Call to Order and Roll Call
The first meeting of the Interim Joint Committee on Local Government was held on Wednesday, June 24, 2015, at 10:00 AM, in Room 171 of the Capitol Annex. Representative Steve Riggs, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Steve Riggs, Presiding Chair; Senators Ralph Alvarado, Stan Humphries, Christian McDaniel, Morgan McGarvey, Dan “Malano” Seum, Damon Thayer, Representatives Linda Belcher, Ron Crimm, Mike Denham, Adam Koenig, Stan Lee, Brian Linder, Tom McKee, Michael Meredith, Russ Meyer, Jody Richards, Jonathan Shell, Arnold Simpson, and Rita Smart.
Guests: David Gordon, Executive Director, Office of Property Valuation; Tom Crawford, Director, Division of Local Valuation, Department of Revenue; Dr. John Gilderbloom, Urban and Public Affairs, University of Louisville; David O’Neill, Fayette County PVA, Kentucky PVA Association; Cindy Arlinghaus Martin, Boone County PVA, Kentucky PVA Association; Joyce Parker, Laurel County PVA, Kentucky PVA Association; and Tony Lindauer, Jefferson County PVA.
LRC Staff: Mark Mitchell, John Ryan, Joe Pinczewski-Lee, and Ashlee McDonald.
Discussion of Property Valuation Administrators
Executive Director David Gordon, of the Office of Property Valuation, said that, according to Kentucky Constitution Section 172, all property shall be assessed for taxation at its fair cash value. In 1965, in the court case of Russman v. Luckett, the Court of Appeals reiterated that property must be assessed at its fair cash value and that any retreat from this standard is not tolerated. House Bill 44 that was passed in 1979 limited an increase in property tax revenue to 4 percent without voter recall. It does not limit assessment increases. With the passage of the Kentucky Education Reform Act in 1990, as of July 1, 1994, all real property located in the state and subject to local taxation was to be assessed at 100 percent.
Tom Crawford, Director, Division of Local Valuation, Department of Revenue, briefly explained the Kentucky property tax calendar which details the assessment dates and specifics when certain valuations and taxes are due.
Mr. Gordon explained that there are several activities that are conducted for assuring property is assessed at its fair cash value. These include having an annual conference on assessment administration, assessment classes that are provided by the Department of Revenue (DOR), a biennial performance audit by DOR, and a sales-assessment ratio study by DOR.
Mr. Crawford explained what sales-assessment ratio studies are and how they impact PVA offices. Sales-assessment ratio studies are authorized by KRS 133.250 and conducted on each PVA office on an annual basis. These studies represent the Department of Revenue's primary way of ensuring that assessments meet the fair cash value standards mandated by the Kentucky Constitution. For example, when a house sells, the PVA uses the sale price against the assessed price and will then get a ratio. If a house sells for $100,000 and it was assessed for $90,000, the ratio would be 90 percent. An arms-length transaction is when an agreement is made by two parties freely and independently and without some special relationship, such as being a relative, having another deal on the side or one party having complete control of the other. Before the recession, in 2004, arms-lengths transactions were below 25,000 and are now trending upward.
Mr. Gordon explained that there has been an upward trend for residential sales since 2011. The ratio level measures how close to 100 percent of fair cash value the assessment level is. The Coefficient of Dispersion (COD) measures the average percentage by which individual ratios vary from the median ratio. A low coefficient of dispersion indicates that appraisals within the area or class of property are uniform.
In response to a question from Senator McDaniel, Mr. Gordon furthered explained coefficient of dispersion.
In response to a question from Chairman Riggs, Mr. Gordon explained that the department delivers its analysis of the assessment ratio study to each PVA by September 1 of each year.
Mr. Gordon stated that an annual revaluation of real property includes a physical examination of the real property being conducted at least once every four years. After the initial evaluation, digital imaging technology can be used for inspections. Kentucky’s physical examination schedule falls in the middle of the schedules in the surrounding states in terms of the time between each physical examination.
Mr. Gordon explained that the use of digital imaging technology is an alternative to periodic on-site inspections if the initial physical inspections are done in a timely completed manner.
In response to a question from Representative Smart, Mr. Gordon stated that 57 counties use Pictometry. Each county determines whether it will use Pictometry.
In response to a question from Representative Simpson, Mr. Gordon explained that counties use Pictometry with other tools to determine property values. There are no state mandates that dictate which tools local jurisdictions use to determine property values.
In response to a question from Representative Lee, Mr. Crawford explained that although the statewide total assessment is up four billion from 2007 to the preliminary totals for 2015, and although there has been a dip in total property tax collection, the total assessment has remained stagnant.
Representative Lee said that his constituents had been noting that property values seemed to be decreasing, but their individual assessments did not seem to decrease despite being in a recession.
