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TUOLUMNE COUNTY ASSESSMENT PRACTICES SURVEY AND ASSESSOR'S RESPONSE OCTOBER 1999 CALIFORNIA STATE BOARD OF EQUALIZATION JOHANKLEHS, MEMBER, HAYWARD DEAN F. ANnAl.., MEMBER, STOCKTON CLAUDE PARRISH, MEMBER, TORRANCE JOHN CHIANG, MEMBER, Los ANGELES KATHLEEN CONN"ELL, MEMBER, SACRAMENTO E.1. SORENSEN, JR., EXECUTIVE DIRECTOR FIRST DISTRICT SECOND DISTRICT THIRD DISTRICT FOT.JRTH DISTRICT STATE CONTROLLER FOREWORD The county assessor is responsible for the assessment of all taxable property within the county, except state-assessed property. The assessor's responsibilities include such things as: (1) discovering and taking inventory of all property within the county; (2) determining a property's eligibility for a full or partial exemption from assessment; (3) determining the proper assessee; (4) determining the location for assessment purposes of the property; and (5) determining the taxable value of the property in accordance with California property tax law. Determining taxable value is usually the most difficult and subjective of the assessor's duties. In addition to the inherently subjective nature of the appraisal process, the assessor also has to determine whether the taxable value is to be based on current fair market value or on a restricted value. When there is construction activity on a property, the assessor has to determine whether the construction is to be assessed or whether it is excluded from assessment under the law. When there is an ownership transaction, the assessor has to determine whether the law requires a reassessment of the property or whether the property must continue to be assessed according to the existing value base. The factors discussed above, as well as others not mentioned here, contribute to making local property tax assessment a difficult tax program to administer. It is also a very important program since the property tax is one of the most important sources of revenue for local governments and public schools. For property owners it is a major annual tax burden, and, since it is normally paid in one or two large installments rather than many small increments, it tends to be more visible than most other taxes. Accordingly, pr9per administration of the property tax assessment program is vitally important both to the public agencies that rely on the tax and to the people who have to pay the tax. Although the primary responsibility for local property tax assessment is a function of county government, the State Board of Equalization has a nUIl!ber of duties in the property tax field imposed by the State Constitution and the Legislature. One of these duties, performed by the Board's County Property Tax Division (CPTD), is to conduct periodic surveys of local assessment practices and report the findings and recommendations that result from the survey . . Assessment practices surveys are required by Government Code sections 15640 et seq. These code sections require each county's assessment practices to be the subject of such a survey at five year intervals. The surveys must include research in the assessor's office to determine the adequacy of the procedures and practices employed by the assessor in the assessment of taxable property, compliance with state law and regulations, and other required duties. The surveys may include a sampling of assessments from the local assessment roll to determine eligibility for the cost reimbursement authorized by Revenue and Taxation Code section 75.60. The assessor was provided a draft of this report and given an opportunity to file a written response to the recommendations and other findings contained in the report. This report, the county assessor's response, and the Board's comments regarding the response constitute the final survey report which is distributed to the Governor, the Attorney General, both houses of the State Legislature; and the county's Board of Supervisors, Grand Jury, and Assessment Appeals Board. Field work for this this survey report of the Tuolumne County Assessor's Office was completed during April of 1998. This report does not reflect changes implemented by the assessor after the fieldwork was completed. The Honorable David W. Wynne, the Tuolumne County AssessoriRecorder, and his staff gave us. their complete cooperation during the assessment practices survey. We gratefully acknowledge their patience and good spirit during the interruption of their normal work routine. Ｑｾ＠ ｾ＠ Charles Knudsen, Chief County Property Tax Division Property Taxes Department California State Board of Equalization October 1999 .11 County Property Tax Division Survey Group TUOLUMNE COUNTY Survey Program Manager: Charles Knudsen Principal Property Appraiser Survey Team Supervisor: David Hendrick Supervising Property Appraiser Survey Team Leader: David A. Lucero Senior Property Auditor Appraiser Office Survey Team: Mike Allen Manuel Garcia James McCarthy Teresa Brink Associate Property Appraiser Associate Property Auditor Appraiser Senior Petroleum & Mining Appraisal Engineer Tax Technician IT III Table of Contents EXE CUTIVE SUMMARY ••••••••••••.•••••••••••.•.•.••••••••••••••••••••••••...••••••..•.•••••••••.••••••••••••.•••.••••.•.•.•••••.•••••••.•.•..••••••••• 1 Introduction ................................................................................................................................................... 1 Overview of the Tuolumne County Assessment Roll ...................................................................................... 2 Findings ........................................................................................................................................................ 3 Recommendations and Suggestions.,............................................................................................................... 4 ADMINISTRATION•••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 7 '. Procedures Manual ......................................................................................................................................... 7 Roll Corrections ............................................................................................................................................. 7 Assessment Appeals ............................................................................................................................:.......... 8 Low-Value Property Exemption Resolution ................................................................................................... 8 Disaster Relief ................................................................................................................................................ 9 REAL PROPERTY VALUATION AND ASSESSMENT •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 11 Base Year Values ......................................................................................................................................... 11 Change in Ownership ................................................................................................................................................ 11 New Construction ..................................................................................................................................................... 13 Declines in Value ......................................................................................................................................... 15 Supplemental Assessments..................................................................................................................... " .... 16 Special Property Valuation and Assessment ................................................................................................. 17 California Land Conservation Act Property (CLCA) .................................................................................................. 