State Education Funding Lawsuit: The battle over property assessments

The state of Delaware finds itself in court, defending its public school funding system in a lawsuit filed last year.

Over the next two weeks, Delaware Public Media is taking an in-depth look at the key issues in the case. Part 1 focuses on the controversial issue of  property reassessment.

In January 2018, two organizations, Delawareans for Educational Opportunity and the NAACP Delaware State Conference of Branches, with legal support from the ACLU Foundation of Delaware and the Community Legal Aid Society, filed suit in the Court of Chancery challenging Delaware’s system of funding public education.

The suit contends that inequities in the funding system impair the opportunity of disadvantaged students to receive an adequate education. The plaintiffs also argue that the current system for levying property taxes at the county level contributes to the problem because it violates long-established standards set by the Delaware General Assembly.

In the first part of his series, Delaware Public Media contributor Larry Nagengast examines assessments and property taxes.

Want to know what your house was worth in 1974? If you live in Sussex County, it’s as easy as checking its assessed value on the county’s tax rolls.

Do the same in New Castle County and you’ll get a figure for 1983. In Kent County, you’ll get your home’s value in 1987.

But valuations generated in 1974, 1983 and 1987 don’t necessarily reflect today’s property values.

And what if your home was built after the year of the latest assessment in your county? Well, the county figures out what it would have been worth at the time of that assessment – even if it possesses thermal windows and high-efficiency heating and cooling systems that weren’t being manufactured when the last assessment occurred.

“We’ve had three commissions, at least, in the last 25 years” recommending that Delaware’s counties conduct reassessments – and suggesting better ways to get the job done, says Edward C. Ratledge, director of the Center of Applied Demographics and Survey Research at the University of Delaware.

Nothing has happened.

That could change in a few years, thanks to a lawsuit filed a year ago that challenges the state’s school finance system, asserting that the way the system is set up fails to channel equitable funding to schools whose students have a greater need for services to obtain an adequate education. A second prong to that suit challenges the counties’ assessments – asserting that the numbers are so out of date that they no longer satisfy the “fair market value” standard required by state law.

Vice Chancellor Travis Laster, who is hearing the case in the state’s Court of Chancery, has divided the suit into two parts, one dealing with the state funding issue and the other dealing with the counties and property assessments.

Lawyers for both sides – Delawareans for Educational Opportunity and the NAACP Delaware State Conference of Branches as plaintiffs and state and county officials as defendants – are now working out scheduling issues. Plaintiffs’ attorney Ryan Tack-Hooper, legal director for ACLU Delaware, says the assessment phase of the case will go first, and that Laster could issue a ruling by the end of the year.

It could take a year beyond the conclusion of the assessment phase before a decision is issued on the more complex state funding issues, Tack-Hooper adds.

Laster issued his first ruling on the assessment matter last October. He rejected all of the technical defenses the counties raised– that Chancery lacked jurisdiction, that the plaintiffs had other remedies available, that the county finance officers shouldn’t have been named defendants because they don’t control the assessment process. He noted, however, that no one had alleged the county finance officers had done anything wrong, but they are responsible for collecting taxes based on the assessments.

“Property values have changed dramatically since the 1970s and 1980s,” Laster wrote. “The plaintiffs observe that the statewide inflation-adjusted median sales price of a new home in January 1980 (measured in 2017 dollars) was $126,455. By January 2010, the median value of all owner-occupied housing in Delaware (not just new homes) was $273,000, a 116% real increase over the 1980 figure. They also observe that the House Price Index for New Castle County, published by the Federal Housing Finance Agency, increased 340% between 1983 and 2016. Yet the counties continue to use property values from 1987, 1983, and 1974.

“One can reasonably infer that during the intervening decades, property values have changed at different rates in different parts of the state. Beach property in Sussex County has appreciated differently than property further inland. Urban property in Wilmington or Dover has appreciated differently than property in the suburbs or more rural areas. Yet the counties have locked in the relative valuations that existed in 1987, 1983, and 1974.”

The assessment portion of the case will have different implications for county governments, for school districts and for taxpayers.

First, Tack-Hooper says, “we hope to get some agreement on the basic facts…. It is hard to imagine that anyone could argue that the assessed value [of properties] in each county is equal to their fair market value.”

If the plaintiffs prevail, he says, the most favorable outcome would be for the court to order that the counties cannot continue to collect property taxes based on the outdated assessments – in effect forcing the counties to conduct their own reassessments.

“There’s no question we’re overdue” for a reassessment, says New Castle County Councilman John Cartier, a Democrat whose district includes eastern Brandywine Hundred. “Right now assessed values reflect a steep discount from actual property value.”

However, New Castle County Executive Matt Meyer says, “I’m not convinced reassessment is going to lead to better outcomes” in terms of school funding and educational equity.

For the counties, reassessment is, in some respects, a no-win situation.

In early 2017, shortly after Meyer took office, New Castle County’s Office of Property Assessment estimated that the reassessment process, from soliciting bids to hearing taxpayer appeals, could take five to six years, and the costs would include at least $10.5 million for the assessment itself, plus millions for special software and likely fees for legal counsel to handle the inevitable appeals by owners of commercial properties.