In response to a question from Representative Belcher, Mr. Gordon stated the cost of the Pictometry program depends on the size of the county.
In response to a question from Representative Koenig, Mr. Crawford explained that the sales assessment ratio study is conducted from a sample provided by the PVAs. A 90 percent to 110 percent range is the guideline from the International Association of Assessing Officers (IAAO). Property assessment is not an exact science.
In response to a question from Representative Meredith, Mr. Gordon explained that a physical inspection must be done every four years as found in KRS 132.690. There is no statutory definition for “physical examination.”
Chairman Riggs said that the dictionary definition of “physical” includes “sight.”
In response to a question from Representative Lee, Mr. Gordon said that he likely would have consulted with general counsel before making a determination relative to the use of Pictometry, but also that the use of digital imagery is allowed within IAAO guidelines.
Dr. John Gilderbloom, Urban and Public Affairs, University of Louisville, said that the Jefferson County PVA’s office had provided assessment data for their independent study. He provided several examples of homes in the Louisville Metro area and discussed the variations of appraisals by real estate appraisers of the values of these homes and the accuracy of the Jefferson County PVA valuations of these homes.
Urban thinking uses a classic concentric zone model that illustrates how cities grow, and are defined, and how home values change. Louisville reflected this model until after the 1980s. Now with investment, properties are increasing in the downtown areas where traditionally they lagged. Downtown property values are soaring, and this has been captured by the PVA’s office. This effect has been replicated in many cities nationally. Young people are attracted to the downtown areas for various reasons. The PVAs are capturing the values of these areas accurately because of the volume of sales activity.
Dr. Gilderbloom said there are areas in Louisville Metro that are quickly appreciating in value as well as some areas that are appreciating slowly.
There are consequences to homeowners when their property is under-appraised. Real estate appraisers, which is a different occupation than a PVA, do not appraise property fairly. They have a lack of formal education or have training in disciplines that promote inaccurate valuations. Their current methodologies create biases against downtown neighborhoods. This can lead to difficulties in securing financing.
Representative Denham said that real-estate appraisers do not work for the banks. Banks do not interact with appraisers to avoid the accusations of manipulating the appraisers.
Dr. Gilderbloom said that appraisers are not familiar with local neighborhoods. He suggested that improvements can be made in education to improve the accuracy of real estate appraisers.
Representative Denham said that the appraisers’ issue is different than a banking issue.
Dr. Gilderbloom said that PVAs use advanced, scientifically-based assessment methodologies that real estate appraisers do not, such as hedonic regression equations. In particular, his research indicated that the Jefferson County PVA’s analysis is without bias. About 95 percent of the time, the Jefferson County PVA gets the value within 90 percent to 110 percent of the actual value.
In response to a question from Senator Seum, Dr. Gilderbloom said that his determination with a very small margin of statistical error itself indicates that the target value of 90 percent to 110 percent is being met by the PVAs.
In response to a question from Representative Lee, Dr. Gilderbloom said that historically the rich and powerful complain about taxes. They fail to account for the increase in their property investment. Historically the poor and minorities pay more. The PVAs in Kentucky do a good job using their analytics to ensure equitable assessments are provided for everyone. The “rich” were defined has those living in high income neighborhoods, and that tax justice is that everyone pays their fair share based on the value of their house. For awhile, some people were not paying their fair share.
Representative Meredith said that banks do not hire appraisers. Customers hire the appraisers. The banks may act as clearing agents, though.
Dr. Gilderbloom said that the appraisers are selected randomly. Sometimes a person hires a good appraiser and sometimes a person hires a poor one.
In response to a question from Senator Thayer, Dr. Gilderbloom said that his definition of “rich” in terms of his testimony was when people sell property in excess of $500,000. In terms of being wealthy, the top 5 percent make over $100,000 a year.
Senator Thayer said he feels the use of code words such as “tax justice” and “fair share” when used in relation to wealth make it sound like being wealthy is bad. The wealthy create the jobs and pay the taxes that make the country work.
Dr. Gilderbloom said that what he meant by justice is “fairness.” There has been a history in this country in relation to property tax assessments of the poor carrying the burden. He said that Kentucky is doing it right.
In response to a question from Representative Linder, Dr. Gilderbloom said that he felt that where the PVAs throughout Kentucky use proper assessment tools, they are doing as well as the Jefferson County PVA. It was the Jefferson County PVA’s assessment methodologies that he had studied in detail and determined to be accurate and without bias. State law requires a certain level of accuracy by all PVAs.
