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Return to publications and speeches Evaluating the Five Largest Appraisal By Paul Pennington In order to determine how five counties performed in assessing real and personal property, the author analyzed their operations-from budget cost-effectiveness, staff productivity, and accuracy of their tax rolls to lawsuits per parcel ratio. THE GREAT 17TH-CENTURY economist Adam Smith once said, "It is the highest impertinence and presumption, therefore, in kings and ministers to pretend to watch over the economy of private people, and to restrain their expense. . . . They are themselves always, and without any exception, the greatest spendthrifts in the society." Is old Adam Smith right? Well, we are all seeing a lot in the media these days about attempts to cut government spending at all levels (i.e., federal, state, and local). This analysis limits its scope to those government entities that are responsible for the property tax assessments on real and personal property-specifically, the five largest Texas appraisal districts. Are they spendthrifts or prudent stewards of your tax dollars? When examining the operations of government entities, you are confronted with the old adage that governments are not run like businesses. Therefore, the argument goes, they cannot be evaluated in the same manner as private sector companies. What to do? You either throw your hands up in the air and ask, "Why ask why?" or you develop parameters that impartially measure the effectiveness and productivity of the government entities you wish to study For the last three years I have examined the operations of the five largest appraisal districts in the State of Texas (Bexar, Dallas, Harris, Tarrant, and Travis counties). This article discusses the results of my research on the performance of these districts during tax year 1992 and should not be considered a reflection of their operations for tax year 1993. The statistics used in this survey were obtained from the 1992 Texas Property Tax Appraisal District Survey, the Open Records Act, and questionnaires sent to the chief appraisers of each of the five appraisal districts. All sources were used in compilation of this analysis. Six generic categories are examined and commented on: 1. Tax roll analysis, 2. Budget analysis/cost effectiveness, 3. Budget analysis/staff productivity, 4. Lawsuits/effectiveness of the administrative remedy, 5. State ratio study/accuracy of appraisals, 6. Appraisal Review Board budget comparison/cost benefit. THE TAX ROLL RANKING In analyzing the five tax rolls involved in this analysis, I looked at three areas: 1. The total taxable value, 2. The total number of tax parcels administered, 3. The percentage of change between tax year 1991 and 1992. Observations. In analyzing the top five appraisal districts (Table 1) strictly on the guidelines noted above, the following rankings were achieved. Harris County tops the list both in terms of the size of tax roll and total number of tax parcels, followed in descending order by Dallas, Tarrant, Bexar, and Travis Counties. It is interesting to observe that, whereas each district added additional tax parcels between 1991 and 1992, their respective tax rolls decreased. Obviously, these counties were still experiencing loss in taxable values due to the savings and loan debacle, overbuilding, and other economic factors that adversely affected Texas during the late 1980s and early 1990s. Table 1
BUDGET ANALYSIS (Cost Effectiveness) In ranking the cost effectiveness and productivity of each of the districts in question, I have examined three major areas of operation: 1. The 1992 operating budgets, 2. Number of employees during 1992 3. 1992 cost per parcel. Administration cost per parcel. As noted in Table 2, each district's 1992 budget has been divided by the total number of parcels administered by that district. This calculation indicates the average cost for each district to administer its tax parcels. The chart clearly shows Dallas County administering its roll at a significantly lower rate per parcel than the other districts, with Bexar County registering the highest per parcel cost. If one considers the cost to administer a tax parcel in Dallas County ($15.46) and compares it to Bexar County ($20.45), one finds a difference of 32 percent. Why does such a budget disparity exist? Can the 32 percent difference be accounted for as an economy of scale, based on the fact that Dallas is a larger district, with more employees and greater resources? Apparently, economies of scale have nothing to do with it. Looking at Harris County, the largest of all of the Texas appraisal districts, shows that their cost to administer a tax parcel is 22 percent higher than that of Dallas County. Evidently, Dallas' lower administrative costs must be attributable to more effective use of resources. Thus, Dallas County taxpayers are realizing lower administrative cost than their counterparts in Bexar, Harris, Tarrant, and Travis Counties Table 2 Administrative Cost Per Parcel Rating
BUDGET ANALYSIS (Productivity) Tax parcel employee ratio (productivity). If we take this process one step further, it is possible to determine a ratio between the number of tax parcels and the number of employees per district; in other words, to rank the productivity of the district's employees. As shown in Table 3, this can be achieved by dividing the total number of tax parcels per district by the total number of each district's employees. Using this comparison, we find Dallas County with the highest ranking and Tarrant County with the lowest. There is also an unexpected finding. As can be seen above, the cost to administer tax parcels and the tax parcel/employee ratio do not necessarily correspond. For example, Bexar County had the highest average tax parcel administrative cost, but is ranked second in the tax parcel/employee ratio. Thus, a district's cost to administer its tax parcels does not appear to be connected to its respective budgets and staffing. Another interesting observation is the range of disparity of productivity in comparing the districts. The management team at the Dallas Central Appraisal District is getting higher productivity out of its staff, based on the average tax parcel/employee ratio of 3,124 parcels per employee; whereas Tarrant County has a tax parcel/employee ratio of 2,452 tax parcels per employee, or 27 percent less productivity than Dallas.
