By Van Smith
Published in City Paper, Oct. 13, 2004
This spring—as happens almost every spring—Baltimore confronted a budget crisis. City Hall’s $2.1 billion spending plan for fiscal year 2005 entailed cutting 533 government jobs and curtailing city services to pay for it. On April 14, Mayor Martin O’Malley proposed an alternative: a suite of new taxes and fees that would preserve the jobs and services with $48 million in revenue.
Five weeks later, with the budget process complete, the City Council had trimmed O’Malley’s tax proposal down to three elements that would generate $30 million from taxpayers: doubling levies on real-estate sales and imposing new fees on phones and energy use.
“It happened so fast,” City Councilman Keiffer J. Mitchell Jr. (D-4th) says in summing up this year’s open-and-shut budget battle in Baltimore, the most heavily taxed jurisdiction in Maryland. Mitchell chairs the council’s Taxation Committee and thus led the legislative body’s tax debate. In a recent interview, he remembered how he and his council colleagues felt as if “we had our backs against the wall” when confronted with the mayor’s proposals.
Since April, Mitchell has learned that there was an unexplored option—going after millions in untapped revenue potential from the city’s existing property-tax rolls by appealing low assessments. While O’Malley touched on this idea in passing in a Sun article in December 2003, saying that “generally the state underassesses city properties,” a strategy to get the state to do more accurate assessments never made it into his set of gap-closing proposals in April 2004—or into the City Council’s ensuing tax debate.
Property assessments are the basis for calculating how much property owners are taxed for their holdings, and are conducted by the state in three-year cycles—a third of the city is assessed each year. Baltimore City’s property tax rate, just shy of $2.33 per $100 of assessed value, is much higher than in any of the state’s 23 counties. Thus, underassessing property in Baltimore shortchanges city coffers—and, due to the high tax rate, those coffers are being shortchanged more dramatically than in other parts of the state. Montgomery County is the only jurisdiction in Maryland that appeals property assessments it believes are too low, but under state law any jurisdiction is free to do so.
Unbeknownst to Mitchell and the public during the five-week debate this past spring, a privately funded study about the revenue potential locked up in underassessed city commercial property had already been underway for more than two years. While the City Council was weighing its options, a draft report from this effort was in the hands of a select group of people for review and comment, including staff at the city’s Department of Finance. Its fundamental finding: The city should consider going after millions in unrealized revenues by appealing underassessments of commercial property within its borders. By the time Mitchell learned of the draft report, the new taxes had already become law.
“I guess it was July when I first heard about it,” Mitchell recalls, “and that was through some businesspeople. I’ve asked for a copy of it from the [city’s] finance department, but was told it was in draft form.”
The study, which has yet to be released, was overseen and underwritten by the Abell Foundation, the renowned research and grant-making outfit that works to improve quality of life in the city and state. In mid-September—five months after first hearing rumors about the study—City Paper obtained a draft copy of the report, titled “A Costly Problem: Commercial Property Assessments in Baltimore.” Its preliminary conclusions, based on comparing assessed values to the sales value of a sample of 121 commercial properties, show that nonresidential property in the city is significantly underassessed.
For example, one of the properties study author John Hentschel looked at as part of his research was the old United Iron and Metal site at Pulaski Highway and Haven Street in East Baltimore, a scrap-metal processing facility on one acre of land with a 4,400-square-foot building. The property sold for $220,000 in 2000, yet Hentschel discovered that it was assessed at $42,000—less than a fifth of the sales price. He also looked at the old Abbey Schaefer Hotel at 723 St. Paul St. in Mount Vernon, which sold for $650,000 in 2001; its assessed value was $315,020, less than half of the sales price.
The question of exactly how much city commercial properties are underassessed is still a matter for discussion as the study continues to wend its way through the review process, but it is enough to translate into millions in unrealized tax revenue—potential revenue that Mitchell believes should have been on the table when the council was weighing its budget options.