Mr. O’Neill, Fayette County PVA, said that PVAs reflect the market, but do not set the market. Appraisals are different than valuations conducted by PVAs. The “high water mark” in sales in Fayette County was in 2005, after which they declined. Kentucky did not have the huge bubble in property values as in other states. Kentucky’s values stayed somewhat flat during that time. The number of house sold dropped dramatically, though, in 2008, when the recession began reaching the low point in 2011. PVAs needed a critical mass of sales to conduct reassessment.
In response to a question from Chairman Riggs, Mr. O’Neill said that he did not believe the state law requiring valuations to be done every year needed to be changed. There are 110,000 parcels of property in Fayette County. The Department of Revenue conducts reviews to include the assessment ratio study. The newspaper also conducted an in-depth article that found that all the PVAs were within the assessment ratio guidelines.
PVAs are required to assess each parcel at 100 percent of its fair cash value. House Bill 44 limits the total funding to a tax district to 4 percent of its previous year’s revenue without a referendum. However, there is no similar 4 percent limitation for individual properties. There is no 10 percent deviation standard set by the Department of Revenue for individual real property assessments. There is an acceptable range of 90-110 percent sales ratio that reflects the median of all arms length transactions in a county, arrayed as the sale price divided by the assessment. In addition to reassessments of the properties in the quadrants, the Department of Revenue may direct the PVAs to conduct reassessments in other areas outside the quadrants where sales ratios do not meet acceptable standards.
In response to a question from Chairman Riggs, Mr. O’Neill said that the PVAs know that they have to assess all properties at 100 percent fair cash value every year and physically inspect all properties once every four years
.
In response to a question from Representative Shell, Mr. O’Neill said that the letter from the Department of Revenue to the Jefferson County PVA was intended for clarification for that particular county. Aerial mapping is available, but as long as resources exist, he plans to continue to perform physical inspections of properties. Each county in Kentucky has unique circumstances.
In response to a question from Chairman Riggs, Tony Lindauer, Jefferson County PVA, Kentucky PVA Association, explained that Pictometry has proved to be more efficient and accurate.
Joyce Parker, Laurel County PVA, said that it would cost Laurel County $70,000.00 each time the Pictometry software is flown over the county for revaluation.
Mr. Lindauer said that he uses “Change Finder,” which is an add-on to Pictometry. It enables the user to set notification parameters that will alert the user to changes in the footprint of properties.
In response to a question from Representative McKee, Mr. Lindauer affirmed the responsibility of property owners to list additions that affect their property values with the PVA. However, there is no obligation for property owners to note changes in their subdivision, which might increase their own property values and report the value increase in their property to the PVA. The appeals process is a safety net for assuring accurate valuation.
In response to a question from Representative Meredith, Ms. Parker said that, while still conducting physical inspections, Pictometry would aid in finding property changes in the field that are otherwise difficult to locate. Building permits are only required in the city. Mr. Lindauer said that, in the first year Jefferson County used Pictometry, it added $35,000,000 of undocumented properties in inaccessible places.
In response to a question from Representative Meredith, Mr. O’Neill stated that he has 23 employees in his office. Mr. Lindauer has 60 employees. State law dictates how many employees are permitted.
In response to a question from Representative Smart, Mr. Lindauer replied that the use of Pictometry is being requested in the next budget cycle.
Representative Bratcher said he had asked for an investigation of the PVA because there are so many red flags associated with the Jefferson County PVA. The significant property valuation increases after a period of no increases. There are questions relating to the letter of the law. The people of Jefferson County are upset. An investigation should be conducted. He inquired about the frequency of required PVA audits and what was mandated in statute. In conversations with the Commissioner of the Department of Revenue, the 2012 audit was just being completed, and the 2014 audit would be started.
Mr. Lindauer read portions of the summary from the 2012 audit for Jefferson County that was recently released. It noted the advantageous use of electronic media and the fact that it passed the audit.
In response to a question from Chairman Riggs, Ms. Martin said that it is not uncommon for properties to go up in a period of eight or so years in an amount of 10 percent to 15 percent, or even 20 percent. Mr. O’Neill said that there were a few properties in Fayette County that saw similar increases. Mr. Lindauer noted that he thought some of the spikes in Jefferson County were a result of map corrections, resulting from refining the actual boundaries of the original subdivisions.
In response to a question from Representative Crimm, Mr. Lindauer stated that he served the people of Jefferson County and apologized for a remark that was quoted in the newspaper. The remark should have been that property values had remained so low for a period of time and now that the market has improved. Certain people are hurting because of the increase in property values. Changes to the homestead exemption may be considered.
Representative Crimm said that the PVAs must be able to explain changes in property value when asked to do so by the property owners in conference.
Representative Simpson suggested that the PVAs and the Department of Revenue carefully consider the letter of the law and provide recommendations in amendments to the KRS should they be deemed necessary, to ensure that current practice and the law are harmonious.
There being no further business, the meeting was adjourned 12:05 p.m.