The 2012 General Reassessment: Unlike Any Other in Indiana History

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1 The 2012 General Reassessment: Unlike Any Other in Indiana History A t first glance, the 2012 general reassessment was, in many ways, like every other general reassessment conducted in Indiana. First, counties conducted inspections on more than 2.5 million parcels, both improved and vacant. Pursuant to Indiana law, physical inspections of all improved parcels were required. This provides for a complete inventory of all improvements to ensure the equitable distribution of the property tax burden. While variation exists among the counties, it is estimated that nexus news, volume 2 In this second edition of Nexus News, the 2012 general reassessment in Indiana is examined. Preliminary data from the DLGF indicate that this reassessment was very unique, as compared with previous reassessments. Please note that data used in Charts 2, 3 & 4 do not include LaPorte and Sullivan counties. Complete datasets for these two counties were not available for each year analyzed. Actual statewide figures would obviously increase with their inclusion, however the end results and observations would not change. Newsletter of the Nexus Group, Inc. approximately 60 percent of improved parcels experienced some change with 2012 reassessments. Such changes might include the addition of new improvements, removal of demolished improvements, changes in grade, condition, and effective age, etc. With regard to vacant parcels, counties reviewed these parcels for possible new improvements or change in use (i.e. excess residential to farmland, primary use to undeveloped use, etc.). Second, the Indiana Department of Local Government Finance (DLGF) updated cost tables for all residential, commercial, industrial, and agricultural improvements to In the mass appraisal world, the cost approach continues to be the most viable starting point in valuing real property improvements. While the state had not updated such costs since the 2002 general reassessment (the 2002 manual was based on 1999 costs), most counties had either updated their own cost tables or applied market factors based on sales or income data. It should also be noted that the DLGF used a new source (Craftsman) for the 2012 cost tables. While the DLGF did not change the state s depreciation schedules, the base year for depreciation was changed from 1999 to While many counties had been updating their depreciation dates for commercial and industrial parcels, residential depreciation was largely untouched since This was primarily due to the fact that sales data was used to adjust residential assessments beginning in 2006 and continuing thru the reassessment. Third, the DLGF also updated the location cost multipliers for many counties. Since construction costs are based on Indianapolis cost (Marion County), location cost multipliers recognize the fact that construction costs vary across the state. Increases or decreases to these base costs were provided by the DLGF thru the location cost multipliers. Finally, the DLGF updated the base rate for agricultural land to $1,630 per acre. Under current law, the DLGF is required to calculate new base rates for farmland (See Chart 1, page 2). In short, this calculation is based on a five-year rolling average of capitalized cash rent values per acre. Soil productivity factors are subsequently applied to this base rate, whereby more productive soil provides for an increase in value, while less productive soil provides for a decrease in value. The DLGF did not update the soil factors for A Publication of the Nexus Group, Inc. April 2013 Page 1

2 the 2012 general reassessment and the Indiana General Assembly has delayed, at least for the foreseeable future, the implementation of new soil productivity factors. Gross AV Changes At second glance, the 2012 general reassessment was not anything like previous reassessments, at least in terms of the changes in statewide gross assessed values for real property. Following the past four reassessments (1979, 1989, 1995 and 2002), real property assessed values in Indiana increased, often dramatically (See Chart 2, Page 3). In the state s previous four reassessments, gross real property assessed values increased 41 percent, 32 percent, 13 percent, and 52 percent. Preliminary assessment data from the DLGF indicate an actual decrease of a little more than 1 percent in the statewide gross assessed value following the 2012 general reassessment. In 2011, the statewide gross assessed value of real property was $400.6 billion. Following the 2012 general reassessment, the statewide total decreased by $4.2 billion, or 1.1 percent, to $396.4 billion. How is this possible? The primary reason for this was the statewide implementation of annual trending or updating of real property values. Starting in 2006, real estate values in Indiana were updated on an annual basis. Another reason, especially in Nexus counties, was the start of rolling or cyclical reassessment. Following the 2002 general reassessment, several Indiana counties continued inspecting properties to correct errors resulting from 2002 and ensure better assessment accuracy. Annual Trending Historically, real estate values in Indiana had never been updated between general reassessments. Up until 2006, changes in real property value between reassessments were the result of new construction, demolition, or appeals. In other words, real property assessed values stayed relatively constant between reassessments. As such, general reassessment often resulted in large increases in real property assessed A Publication of the Nexus Group, Inc. April 2013 Page 2

3 tax shifts both between and within property classes. With the 1979, 1989, and 1995 reassessments, the state relied solely on a cost-based assessment system that was eventually ruled unconstitutional in the Town of St. John case. In the old system, market value concepts were virtually non-existent. For improved property, the state relied on replacement cost new less depreciation as the basis for true tax value. These costs, however, were not real world costs and they were not updated between reassessments. was no longer the starting and ending points in valuing real estate. While cost continued to be used as the starting point in the valuation process, market value approaches (sales comparison and income approaches) were implemented for the first time. The new value-in-use system incorporated real world data into the valuation process. Many taxpayers, especially homeowners, did not appreciate the results of market-based valuation. However, taxpayers were able to utilize real world data to evaluate their assessments. As Chart 2 illustrates, the 2002 general reassessment resulted in a substantial increase in gross assessed values. While all property classes experienced assessment increases, residential property increased significantly more than all other classes. Most everyone recalls the result of this: large property tax shifts to homeowners who, on average, confronted property tax increases of 25 percent or more. This tax shift to homeowners resulted in reduced property tax liabilities for agricultural, commercial and industrial property taxpayers. A Publication of of the Nexus Group, Inc. April 2013 Page 3