17 Taxable Government-Owned Property ....................................................................................................................... 18 Possessory Interests .................................................................................................................................................. 19 Water Company Property .......................................................................................................................................... 21 Timberland Production Zone Property .................................................. :..................................................................... 22 Mineral Properties .................................................................................................................................................... 23 PERSONAL PROPERTY VALUATION AND ASSESSMENT •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 24 Introduction ................................................................................................................................................. 24 Business Property ......................................................................................................................................... 24 Audit Program .......................................................................................................................................................... 24 Business Property Statement Processing .................................................................................................................... 26 Business Property Appraisal Record .......................................................................................................................... 27 Direct Assessment .................................................................................................................................................... 28 ｧＺｾ［＠ Other Taxable Personal Property .................................................................................................................. 29 Boats ........................................................................................................................................................................ 30 Aircraft .................................................................................................................................................................... 31 Manufactured Homes ................................................................................................................................................ 33 IV EXECUTIVE SUMMARY INTRODUCTION Regardless of the size of the county, the assessment of property for tax purposes is a formidable task. Proper administration of this task is vital both to government agencies in Tuolumne County and to taxpayers. Because the job is so important and so complex, it is necessary for an independent agency such as the State Board of Equalization (BOE) to make periodic review of the assessor's operation. This survey report is the result of such a review the Tuolumne County Assessor's Office. by the BOE's County Property Tax Division (CPTD). Government Code section 15640, in part, mandates that the State Board of Equalization shall: (a) ... make surveys in each county and city and county to determine the adequacy of the procedures and practices employed by the county assessor iIi the valuation of property for the purposes of taxation and in the performance generally of the duties enjoined upon him or her. (c) The survey may include a sampling of assessments from the local assessment rolls sufficient in size and. dispersion to in·sure an adequate representation therein of the several classes of property throughout the countY. (f) The board shall develop procedures to carry out its duties under this section after consultation with the California Assessors' Association. The board shall also provide a right to each county assessor to appeal to the board appraisals made within his or her county where differences have not been resolved before completion of a field review and shall adopt procedures to implement the appeal process. It is apparent from this language that the Legislature envisioned the BOE's office research and appraisal sampling to be parts of a single, connected process, i.e., the evaluation of how well the county assessor is carrying out his or her sworn duty of properly assess all taxable property on the local tax roll. This evaluation was to be based on office research, or in certain circumstances, office research and actual field appraisals of sampled roll items. The way in which the office research and the sampling process is carried out was developed after consultation with the county assessors by the staff of the BOE's Property Taxes Department. This survey was conducteq. according to the method mandated by Government Code section 15642. Following legislative direction, our survey primarily emphasizes issues that involve revenue generation or statutory mandate. This report is the culmination of a review of the that Tuolumne County Assessor's operation that consisted of the CPTD's office ｲｾｳ･｡｣ｨ＠ examined current practices and procedures in key areas to see whether significant problems exist in the assessor's operation. Finally, the survey report offers positive courses of action, presented here as recommendations and suggestions, to help the assessor resolve problems identified in the program. The recommendations and suggestions contained in this report are based on our· analysis of data which indicates that statutory violations, under or over assessments, or unacceptable appraisal practices may be occurring in specific areas. . 1 Revenue and Taxation Code section 75.60 requires that the BOE certify a county as eligible for the recovery of costs associated with administering supplemental assessments. In order for a county to qualify as an eligible county, it must achieve an average assessment level that is not less than 95 percent of the amount required by law as determined by the BOE through its assessment-sampling program. In addition, for sampling for the 1996-97 fiscal year and subsequent fiscal years, the sum of the absolute values of the differences cannot exceed 7.5 percent of the legally req4ired amount. Based upon our assessment sampling for the 1993-94 assessment roll, the BOE certified Tuolumne County as an eligible county. This indicates that its assessment program is in substantial compliance with the law as of that sampling. Section 75.60 requires that certification remain in effect until the next sampling. Counties in which a survey has been conducted without sampling are subject to sampling if the BOE believes significant assessment problems as defined in BOE Rule 371 exist. The survey found no indication that significant assessment problems exist in Tuolumne County. Accordingly, Tuolumne County remains eligible to recover administrative costs as specified in section 75.60. OVERVIEW OF THE TUOLUMNE COUNTY ASSESSMENT ROLL The following information is extracted from the State Board of Equalization' s Annual Reports to the Governor and from the BOE's A Report on Budgets and Workloads, and Assessment Appeals Activities in California Assessors' Offices 1997-98, dated June 1999. Budget dollars and assessed values have been rounded for this survey report. Our review of the assessor's operations related to the assessment roll for 1997-98. Tuolumne County's 1997-98 assessment roll consisted of the indicated property types and assessed values: Property Type Residential Rural (I) Commercial-Industrial All Other Total Secured Roll Unsecured Assessments Total Number of ａｳ･ｭｮｴｾ＠ Total Assessed Value 30,148 4,004 1,200 2,111 37,463 3,668 41,131 $2,021,087,000 662,781,000 475,800,000 113,147,000 3,272,815,000 114,166,000 3,386,981,000 (l}inc1udes rural homes Since our last survey in 1992, the number of assessments increased only 1;5 percent. However, total assessed value increased by more than $827 million or 32 percent; the average