While the councilman still hasn’t seen the report, he says that what he’s heard “suggests to me that I didn’t have all the tax information that I would have liked to have had before we went raising taxes on everyone.”
Steve Kearney, O’Malley’s director of policy and communication, says that the mayor’s office wasn’t “aware of the report, because it was still a draft that was under review.” He adds that “the purpose of the report is to promote public discussion, but you don’t have the debate before you have the facts.”
“As soon as the report comes out,” Mitchell promises, “I’m going to have a hearing—one that we should have had before we started biting the hands that have invested in this city.”
The Abell Foundation was not pleased that a copy of its report-in-progress had gotten into the press’ hands.
“We’ve got a problem here,” said a stern-voiced Gilbert Sandler, Abell’s spokesman, in a late-September phone call to City Paper. “That report has not been vetted. We have no idea what’s true and what’s not true, so it is not ready, by any means—we are not ready to release any piece of it.”
Later, after talking it over with other staff at Abell, Sandler called back to say, “You do what you want to do, and we’ll do what we’re going to do.” Abell’s people would not be available for interviews or meetings to discuss the study, he explained, and he cautioned that “there are many points of view that need to be taken into account that aren’t in that draft. It’s a work in progress. You shouldn’t publish [its findings] until we release it.”
On Oct. 4, City Paper learned that Abell’s position had shifted—the study’s author would be allowed to discuss the study and address its shortcomings. John Hentschel, a real-estate appraiser who served as the city’s real-estate officer from 1982 to 1992, is founder and president of Hentschel Real Estate Services, an Abingdon-based consulting firm, and an internationally recognized expert in public-sector real-estate practices. An afternoon meeting with Hentschel at the White Marsh Mall food court presented a clearer picture of the study’s findings.
During the meeting, Hentschel—a friendly, forthcoming, well-dressed fellow who chooses words carefully as he wrangles complex real-estate concepts into clear language—readily concedes that his draft report contains some errors in analysis. But, he adds, his overall conclusions stand: The city is missing out on substantial revenues due to underassessed commercial properties, and there are steps—at both the local and state level—that can be taken to remedy the situation.
The road to the “A Costly Problem” report started, Hentschel recalls, late in 2000 or early in 2001, when “Abell called me and said, ‘We are thinking about doing a study about this, are you interested in doing it?’ And I said, ‘Sure,’ and I wrote a proposal.” He had noted, while perusing newspaper reports, that when major commercial properties sold the assessed values were well below the sales prices. “It would make you scratch your head,” he recalls.
And so, starting in late 2001 or early 2002, Hentschel embarked on a lengthy project that would ultimately lead to the draft report, “A Costly Problem,” which he submitted to Abell in late January or early February 2004. It was based foremost on looking at recently transacted commercial property sales and comparing the sales prices to the properties’ assessed values.
“The more you got into it, the more you would say, ‘Well, why is this, why is this, why is this?’” he says. “So you start asking more and more questions. And if you are not coming in with a pre-conceived conclusion, it takes you where it goes.” And where it went, Hentschel says, indicated that underassessments of commercial properties were a real problem that could be remedied if the city chose to appeal low assessments.
“Each year,” Hentschel wrote in his conclusion of the draft, “taxpayers diligently review their property tax assessments to ensure that they are being asked only to pay their appropriate share of property taxes, and no more. Isn’t it reasonable to expect local public officials to exert a similar degree of fiscal prudence on behalf of all City residents by diligently performing a similar annual review to ensure it is receiving its fair share of revenues from the assessable tax base, and no less?”
The main constructive criticisms of the “A Costly Problem” draft so far, Hentschel explains, have come from Doug Brown, supervisor for public-policy analysis in the city’s Department of Finance, who handed over his thoughts in writing to the Abell Foundation on Sept. 28.