4 By updating real property values annually, substantial assessment changes and tax shifts would be avoided. Ideally, annual trending should have immediately followed the 2002 reassessment. However, the fallout from the reassessment (delayed completion, large number of appeals, and errors, legislative attempts to decrease tax shifts, etc.) combined with a lack of political will delayed its implementation. Keeping in mind that the assessments were based on 1999 values, 2006 was not really an annual trend. Rather, it was a time for counties to catch up on real estate values by increasing the reassessment, in that the state was adding 6 years to the valuation date. In changing the valuation date from 1999 to 2005, gross real property assessments increased by nearly $62 billion, or nearly 20 percent, for March 1, 2006 (See Chart 3). This chart also illustrates the impact of annual trending on gross assessed values for real property. While 2007 resulted in a statewide increase of 4.1 percent or $15.6 billion, statewide gross assessed values have stayed relatively constant over the last six years. Without annual with changes in previous reassessments where values were not updated annually. Annual trending, however, prevented this large assessment increase. To the extent that counties were correctly trending values between 2006 and 2011, it should come as no surprise that gross assessed values for 2012 changed so little in most counties (See Chart 4, Page 6). Between 2011 and 2012, the following can be observed based on data provided by the DLGF: The state experienced a $4.2 billion decrease, or just over 1 percent, in 2012 real property A Publication of the Nexus Group, Inc. April 2013 Page 4

5 39 counties experienced an increase in real property assessments in The county with the largest loss in value was Vanderburgh ($930.2 million). The county with the largest gain in value was Miami ($221.4 million). Cyclical Reassessment Another new assessment concept initiated in several counties, especially Nexus counties, throughout the state was rolling or cyclical reassessment. In some counties, this approach began as early as The 2002 general reassessment was problematic in many ways. First, counties had very little time to implement the market value-in-use system that was first introduced in Most counties rushed to meet completion dates. Second, counties generally lacked an understanding of value in the new assessment system. While several aspects of the old assessment system carried into the new system, the introduction of market-based concepts in Indiana was new to most assessors. Never before had the state relied on sales data to determine land values, let alone improvement values. Further, valuation techniques using income capitalization had never been used in Indiana. Given these obstacles, most counties approached the 2002 general reassessment as they had previous reassessments. Most of their attention was given to the physical inventory of real property. While the physical inventory of property remains critical to the equitable distribution of the property tax burden, little attention and time were given to the more important valuation concepts surrounding market value-in-use. The end result was a substantial number of appeals and assessment errors throughout the state. Recognizing this problem, many county assessors continued to review and visit properties throughout their counties following the 2002 reassessment. This rolling or cyclical reassessment began as early at 2003 in some counties, and continued on until the start of the 2012 general reassessment. These efforts not only corrected the errors created by the 2002 reassessment, but, more importantly, laid the groundwork for more accurate assessments and substantial reduction in appeals in future years. As part of their ongoing efforts to review assessments on a more frequent basis, assessors also began collecting income and expense data for income producing properties, including but not limited to apartments, rental homes, mini-warehouses, mobile home parks, retail centers, etc. Though the income approach to value was all but ignored with the 2002 general reassessment, many counties began relying on this approach to value income producingproperties beginning in Conclusion At its onset, the 2012 general reassessment seemed like any other reassessment. Now that it is complete, it is obviously unlike any other in Indiana history. There were no large assessment increases. There were no large tax shifts to homeowners. There was no taxpayer rebellion. There was no legislative response to the reassessment. As Dr. Larry DeBoer of Purdue University points out in a recent study, the real impact of the 2012 reassessment may be on local governmental units. Decreasing assessments in taxing districts already at the tax caps will end up with less revenue. Decreasing assessments in taxing districts near the tax cap may end up with less revenue. As such, more local budget cuts will likely result for local government beginning in As 2013 tax rates are currently being calculated by the DLGF, the extent of the reassessment impacts on local budgets in not yet fully known. A future publication of Nexus News will examine this topic in detail. The 2012 general reassessment is also the last of its kind in Indiana. Starting in 2014, a statewide rolling or cyclical reassessment program will be implemented. Portions of each county will be reassessed annually, supplemented by annual trending. This is identical to the rolling reassessment program implemented in many Nexus counties since The results should be similar: consistent and timely assessments, relatively small tax shifts between and within property classes, fewer appeals and assessment errors, and ultimately, a more equitable distribution of the property tax burden. A Publication of the Nexus Group, Inc. April 2013 Page 5

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