BILL ANALYSIS SENATE LOCAL GOVERNMENT COMMITTEE Senator Tom Torlakson, Chair BILL NO: AB 934 HEARING: 8/22/01 AUTHOR: Hertzberg FISCAL: Yes VERSION: 8/21/01 CONSULTANT: Swenson PROPERTY TAX ASSESSMENT APPEAL PROCEDURES Background and Existing Law Each of California's 58 counties has a constitutionally elected assessor who sets the value of property. This duty includes the valuation of all residential, business, and agricultural properties, boats, aircraft, and apartment houses. The values determined by the assessor then become the basis for calculating annual property taxes owed by the property owners. If a property owner disputes the assessor's valuation, the owner may appeal the assessment to the county board of equalization. The California Constitution establishes a board of equalization in each county. These boards equalize the values of locally assessed property by adjusting individual assessments. In practice, county boards of equalization review contested assessments to ensure that all property is fairly assessed. A county board of supervisors may sit as the county board of equalization, or it may create one or more assessment appeals boards. In 19 counties, mostly the smaller rural counties, the county board of supervisors sits as county board of equalization. In the remaining 39 counties, the county supervisors appoint the assessment appeals boards. Assessment appeals board members serve three-year staggered terms and there is no limit on the number of terms a member may serve. In counties with less than 200,000 people, the county supervisors can appoint anyone believed to possess "competent knowledge of property appraisal and taxation." In larger counties, an appointee must have at least five years of professional experience in California as a public accountant, licensed real estate broker, attorney, or an accredited or certified property appraiser. New, but not existing, appeals board members must take training (SB 1234, Schiff, 1999). The assessment appeals board (or a county board of AB 934 -- 8/21/01 -- Page 2 supervisors sitting as the appeals board) conducts impartial hearings on property assessment disputes between taxpayers and the county assessor. Based on the evidence presented at these hearings, the board determines the fair market value for the disputed property. The board-established value appears on the county property tax roll and the courts consider the board's decision to be conclusive. Because this process is equivalent to a decision by a trial court, appeals courts only review a board's decision for arbitrariness, abuse of discretion, or failure to follow the law. In other words, a taxpayer may appeal a decision of an assessment appeals board to the courts on issues of law such as denial of due process by the appeals board or use of unlawful appraisal methods, but not on issues of fact, including the actual assessment value itself. One point of view holds that this distinction between fact and law reflects the county board of equalization's constitutional duty, and therefore the courts are precluded from determining assessment values. Thus, if a taxpayer disagrees with the property assessment value determined by an assessment appeals board, there is no judicial remedy to dispute the amount. The Legislature extended the right to sue over assessment values to owners of state-assessed property (SB 2601, Garamendi, 1988). The constitutionality of this law was challenged but the Sacramento Superior Court upheld the 1988 law. The court concluded that because the State Board of Equalization both determines the value and hears the appeals of state-assessed property, there is no independent review of the determination of value. Thus a judicial remedy is appropriate. The decision was never appealed. Many observers note the important distinction from the process for determining and appealing locally assessed property where an independent board hears the appeals. On July 16, 2001, Legislative Counsel issued a written opinion concluding that the February 23, 2001 version of AB 934 is unconstitutional because it allows the courts to determine locally assessed property tax values. In Counsel's view, AB 934 would "impermissibly delegate to trial courts the quasi-judicial fact-finding authority granted to county boards of equalization by Section 16 of Article XIII of the California Constitution." Attorneys AB 934 -- 8/21/01 -- Page 3 representing private clients responded with a competing opinion saying that there is no provision of the California Constitution limiting the power of the Legislature to provide for trial de novo review of decisions by local boards of equalization. The Los Angeles County Counsel's Office rebutted that opinion and issued its own opinion agreeing with Legislative Counsel. Proposed Law Assembly Bill 934 allows property owners and county assessors to use a limited version of a "trial de novo" proceeding when challenging local property tax assessments. In a taxpayer's suit seeking the refund of locally assessed property taxes or in a county assessor's suit challenging the findings of the county board of equalization, AB 934 requires the court to exercise its independent judgment on the evidence presented by either party. The bill requires the court to follow the substantial evidence test. After the court decides the case, county officials must change the property tax roll. If the county prevails in a taxpayer's suit seeking a refund, AB 934 requires