcels 82,000 Total Budget 2,436,341 Total Staff 36.5 Budget as a percent of total property taxes 2.297 Budget/cost per parcel 29.71 parcels per staff 2,247 Agency Sarasota County State FL Year 1999 Total Property/Business Taxes Levied 320,000,000 Total Real Property Parcels 275,000,000 Total Budget 4,100,000 Total Staff 75 Budget as a percent of total property taxes 1.281 Budget/cost per parcel 14.91 parcels per staff 3,667 Agency Sedgwick County State KS Year 2008 Total Property/Business Taxes Levied 475,000,000 Total Real Property Parcels 216,253 Personal Property Accounts 43,132 Total Budget 4187,077 Total Staff 73 Budget as a percent of total property taxes 0.881 Budget/cost per parcel 19.36 parcels per staff 2,962 Agency Shelby County State TN Year 2008 Total Real Property Parcels 349,850 Personal Property Accounts 39,637 Total Budget 10,115,532 Total Staff 157 Budget/cost per parcel 28.91 parcels per staff 2,228 Agency Spotsylvania County State VA Year 2009 Total Property/Business Taxes Levied 95,278,685 Total Budget 928,606 Total Staff 10 Budget as a percent of total property taxes 0.975 Budget/cost per parcel 15.79 parcels per staff 5,880 Agency Tulsa County State OK Year 1999 Total Property/Business Taxes Levied 317,284,000 Total Real Property Parcels 226,932 Total Budget 4,712,000 Total Staff 105 Budget as a percent of total property taxes 1,485 Budget/cost per parcel 20.76 parcels per staff 2,161 Agency City of Virginia Beach State VA Year 2006 Total Property/Business Taxes Levied 463,645,072 Total Real Property Parcels 148,095 Total Budget 2,688,347 Total Staff 35 Budget as a percent of total property taxes 0.580 Budget/cost per parcel 18.15 parcels per staff 4,231 Agency Washoe County State NV Year 2007 Total Property/Business Taxes Levied 616,095 Total Real Property Parcels 161,095 Total Budget 7,157,054 Budget/cost per parcel 44.43 Agency Wyandotte County State KS Total Real Property Parcels 230,000 Personal Property Accounts 50,000 Total Budget 3,380,194 Budget/cost per parcel 14.70 88 Appendix E: County Ratio Study COUNTY OF HAWAII FINANCE DEPARTMENT REAL PROPERTY TAX DIVISION SALES RATIO ANALYSIS Tax Year 2011-12 Assessments as of January 1, 2011 Prepared by: Stanley A. Sitko Real Property Tax Administrator Certified General Appraiser 89 Narrative A sales analysis allows us to review the actual market (recorded sales) versus the current assessments made by the Real Property Tax Division. Pursuant to Section 19-53 of the Hawaii County Code, the director of finance shall cause the market value of all taxable real property to be determined and annually assessed by the market data and cost approaches to value using appropriate systematic methods suitable for mass valuation of properties to obtain, as far possible, uniform and equalized assessments throughout the County." The analysis was performed on three distinct types of assessments, vacant land, improved residential property and residential condominiums. The analysis consists of valid sales occurring in the 2010 calendar year. The appraisers use the market data, or sales comparison approach, in setting land values. The value of residential buildings is determined using cost tables. The valuation of condominium property is determined using only the market data approach. Because of the limited number of sales this report does not include any commercial property. The summary sheet for improved residential parcels shows an overall sales ratio of 0.99. This means that overall improved residential assessments are low by approximately 1%. For vacant parcels the ratio is 0.90, or an underassessment of approximately 2%. The overall ratio for the condominium sales is 1.00, or at value. The PRD (price-related differential) is a statistic for measuring assessment regressivity or progressivity. The PRD for all ratios shows ubias in favor of higher valued properties. Another use of the analysis is