Call to Order and Roll Call
The second meeting of the Interim Joint Committee on Local Government was held on Wednesday, August 25, 2010, at 10:00 AM, in Room 171 of the Capitol Annex. Senator Damon Thayer, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Damon Thayer, Co-Chair; Senators Walter Blevins Jr., Julian M. Carroll, Mike Reynolds, John Schickel, Elizabeth Tori, and Johnny Ray Turner; Representatives Mike Denham, Ted Edmonds, Derrick Graham, Richard Henderson, Charlie Hoffman, Dennis Keene, Adam Koenig, Stan Lee, Tom McKee, David Osborne, Arnold Simpson, Ken Upchurch, and Jim Wayne.
Guests: Cindy Rich, Boone County Property Valuation Administrator; Rick Brueggemann, Hemmer, Pangburn, DeFrank, PLLC; Dana Mayton, Deputy Attorney General; Andrew Hartley, Matthew Frohlich, and Wendy Thompson, Department for Local Government; Jeff Kelly, Webster County Property Valuation Administrator; Garth Kuhnhein, Terry Donoghue, and Lou Hartfiel, Northern Kentucky Tea Party; J.C. Morgan, Campbell County Library; Terry Manual, Department for Libraries; Ted Blaney, Owen County Tea Party; Eddie Tammy, Boyle County Property Valuation Administrator; and J. R. Roth, Kentucky Woodland Owners.
LRC Staff: Mark Mitchell, Joe Pinczewski-Lee, Kristopher Shera, Pam Thomas, Tom Willis, Matt Niehaus, Bryanna Carroll, and Cheryl Walters.
Approval of Minutes
Upon the motion of Representative Henderson, seconded by Senator Schickel, the minutes of the June 23, 2010 meeting were approved.
Consideration of Resolution
Senator Thayer asked for a motion to adopt a resolution adjourning the meeting in memory of Janet Harris, Senator Harris’ wife who passed away recently. Representative Osborne so moved, seconded by Representative Denham. The motion carried by voice vote.
Discussion of Rate Calculations in 1979 HB 44
Senator Thayer told the committee that Mrs. Cindy Rich, Boone County Property Valuation Administrator (PVA), had expressed concerns to him regarding 1979 HB 44 and that he invited her to address those concerns. He then recognized Senator Schickel to introduce Mrs. Rich.
Senator Schickel told the committee that Mrs. Rich was a Certified Public Accountant and has been Boone County’s PVA since 2006. As PVA, Mrs. Rich has discovered how tax rates are calculated and has taken a personal interest in attempting to make sure the public is not being misled. Senator Schickel added that Mrs. Rich firmly believes that some districts are able to take in more than the four percent allowable revenue increase per HB 44, which she believes was not the original intent behind the bill. He stated that Mrs. Rich has decided to educate taxpayers in the hopes to make the legislature aware of the problem and get it changed.
Mrs. Rich introduced Mr. Rick Brueggemann, an attorney representing her, to answer questions from the committee. She told the committee that she was appearing before the committee as a concerned citizen, not as a PVA. Mrs. Rich told the committee that HB 44 was passed by the General Assembly in 1979 and the original intent was to prevent taxing districts from raising tax revenue, as opposed to rates from real property more than four percent. There is a common misconception among taxpayers that if the rates do not go up, then taxes do not go up. No matter what the assessments, the revenue should go up no more than four percent. The focus is on tax revenues collected, not the previous year’s rate. The compensating rate is the rate which will produce the same amount of revenue as the previous year, excluding new property.
After providing an explanation of the compensating tax rate, Mrs. Rich stated that taxing districts are permitted to take up to four percent increase in revenue without it being subject to voter recall. This is not happening. If there is a difference in real and tangible property rates, the calculation, as being interpreted in the statute, is allowing for a more than four percent increase without that amount in excess of four percent being subject to voter recall. This is according to tax rate calculations and work sheets prepared by the Department for Local Government (DLG) and the Department of Libraries and Archives.
After citing a case example from the Owen County Library District and the Boone County fiscal court, Mrs. Rich explained that in time of increasing assessments, tax rates are failing to drop. Taxpayers are being led to believe revenue is only able to go up four percent or that revenue is not going up at all. Mrs. Rich pointed out that KRS 132.010(6) defines the compensating rate and allows interpretation of the “minimum revenue limit” test. Personal property, which is often times taxed at a higher rate, is being “lumped in” to the tax rate calculation. This effectively weights the average of the real and personal property rates and makes the compensating rate higher than it would normally be, or what it would be if the two rates were the same. Personal property is then taken back out.
