Monday, April 9, 2012

T&G: Higher valuations loom for property. Past city practices are blamed

Source: T&G reporter Nick Kotsopoulos

To say there are concerns at Worcester City Hall about the yet-to-be released new valuations for commercial and industrial properties would be an understatement. There are big-time concerns.

Word has it the new valuations for many of those properties could be significantly higher than in the past and the increases won’t necessarily have anything to do with the state or health of the local business community.

Instead, the assessment increases that seem to be looming on the horizon for those properties are said to be the result of past city practices that kept valuations artificially lower than what they should have been for many years.

Talk about a hornet’s nest.

Last week, City Manager Michael V. O’Brien informed the City Council that there is a very good chance the fourth-quarter property tax bills, which city officials had hoped to mail out by May 1, will be further delayed.

He said the delay is likely because the city did not complete its review of all 4,800 commercial properties and submit those new property values to the state Department of Revenue for its review until early last week. City officials had hoped to have that done weeks before.

But the process to review the proposed new assessments for commercial and industrial properties did not go as smoothly as the one for residential properties, which received “pending preliminary certification” from the state Department of Revenue almost a month ago.

Mr. O’Brien said updating the assessed valuations for commercial properties proved far more complicated after it was discovered that city assessors for years had apparently been manually overriding valuations that had been set by computer programs.

Those familiar with the issue said when the computer-generated values were manually overridden, the new assessments often came out lower.

While assessments for residential properties are largely derived based on sales of comparable properties, establishing valuations for commercial and industrial properties is much different; assessors use the industry-standard income approach to generate a fair-market value for those properties. The income approach is most applicable to real estate that is normally bought and sold on the basis of its income-producing capabilities.

In the process of modernizing the city’s property revaluation systems, city assessors uncovered the previous practice of “manual overrides” on as many as 2,000 (roughly 40 percent) of the city’s commercial and industrial properties, according to the city manager.

He said those overrides allow an assessor to manually enter a data element or formula into the assessment system and override the resultant valuation that should have been calculated by the system.

As a result, Mr. O’Brien said the new property value would be based on an artificial override and not on the internal calculations of the system.

To make matters worse, no documentation could be found in files on why or when these manual overrides were put into place.

“There was no element within the old software program that highlighted that this action was taken or that prompted staff to review on a year-to-year basis,” Mr. O’Brien said. “It appears that some date as far back as 30 years as far as we can tell, with no supporting documentation as to why or when the adjustments were made.”

Mr. O’Brien said all the manual overrides have now been completely removed, because they have no standing based on the current parcel or market conditions.

That’s the good news; the bad news is that it’s not exactly known at this time what impact that will have on the new commercial and industrial property values. But one City Haller acknowledged the increases for some of those properties could be dramatic.

“The analysis of how these previous manual overrides may affect the commercial valuations of the parcels that had an override is under way,” Mr. O’Brien said. “There are many factors that will affect the revaluations this year, therefore, there is no one-size-fits-all.

“It will also depend on how many years this manual override was in effect and how dramatic the difference is between the manually entered information and current market conditions, along with all the data that the assessment system applies to derive fair and equitable valuations.”

If in fact the new assessments for commercial and industrial properties should dramatically increase, it could end up impacting homeowners as well.

In recent years, the City Council has frequently adopted the lowest possible residential tax rate as a way to buffer homeowners from significant property tax increases. When the council adopts the lowest residential tax rate, it translates into the highest possible tax rate for commercial-industrial properties.

But if there are dramatic increases in property assessments for business properties, there is no way the council would be able to vote the lowest residential tax rate this year, or anything close to it for that matter. If it did, the tax bills for some business could become overly burdensome.

So, if the council has to adopt a more favorable tax rate for businesses to buffer them from significant tax increases, guess what? It means a greater tax burden might have to be placed on homeowners even though local residential property assessments have decreased by 3.8 percent on average compared to the previous year.

Meanwhile, what does this all say about the public’s confidence in the city’s assessing practices if it is indeed true that some business property valuations were kept artificially low?

Mr. O’Brien said the fact that manual override practice has been discovered and removed is important and significant. He said the public should have the utmost confidence in the assessed valuations going forward.

“I knew and understood the potential to discover such previous practices and processes when undertaking such an intensive overhaul of these antiquated (assessment) systems,” Mr. O’Brien said. “As with all I have done as city manager, I fix what I find, fix it once and correct it with systems and processes that hold all to the highest standards of accountability from the point of correction forward, and for perpetuity.”

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