First, Hentschel says, Brown identified a link between tax rates for real property (land and improvements, such as buildings and parking lots), which are levied against property owners, and personal property (equipment, machinery, furniture, fixtures, and the like), which are levied against business owners. The draft report, Brown pointed out, did not consider that link.
“The personal property tax rate is computed at two and a half times the real-property tax rate,” Hentschel says. Thus, he continues, if the city were to lower its real-property tax rate in response to more revenue from increased commercial-property assessments, it would have “a corresponding effect of reducing the personal property taxes” entering the community chest.
The draft report also failed to include the impact of increased property-tax assessments on the amount of state education aid to the city. If the city, on its own, successfully appealed assessments upward to the tune of millions of dollars, Hentschel says, then Brown’s “projections show there would be an adverse affect on state aid to education.” (In 2004, the state provided $533 million of the city school system’s $931 million operating budget.) Since the state divvies up education aid based on each jurisdiction’s wealth, as measured by the assessed value of its real estate, then a rise in Baltimore’s assessments—without a corresponding rise in the rest of the state’s assessments—would lead to a reduction in state aid to Baltimore’s cash-strapped education system.
Thirdly, Hentschel continues, if the city unilaterally appealed state assessments upward, “there may be an adverse reaction from an economic-development standpoint, in terms of perception” among businesses that feel they’re being picked on.
Donald Fry, president of local business group the Greater Baltimore Committee, says he knows that in the one Maryland jurisdiction where appeals of underassessments are routinely brought by local government—Montgomery County—“it has resulted in some consternation among some property owners.” Given the city’s “financial strains,” he adds, “City Hall is going to want to look at that very closely, as will we.”
However, Hentschel adds, “the report basically re-emphasizes and re-emphasizes again the matter of parity, equity—that it has to be done in an equitable and above-board fashion. There have to be safeguards put in it so there are no maneuvers to aggressively or capriciously go after certain taxpayers.”
In order to calm such concerns, Hentschel suggests a process by which the city could “look for anomalies that might give basis for appeals” of low assessments. “You need to be comparing apples to apples,” he explains, so the city should find an average assessment value for different types of properties, classified by use, age, size—whatever category works best.
“Once you have each group’s average assessment,” he continues, “you look for outliers—properties that appear to be underassessed because their values are so far below the average. And then you try to find out why. Maybe they are in an off location or they’re deteriorated with age. Then the low assessment is either explainable or not, and if not, you consider it for appeal.”
That’s a fair and equitable way, Hentschel says, to find assessments that don’t pass the smell test. The city could take up such cases with the state’s assessments office in Baltimore City for initial appeal, then, if necessary, to the Baltimore City Property Tax Assessment Appeals Board, and finally—if a case goes this far—to the Maryland Tax Court for a final, binding decision.
But, Hentschel says, Brown makes a good point on behalf of the city: Appealing for assessment increases has to be done on a statewide basis. “Otherwise,” he says, “there would be certain unintentional and adverse effects on the city because of these various linkages in other things—personal property tax, and state aid to education, and adverse perception.”
Though Hentschel did not provide a copy of Brown’s comments to City Paper, Kearney did, faxing them to the paper on Oct. 6 and asking that the document not be quoted directly. (Brown was out of the country and unavailable for comment until after press time.) Computations and conclusions contained in Brown’s written comments reveal the city’s analysis of the revenue impact of seeking to raise underassessments.
According to Brown’s written comments, an 18 percent increase in nonresidential property assessments overall would yield $26.5 million annually in new revenues for the city; and that the same assessment boost on all city property—residential properties included—would add $76.8 million to the coffers. (Brown’s analysis, in the second instance, assumes the same kind of underassessment for residential properties as well.) If the city’s response to this was to try to give taxpayers a break and reduce the real-property tax rate by the same proportion as the boost in assessments—18 percent—there would be a corresponding 18 percent decrease in the personal-property tax rate, the document explains. In other words, any reduction in the real-property tax rate would lead to a reduction in the personal-property tax rate, as well, which would result in a greater over-all revenue reduction.