Table 3 Tax Parcel / Employee Ratio Ranking (Productivity)
EFFECTIVENESS OF THE APPEALS PROCESS Lawsuit to parcels ratio (effective appeal process). Several years ago I heard a chief appraiser say that, when a property tax appeal reaches the courthouse, the system has failed. There is a lot of truth in that statement. Certainly, most chief appraisers would agree that only appeals involving points of law and real valuation disagreements need to reach the courthouse. Clearly, the whole concept of mass appraisal is not a science. Rather, it is an attempt to reach fair and equitable assessments on a mass scale. Thus, appraisal districts should agree that the number of lawsuits filed against them acts as a barometer, indicating the effectiveness of the administrative remedy, which is the appeal process prior to judicial review. In reality, when there is a large upsurge in the number of suits filed against a district, it does indicate a problem within the system. Thus, I have developed a lawsuit-to-parcel ratio ranking, for the purpose of identifying those districts with the most effective administrative remedy system. The ranking is achieved by dividing the total number of tax parcels by the total number of lawsuits filed. We discovered a telling statistic regarding the effectiveness (or ineffectiveness) of the "administrative remedy" for a particular district. As can be seen in Table 4, the lower the number of parcels per lawsuit, the greater the potential for taxpayers being forced to seek legal remedy. In 1992, Travis County gained the highest score for an effective administrative remedy, with Harris County scoring the lowest. Harris County set an all-time lawsuit record (state wide) with 654 lawsuits filed against it in 1992. As also noted in the above chart, Harris County also scored the highest percentage increase in lawsuits (105.66%).
Table 4 Lawsuits to Parcel Ratio Ranking
STATE RATIO STUDY Pursuant to Sec. 5.10 of the Texas Property Tax Code, "The comptroller shall conduct an annual study in each appraisal district to determine the degree of uniformity of and the median level of appraisals by the appraisal district within each major category of property. The comptroller shall publish a report of the findings of the study, including in the report the median levels of appraisal for each major category of property, the coefficient of dispersion around the median level of appraisal for each major category of property. Obviously, one could argue that the cost associated with administering a tax roll in a district that engages in an aggressive reappraisal program might be costlier than that of a district that is, historically, not as aggressive. Or, one might argue that it costs more to produce a more accurate tax roll on a per parcel basis. These are fair arguments; thus, Table 5 shows the findings of the Comptroller of Public Accounts, Property Tax Division 1991 and 1992 property valuation study. However, when the administration cost per parcel rankings are noted, cost does not necessarily equate to a higher rating by the Comptroller's office, as noted in Table 5. As a matter of fact, administrative costs do not appear to have a correlation on the tax rolls rated in Table 5. Table 5 State Ratio Study Ranking (Accuracy of Tax Rolls)
Note: The median level is the median appraisal ratio of a reasonable and representative sample of properties in an appraisal district. Districts would ideally like to get as close to 100 percent on the median ratio as possible and as low a number as possible on the coefficient of dispersion. ARB BUDGET COMPARISON (COST BENEFIT) Do you get what you pay for? There is a growing tendency for professional Appraisal Review Board (ARB) members to serve up to three consecutive terms, or as long as six years (Table 6). The rationale behind this tendency is twofold. First, the assumption is made that, if members are fairly compensated for their part-time participation in the administrative remedy, then appraisal districts will be able to attract qualified members. Second, when districts are unable or unwilling to attract qualified members, they encourage their board members to take appraisal courses to enhance their knowledge of appraisal methodology. Thus, in theory, if an ARB member is fairly compensated for his expertise in dealing with valuation disputes, fair and equitable rulings