assessed value of each roll unit increased 30 percent. Despite the increased workload, the assessor has managed to fulfill his mandatory obligations with fewer staff than he had six years ago. 2 Roll Year Number of Assessments Assessed Values 1991-92 1997-98 40,524 41,131 $2,559,828,000 $3,386,981,000 BUDGET HISTORY 1995-96 Budget 1996-97 Budget 1992-93 Budget 1993-94 Budget 1994-95 Budget $860,000 $822,000 $865,000 $797,000. $725,000 BUDGETED PERMANENT POSITIONS 1992-93 Budget 1993-94 Budget 1994-95 Budget 1995-96 Budget 1996-97 Budget 15 14 11 12 12 SECURED AND UNSECURED ROLL UNITS AND NET ROLL VALUES Total Roll Units For 1997-98 Total Secured Roll Units Total Unsecured Roll Units Total Net Roll Value 41,131 37,463 3,668' $3,386,981,000 BUDGET PER ROLL UNIT Gross Budget For 1997-98 Budget per Roll Unit Roll Value Per Budget Dollar $592,604 $14.41 $4,829 FtNDINGS The real property and personal property assessment programs are benefiting from the use of a Crest Property Tax computer system installed during the 1987-88 fiscal year. Since that time, the system has relieved the assessor's staff of many hours of manually calculating taxable values for many types of properties. In our prior survey report, we made eight recommendations and eight suggestions to improve the real and personal property assessment programs. The assessor has implemented most of those recommendations and suggestions. However, three of those recommendations were not implemented and are repeated in this report. Several suggestions from the prior survey have been upgraded to recommendations. Two recommendations to improve the real property program are repeated from our prior survey; they involve changes in ownership and possessory interest assessments. We still believe the .3 assessor should apply the penalty for non-response by taxpayers to the Change in Ownership Statement (COS). Also,. possessory interests at the fairgrounds should be assessed, unless the board of supervisors enacts a resolution exempting them; and possessory interests for houseboats on a public lake should be assessed separately from the assessment on the houseboat. The assessment program could be further improved by (1) ensuring that documentation in the assessment files supports reductions in taxable values below factored base year value, and (2) by requesting that the board of supervisors revise the county's low-value exemption resolution to conform to the Revenue and Taxation Code section 155.20 requirement that the level of exemption be applied uniformly to real and personal property. Our prior survey included several suggestions for reducing the staff time used for processing property statements and reducing the number of records used. These suggestions have not been implemented; we are upgrading these suggestions to a recommendation, as well as making other recommendations to improve the personal property assessment program. RECOMMENDATIONS AND SUGGESTIONS This report contains both recommendations and suggestions for improvements to the operation of the Tuolumne County Assessor's Office. Government Code section 15645 requires the assessor to respond in writing to the formal recommendations contained in this report.! Our recommendations are reserved for situations where one or more of the following conditions exists: • Existing practices do not conform to state constitutional provisions, statutes, BOE regulations, or case law. • Existing assessment practices result in the generation of an improper assessment. • Existing appraisal practices do not conform to Board-adopted appraisal methodologies. Our suggestions are considered less formal than recommendations, and the assessor is not required to make any response to suggestions. Typically, suggestions are BOE staff opinions on ways the assessor can improve efficiency, product quality, or other matters that do not call for formal recommendations. . I Government Code section 15645 provides, in relevant part: " ... Within a year after receiving a copy of the final survey report and annually thereafter, no later than the date on which the initial report was issued by the Board and until all issues are resolved, the assessor shall fIle with the board of supervisors a report, indicating the manner in which the assessor has implemented, intends to implement, or the reasons for not implementing the recommendations of the survey report, with copies of that response being sent to the Governor, the Attorney General, the State Board of Equalization, the Senate and Assembly and to the grand juries and assessment appeals boards of the counties to which they relate." .4 The following is a summary of the formal recommendations and suggestions contained in this report, arrayed in the order that. they appear in the text. The page is noted where each recommendation or suggestion and its supporting text may be found. Recommendations: RECOMMENDATION 1: Prior to recommending a large reduction in assessed value, audit a taxpayer that appeals the assessment of business property. _ 8 RECOMMENDATION 2: Impose the penalty for non-response to the Change in Ownership 12 Statement (COS). RECOMMENDATION 3: Request that the board of supervisors conform their authorization for cancellation of low value supplemental assessments to the requirements of Revenue and Taxation Code section 75.55(b). 16 RECOMMENDATION 4: Improve the possessory interest assessment program by (1) assessing all PI's at the fairgrounds, (2) separately assessing PI's of houseboat owners, (3) conforming PI base year value determinations to Revenue and Taxation Code section 61 (b) (2), and (4) using prescribedformBOE 502-P. 19 RECOMMENDATION 5: Improve assessment procedures for TPZ land by discovering compatible, nonexclusive uses of TPZ land by periodically sending a questionnaire requesting such information to land 22 owners. . RECOMMENDATION 6: Conform mineral property assessments to the requirements of BOE Rule 4 6 9 ( e ) . 2 3 RECOMMENDATION 7: Improve the mandatory audit program by (1) completing all mandatory audits timely and (2) obtaining waivers of the statute of limitations when audits will not be completed timely. 24 RECOMMENDATION 8: Do not accept property statements that fail to comply with· statutory requirements. 26 RECOMMENDATION 9: Improve the vessel assessment program by (1) applying late filing penalties only when using BOE prescribed forms and (2) requiring certain vessel owners to file annual vessel property statements. 30 RECOMMENDATION 10: Improve aircraft assessments by (1) conducting periodic field inspections and (2) requiring proof of the number of public display days before granting the historical aircraft exemption. 32 RECOMMENDATION 11: Assess manufactured homes as personal property on the secured 33 assessment roll 5 Suggestions: SUGGESTION 1: Develop a policy and procedures manual for assessment function£ 7 SUGGESTION 2: Obtain fire reports from all fire protection agencies. SUGGESTION 3: Request that the Tuolumne County Building Department provide a sequential list of building permits. 14 SUGGESTION 4: Include supporting documentation for market values. 15 SUGGESTION 5: Annually review water company CPUC reports. 21 SUGGESTION 6: Develop a ｾｯｮＭｭ｡､ｴｲｹ＠ 25 SUGGESTION .7: Prepare a four-year history of taxpayers that fail to file business property statements. 26 SUGGESTION 8: Simplify the processing of business property statements by discontinuing the use of the "business property appraisal 27 record" SUGGESTION 9: Obtain computer access to the DMV's vessel.database. ___ 31 audit program. 