the taxpayer to reimburse the county's cost of attorneys fees and assessor's staff time incurred in litigating the factual issues. The court determines the costs, which cannot exceed $100,000 or 20% of the disputed property taxes, whichever is less. Reimbursement for the county's attorneys fees can't exceed the hourly rate charged by the Attorney General. AB 934 prohibits the court from awarding attorney fees or assessor staff expenses incurred in litigating legal issues in a suit for refund. AB 934 defines the county as the prevailing party if the court sustains the assessment appeals board decision or if the court determines the disputed value to be higher than a settlement offered by the county but rejected by the taxpayer during the assessment appeals board process. AB 934 allows the court to assess a penalty against either party for a frivolous lawsuit. AB 934 -- 8/21/01 -- Page 4 AB 934 requires the California Research Bureau, in consultation with the Department of Finance, to study and report to the Legislature and the Governor by January 1, 2006, on the effects of implementing this bill. The study must include several specified items and the California Research Bureau must convene an advisory group to assist it. The bill also requires the California Research Bureau to keep any taxpayer information confidential and encourages county officials to cooperate with the Bureau in providing information. AB 934 encourages the Judicial Council to train judges in the valuation and assessment of property and encourages the Council to provide experienced judges to counties. AB 934 encourages the State Board of Equalization to compile a list of professionals experienced in the valuation and assessment of complex properties who are available to serve as assessment appeals board members These provisions automatically terminate on January 1, 2008. Comments 1. Their day in court . Because assessment values determine property taxes, which in turn generate local revenues, many property owners believe that assessment appeals boards are too close to counties' fiscal interests to be truly independent. They say that the county assessment appeals process is inherently biased toward protecting the counties' coffers. Stories of rogue appeals boards and county supervisors that try to limit or even dismantle appeals boards when they too strongly favor taxpayers are not difficult to find. Armed with scores of anecdotes to support their case, property owners want to go to court when they think appeals boards have treated them unfairly. AB 934 gives them their day in court. 2. Is it constitutional ? Legislative Counsel's written opinion concludes that the February 23, 2001 version of AB 934 is unconstitutional. The August 21, 2001 version of AB 934 changes the parameters for going to court, but the constitutionality arguments still apply. Although other attorneys differ, the courts have generally reached similar AB 934 -- 8/21/01 -- Page 5 conclusions. When the Legislature considered adopting trial de novo for state assessees, opponents raised the same concerns, but a trial court upheld the statute's constitutionality. However, the situation for state assessees is different because the State Board of Equalization both sets the value and sits as the appeals board of state-assessed property. Thus, there is no independent review of the determination of value. The Committee may wish to consider whether it is appropriate to pass a bill that Legislative Counsel has declared unconstitutional. 3. Unknown cost for counties . Most of the assessment appeals cases that go to hearings involve highly valued commercial property. Because there are a lot of property tax dollars at stake, these cases are most likely to go to court. Although difficult to precisely measure, by limiting the court to reviewing the evidence presented at the assessment appeals board hearing and requiring taxpayers to cover counties' court costs when the taxpayer loses, AB 934 limits some of the counties' costs. However, the true cost implications for counties are still unknown. As a result, counties fear that AB 934 will compel them to settle out-of-court because they lack the financial resources to defend the cases in court. Counties will lose property tax revenues not because they over-assess property, but because they settle on lower assessments to avoid litigation costs. 4. Identifying the problem ? Property owners file thousands of assessment appeals each year. Most of the volume involves residential property while most of the value involves commercial property. Although concrete statewide data are not available, recent surveys suggest most appeals are resolved before they get to an assessment appeals board hearing. The cases that go to a hearing do not represent the broad spectrum of appeals initially filed. Instead, most of the cases that go to hearing involve either commercial personal property, primarily computer and electronic equipment, or apartment complexes. The disputes often involve depreciation schedules. Some observers believe that the underlying problem for these property owners lies in the county assessors' practices, not with the appeals boards. By asking the California Research Bureau to study and report on the issues, AB 934 lets the Legislature identify and resolve the problems. AB 934 -- 8/21/01 -- Page 6 5. Legislative history . Bills attempting to extend this so-called trial de novo procedure regarding issues of fact (assessment values) to locally-assessed property failed in 1989, 1991, 1995, 1996, 1997, 1998, and in 1999 (SB 1293, Schiff, 1999). The bills stumbled over local governments' cost concerns and the constitutional issue every time. Although the constitutionality issue remains, AB 934 goes a long way toward limiting and mitigating the counties' cost and revenue concerns. 