When Brown’s comments turn to the subject of the aid-to-education impact of increased assessments, he uses a slightly different example—a 15 percent increase in assessments. If the city increased assessments 15 percent without any increases in property assessments in the state’s 23 counties, the city would lose $21.5 million in state aid for education, much of which would shift to other counties. If, however, each county reassessed its properties to the tune of 15 percent, then the city’s share of state aid would increase by about $7 million.
Without delving further into the mathematical and statistical minutiae of Brown’s comments and Hentschel’s draft report, it is clear that addressing underassessed properties in Maryland would have a significant impact on local-government budgets—all the greater if the job was undertaken state-wide, as Brown recommends.
For now, the state agency in charge of property assessments is staying mute on the subject. “The Abell report hasn’t been officially released,” John Sullivan, head of the state’s Department of Assessments and Taxation, says in a phone conversation. “We received the draft in April, and we responded to everything in the report, and so far the Abell Foundation has not gone forward with it. Our response to their draft is in their hands, and I’m not obliged to give you my response to that draft until it is officially released.”
However, Sullivan says that he does not think there is an underassessment problem in Baltimore, much less Maryland. “We treat all property owners the same,” he says. “Each one is our customer, and we treat that customer as we would want to be treated. And all of our assessments—every one, and we have 2 million properties we’re responsible for assessing—are valued uniformly and equitably across the state.”
While Sullivan won’t share his written comments on Hentschel’s draft, he reveals that there was at least some administrative reaction to what it contained. “It did show many examples of inaccurate assessments that have since been corrected,” he says. “I think 90 percent of the properties he cited have been adjusted.”
When City Paper reviewed some of the properties Hentschel sampled as underassessments, state Department of Assessments records indicate that nearly all have been adjusted since the study was conducted (see “The Short Lists”). Some assessments were raised to almost equal the sales price—but several upward adjustments were minor, and a couple were adjusted downward, so that the gap between assessed value and the sales prices actually widened.
In addition, City Paper did an analysis on its own set of sample properties (see “The Short Lists”). Anyone with Internet access and a minimal amount of database searching skills can go to the Department of Assessments Web site and do his or her own analysis of assessment-to-sales-price comparisons.
Even before Hentschel’s “A Costly Problem” draft report was sent out for review and comment, rumbles of discontent over possible underassessments statewide were being heard last year in Annapolis. “Property under-assessments are a significant problem facing the State of Maryland,” wrote Ronald Bowers, administrator of the state’s Property Tax Assessment Appeals Board, to state Del. Leroy Myers (R-Allegany and Washington counties) in a May 13, 2003, letter (emphasis in the original). “Many properties in the state are under-assessed at between 10 and 80 percent of the actual market value,” the letter continues. “This translates into inequitable taxes for similar properties and lost revenue for the State and local governments.”
The state Department of Assessments and Taxation “was cut back, budget-wise, and it was kind of hampering them from doing their job,” Bowers said recently when asked about the letter. “They need modern equipment other than clipboards to keep up with this ongoing problem, and they were losing people,” he says—touching on a possible reason why assessments appear to have gotten out of whack in the first place. “The proper equipment and the right amount of people is a good investment,” he continues, “because a little bit for them yields a lot for government—and a greater sense that the process is working fairly. If it isn’t fair, if it isn’t done properly, then the mainstream taxpayer is paying an extra burden.”
Councilman Mitchell echoes that sentiment: “I don’t think the city’s getting its fair share, so let’s recoup what we already have [from correcting underassessments] before we go taxing everybody. And these new taxes—especially the phone taxes—hit everybody at the same level, $3.50 per line per month. At least with property taxes, the amount you’re supposed to pay is intended to be in line with the amount of value you have.
“Right now, there is so much distrust in government that it’s not right,” he says. “We have to do what is right.”