6 10 ADMINISTRATION PROCEDURES MANUAL A comprehensive policy and procedures manual is essential for communicating the assessor's policies, standards, and procedures for the preparation of assessments to the staff. This manual, also known as an operations manual, will provide the assessor's staff with written directives necessary to perform their duties in an adequate manner. A current manual can help ensure that the assessor's office work is consistent with approved policies and practices. A written procedure manual will address issues that are not common, yet must to be dealt with as part of the assessment program. A well-written procedures manual promotes uniformity, clarity, continuity, and equal treatment for all taxpayers. Such a manual makes it easier to train newly hired employees and to cross-train current employees. SUGGESTION 1: Develop a policy and procedures manual for assessment functions. The. assessor has no operatienal procedures manual. Any assessor's office should have a manual that furnishes concepts and objectives, as well as detailed instructions for preparing assessments for the different property types and conducting audits. We suggest that the assessor develop a policy and procedures manual pertaining to assessment operations. ROLL CORRECTIONS Revenue and Taxation Code section 531 requires that if any property belonging on the local roll has escaped assessment, the assessor shall assess the property on discovery, at its value on the lien date, for the year for which it escaped assessment. Upon discovery of property escaping assessment, the assessor must immediately add the escape assessment and any applicable penalty to the assessment roll prepared or being prepared in the current assessment year. Revenue and Taxation Code sections 531, 531.1, 531.2, 531.3, 531.4, and 531.5 require the penalty and interest described in Revenue and Taxation Code sections 504 and 506 :when the escape assessment is caused by the described circumstances. Generally, interest must be added to any escape that was caused by the taxpayer's failure to report accurately and completely. Escapes and any penal assessments are combined and the applicable tax rate is applied to the suill, resulting in the tax. Revenue and Taxation Code section 506 requires that interest be added to this computed amount of tax at the rate of three-fourths of 1 percent per month, from the date or dates the taxes would have become delinquent, if they had been timely assessed, to the date the additional assessment is added to the assessment roll. When an escape assessment is enrolled, the county auditor is notified via the auditor's copy of . the Notice of Escape Assessment sent to the taxpayer. The notice contains a reference to the Revenue and Taxation Code section authorizing the escape assessment. The auditor is responsible for determining the amount of interest (if any) that should be added to the tax bill. ·7 We believe the assessor's procedures for roll corrections fulfills his obligations for the clerical processing of roll corrections. ASSESSMENT ApPEALS The assessment appeals function is described by article xm, section 16, of the California Constitution, which provides that the Legislature shall determine the manner and procedure of assessment appeals. Revenue & Taxation Code sections 1601 through 1641.1 are the statutory provisions that regulate county boards of supervisors in the appeals function. Government Code section 15606(c) directs the Board of Equalization (BOE) to prescribe rules and regulations to govern local boards of equalization; the BOE has adopted Property Tax Rules 301 through 326 to regulate assessment appeals. We conducted a review of the assessment appeals functions of the assessor's office. In Tuolumne County, the assessor and his staff have kept the appeals to a minimum by fully explaining the basis for taxable values to prospective appellants and reducing taxable values when such reductions are warranted. However, we do have a recommendation that, if implemented, should ensure that only appropriate assessment reductions are made. RECOMMENDATION 1: Prior to recommending a large reduction in assessed value, audit a taxpayer that appeals the assessment of business property. The assessor should conduct audits before major reductions in taxable value are recommended during an assessment appeal. Cost, income, and expense data all need to be verified so that the appeals board has all the facts before a value decision is made. A major corporation was granted multi-million assessed value reductions for two assessment years. These reductions were made without the benefit of an audit. This company, which became a mandatory audit in 1989, has never been audited. Good assessment ·practices require that an audit be. conducted before a large reduction in taxable value is granted. We recommend that these types of accounts be audited before the assessor stipulates to a value reduction, or makes a . recommendation to an appeals board for a reduction in taxable value. In Tuolumne County, the assessor and the assessment appeals board maintain a good working relationship in order to make the appeals process efficient, particularly in the areas of case scheduling and document processing. We attended one assessment appeal hearing during which the assessor's staff appeared to be well prepared, and their presentation of the case was very professional. LOW-VALUE PROPERTY EXEMPTION RESOLUTION Revenue and Taxation Code Section 155.20 authorizes a county board of supervisors to enact a resolution exempting all real property with a base year value and personal property with a full 8 value so low'that, if not exempt, the total amount collected in taxes, special assessments, and any applicable subventions is less than the cost of collection. The exemption threshold may not exceed $5,000. For certain possessory interests in publicly owned fairgrounds, convention centers, or cultural facilities, the limitation is increased to $50,000. The Tuolumne County Board of Supervisors adopted a low-value property exemption resolution No. 28-93, dated March), 1993. This resolution authorizes the county assessor to exempt any property with a full value of $2,000 or less from the unsecured assessment roll for each fiscal year thereafter until rescinded. . Section 155.20 requires that the exemption. be applied uniformly to the different classes of property that meet the exemption threshold. While this low-value property exemption resolution applies only to property assessed on the 'unsecured roll, we found numerous assessments with a taxable value less than $2,000 on the secured assessment roll, The meaning of "class of property" is uncertain in assessment law, however, a common dictionary definition is "things grouped together because of a certain likeness or common traits". This statute has been amended since the board of supervisors adopted the resolution exempting low value property. We believe the assessor should review the resolution with the county counsel for compliance with the statute. DISASTER RELIEF Revenue and Taxation Code section 170 provides that the county board of supervisors may adopt an ordinance authorizing property tax relief for the owner of any taxable property whose property suffers damage exceeding $5,000, without fault of the owner, in a misfortune or calamity. The section prescribes procedures for calculating value reductions, applying for relief, enrolling the value of the repaired or restored property, and other considerations. The Tuolumne County Board of Supervisors passed ordinances 3.36.010 and 3.36.020, granting the assessor the authority to provide tax relief on properties damaged by misfortune or calamity. Ordinance 3.36.010 covers the application for reassessment; Ordinance 3.36.020 ､ｾ｡