Accurate property assessments are a basic requirement for many school funding systems to function properly. Unfortunately, data suggest that a variety of problems are introducing inaccuracies, exacerbating inequalities, and causing negative chain reactions in taxing jurisdictions all around the land. A trio of economics researchers conducted a deep dive into one state’s efforts to reform its property assessment infrastructure, and their report was recently published by the Board of Governors of the Federal Reserve System.
In 1989, a series of newspaper articles in the Lexington Herald-Leader exposed the existence of rampant problems in every corner of Kentucky’s K–12 education system, including numerous instances of tax evasion, inequitable treatment of property owners, and ineffectual safeguards around tax assessment protocols. Journalists and state investigators identified the most pressing problem as the underassessment of properties—specifically, high-end homes—brought on by a mix of mistakes and corruption. In response, lawmakers passed the Kentucky Education Reform Act (KERA) in 1990. Under that law, the state’s Department of Revenue was given expanded power over locally-elected property assessors, and a technical assistance intervention was imposed on the worst offenders in an effort to improve their practice. Additionally, KERA introduced a means by which to double check the accuracy of assessments.
To evaluate Kentucky’s efforts, researchers from the Federal Reserve examined administrative data from all 120 counties in the state. The state had deemed ninety-three counties to need intervention: twenty-five were emergency reassessment (ER) counties, and sixty-eight were technical assistance (TA) counties. Twenty-seven additional counties weren’t given any direct intervention under KERA and serve as a control for certain analyses. Data for pre-treatment investigation cover the years between 1982 and 1989, and post-treatment data cover 1990 through 1998. The researchers use a difference-in-differences approach to conduct their analyses.
Overall, they found that the treatment (training, oversight, double-checking) substantially increased aggregate assessed real property values. By the end of the active intervention in 1994, per-pupil property value in ER counties had increased by 32 percentage points over untreated counties compared to 1989. For TA counties, the increase was a more-modest 11 percent, as expected due to the lower levels of intervention needed. By 1996, districts in ER counties were receiving approximately $100 additional per pupil from local property tax revenue. (The researchers looked at commercial and farm property, as well as residential, but the report focuses mainly on residential, as does this review.)
They also found that interventions had large positive effects on assessment inequity. Using a new protocol called coefficient of dispersion (COD), state overseers measured the average difference between the sales ratios and the median. When properties are equitably assessed, assessment-to-sales ratios within a jurisdiction should be similar across properties, regardless of size or sales price. A low COD indicates an equitable assessment across properties (e.g., an accurate and properly-functioning system), while a high COD indicates a flawed assessment (though it is not enough to isolate a cause). The intervention reduced the COD in ER counties by an average of 15 points, indicating that the system had become more accurate. A similar pattern of COD reduction occurred in TA counties, though it was less pronounced.
The report describes in detail how these results indicate an increase in assessment accuracy and equity, rather than, say, an increase in home prices within treatment counties over the same period. Data indicate that internal factors (such as understaffed assessors’ offices and corruption) likely drove the underassessment problem, rather than external factors such as population density changes and local economic conditions. Hence, they deem the cure highly effective in treating the disease: The more inequity that existed before the intervention, the greater corrective the intervention applied.
Finally, the researchers use their estimates of the treatment effects along with the state aid formula to simulate the impacts of the intervention on state aid to the treated districts. Predictably, increasing local revenue to schools decreases the need for state dollars to level up district funding, although changes to the overall funding formula, which were also part of KERA, limit that impact slightly. Still, millions in state funding that should rightly have gone to districts playing by the property assessment rules ended up in ER and TA districts in each pre-treatment year, a situation significantly remediated post-treatment.
What does all this mean? The Fed’s research team suggests that COD double checking could be applied to any property tax assessment system to ensure its accuracy. This recommendation applies not only to schools, but to public transit, police and fire service, and libraries. Any system funded by property taxes, and run by public servants who may toil in understaffed offices or who could succumb to corruptive elements, should take advantage of this simple—and proven—double-check protocol.
SOURCE: Alex Combs, John Foster, and Erin Troland, “The Role of Property Assessment Oversight in School Finance Inequality,” Board of Governors of the Federal Reserve System (July 2023).