to review and verify the cost tables. As all improved properties currently use basically the same cost tables, variations in ratio by class between zones is primarily due toland value inequalities and not the cost tables. The zones with fewer sales may be skewed due to a smaller sample size. This year depreciation tables were adjusted to reflect the market data and the sales prices were adjusted to reflect a 6% drop in value over the year. Also included in this analysis is the coefficient of dispersion. The COD is the most used of measure of uniformity in ratio studies. It is based on the average absolute deviation from the median sales ratio and is expressed as a percentage. Low CODs are associated with good appraisal uniformity. Industry standards are 15% or less and 20% or less for improved residential and vacant land, respectively. More homogenous properties (i.e. condos, vacant lots in the same area, new homes in the same subdivision) tend to have a much lower COD. The combined level of assessment is 99% with a median of 98% and a COD of 17.85 using 2,381 sales. In conclusion, the sales ratio analysis reflects an acceptable level of assessment in general. 90 SALES RATIO ANALYSIS For 2011-12 Tax Year Improved Residential Properties Stratified by Zone Zone 1 2 3 4 5 6 7 8 9 Ratio 1.05 0.95 1.11 0.97 0.95 1.01 0.94 0.94 0.96 Median 0.99 0.95 1.20 0.99 0.93 1.00 0.96 0.91 0.97 COD 19.22 11.81 18.08 19.41 21.27 11.41 12.30 16.83 10.41 # Sales 347 158 5 26 38 164 221 23 43 Stratified by Building Class Class 1.2 3 4 5 6 7-9 Ratio 0.95 1.02 0.97 0.95 0.98 0.89 Median 0.93 0.98 0.98 0.97 0.98 0.87 COD 20.07 15.13 12.06 11.04 14.77 17.50 # Sales 119 535 277 46 24 24 Stratified by Age Age Pre 1950 1950's 1960's 1970's 1980's 1990's 2000's Ratio 0.92 0.91 0.91 0.96 1.01 1.00 1.01 Median 0.89 0.92 0.89 0.94 0.96 0.99 0.99 COD 25.61 20.61 18.69 13.87 17.75 13.94 12.42 # Sales 32 29 43 119 154 206 442 Further sales analysis by Zone and class was not done this year due to the lack of sales in certain areas and classes. 91 Sales Analysis for 2011-12 Tax Year Summary Sheet (cont.) Vacant Parcels Mean Median COD # of Sales Countywide 0.98 0.98 23.17 980 Zone 1 0.98 0.99 24.42 636 Zone 2 0.96 0.94 19.39 50 Zone 3 0.91 0.93 9.47 5 Zone 4 1.05 1.00 17.19 15 Zone 5 0.87 0.84 29.26 33 Zone 6 1.04 1.02 11.65 44 Zone 7 1.02 1.02 17.40 74 Zone 8 0.88 0.84 29.47 19 Zone 9 0.95 0.88 29.10 104 Condo Sales Mean Median COD # of Sales Countywide 1.00 0.98 11.03 371 Zone 2 1.03 1.01 14.07 30 Zone 6 0.99 0.99 11.17 137 Zone 7 0.99 0.97 10.49 202 Zone 8 92 Zone 9 2 Sales Analysis for 2011-12 Tax Year Summary Sheet (Prior Year's Values in parentheses) Vacant Parcels Total sales Analyzed 980 (951) Average Sales Ratio 0.98 (.97) Median Sales Ratio 0.98 (.96) Average Deviation 0.23 (.19) Coefficient of Dispersion 23.17 (19.49) Price-related Differential 1.28 (1.07) Improved Residential Sales Total Sales Analyzed 1025 (937) Average Sales Ratio 0.99 (.98) Median Sales Ratio 0.97 (.97) Average Deviation 0.15 (.15) Coefficient of Dispersion 15.03 (15.26) Price-related Differential 1.08 (1.08) Condominium Properties Total Sales Analyzed 371 (310) Average Sales Ratio 1.00 (1.01) Median Sales Ratio 0.98 (1.02) Average Deviation 0.11 (.12) Coefficient of Dispersion 11.03 (11.64) Price-related Differential 1.02 (1.08) 93 Appendix F: Examples Illustrating Level and Uniformity Statistics Based on Ratio Studies Table RI: Level of assessment Sale # Assessed Value Sale Price Ratio 1. $ 20, 000 $ 50, 000 40. 