ｬｳ＠ with . processing the application. Our 1993 survey suggested the assessor revise the application form' for disaster relief by asking for the date of the damage. We also suggested revising the worksheet, used by appraisers for calculating the. amount of relief, to include the proper time frame for the next year's assessment. We now find that the relief application requests the date of the damage and the worksheet is no longer used. The assessor's office processes between 20 and 30 applications for disaster relief each year. The assessor's discovery technique includes building permits for demolishing or repairing property, newspaper articles, and inquiries from taxpayers. While we are not critical of the assessor's 9 discovery methods, we believe the following suggestion may aid in the discovery of firedamaged property in Tuolumne County. SUGGESTION 2: Obtain fire reports from all fire protection agencies. There are 16 fire departments in Tuolumne County; some are volunteer and quite small. While they have not always had proper reporting procedures, they are required to report structure fires to the state fire marshal. The assessor does not receive copies of these fire reports. We suggest the assessor obtain copies of all fire reports. .10 REAL PROPERTY VALUATION AND ASSESSMENT BASE YEAR VALUES Article XIII A of the California Constitution provides that the taxable value of real property shall not exceed its 1975 full cash value, factored at no more than 2 percent per year for inflation, unless there is a change in ownership or new construction. The 1975 full cash value and subsequent values that result from a change in ownership or new construction are known as base year values. Change in Ownership Revenue and Taxation Code section 60 defines change in ownership as a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest. Revenue and Taxation Code sections 61 through 69.5 further clarify what is considered a change in ownership for property tax purposes. The following table is a five-year history for Tuolumne County of the number of recorded documents, number of deeds recorded, and the number of deeds that resulted in the assessor establishing a new base year for the transferred property. 1993-94 1994-95 1995-96 1996-97 1997-98 Recorded Deeds 4,435 4,371 3,536 3,851 3,987 Deeds Resulting in a New Base Year 1,818 1,833 1,796 1,546 1,586 In Tuolumne County, these properties with a new base year represent, on an annual basis, a change in ownership for property tax purposes for approximately 4.5 percent of the assessments on the secured roll. Given that the counties that neighbor Tuolumne' have similar economies, property market. For the 1996-97 there is no reason to expect significant differences in the ｲｾ｡ｬ＠ assessment year the equivalent ratio for four neighboring mountain counties averaged' approximately 4.4 percent. However, the equivalent ratio on a statewide basis is approximately 8 percent. For the five-year period, 42 percent of recorded deeds in Tuolumne County resulted in a new base year for the conveyed property. Statewide, the vast majority of "deeds" (documents such as grant deeds, quitclaim deeds, etc.) represents changes in ownership for property tax purposes. In some counties, in excess of 90 percent of deeds represent changes in ownership. Tuolumne County's 42 percent ratio seems low; however, the 42 percent ratio is consistent over the fiveyear period. In our brief review, we were not able to ascertain the reason for such a low ratio of . deeds that resulted in a new base year. 11 Our staff reviewed the processing of recorded deeds, tracking of change of ownership statements, etc. While the program for processing deeds is works well, we do have a recommendation for improving this activity. Revenue and Taxation Code sections 480 et seq. impose requirements for reporting change in ownership events to the assessor. Revenue and Taxation Code section 482 imposes a penalty for failure to timely report a change in ownership. RECOMMENDATION 2: Impose the penalty for non-response to the Change in Ownership Statement (COS). Occasionally, a deed representing a ｣ｨ｡ｾｧ･＠ in ownership is not accompanied by a Preliminary Change of Ownership Report (PCOR). When a peOR is not filed with the recorded deed, the assessor's practice is to mail a Change in Ownership Statement (COS) to the new owner. If the initial COS is not returned within 30 days, a second COS is mailed. If this 'second COS is not received within two weeks, the assessor mails a final COS with a notice informing the taxpayer that the noncompliance penalty will be applied if a response is not r.eceived in 10 days. This timeline allows the taxpayer a minimum of 54 days to return a COS without penalty. Revenue and Taxation Code section 482 provides that, if a person fails to file a COS within 45 days ｾｦｴ･ｲ＠ a written request by the assessor, the assessor shall add a penalty to the assessment. By not applying the penalty in a timely manner, the assessor is, in effect, extending the filing period without legal authorization. We recommend that the assessor apply the penalty promptly upon expiration of the 45-day period. LEGAL ENTITY OWNERSmP PROGRAM (LEOP) The LEOP section of the BOE's Policy, Planning, and Standards Division transmits a report to each county identifying the property of legal entities that have reported a change in control. Each of the listed change in control transactions is investigated and verified hy the LEOP section. The report includes the names of the acquiring entities, the date stocks or partnership interests transferred, the parcels involved, and whether the property was owned or leased on the transfer· dates. Many of the acquiring entities are unable to provide detailed information pertaining to the name of the county in which the property is located, the assessor's parcel number, or how many parcels are owned by the entity. Due to the questionable accuracy of the data provided by the entities, LEOP has advised assessors to thoroughly research each named entity's holdings to determine that all affected parcels in their counties are identified and properly assessed We randomly checked assessment records of some properties listed in LEOP reports transmitted to the assessor's office, believed to have changed ownership during the time period January 1,1982, to February 1,1998. For this time period, the LEOP unit informed the 12 assessor's office of 38 companies and 81 parcels that required investigation for possible change in control. We found that the assessor had taken proper action on the properties we reviewed. New Construction Revenue and Taxation Code section 70 defines "newly constructed" as any addition to real property, whether land or improvements (including fixtures), since the last lien date and any alteration of land or any improvement Ｈｩｮｾｬｵ､ｧ＠ fixtures) since the lien date which constitutes a major rehabilitation thereof, or which converts the property to a different use. When real property undergoes new construction, section 71 requires the assessor to determine the added value of those improvements upon completion. This value is established as the base year value for those specific improvements and is added to the property's existing base year value. When . new construction replaces existing improvements, the value attributable to those existing improvements is deducted from the property's base year. BUILDING PERMITS Building permits are the main source the assessor uses to discover new construction. The County of Tuolumne and the City of Sonora are the-two permit-issuing agencies in Tuolumne County. The assessor receives copies of newly issued permits from the two agencies each month, as well as lists of permits with final inspections completed. The permits are reviewed for assessable new construction. The determination of the existence of assessable new construction is based on the stated cost of the construction or description of the construction. Those permits considered to be for assessable new construction are then entered into a spreadsheet that becomes the basis for assignments to the appraisal staff. The spreadsheet is printed monthly and is the control for reappraisals by the real property staff. The collection, screening, sorting, and tracking of permits is a high priority in the assessor's office. The appraisal records we reviewed were well documented. The following statistical history of new construction in Tuolumne County over the past four years shows the total number of permits received, new assessments resulting from those permits, and the new construction value added. 