State: Support your equalization office

By Jason Ferguson

 

Understanding property assessment in South Dakota—with terms such as “true and full value,” “median assessment ratio,” “adjustment factor” and “coefficient of dispersement” can be confusing.

The message delivered to the Custer County Commission by the State of South Dakota at the commission’s July 10 meeting, however, was much less confusing: support the local director of equalization office and get on board with this year’s increased property assessments.

Three state Department of Revenue employees—deputy secretary David Wiest, director of state property tax Lesley Coyle and property tax specialist Wendy Semmler—all made the trip from Pierre to discuss the recent consternation over the property tax assessment increases in Custer County and, by extension, Custer County equalization department director Patty Caster and her staff.

“Your support of the department of equalization is very important,” Wiest told the commission. “If you have questions, walk down the hall and talk to the director or talk to the person who goes out and appraises the property. Ask, ‘How does it work again?’”

Wiest said it’s vital the commission give the equalization department “the tools it needs to succeed” and becomes educated on how the assessment process works so it can explain to taxpayers how and why assessments go up, sometimes dramatically so.

“It’s not something (people) get inherently. It’s complicated,” he said. “What we need to do as the  Department of Revenue is to keep pushing and training directors of equalization to do a good job and to reach out to county commissions to explain how all this stuff works, so when a taxpayer comes up to you and says, ‘Geez, my valuation went up by 30 percent. Something is out of kilter,’ the commission understands there is a bigger, broader process that needs to be looked at.”

The visit from the Department of Revenue staff members comes on the heels of some county residents’ complaining to the commission about sharp rises in their property valuations, followed by a June 5 meeting of the commission at which commissioner Mark Hartman also protested the sharp increases.

Caster has been warning about the impending assessment increases since December 2017, when she told the commission department of equalization that many county structures had not been assessed at their market value for at least two years, prior to when she took over the equalization department. The increases were not brought on solely by the county’s need to fall into compliance with the state, however, as Caster said at a special May meeting that relatively new DOE staff and unfamiliarity with the Computer Aided Mass Appraisal system and its capabilities also contributed to the increase.

Wiest took the commission and those at the meeting through a step-by-step look at how the assessment process works, citing state codified law that says all property must be assessed at “its true and full value.” For non-ag land, that means market value, or what the home can sell for, while ag land is taxed at its agriculture income value.

Property is assessed on an annual basis at its taxable value, which is 85 percent of its full and true value. Wiest stressed that equalization means all like properties are treated equally within an assessment district.

“Treating everybody the same is important,” he said. “Equalization is saying if three houses are identical, their assessments should be close, as well.”

That doesn’t mean homes are always valued identically. Factors such as their town or neighborhood matter. A home in Faulkton would not be valued as the same home in Custer.

Assessed values change for various reasons, including the property physically changing, such as additions that increase the value or depreciation to reduce the value. Fluctuations in the market can affect property value, and sometimes—which is a large factor for Custer County—previous assessments were incorrect.

The goal, Wiest said, is accurate assessments on all properties, not the same percentage change to all properties. Properties can change in value at different rates, and a blanket assessment is a poor practice.

“Sometimes errors are made. It’s kind of like anything we do; we’re always looking back and saying it may have been a good idea at the time, but now we need to do this,” he said. “Not every property in every county in this state is going to change valuation at the same rate year after year. It just doesn’t occur.”

Wiest then led the commission through a 2018 sales ratio study for the county that focused on 300 sales, 106 of which were a lot with a home on it in the county and another 96 of which were a lot in the county without a home. The bulk of the rest of the sales on the report (60) were a lot within a municipality with a home on it.

The median assessment ratio compares what a property sells for in the open market versus how it is assessed. By dividing one into the other you arrive at the median assessment ratio, which ideally would be at least the 85 percent of the taxable value, with the “sweet spot” being around 92. All of the county’s ratios were below the 85 percent mark.

A coefficient in dispersion points out any disparity in how properties are assessed. Wiest likened it to shooting with a shotgun, saying the better the grouping, the better the chance of “hitting the mark.” As such, an equalization department wants to see tight groupings in its assessment properties, because if individual assessments vary markedly either above or below the average, then the disparity of assessments will reflect that in higher coefficients. State law states a county’s coefficient of dispersal should be no higher than 25. On the report used, in town lots, lots in the county and non-ag properties in general were all over 25. Non-ag properties also had a median assessment ratio of only 74.2 in 2018.

“The market drives what you do. It may drive you to say ‘this part of town needs to be adjusted down,’ or ‘this part of town needs to be adjusted up,’” Wiest said. “These statistics are very important for what the department of equalization does. The moral of the story is we have been arm wrestling about assessments a long time in our state and we will well after all of us in this room are gone.”

Wiest touched on the equalization (taxable) factor, which is assigned annually to each county by the Department of Revenue. It is based on the countywide median sales to assessment ratio, with the goal of adjusting assessed value to 85 percent of market value for taxing purposes.

For instance, if property is assessed at 100 percent of market value, the factor is .850, so it can be taxed at 85 percent of market value. If it is assessed at 85 percent of the market value, it is right where it needs to be, so it is taxed at the factor of 1.00. However, when the level of assessment is below market value, such as at 70 percent, the factor is raised much higher to 1.214 to make up for the property being underassessed.

Since property tax funds education in South Dakota, Wiest said the factors make sure each county pays for education equally. State aid for education is calculated by figuring the local need—how many students there are, teachers needed, etc.—against local effort—the 85 percent taxable valuation times levies set by the state legislature.

What the state doesn’t want, Wiest said, is for a county to attempt to get more state aid for schools by lowering values or getting less money by increasing values.

It all comes down to tax burden equality, Wiest said. Underassessed property does not pay its share of the tax burden. It’s the equalization department’s job to find anomalies and fix the issues to make the playing field level—even if that means dramatic increases to some properties. Those who saw the dramatic increases were enjoying a benefit of being underassessed for years, he said.

“When you line up things equally on the assessment side of things, things will line up equally on the taxation side of the fence,” Wiest said. “We put a lot of energy and effort into assessing property. We are continually studying the market. It changes every year. Sometimes bigger increases are necessary  because we run across anomalies or errors occurred and we have to fix them.”

Commission chairman Jim Lintz asked if the county was allowed to put a cap on the amount an assessment jumps each year to extend the time it takes the county to get to the 85 percent threshold and minimize the sharp jumps a property owner sees. Wiest said there is no state statute that gives the county that authority.

“At the end of the day, you have to cut the director of equalization [slack] and support them,” Wiest said. “It’s a tough task. They need support. I’m here to support them.”