00% 2 30,000 50,000 60.00% 3 40,000 50,000 80.00% 4 50,000 50,000 100.00% 5 60,000 50,000 120.00% 6 70,000 50,000 140.00% 7 80,000 50,000 160.00% Totals : 350,000 350,000 700.00% MEAN = 100.00% MEDIAN 100.00% WTD. MEAN 100.00% In Table R1, all measures of assessment level equal 100% of market value. This does not require each individual ratio to be 100% or even within any specified range of 100%. Table R2: Level of assessment may be affected by asymmetrical distribution of ratios Sale # Assessed Value Sale Price Ratio 1 $ 80, 000 $ 50, 000 160.00% 2 75, 000 60, 000 125.00% 3 70, 000 70, 000 100.00% 4 65, 000 80, 000 81.25% 5 60, 000 90, 000 66.67% 6 55, 000 100, 000 55.00% 7 50, 000 110, 000 45.45% Totals : 455,000 560, 000 633.37% MEAN = 90.48% MEDIAN = 81.250 WTD. MEAN = 81.25% Because it is common for ratio study statistics to be influenced by high ratios to a greater extent than low ratios, the median is considered the most appropriate measure of assessment level for general purposes. 94 Table R3 provides a ratio study that indicates good level of assessment, but poor uniformity. Table R4 shows similar assessment level with good uniformity. Table R3 Good level, poor uniformity Sale # Assessed Value Sale Price Ratio 1 $ 10, 000 $ 25,000 40.00% 2 30,000 50,000 60.00% 3 22,500 30,000 75.00% 4 60,000 60,000 100.000 5 37,500 30,000 125.00% 6 70,000 50,000 140.00% 7 40,000 25,000 160.00% Totals : 270,000 270,000 700.00% MEAN = 100.000 MEASURES OF LEVEL MEDIAN 100.00% WTD. MEAN = 100.00% (COD) COEFFICIENT OF DISPERSION = 36.71% MEASURES OF UNIFORMITY (COV) COEFFICIENT OF VARIATION = 44.06% Table R4: Good level, good uniformity Sale # Assessed Value Sale Price Ratio 1 $ 21,000 $ 25,000 84.00% 2 44,000 50,000 88.00% 3 28,000 30,000 93.33% 4 60,000 60,000 100.00% 5 32,000 30,000 106.67% 6 56,000 50,000 112.00% 7 29,000 25,000 116.00% Totals : $ 270,000 $ 270,000 700.00% 1 MEAN = 100.00% * MEASURES OF LEVEL MEDIAN = 100.00% WTD. MEAN = 100.00% (COD) COEFFICIENT OF DISPERSION 9.90% MEASURES OF UNIFORMITY (COV) COEFFICIENT OF VARIATION = 12.17% 95 Appendix G: A Distribution-free Method for Locating Outliers and Extreme Outliers 92 The following procedure will identify outlier ratios that fall more than 1.5 times beyond the range of the middle 50 percent of the arrayed sample. Ratios that exceed 3 times this range can be labeled as extreme outliers. Locating trim boundaries Data set before trimming Rank Ratio (A/S) 1 0.611 2 0.756 3 0.762 4 0.853 5 0.867 6 0.909 7 0.925 8 0.944 9 1.014 10 1.052 11 1.178 12 1.367 13 1.850 14 2.500 Median ratio 0.935 COD 32.271 Steps to locate trim boundaries 1. Locate the first quartile paint Formula to locate the first quartile: (0.25 X number of ratios) + 0.25 (0.25 X 1.4 ratios) + 0.25 = 3.75 3.75 is three-quarters between the third and fourth ranked ratios. Ratio 3 = 0.762 Ratio 4 0.853 Three-quarters between = (0.853-0.762) X 0.75 = 0.068 The first quartile point= 0.762 + 0.068 = 0.830 2. Locate the third quartile point Formula to locate the third quartile: (0.75 X number of ratios) + 0.75 (0.75 X 14 ratios) + 0.75 = 11.25 11.25 is one-quarter between the eleventh and twelfth ranked ratios. Ratio 11 = 1.178 Ratio 1.2 = 1.367 One-quarter between = (1.367 1.178) X 0.25 = 0.047 The third quartile point = 1.178 + 0.047 = 1.225 3. Compute the interquartile range The distance between the first and third quartile=interquartile range 1.225 - 0.830 = 0.395 92 2010. Standard on ratio studies. (using methodology demonstrated in Appendix B) Kansas City, MO: IAAO. 96 4. Establish the lower boundary The lower trim point = first quartile - (interquartile range X 1.5 or 3.0): 0.830 - (0.395 X 1.5) = 0.238 0.830 - (0.395 X 3.0) 0.355 5. Establish the upper boundary The upper trim point = (interquartile range X 1.5 or 3.0) 1 third quartile: (0.395 X 1.5) + 1.225 = 1.818 (0.395 X 3.0) + 1.225 = 2.410 Outliers eliminated Extreme outliers after 1.5 X trimming eliminated after 3.0 X trimming Rank Ratio (A/S) Rank Ratio (AIS) 1 0.611 1 0.611 2 0.756 2 0.756 3 0.762 3 0.762 4 0.853 4 0.853 5 0.867 5 0.867 6 0.909 6 0.909 7 0.925 7 0.925 8 0.944 8 0.944 9 1.014 9 1.014 10 1.052 10 1.052 11 1.178 11 1.178 12 1.367 12 1.367 13 1.850 Median ratio 0.917 Median ratio 0.925 COD 15.649 COD 22.012 97 Appendix H: Common Reappraisal Cycles and