1996-97 1995-96 1994-95 1993-94 1,892 1,953 1,607 1,776 New Assessments from Permits 864 943 1,131 1,369 New Construction Value Added $42,072,746 $44,074,984 $65,565,948 $76,820,513 New Construction Total Permits Received 13 As demonstrated by the table, many permits do not result in new assessments. (Less than 50 percent of the 1995-96 and 1996-97 permits resulted in new assessments.) Permits for construction that do not result in a new assessment include items considered to be repair and maintenance activities. 2 Information furnished us by the assessor's office shows the number of new construction appraisal units per appraiser decreased to 54 percent from their level ten years ago. We found no list provided to the assessor by the building department of all issued permits, in sequential order. In fact, the only list received by the assessor's office is based on the final dates of new construction. Because there is no control list, the assessor never· knows if he has received copies of all issued permits. SUGGESTION 3: Request that the Tuolumne County Building Department provide a sequential list of building permits. The County of Tuolumne Building Department issues approximately 85 to 90 percent of all building permits. Tuolumne County is in the process of adopting a new computer networking system for most of its agencies. With the new computer system, the county building department will be able to furnish the assessor a complete list of permits, issued in numeric order or in any array the assessor's office chooses. We suggest the assessor's office request the building department provide a sequential list of permits issued in order to ensure that the assessor has . received notice of all issued permits. HISTORICAL COSTS The assessor's office primarily uses contract costs to value residential new construction. If contract data is not available or unreliable, cost estimating manuals such as Marshall Valuation Service or Assessors' Handbook Section 531 are used. ｾ･＠ compared costs used by the assessor to BOE cost manuals, and found the differences to be minimal. SELF REpORTED NEW CONSTRUCTION The assessor's self-reporting system for new construction is used mainly to gather cost data for those projects where an appraiser did not have time to visit the construction site. Approximately two dozen self-reporting statements for new construction events are sent to taxpayers each year. The majority of them are returned with the requested data. 1 See Property Tax Rule 463 (4). 14 DECLINES IN VALUE Revenue and Taxation Code section 51(b) requires that real property, subject to article XIII A, be annually assessed at the lower of the base year value (adjusted annually for inflation) or the current market value, as defined in Revenue and Taxation Code section 110. If the taxable value is less than the factored base year value, section 51(e) requires an annual review until the current market value again exceeds the factored base year value. Due to economic conditions during the past few years, property values in many areas of California have declined or stagnated. As a result, many county assessors were forced to make record numbers of reductions in taxable values. Tuolumne County has been no exception. The following table shows the reductions in taxable value processed by the assessor's office over the past three years.' Since manufactured homes make up ·the majority of the assessments with this condition in Tuolumne County, they are shown separately. Assessments with Taxable Value Less Than FBYV Year Total Manufactured Homes 1997-98 1996-97 1995-96 2,521 2,635 2,367 1,890 1,870 1,846 Other Than Manufactured Homes 631 765 521 SUGGESTION 4: Include supporting documentation/or market values. We .reviewed several reduction-type assessment records and found they lacked documentation supporting the market values. Adequate documentation to support market value estimates were included for the year the property first received the reduction in taxable value. However, there was a lack of supporting documentation for subsequent years' reductions. We could not determine whether or not these properties were reappraised every year, as required by the statute. Due to the limited scope of our review of the assessor's operations, we were not able to determine whether or not erroneous assessments occurred. Such a determination would have required an amount of appraisal activity that our resources did riot allow. Proper documentation, such as notes in the remarks section of the building record or a listing of timely sales of comparable properties, should be included in the file. The lack of such data hinders appraisal review and makes justification of the assessment difficult. We suggest the assessor ensure that proper documentation is included in the assessment files. 15 SUPPLEMENTAL ASSESSMENTS Revenue and Taxation Code section 75, et seq., requires that whenever a change in ownership occurs or new construction resulting from actual physical new construction on the site is completed, the assessor shall appraise the property changing ownership or the new construction at its full cash value on the date the change in ownership occurs or the new construction is completed. The value so determined shall be the new base year value of the property. Our review of the assessor's supplemental assessment roll practices found no problems except with his practice of exempting certain low value supplemental assessments. The following is a four-year history of the supplemental assessments processed by the Tuolumne County Assessor's Office. Number of Supplemental Assessments Tax Billed 1996-97 1995-96 1994-95 1993-94 1,589 1,707 2,560 2,407 $416,266 $481,836 $645,802 $679,766 Revenue and Taxation Code section 75.55(b) allows a board of supervisors to enact an ordinance authorizing the assessor to cancel small supplemental assessments. The maximum amount allowed to be cancelled is the equivalent of $20 in tax for real property and $50 in tax for manufactured home accessories. RECOMMENDATION 3: Request that the board of supervisors conform their authorization for cancellation of low value supplemental assessments to the requ;,en:rents of Revenue and Taxation Code section 75.55(b). In our previous survey, we suggested that the assessor's office request that the board of supervisors adopt an ordinance authorizing the cancellation of small supplemental assessments. The board of supervisors adopted Resolution 27-93, on March 2, 1993. The resolution authorizes ,the assessor to cancel any supplemental assessment where that assessment would result in an amount of tax less than $20. The present board of supervisors' authorization to cancel assessments does not conform to the requirements of the statute because it is. not an "ordinance." We recommend that the assessor request the board of supervisors ensure their instructions to the assessor conform to the statute. 