Mrs. Rich provided an example of a county’s process for setting the property tax rates that demonstrated how the revenues can exceed four percent without invoking the possibility of public recall
Mrs. Rich told the committee that she requested an Attorney General’s Opinion (OAG 10-005, included in the members’ folders) asking, “Is it proper to include personal property when it is specifically excluded under the first sentence of KRS 132.010(6)?” The answer was, “the exclusion only applies to the first sentence, not the second sentence of the definition.” Also, when there is a rate disparity between real and personal property rates, it allows such districts to set a higher tax rate without voter recall. No counties have real and personal property rates that are the same, and as a result are truly subject to the four percent limit. Some districts are taking advantage of the minimum revenue limit and others are not. The result is that some citizens enjoy rights of recall for real property tax revenue increases beyond four percent, while others do not. This unequal treatment among taxpayers of the same class is constitutionally permissible according to the most recent Attorney General’s Opinion requested, because it results from decisions made by the county fiscal courts or other local taxing authorities and not the classifications that are in the statute.
Mrs. Rich told the committee that in 1980, the former Attorney General, presently Governor Beshear, issued an Opinion indicating “the clear and unambiguous intent of the General Assembly was to place a ceiling upon real property tax rates while specifically exempting personal property tax rates.” The Opinion further stated, “The very definition of ‘compensating tax rate’ evinces a legislative intent that only revenue from real property comes within HB 44 limitations. Personal property and new property are specifically excluded from the definition of ‘compensating tax rate.’” The answer, again, was that it was referring to the first sentence, not the second sentence of the statute.
Mrs. Rich stated that HB 44 intended to limit revenue collected from real property by four percent over the previous year by allowing voter recall. Greater percentages are allowed without triggering recall because KRS 68.245(6) uses the term “compensating tax rate” in calculating its four percent limit. Since the definition of “compensating tax rate” allows greater percentages to be collected, there is no true four percent limit on increases of tax revenue from real property.
In conclusion, Mrs. Rich suggested that the legislature can fix this problem by mandating that the real and personal property rate be the same, or define a compensating rate for each class that is calculated completely separate of the other. “Personal property” should be excluded from both the first and second sentence of KRS 132.010(6) for perfect clarity.
Senator Carroll commented that the problem may be a misinterpretation of the statute by DLG. It was the intent in 1979 to limit revenue from both classifications of property to not more than four percent.
Mr. Brueggemann said he believed that the original intent of HB 44 was to limit the amount that real property taxes can increase from the previous year and that the “however” clause in the definition of “compensating rate” was placed there to guarantee for a certain year at least the same amount of revenue as the previous year in consideration of personal property rates.
Senator Carroll said that at a future time, the Attorney General and DLG should have the opportunity to address the committee.
In response to a question from Representative Simpson, Mr. Brueggemann said his office believed the two opinions of the Attorney General were in conflict in terms of the application of personal property tax to HB 44, but did not believe the Attorney General viewed them as being conflicted.
Representative Simpson commented that he agreed that DLG was not applying the tax as it should be applied. He told Mr. Brueggemann that he might have to seek resolution in court at which Mr. Brueggemann responded that a court resolution was being considered with a desire to fix the situation in the most expeditious manner possible.
Senator Thayer commented that, in contrast to the elected fiscal court setting tax rates, there is no recourse for taxpayers because board members of special districts are appointed rather than elected.
Representative Koenig commented that he would also like to hear from DLG and the Attorney General. In response to a question from Representative Koenig regarding what would happen when new property was incorporated into the rest of the taxable property, Mrs. Rich said the rates would go down.
In response to a question from Representative Lee about how much money taxpayers may have wrongly paid since 1979, Mrs. Rich predicted millions of dollars. Representative Lee commented that he would encourage testimony from the Attorney General regarding the most recent Attorney General Opinion.
In response to a question from Representative McKee, Mrs. Rich said the Attorney General has indicated that the tax rates have been calculated in the same manner for 30 years.
Mr. Brueggemann said he felt that the situation changed in the early 1980s when personal property rates and real property rates became different after the previous Attorney General Opinion.
In regard to protecting the agricultural community, Representative McKee urged caution for legislative changes to HB 44.