6. Laundry list of other arguments . The trial de novo issue has elicited considerable debate and both proponents and opponents have developed long lists of other arguments and rebuttals. Most of these topics are secondary to the bill's primary issues and rely on undocumented opinions or fears. Among the concerns is the question of the qualification of assessment appeals board members to judge property valuation disputes as well as the ability of trial judges to do the same. By encouraging both the Judicial Council and the State Board of Equalization to provide additional training on property assessment and valuation and make available to counties any expertise they possess, AB 934 takes a first step toward addressing this concern. Other topics include: The observation that trial de novo is afforded to all of the state's other taxes and to locally assessed property taxes in many other states, as well as the observation that other taxes are not subjectively determined and other states have different property tax systems than California. The suggestion that the courts will be overloaded with new cases as well as the observation that the courts are not overwhelmed by cases for other taxes nor did they see a big increase when the Legislature granted trial de novo for state assessees. Allowing trial de novo will improve the quality of appeals boards' hearings as well as the opinion that it will minimize the importance of their purpose. 7. Sunset provision . AB 934 sunsets on January 1, 2008. This sunset provision along with the results of the Research Bureau study will allow the Legislature to consider the effects of AB 934 and then continue, amend, or delete the process as appropriate. AB 934 -- 8/21/01 -- Page 7 8. Double referral . If the Committee passes AB 934 at its August 22 hearing, the Rules Committee has ordered it referred back for a possible referral to the Senate Revenue and Taxation Committee which has asked for the bill. Assembly Actions Assembly Revenue and Taxation Committee: 7-0 Assembly Floor: 64-2 Support and Opposition (8/21/) Support : California Taxpayers' Association, California Chamber of Commerce, California Manufacturers' and Technology Association, American Electronics Association, Association of Imaging Technology and Sound, California Business Properties Association, California Restaurant Association, California Retailers Association, Motion Picture Association of America Inc., National Association of Real Estate Investment Trusts, Silicon Valley Manufacturing Group, State Board of Equalization, Taxation Section of the State Bar of California, Western States Petroleum Association, Agilent Technologies, AMB Property Corporation, AMD, Amgen Inc., Apple Computer, Inc., Boykin Lodging Company, BP, Calpine Corporation, CarrAmerica Realty Corporation, County East Mall, Equity Office Properties, Equity Residential Properties Trust, FelCor Lodging Trust Incorp., Glenborough Realty Trust Incorporated, Hewlett-Packard Company, Hilltop Mall, Intel Corporation, Kilroy Realty Corporation, Lane Westly Inc., La Salle Hotel Properties, Lockheed Martin Missiles & Space, Macerich Company, Metricom Inc., Nestle USA, New United Motor Manufacturing, Inc., Northridge Mall, Pacific Bell, Pacific View Ventura, Paramount Pictures, Pillsbury Winthrop, Prologis Trust, Property Tax Assistance Co. Inc., Realty Income Corporation, Rodi Pollock, Rouse Company, Semiconductor Equipment & Materials International, Solectron Corporation, Stoneridge Shopping Center, Sunvalley Shopping Center, United Airlines, Valero Energy Corporation, Verizon Communications, Inc., Westside Pavilion, WorldCom, Xilinx. Opposition : California Assessors' Association, California Association of Clerks and Election Officials, California AB 934 -- 8/21/01 -- Page 8 State Association of Counties, League of California Cities, Urban Counties Caucus, California School Employees Association, California Teachers Association, California Federation of Teachers, Community College League of California, Faculty Association of California Community Colleges, California Independent Public Employees Legislative Council, and California Tax Reform Association, Service Employees International Union; Counties of Contra Costa, Glenn, Humboldt, Kern, Napa, Orange, Placer, San Bernardino, Riverside, Sacramento, San Diego, Santa Barbara, Santa Clara; Cities of Alturas, Blythe, Costa Mesa, Chula Vista, La Quinta, Merced, Modesto, Moreno Valley, Riverside, San Bernardino; County Assessors in Alameda, Alpine, Calaveras, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Kern, Lassen, Los Angeles, Marin, Mendocino, Modoc, Napa, Nevada, Placer, Riverside, Sacramento, San Diego, Santa Clara, Santa Cruz, Shasta, Sonoma, Stanislaus, Sutter, Tulare, Ventura, Yolo; City of Indio, Orange County Citizens Against Lawsuit Abuse, Silicon Valley Citizens Against Lawsuit Abuse, Lake Elsinore Unified School District, Palo Verde Unified School District, Riverside Unified School District, County of Santa Clara Sheriff, City Treasurer for the City of Redondo Beach, Judge Quentin L. Kopp, Roy M. Avondet CPA.