Michael Houdyshell, director of property and special taxes division for the South Dakota Department of Revenue came before the Custer County Commission at the commission’s May 9 meeting with a simple message: raise the valuations of all non-ag[ricultural] properties in Custer County, or the state is going to do it for you.
Houdyshell didn’t use those exact words in telling the commission that many non-ag properties in Custer County are not assessed at their market value, but he got his point across that the county isn’t following state law and runs the risk of having the state intervene if this continues.
“We’re looking at the history here and things have gotten progressively worse,” Houdyshell said.
State law requires the county’s valuations be at least 85 percent of market value on its ratio. Currently, Custer County’s non-agricultural median ratio sits at 84.2 percent, meaning a property that sells for $100,000 in Custer County on average is assessed only at $82,400 of its value. The value of the structure should be what it would cost to replace the structure new, minus depreciation.
The closer the county gets to assessing at 100 percent of market value on its ratio, the better the adjustment factor it receives from the state. Full and true property assessments are adjusted (the adjustment can be positive or negative) to bring them closer to a taxable value for equalization. Sales of properties in the county the previous year are used to determine the adjustment factor.
The county has been below the required 85 percent threshold for at least two years and, as such, the 2019 tax bills for property owners will be larger because they will be required to pay taxes on the full and true assessment of the property—100 percent.
The taxing at full and true value is the first step the Department of Revenue takes to correct the problem. The next step is to work with the county commission and the department of equalization for the following year to get back into compliance.
Houdyshell said the critical key to correcting the problem is for the commission to allow the department of equalization to do what is necessary — raise valuations to coincide with raises in market price — to stay in compliance with law.
“If that means they increase values on non-ag property to get to at least that 85 percent, that’s what they need to do,” he said.
Should the county not fall into compliance the following year, the taxable factor can be pushed over 100 percent in an attempt to get back up to 85 percent. That would mean property owners must pay taxes on more than the assessed value of the property.
“Obviously, that is not an ideal situation,” Houdyshell said. “Think about a property that is assessed at its full and true value, and now you’re asking property owners to pay taxes on a value that exceeds the actual value of the property, which is not only a violation of the state law, it’s a violation of the state constitution, which requires that taxes cannot be assessed on property more than its value.”
In the most drastic of measures, state law allows the secretary of revenue to order a reassessment of the entire county if it continually fails to comply.
“Obviously, that’s not something the secretary of revenue wants to do,” Houdyshell said. “It is truly an extraordinary remedy. We think we can work with [department of equalization director] Patty [Caster] to come up with a plan to get into compliance and stay in compliance. That’s the goal here.”
Caster said she already had a plan to correct the problem, but was told by the commission not to do anything that would raise values for 2018. Her plan was to change some data on the Computer Aided Mass Appraisal (CAMA) System, which was introduced in 2011 and now has all the reappraisal data collected during the recent five-year reappraisal project.
The depreciation table in the system is still set at 2011 levels, she said, which means anything constructed from 2012 to 2018 is not depreciating at the correct percentage. The costing manual also has not been changed since 2011 and is sitting at 85 percent of what it would cost to build a structure in 2018 according to contractors, sales and building permits.
“The long and short of it is Custer County is going to need to do something with its non-ag properties this next year in order to get back into compliance,” Houdyshell. “I hope the commission understands what the potential consequences are for property owners in the county when the county is not in compliance.”
Houdyshell said the problem could affect the Custer School District as well. The Department of Revenue is required to certify values to the Department of Education when it determines state aid for school districts or the impact on the school districts within the county at the 85 percent level.
If the county is not assessing property at 85 percent of full and true value, that can negatively impact the school district because it will not receive enough state aid from those property taxes to meet its needs.
Houdyshell said the cause of the situation could be a number of things, including market prices fluctuating and variances in the market, what properties are selling for and the number of sales used in the studies the Department or Revenue undertakes.
However, Custer County has plenty of sales each year. The Department of Revenue looks at sales and analyzes the market every year, which it in turn uses to determine its adjustment factor, which he said leads him to believe values are not increasing in the county as they should to reflect what is going on in the market.
“So, instead of keeping pace with the market, it looks like the values are essentially stagnant,” he said. “The market is outpacing what is happening with assessments.”
Houdyshell pointed to another factor — intentions — as the likely culprit. Each year, county departments of equalization are required to submit those “intentions” by Jan. 1. Those intentions tell the Department of Revenue what the department of equalization office intends to do for the upcoming assessment year. Based on sales, studies and what they are seeing in the market, the department of equalization director tells the Department of Revenue how it plans to meet the 85 percent level of assessment.
At the Department of Revenue, Houdyshell said, officials set the adjustment factor under the assumption those changes are actually occurring. He doesn’t know it for a fact, he said, but he doubts some of the changes the county has been portraying to the Department of Revenue have taken place.
“I think some of the values have not been going up as the assessment plan has called for and the intention documents have certified to the department were going to occur,” he said.
Caster said the intentions issue started prior to her coming into the office, as when she worked on the documents in January, she discovered values were still too low. Caster asked the appraisers in the office if the previous intentions document had been carried out and they informed her that to the best of their knowledge, they had not.
Houdyshell said the Department of Revenue always recommends to counties that if the market is showing it’s necessary, the county increases each year because it is far more desirable for taxpayers to see incremental increases to their assessments than to face a much larger assessment to correct a problem.
“It causes inequities in the property tax burden, as well,” he said.
Caster said a higher property assessment does not automatically mean higher taxes. Assessments more in line with the required median ratio could mean levies stay where they are or even go down because the factor the state gives the county could improve.
Commissioner Travis Bies questioned if the Department of Revenue could determine the county has a problem over such a short time frame, saying sales and the economy could be booming right now, but that could change quickly, driving down the cost and value of property.
“Are you going to reduce the value (when that happens) so we can get back (to where values were)?” he asked.
Caster said after the meeting that would be the case, as the market and ratio factor are analyzed yearly.
Commissioner Jesse Sorenson said he saw it as a five-year trend and commission chairman Phil Lampert said a plan of attack is needed to remedy the situation.
After the meeting, Caster said she would like to put her aforementioned plan into action, which is to correct the information in the CAMA system this year and begin working on a non-ag land study to better equalize non-ag land values in 2019. The result, she said, is that in 2020 when the CAMA system updates what it costs to build structures there won’t be such a big jump in structure values.