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Most governmental units receive the bulk of their funding from property taxes. The amount a property owner pays is determined by an assessed value. In Howard County, those assessed values have been in decline for years.

That may not seem true for many homeowners who have seen their tax bills rise, but businesses and industry in the community appear to be getting a big break. That is the conclusion reached by a recent study commissioned by the city of Kokomo.

According to Kokomo director of operations Randy McKay, the study followed years of declining revenue and assessed values that city leaders couldn’t explain.

“We received our anticipated tax draw, which caused some concern, and we decided to look into it,” said McKay. “As part of that inquiry, we looked at the Gross Assessed Value for Howard County compared to the rest of the state.

“It showed that Howard County is somehow last in the state for GAV growth, which defies all logical explanations, especially when you consider that there has been over $2 billion in private investment in the past few years. Because of this concern we felt like we needed an independent, expert view on how this is possible.”

The city consulted with the Indiana Association of Cities and Towns and was directed to Indianapolis-based Nexus Group. The company was asked to evaluate the assessment process locally, and it concluded that businesses and industry were under-assessed by more than $190 million a year -- or nearly $1 billion over the five-year scope of the study.

Nexus sampled 160 business and industry properties as part of its study, and some of the disparities it claimed to find were stunning, particularly when it came to franchise restaurants. For example, the Starbucks location in the Markland Plaza is assessed currently at $159,700 -- down from $167,100 just two years ago. Nexus assessed the property at $1 million.

The McDonald’s restaurant along West Sycamore Street assesses at $650,800 -- down from $741,700 a year before. Nexus assessed the property also at $1 million. And Outback Steakhouse on the city’s south side enjoys an assessment of $537,400 -- down from $589,800 two years earlier. Nexus assessed it at $1.3 million.

Leaders alarmed

The disparity caught the attention of Dr. Jeff Hauswald, superintendent of Kokomo Schools. He and a number of other local officials were presented with the study’s findings last week. It answered questions he had held for some time.

“We watched assessed valuation drop during the recession, but every year since we expected to tick upwards,” said Hauswald. “That hasn’t happened. I had questions as to why. Something didn’t add up. We couldn’t get a clear understanding.

“So, when presented with this information, it gave us some perspective on some of the reasons the AV may be going down. Unemployment in Howard County continues to improve. We have bucked trends in population. We have new businesses moving in and new investment taking place. The news is all positive, so having AV declines don’t make sense.”

Hauswald believes that if the Nexus study proves to be accurate, there is damage being done to his school corporation by under-assessment.

“This could impact Kokomo Schools by hundreds of thousands or even millions of dollars,” said Hauswald. “We don’t want to use the study to project conclusively what the harm may be, but we are comfortable in stating if undervaluation is taking place at the level in the study, our school system is being financially harmed.”

Christopher Smith, superintendent of Taylor Schools, was similarly intrigued by the study’s findings.

“What I took from the meeting is that the mayor wanted to know why we are 92nd out of 92 counties in assessed value growth,” said Smith. “The company explained why. At the end of the day the assessed values for a number of commercial properties were extremely low.

“How can that happen and why? I don’t know. I was stunned by this presentation. Taylor Schools has no money in our capital projects account to even fix a roof or pave a parking lot. After listening to this report, if there is an issue that can be corrected -- and I don’t know if there is -- wouldn’t it be great if there was some way this could help Taylor?”

Assessor responds

The Nexus study paints a disturbing picture, but Center Township Assessor Sheila Pullen disagrees with its findings. As the person charged with setting assessed values for businesses and industry, she feels the work in her office and that done by Ad Valorem -- the contractor assisting the county in assessment -- is accurate.

“Our charge is to be fair and equitable, and I feel that is what we have been doing,” said Pullen. “I have to defend the assessed values that come out of my office. I go over our values and approve them before they are implemented.

“This is an out-of-town firm. The people who work for us live in Howard County. They work in Howard County. I’m comfortable with the job my people and Ad Valorem have done.”

Pullen added that there are a number of factors that play into the lower assessed values in Howard County. The 2008 recession hit the local community harder than just about any place in the nation. The housing market is only now recovering. The county has had to engage in legal battles with some of the largest industrial taxpayers in the community, and the “big box” stores currently are challenging their assessed values. Also, as the economy continues to improve and people find work, they are beginning to buy properties that languished on the market for years at deflated prices.

Ad Valorem CEO Jay Morris also took issue with the study and claimed that Nexus didn’t play by the same rules that his company and the assessor are forced to use at the direction of the state

“They do not know the area, and they did not do a market analysis,” said Morris. “They did an assessment analysis. They came in with the knowledge that they had from other counties and said, ‘We have our office space at $52 a square foot, so you are under-assessed.’

“We have to use the market and sales that we have here. We are not under-assessed. The ratio study that we submitted to the state has us at 92 percent of the market. By state guidelines, we are supposed to be between 90-110 percent of the market.”

Morris said that after getting a look at the Nexus study, he made some comparisons of his own, searching out businesses in counties not serviced by Nexus or Ad Valorem. What he found reinforced his confidence that local assessments are appropriate.

“I did pull other counties that are similar to our size, and the restaurants I found there are similar in value to the ones we have,” said Morris. “Nexus is one of those companies that went in and felt that the restaurants should be assessed at what they are selling for.

“Here is the problem with that. You have two Arby’s that have sold in the last four years. They sold for $1.8 million, but that is a sale lease-back. They are buying the lease, not the real estate. The state has been very clear that we cannot use sale lease-backs.”

Morris also took issue with the fact that the Nexus study employed information gleaned from a website called Loopnet -- a resource used by Realtors to track sales of commercial properties across a large geographical area -- rather than comparable sales figures from the local community.

“One property on Loopnet showed a sales value of $750,000, but the local sales disclosure showed that the actual sale price was $150,000,” said Morris. “If this is the data they used, when they either have the wrong sale price or they do not have all of the parcels that were part of the sale, they were running on their knowledge.”

Though Morris admittedly has had little time to examine the Nexus study, his conclusion is that the company tried to apply what might be true in other communities to Howard County -- a practice he would not employ if the roles were reversed.

“They don’t know Howard County,” said Morris. “I would not presume to go down to Bloomington and understand how Nexus can have a base rate of $650,000 an acre on a street a mile away from the college campus. They have evidence to back that up. I wouldn’t say there is no way they can do that because I don’t know Bloomington.

“To come into Howard County and not do a ratio study, that shows very poor choice or effort. For the mayor to take this report and run with it without consulting us shows the same type of carelessness.”

Despite her misgivings about the study, its methodology, and the fact that the city engaged in the study without first consulting with her or Ad Valorem, she pledged to examine the findings and re-evaluate her processes.

“We will be objective and look at everything to see if there is a problem,” said Pullen. “But our numbers have been good. Our ratio numbers have been approved by the state. I know some taxing units are suffering. But I’m not sure it is fair to lay that at our feet.”