Overall, “it totals north of $20 million,” Cartier says. Statewide, Meyer adds, the price tag could easily top $50 million, money that Meyer says would be better spent by funneling it directly to the schools.

However, even though a reassessment would increase the assessed value of properties, it would not result in a windfall for the counties.

That’s because state law allows counties to increase their tax revenue by 15 percent in the year a reassessment takes place – essentially to cover the cost of reassessment. But there’s a big catch in the law: in the following year, counties have to reset their tax rate so the revenue generated post-reassessment is no greater than the amount property taxes generated the year before reassessment. Of course, county governments could subsequently raise property tax rates but elected officials are historically not happy to face voters in re-election campaigns if they have recently raised taxes twice – once for reassessment and once for general revenue purposes.

Besides, Meyer says, “if we do it wrong, it could dramatically increase taxes for some … and it could have an impact on economic activity and job growth.”

For the school districts, a reassessment would provide a one-time bonanza – the opportunity to increase their property tax revenues by 10 percent in the year the revaluation occurs. Unlike the counties, school districts are not required to roll back their rate the following year. While 10 percent might sound like a big increase, it applies only to the average of 31 percent of district revenues that come from the property tax, so it’s actually only a 3 percent hike in a district’s overall revenues.

Even so, as the plaintiffs argue and Laster noted in his October ruling, because they must rely on outdated assessments which are essentially frozen in time while inflation and other factors erode their budgets, school districts typically must go to district residents every three to five years with a referendum to ask for a property tax increase. 

“Frequent tax referendums generate negative reactions,” Laster wrote. “Some residents object as a matter of principle to having their taxes raised. More object if they think their tax dollars are not being used wisely. Delaware’s complex system for funding public schools is not easily understood. Confronted with regular requests for tax increases, some residents naturally infer that school officials are wasting money. Community resentment does not help the public schools or Disadvantaged Students.”

For taxpayers, the outcome is a big question mark, and the uncertainty can make property owners fearful.

The conventional wisdom of reassessments is that one-third of the properties see their valuations increase by about the same percentage as the county average, and that one-third will see greater percentage increases and one-third will see lesser percentage increases.

However, as Ratledge notes, property owners have a natural tendency to overvalue their own holdings, “so they’re always scared that theirs is going to go way up.”

So, he explains, while two-thirds of the property owners are likely to feel no harm from the results of a reassessment, it’s their fear of being part of the one-third that sees a significantly higher tax bill that gets transmitted to lawmakers, which makes them reluctant to advocate a reassessment.

Another complicating factor, according to Ratledge and Robert Silber, finance director for the Christina School District, is that valuations of commercial and industrial properties can have a disproportionate effect on school tax revenues. (These properties account for about one-quarter of the assessed valuation in New Castle County.)

In recent years, in Delaware and nationwide, they say, owners of such properties have gone to local governments, and to the courts if necessary, to challenge assessments, especially if there has been a change in the property’s use. In the 2018 fiscal year, Silber noted, the owners of the DuPont Building in downtown Wilmington, home of Chemours and The Playhouse, succeeded in gaining an $8.4 million reduction in its assessed value, costing the Christina district about $200,000 a year in tax revenue. In the Brandywine School District, decreased valuations of the AstraZeneca campus on Concord Pike, Tri-State Mall and the former Evraz Steel complex in Claymont and the closed DuPont Edge Moor plant  have reduced tax revenues by about $2 million a year, Superintendent Mark Holodick says.

While Ratledge contends that such revaluations are appropriate because they place properties at closer to their true value, Silber says they enable large businesses to trim their tax liabilities and transfer that burden onto other taxpayers, primarily homeowners.

While this portion of the court case has many possible outcomes, people familiar with the suit, no matter what their legal perspective, point to a possible solution that would likely work better than what the counties have now: a system of rolling assessments like the one Maryland uses now.

In Maryland, one-third of the properties in the state are reassessed each year, and the new assessment is phased in on a three-year cycle. One example, provided by New Castle County’s Office of Property Assessment, describes what happens in a property assessed at $100,000 is reassessed at $130,000. In that case, the property owner pays taxes on an assessed value of $110,000 the first year after reassessment, on $120,000 in the second year, an on $130,000 in the third year.

In a rolling assessment system, valuations would change with the real estate market, and if valuations gradually moved upward, that would reduce the pressure on local governments and school boards to frequently increase their tax rates.

The best way to conduct a reassessment is to do it statewide, and to have the state issue revenue bonds to fund it, Ratledge says. That would be fairer to the counties, he adds, because they shouldn’t have to shoulder the cost when more than two-thirds of the property tax revenue collected in the state goes to the school districts.

Reassessment, Ratledge says, “is a messy project” but failure to reassess “is not good government.”

And, Tack-Hooper adds, “given how badly out of whack things are now, almost any reasonable effort is going to be more fair than what we have today.”

Correction: This piece initially indicated state law allows counties to increase their tax rate by 15 percent in the year a reassessment takes place.  In fact, state law allows counties to increase their tax revenue by 15 percent in the year a reassessment takes place.   Delaware Public Media apologies for the error.