should be the result. Unfortunately, theory does not resemble reality when ARBs are closely examined. Those districts that spend more money on their ARBs do not necessarily obtain more equitable rulings or raise the ranking of their tax rolls as a whole. For example, the comparison noted in Table 7 illustrates the effect funds budgeted per ARB member has on the lawsuit to parcels ratio and the state ratio study ranking. The table shows that the amount of funds budgeted for ARB members does not necessarily have a correlation to the effectiveness of the appeal process or the accuracy of the tax rolls they are charged by law to review. Table 6 ARB Budget Comparison
Table 7
What does the Code say about ARBs? The Texas Property Code requires each county to have an appraisal district and to establish an appraisal review board. Although ARBs may vary in size, the Code gives some guidelines. ARBs must have at least three members and, depending on the county's population, they may have as many as 45 members. ARB members are appointed by the appraisal district Board of Directors to serve two-year terms, which begin at the first of the year. The Code has some restrictions on the eligibility of potential members, which deal mainly with conflicts of interest, nepotism, and residency requirements. The Code is remiss, however, in that it does not have any requirements relating to possession of even a general knowledge of the appraisal of real or personal property. So what's wrong with ARBs? In the last ten years, four disturbing scenarios have developed among ARBs: Bias. I am told that carved into the stone above one of the entrances to the Justice Department building in Washington, D.C., is the inscription: "The Government wins when justice is served." It doesn't say: "Justice is served when the Government wins." Some ARBs seem to have trouble with that concept, because of the built-in structural problems in their appointments and association with appraisal districts. ARB members are appointed by appraisal district Boards of Directors, some of whom are elected public officials, while others are members of the private sector. Once appointed, the ARB member is trained by the district's staff and compensated from the district's coffers. This process in itself tends to create a bias in favor of the district. As an example, the Tarrant Appraisal District in fiscal year 1990 spent $973,451 in legal fees, approximately 10 percent of their operating budget, defending themselves against taxpayer lawsuits. The onslaught of suits was generated in large part by their ARB's bias during the formal hearing process. The Texas Legislature recognized the problem, singled out Tarrant County, and passed legislation that forced the ARB to relocate to separate facilities from the Tarrant Appraisal District offices. In response to the legislative mandate, they moved one door down in the same office complex. The good news is that the hand slap by the legislature apparently had an effect: Tarrant County reported spending $59,485 in legal fees in fiscal 1991 versus $973,451 in fiscal 1990. Why ask "why?" In Sec. 6.43, the Code provides for the ARB to ". . . employ legal counsel as provided by the district budget or use the services of the county attorney who may use the staff of the appraisal office for clerical assistance." The problem with partiality towards the district is added to when the ARB, acting as an "independent body," retains the same legal counsel as the district. For example, both Dallas and Tarrant see no conflict of interest in using the same counsel as their respective ARBs. However, there are occasions when administrative and legal disputes arise-between taxpayers or their agents and the appraisal district. When an issue is brought before the ARB, and their legal counsel and that of the district is one and the same, how can one reasonably expect an impartial resolution? The answer to this dilemma is apparently, why ask "why?" Cronyism The next scenario that inevitably develops is that "pork barrel syndrome." This syndrome raises its ugly head whenever public funds can be doled out to friends and associates, regardless of qualifications. A classic example of this has evolved in Harris County. In October of 1992, the Houston Business Journal ran a series of articles about the amount of cronyism used to select Harris County Appraisal