Representative Wayne commented that the broader issue of how people are governed at the local level needs to be looked at and that he felt the current system of local government is very inefficient, noting the number of county government in Kentucky and that the state itself has to provide finances to support the local governments. He encouraged a consolidation of services.
In response to a question from Senator Schickel, Mrs. Rich said Boone County’s, specifically, and other counties’ assessments are decreasing, but to what extent, she could not address on a statewide level. Senator Schickel commented that he was concerned about the situation in an economic downturn that despite falling property values, the citizens were still expected to produce the same amount of revenue.
In response to a question from Senator Reynolds, Mrs. Rich said schools in Northern Kentucky are truly limited to four percent and are using the same rate for real and personal property.
Senator Thayer asked Deputy Attorney General Dana Mayton to address the committee and answer questions from members. Deputy Attorney General Mayton told the committee that generally, the opinions speak for themselves, and that when crafting opinions, the Attorney General seeks input from others. In this instance, the Attorney General determined that DLG was calculating the rate correctly according to a strict interpretation of the statutes. The legislature makes policy and the Attorney General’s Office defers to the General Assembly on how it would proceed on this matter.
In response to a question from Representative Lee, Deputy Attorney General Mayton said that the Attorney General’s involvement in a lawsuit pertaining to the litigation would depend on the analysis of the allegations and a decision made whether to intervene.
In response to a question from Representative Lee, Deputy Attorney General Mayton said even though she was not sure, she thought 20 or 30 days would be the time limit for the Attorney General’s office to a suit which questions the constitutionality of the statute. She will report back to the committee with the exact answer.
Senator Carroll commented that an appropriate suit would be declaratory in nature to interpret a statute in question. He filed a bill that was passed in the 1960s requiring farm property to be assessed at farm property values.
Senator Carroll further commented that OAGs are not written by the Attorney General himself but rather are written by expert staff members of that office.
Senator Thayer asked Mr. Andrew Hartley, staff attorney for DLG, to address the committee. Mr. Hartley introduced Mr. Matt Frohlich, who is responsible for the tax rate calculations. Mr. Hartley told the committee regarding the calculation of the compensating tax is no more and no less than a mathematical formula. DLG is following the rigorous and literal word of the statute for calculating the compensating tax rates.
Senator Carroll noted after Mr. Hartley discussed the two calculations of the compensating tax rate and the four percent rate that he believed that the difference in opinion from his perspective may be that the compensating tax rate is calculated to be less that the four percent rate, but greater than the previous year’s revenue.
Mr. Hartley said he would be glad to present the brief that they provided to the Attorney General’s office to the committee which contains various mathematical examples. Senator Thayer asked that he make it available to LRC staff.
Senator Thayer announced that Pam Thomas, Committee Staff Administrator of the Appropriations and Revenue could provide history to the committee at a future meeting and also Mr. Hartley could be invited back to address the committee.
Representative Simpson clarified that DLG was simply using the wording of the statute to make the calculations to which Mr. Hartley agreed.
Representative Lee stated that a copy of Mr. Brueggemann’s brief should be given to the committee and any documents from the Attorney General’s office.
Senator Thayer commented that this is an issue that the public should be aware of.
Mr. Brueggemann noted that even if a declaratory judgment is rendered agreeing with DLG’s method, that a legislative change may still be pursued.
Senator Thayer recognized Mr. Jeffrey Kelly, Webster County PVA, to address the committee. Mr. Kelly told the committee that tax rates have been a mystery to taxpayers and that the process needs to be looked at. HB 44 provides a ceiling and a floor. Mr. Kelly questioned why four percent was chosen.
Senator Thayer recognized Mr. Garth Kuhnhein to speak for taxpayers. Mr. Kuhnhein talked about the Kenton County Library District’s understanding that the board had to take the compensating tax rate. Appointed library board members make tax decisions. The library received on average 85 percent of what the county receives to operate the library.
Senator Thayer recognized Mr. J. C. Morgan, Director of the Campbell County Public Library. Mr. Morgan stated that the property tax is the only tax that libraries get in contrast to other revenue sources available to counties. The library district has been a good steward of the taxpayers’ money. HB 44 has benefitted libraries and asked the committee to think of libraries when it considers any changes to the law.
Senator Thayer announced that the committee’s next meeting would be a joint meeting with the State Government Committee in Georgetown at Toyota.
There being no further business, the meeting was adjourned at 12:10 p.m.