Budget Quirk Caused Property Owners To Pay More '05 Taxes Than Necessary, County Figures Reveal

By Andy Meek

Hands in the Cookie Jar
Here's how much each local municipality used of its 2005 appeals allowance:

Shelby County - 62.74 %
Memphis - 66.36 %
Arlington - 80.63 %
Bartlett - 67.57 %
Collierville - 66.99 %
Germantown - 54.47 %
Millington - 75.07 %

Source: Shelby County Assessor's Office

Thanks to a budgeting oddity that coincides with every countywide property reappraisal, taxpayers in Memphis and Shelby County paid more in property taxes in 2005 than necessary, according to recent figures compiled by the Shelby County Assessor's office.

The reappraisal occurs once every four years, and the tax situation does not apply to Lakeland since it has no property tax.

The factors that led to property owners paying more than necessary only coincide with the reappraisal, so it's not a yearly occurrence. Here's how it happened in 2005.

Year in review

Per state law, local governments are not supposed to receive an overall revenue increase from the reappraisal. But the assessed values for many property owners - and, as a result, their tax bills - often go up after a reappraisal.

To offset that, governments set their property tax rates at whatever amount will generate the same revenue they were getting before the reappraisal. They're then free to raise the tax rate by whatever amount they wish, following sufficient public notice.

And herein lies the quirk: In the first tax rate governments set after reappraisal, they also are allowed to include a buffer, referred to as an appeals allowance. That amount compensates for the inevitable onslaught of property appeals from people who disagree with their new property values.

In 2005, for example, Shelby County's certified tax rate was set at $3.73. But at the time, county officials also were projecting a loss of slightly more than $699 million in assessed value from the county's tax roll.

That's the amount county officials thought they'd lose once all the successful appeals were heard and the assessed values had been adjusted because of the 2005 countywide reappraisal. It was a guess, and it was all county officials could do when it came time to set the final tax rate, since the appeals process was still about a year away from being finished.

"Of course, we encourage (governments) to be conservative about that, but it's kind of a hit-or-miss thing," said Kelsie Jones, executive secretary of the Tennessee Board of Equalization.

'Crap shoot'

And that $699 million guess, it turns out, was a little high, according to figures from Property Assessor Rita Clark's office.

The $699 million the county expected to lose equated to 17 cents on the county's tax rate. Adding that 17 cents to the certified rate of $3.73 made the county's adjusted certified tax rate $3.90. But only 62.7 percent of the 17-cent appeals allowance actually was used up, Clark's figures show.

In other words, the county only used about 10 cents of that 17-cent allowance. That means the county's tax rate was roughly 7 cents too high.

"It's a crap shoot is what it is," Clark said. "We run a report on a regular basis of every municipality, with how many appeals they have out and how much they have used of the appeals allowance, and none of them have come close to using it."

Penny gained, millions earned

In 2005, the Shelby County Commission approved a 14-cent increase in the county's property tax rate, boosting the $3.90 figure to $4.04. But what the unused portion of the appeals allowance means, in effect, is that the county actually raised the tax rate by about 21 - not 14 - cents.

And each penny on the tax rate produces about $1.5 million in revenue.

"It's only been during the last three reappraisals that the state's had this requirement, and each time we've gotten a little better at it," said Jim Huntzicker, the county's director of administration and finance. "When you set the reserve, you actually hope you've got a couple of pennies extra in it - the one thing you don't want to have happen is you come up short so that you have a revenue shortfall."

Clark's figures also show other municipalities, including Memphis, did not use all of the appeals allowance they included in their 2005 tax rates.

From the public's perspective, the state law that governs the appeals allowance situation is more of a disclosure tool than anything else. It lets property owners know exactly how much taxes may have been increased overall.

Potential trip wire

But local governments must follow another feature of the law related to appeals. If all the appeals allowance has not been used, something called a recapture rate must be calculated the following year, Jones said.

Again, that amount basically is a disclosure to the public about the actual effect of property appeals. The recapture rate figure is arrived at by subtracting the leftover appeals allowance from the tax rate approved the previous year.

Then, if a local government decides to set a tax rate that exceeds that amount, a public hearing must be held during which property owners have a chance to comment. It's a small but important step, and it's one that has the potential to trip up some governments every now and then.

For instance, though the Memphis City Council voted in June to keep its 2006 tax rate - $3.43 - the same as the rate it approved in 2005, the city was supposed to calculate a recapture rate first, according to Jones.

Assessor's figures show the appeals allowance built into the $3.43 tax rate the city approved in 2005 was about 5 cents too high. And because no recapture rate had been determined as of Monday, July 10, the action taken on the city's 2006 property tax rate still is not final.

"As far as I know, the only thing that would be involved in the city retracing its steps would be to give notice of the situation and that the public would be invited to submit comments," Jones said.

"They would need to state that the council will meet in public session to receive public comments on whether the recapture rate is to be exceeded - that for that purpose, the council will reconsider its previous action in adopting a final '06 tax rate. They would then hear what the public has to say before ratifying that action or receding from it."