Property Inspection Practices 93 Table 22.Legally required and commonly practiced reappraisal cycles, 2009 and 1999, 2009 1999 Provinces States Provinces States Legal Common Legal Common Legal Common Legal Common No specified cycle 2 1 8 0 2 7 One-year cycle 2 2 16 8 3 1 17 8 Two-year cycle 0 0 2 2 0 0 7 5 Three-year cycle 1 1 7 6 3 2 7 4 Four-year cycle 2 1 1 5 2 3 9 7 Five-year cycle 0 0 9 6 0 1 6 7 Six-year cycle 0 0 3 3 0 0 4 3 Eight-yeat cycle 0 0 0 1 0 0 1 1 Nirre-year cycle 0 0 0 0 1 0 0 0 Ten-year cycle 0 0 0 0 1 3 2 3 Table 23. Property inspection practices, 2009 and 1999 Provinces States Yes I No Other N/R Yes No Other N/R 2009 All inspected during a reappraisal 1 6 0 5 23 20 1 7 Percentage inspected annuaffy on a cycle 3 4 0 5 28 2 7 Residential Interiors Inspected 4 0 3 5 17 4 7 inspection following a sale 5 2 0 5 10 7 6 Inspection following a building permit 5 1 1 4 13 8 7 Property data reviewed in office without Inspection 3 0 4 4 17 11 1999 All inspected during a reappraisal 5 6 0 1 35 1 15 0 1 Percentage inspected annually on a cycle 8 2 0 2 29 17 1 4 Restial interiors inspected 1 0 0 2 21 19 1 10 Inspection following a sale 5 4 0 3 8 25 0 18 Inspection following a building permit 5 4 0 3 15 19 0 17 Property data reviewed in office without Inspection 11 2 0 2 21 17 2 11 Other = the respopdert indicated that some local districts did the inspection, while other districts did not. N/R = no response. 93 Dornfest, Alan S., Steve Van Sant, Rick Anderson, and Ronald Brown. State and Provincial Property, Tax Policies and Administrative Practices (PTAPP): Compilation and Report. Journal of Property Tax Assessment & Administration. Volume 7, Number 4. pp. 19-20. 2010. 98 Appendix 1: Elements that Contribute to Valuation Equity 94 Element Annual reassessment to current market value. Significance Enables the property tax to be based on values that reflect the current market place and whatever changes have occurred in the last year. Provides a tie to an annually recurring tax. Element Periodic (frequent) reappraisals contingent on quality thresholds. Significance While it is important to capture the effects of physical characteristic changes frequently, the necessary frequency will vary depending on local patterns of construction, movement, remodeling, and so forth. Quality thresholds are more efficient ways of determining the need to re-establish underlying physical characteristics of properties. Elements Primary assessment responsibilities operate at smallest practical level of government. Significance Creates a more open and transparent system, inviting public input and appropriate checks and balances. Element Performance analysis /quality assurance, including ratio studies, procedures reviews, and peer reviews. Significance Establishes quantifiable goals for reappraisal and provides objective and subjective means of testing outcomes. Element Commitment to professional staffand adequate ongoing training programs. Significance Establishes professional credentials for staff performing reappraisal, statistical, and related functions. Increases public assurance in quality of product. Element High quality lands records and accurate inventory of property. Up to date computer software and hardware. Significance Provides quality physical characteristic underpinnings for reappraisal or other assessment functions. Computer systems enhance ability to update values frequency. Element Public relations, including open records and active communication utilizing web technology and more traditional forms. Significance Alleviates taxpayer concerns regarding reappraisal and related activities. May achieve "buy in." 94 Dornfest, Alan S. In search of an optimal revaluation policy. Challenging the Conventional Wisdom on the Property. Edited by Roy Bahl, Jorge Martinez-Vazquez, and Joan Youngman. Chapter 4. p. 102. Lincoln Institute of Land Policy. Cambridge, MA. 2010. 99