Review Board members. Apparently, their ranks were saturated with former city and school district employees. Being true to their new governmental employer, the Harris County Appraisal Review Board satisfied it by recommending questionable valuations, which resulted in taxpayers filing a statewide record of 654 lawsuits Renegade A property owner in Texas has the right to file an appeal if the owner feels the appraised value is in excess of the property's market value. Typically, after an appeal has been filed, a property owner is given an opportunity to discuss and, hopefully, resolve the dispute informally with a member of the appraisal district staff. If an appeal cannot be resolved at this level, the taxpayer is given an opportunity to appeal the disputed assessment to the ARB. For some unknown reasons, be it a lack of confidence in the appraisal district's staff, turf battles, or an attempt to establish their own identity, some professional ARBs have felt it necessary to micromanage the informal appeal process. A case in point would be the actions of the Travis County ARB. The ARB's involvement grew to the point that any valuation agreement reached between a staff appraiser and property owner at the informal level was subject to constant scrutiny. If the ARB didn't agree with a valuation agreement, they would kick it back, forcing the property owner to bring the appeal before them formally for resolution. The legislature recognized the problem and, during the 1993 session, passed legislation (S.B. 893) to remedy the situation. Effective September 1, 1993, any agreements reached during the informal appeal process between the taxpayer and the district's staff are final and not subject to review by the ARB. Table 8 Evaluation Ranking Tax Roll Size Ranking (Certified Assessments and Number of Parcels) (1) Harris (2) Dallas (3) Tarrant (4) Bexar (5) Travis Administration Cost per Parcel Ranking (Most Cost Effective) (1) Dallas (2) Travis (3) Harris (4) Tarrant (5)Bexar Highest Tax Parcel per Employee Ratio (Highest Staff Productivity) (1) Dallas (2) Bexar (3) Harris (4) Travis (5)Tarrant Lowest Lawsuits per Parcel Ratio (Most Effective Appeal Process) (1) Travis (2) Dallas (3) Bexar (4) Tarrant (5)Harris Best State Ratio Rating (Most Accurate Tax Roll) (1) Dallas (2) Bexar (3) Travis (4)Tarrant (5)Harris Highest ARB Budget Cost per Member (Lease Cost Beneficial) (1) Harris (2) Tarrant (3) Travis (4) Dallas (5)Bexar FINDINGS What do these statistics mean? Certain trends emerge. Noted in Table 8 are the rankings of each district, by each of the categories originally set forth in this analysis. In 1992 the Dallas Central Appraisal District had the highest ratings in terms of budget cost effectiveness, staff productivity, and accuracy of their tax roll. The Travis County Appraisal District, by virtue of its excellent rating of lawsuits per parcel ratio, showed its effective administrative remedy program in 1992. So, as old Adam Smith would put it, are there spendthrifts within the five largest appraisal districts? The answer is both yes and no. For example, by examining the above charts, one is automatically struck by the fact that Harris County, the largest appraisal district, does not appear to benefit from any economies of scale. The vast amount of moneys it spends does not seem to equate to a more efficient appraisal district or more accurate tax roll. On the other hand, Bexar County, which has the highest administration cost per parcel, also has the second highest rating by the state on the accuracy of its tax roll and ranks second in staff productivity. Therefore, it appears that money in itself is not the question, rather the manner in which appraisal districts strive to effectively manage their resources. All of the appraisal districts noted in this analysis perform mammoth appraisal tasks, and I'm sure for the most part, theirs is a thankless job. Criticizing the administration of these districts is an easy thing to do; however, that is not my objective. Rather, the purpose of this analysis has been to applaud the efforts of the most efficient districts and hope that the others will find the analysis constructive and commentary useful.
PAUL PENNINGTON is President, P.E. Pennington & Co., Inc., a regional property tax consulting firm in Dallas, TX. |
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