16 SPECIAL PROPERTY VALUATION AND ASSESSMENT California Land Conservation Act Property (CLCA) An agricultural preserve is established between a land owner and the city or the county, pursuant to the Government Code section 51200, et seq. Lands under contract are assessed on the basis of agricultural income-producing ability, including any compatible use income (e.g., hunting, communication facilities), and are assessed at the lowest of this restricted value, the current market value, or the factored base year value, as defined in article XIII A of the California Constitution. Revenue and Taxation Code sections 422 through 430.5 deal explicitly with the assessed valuation oflands subject to agricultural preserve contracts. Tuolumne County's total assessed value for the 1997-98 fiscal year was $3,253,866,317. CLCA property with a 1997-98 total assessed value of $59,000,499 accounted for only l.8 percent of the total assessment roll. Because of this low ratio, the annual revaluing of CLCA lands is not a major priority for the assessor's office. The following chart shows a five-year assessed value history for CLCA property in Tuolumne County. Year Parcels Acres Taxable Values of . Land 1997-98 1996-97 1995-96 1994-95 1993-94 897 922 908 897 900 123,202 124,611 124,748 125,157 125,603 $30,002,753 30,061,134 29,802,349 30,731,251 27,534,030 Taxable Values· of Improvements Taxable Values of Total $28,997,746 28,122,093 30,218,185 30,580,614 27,811,626 $59,000,499 58,183,227 60,020,534 61,311,865 55,345,656 The amount of land scheduled to come out of the CLCA contract restriction continues to grow in the near term, but declines in the years following 2000. The following table shows the amount of land currently in a non-renewal status and the year of contract expiration .. Year of Contract Termination Percent of 1997-98 Acreage Under CLCA Contract Acreage 1997 1998 1999 2000 2001 2002 2003 2004 1.07% 2.47% 0.50% 0.84% 0.52% 0.56% 0.13% 0.19% 1,322.55 3,046.82 648.95 1,036.62 637.09 694.86 160.00 239.16 Totals 6.32% 7,786.06 17 CLCA assessments must be reviewed each year. Not only must restricted values be adjusted to reflect changes in capitalization rates and incomes, but a comparison must be made between the property's restricted CLCA value, current market value, and factored base year value to determine the proper taxable value. Currently, the assessor is not comparing factored base year value, current market value, and CLCA restricted value to determine the taxable value of property subject to a CLCA contract. The CLCA restricted value is routinely used as taxable value. In Tuolumne County, the total (land and improvements) taxable value of property subject to a CLCA contract averages less than $500 per acre. While it is unlikely, in this county, that factored base year value or market value would ever be less than the CLCA restricted value, the assessor should develop a procedure to make such a comparison. . Dry grazing makes up about 90 percent of all CLCA property in Tuolumne County. In our last survey we suggested the assessor use the animal unit month (ADM) as a unit of comparison for valuing grazing lands. The assessor now has information gleaned from questionnaires regarding carrying capacity and economic rents for valuation of dry grazing lands. We found that the assessor now uses AUM's as a unit of comparison for valuation of grazing land. Taxable Government-Owned Property Article XIII, section 3 of the California Constitution exempts from taxation any property oWned by local government. However, article XIII, section 11 provides that land and improvements located outside the agency's boundaries may be taxed if the property was subject to taxation at the time of acquisition by the government agency. . The provisions of article XIII A of the California Constitution were not applied to taxable government-owned property until the California Supreme Court decided, in 1995, that such property was subject to the provisions. 3 Because of this decision, the assessed value for taxable government owned hind is the lowest of (1) the 1967 assessed value times the appropriate section 11 factor, (2) the current fair market value, or (3) the article XITI A factored base year value. Taxable government-owned improvements should be assessed at the lowest of (1) market value, (2) factored base year value, or (3) the highest full value ever used for taxation of the improvements. Improvements constructed after the land acquisition by a government agency are exempt from taxation. However, if the government agency replaces improvements previously taxed, the newly constructed improvements are taxable. The California Supreme Court decision, that the provisions of article XITI A of the California Constitution apply to taxable government-owned property, has had a significant negative fiscal impact on Tuolumne County. The total assessed value for taxable government-owned properties, for the 1995-96 roll year, was approximately $100 million. For the 1997-98 roll year, the assessed value is approximately $36 million. Coincidentally, the City and County of San 3 Assessor's Letter No. 95/48, dated September 1, 1995. 18 Francisco, the winning plaintiff in the case decided by the California Supreme Court, is also the largest owner of taxable government-owned property in Tuolumne County. The large reduction in assessed value is attributable to the City and County of San Francisco's Hetch-Hetchy water project. Our review of taxable government owned properties in Tuolumne County determined that'these properties are being properly assessed. Possessory Interests A taxable possessory interest (PI) exists whenever a private person has the exclusive right to the beneficial use of government-owned real property. For 1997-98, possessory interests assessed in Tuolumne County consist of the following property types: Number of Possessory Interests by Type Assessed Value USFS Cabins Commercial Rafting Campgrounds Aircraft Storage Government Housing Grazing Mining Claims Miscellaneous 660 37 $19,279,848 13,161,527 285,300 3,980,690 1,464,101 2,351,203 440,657 534,584 1.946.593 Total 1,145 9 15 89 155 35 139 ｾ＠ $43,444,503 Our previous survey included a five-part recommendation to improve PI assessments .. We recommended that the assessor (1) establish a new base year value when a PI has a change in ownership, (2) issue supplemental assessments when PI's change ownership, (3) include the present worth of future contract rents in PI value, (4) assess the possessory interest of a houseboat owner separately from the assessment of the houseboat, and (5) assess all PI's at the county fairgrounds. The assessor implemented only three parts of the our recommendation. These were to (1) establish a new base year value for changes in ownership, (2) issue supplemental assessments, and (3) include the present worth of future contract rent in PI value. Therefore, we repeat two of the items and add we add two additional items to the recommendation. RECOMMENDATION 4: Improve the possessory interest assessment program by (1) assessing all PI's at the fairgrounds, (2) separately assessing PI's of houseboat owners, (3) conforming PI base year value determinations to Revenue and Taxation Code section 61(b)(2), and (4) using prescribedform BOE S02-P. 19 FAIRGROUNDS PI's Again we found that not all fairgrounds PI's are assessed. There are only two fairgrounds PI assessments out of a total of 13 annual events, whose uses demonstrate sufficient durability, private benefit, exclusivity, and independence to qualify as a taxable possessory interest. Since the county board of supervisors has not authorized the fairgrounds PI exemption described in Revenue & Taxation Code section 155.20, assessment of these PI's is required We recommend assessing all taxable possessory interests at the fairgrounds. HOUSEBOAT PI's In our previous survey we discovered permits issued to houseboat owners at a publicly owned reservoir in Tuolumne County of a type that create taxable PI's. The permits usually change ownership when the houseboat sells. We discovered that the assessor was incorrectly combining the value of the boat and the value of the permit into a single personal property assessment for the houseboat. This practice has not changed since our last survey. Various statutes and BOE Rules require that real property and personal property be subject to varying assessment procedures. A possessory interest (the houseboat's permit to use the lake) is real property, so its assessment is subject to the restrictions of article XIII A of the California Constitution and the change in ownership criteria expressed in Revenue and Taxation Code section 61 (b)(2). The houseboat is personal property and its assessed value is not subject to the restrictions t>f article XIII A. The correct procedure would for a houseboat to be ｡ｳ･ｾ､＠ as personal property and the permit to be assessed as a PI in real property. We recommend the assessor separately assess the PI's created by a permit as real property and assess the houseboat as personal property. CHANGE IN OWNERSHIP We found that the PI's for aircraft hangers at two county airports are revalued whenever there is a change in rental amounts. This practice is in conflict With Revenue and Taxation Code section 61 (b)(2), which allows a new base year value to be created only at the end of the reasonably anticipated term of possession used by the assessor to value the PI. We recommend that the assessor conform the determinations of new base year value for PI's to the statute. FORM BOE-502-P Revenue and Taxation Code section 480.6 requires that state and local government agencies annually report possessory interest information to the assessor on a property usage report. This report is in lieu of individual filing of change in ownership statements or preliminary change of ownership reports. Section 480.6 describes the information that must be included on the property usage report. In order to fulfill the need for uniformity in reporting, the Board prescribed Form BOE-502-P, containing inquiries as to the information described in section 480.6. Currently the assessor's office receives information regarding PI properties in a variety of formats. The agency that supplies the information determines the format. In order to provide for 20 uniformity and ease of understanding, we recommend the assessor require that state and local agencies use the BOE prescribed form. Water Company Property Water service providers consist of government-owned systems or privately owned water companies. The California Public Utilities Commission (CPUC) may regulate the privately owned systems. The privately owned systems may be operated for profit or may be mutual water associations. The mutual associations are owned by the customers and provide water at cost to the customer. Each type presents different appraisal problems. The California Constitution article XIII, section 3(b) exempts from taxation property owned by a local government within its boundaries: This includes property owned by government water supply agencies.· When the water system property is located outside of the government agency's boundaries, this exemption does not apply. In those instances, article XIII, section 11 provides that publicly owned water system property located outside its boundaries is taxable if it was taxable at the time it was acquired by the agency. We found that property owned by government water systems is correctly assessed. Privately owned water companies that are operated for profit may be regulated by the CPUC. Real property owned by these water companies is subject to the valuation limits expressed in article XIII A of the California Constitution. If a company's net income is regulated by the CPUC and is a function of historical cost less depreciation, the property's factored base year value may exceed fair market value. We reviewed seven privately owned water companies in the county and found that they are being correctly assessed, using methods recommended in our last survey. We commend the assessor for implementing our previous recommendations. However, the. following suggestion could improve the water company assessments. SUGGESTION 5: Annually review water company CPUC reports. Seven privately owned water companies in Tuolumne County are subject to CPUC regulation. The assessor annually sends BOE form S40-S (Water Company Property Statement) to these companies. Typically, two of the seven companies return the form. When there is no response to the demand for a property statement, a 10 percent penalty. is added to the existing assessment. The companies that do not respond to the request for information have been paying the 10 percent penalty without complaint (no appeals have been filed). However, unless these companies file a property statement, or are audited, there is no way of knowing whether the assessment is proper. In lieu of an audit or information from returned property statements, the assessor can use the water companies' annual report to the CPUC to 21 obtain information used in valuing these companies. We suggest the assessor request copies of these annual reports from the CPUC. Timberland Production Zone Property Land that has been zoned Timberland Production Zone (TPZ) is subject to assessment in accordance with the special TPZ site classifications that exclude the value of any standing timber. Revenue and Taxation Code section 434.5(a) requires assessors to value TPZ land according to site values determined annually by the BOE. Approximately 80 percent of the timberland in Tuolumne County consists of Site Classes II and III, Pine-Mixed Conifer Region. The remaining 20 percent is divided between Site Classes I and IV with a remnant in Site Class V, Pine-Mixed Conifer Region. We found that these site values are used in an appropriate manner to assess TPZ land. ' Improvements on TPZ land are required to be assessed in the same manner as other improvements. Our review of the TPZ appraisal records indicated that improvements on these lands are accurately recorded with proper assessments. The following chart shows a five-year history ofTPZ property located in Tuolumne County: Year Parcels Acres Land 1997-98 1996-97 1995-96 1994-95 1993-94 374 378 378 378 362 84,076 84,409 84,449 84,449 83,032 $9,778,559 9,245,325 8,551,214 6,816,804 6,684,551 Assessed Values Improvements $1,240,101 1,150,787 1,127,208 1,058,084 977,134 Total $11,018,660 10,396,112 10,396,112 7,8}4,888 7,661,685 We did note one area where the assessment of TPZ land could be improved. Revenue and Taxation Code section 435(a) requires that the taxable value of timberland consist of the appropriate site class value described in section 434.5, plus any value attributable to existing, compatible nonexclusive uses of the land. The value of compatible uses is to be annually determined and added to the land value. RECOMMENDATION 5: Improve assessment procedures for TPZ land by discovering compatible, nonexclusive uses of TPZ land by periodically sending a questionnaire requesting such information to land owners. The assessor does not include the value of compatible, nonexclusive uses in the assessments of TPZ land. Once land is initially zoned and assessed as TPZ, there is little contact between the assessor's office and owners of TPZ land. Consequently, if there is income to the land from existing, nonexclusive, compatible uses (e.g., hunting, grazing), the income is not discovered. 22 The assessor should periodically send a questionnaire requesting information on compatible uses to the TPZ landowners. We recommend the assessor improve the discovery process for compatible, nonexclusive uses ofTPZ land. Mineral Properties Tuolumne County has an extensive history of mineral extraction that appears to be in its waning years. A large gold mine that was operating in Jamestown has ceased production and reclamation work is now in progress. There are only four or five active quarry operations in the county and approximately 160 unpatented mineral claims. Producing mineral properties are a depleting resource, and after a few years, the current market value may be less than the adjusted base year value. Changes in the reserves associated with a property can be the result of changes in economics or the operating parameters of the property. In our prior survey, we recommended that the county recalculate reserves when appraising the mines and quarries. The county has not implemented this recommendation, so we are repeating it. RECOMMENDATION 6: Conform mineral property assessments to the requirements of BOE Rule 469(e). The assessor's valuation practice for operating mineral properties is to establish the base year value for the mineral rights, and adjust it annually by the California Consumer Price Index (CCPI). Once a base year value is determined, the assessor makes no analysis of the mineral property