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Report to the Arizona Legislature
By the Auditor General
December 1995
Report # 95- 15
DEPUTV lUDlTOs GENERAL
December 11, 1995
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. Harold Scott, Director
Arizona Department of Revenue
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Department of Revenue ( DOR) Property Valuation and Equalization Division. This
report is in response to a May 5, 1993, resolution of the Joint Legislative Audit
Committee. The performance audit was conducted as part of the sunset review set forth
in A. R. S. 5541- 2951 through 41- 2957.
This is the first in a series of four reports to be issued on the Department of Revenue.
The report addresses the need to improve Arizona's property tax system to make it less
confusing to taxpayers. In addition, DOR needs more authority to enforce equalization
and consistency in property tax values. Further, DOR needs to continue to improve its
Centrally Valued Property audit function to ensure that a sufficient number of
productive audits are performed and that the audits follow auditing standards. Finally,
DOR can do more to ensure that its automated property tax data is reliable, and that
effective records retention and disaster recovery plans are developed and implemented.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on December 12, 1995.
~ o u wRs. Norton
Auditor General
2 9 1 0 NORTH 44TH STREET rn SUITE 4 1 0 . PHOENIX, ARIZONA 8 5 0 1 8 . ( 6 0 2 ) 5 5 3 - 0 3 3 3 . FAX ( 6 0 2 ) 5 5 3 - 0 0 5 1
The Office of the Auditor General has conducted a performance audit of the Department
of Revenue ( DOR) Property Valuation and Equalization Division, pursuant to a May 5,
1993, resolution of the Joint Legislative Audit Committee. The audit was conducted as
part of the sunset review set forth in Arizona Revised Statutes ( A. R. S.) 5541- 2951 through
41- 2957 and is the second in a series of four audits of the Department.
Arizona's constitution and statutes require that similarly valued properties be assessed
and taxed consistently. Although much of this work is performed by elected county as-sessors,
A. R. S. 542- 141. A( 1) specifies that DOR shall
" ...[ Elxercise general supervision over county assessors in the administration of the state
property tax laws fov the purpose of insuring that all property is uni, forrnly valued for state
property tax purposes. "
It is important that property values be consistent and accurate since property value is the
basis for apportioning the cost of government. When similar properties are not valued
consistently, the tax burden is not fairly distributed. Further, equity and consistency are
important because the formulas that distribute state funds such as state equalization aid
for public education are based on property values.
Arizona's Property Tax System
Could Be Improved
( See pages 6 through 13)
Arizona's property tax system is confusing and can mask inequitable property tax ap-praisals.
Arizona's 82 percent property valuation standard is too low and should be made
equivalent to market value. Currently, Arizona appraises and then taxes property based
on 82 percent of a home's market value. This low valuation standard is not only confus-ing,
but it can have the effect of hiding inequitable appraisals from property owners.
Because property owners are most familiar with the market value of their property, they
may mistakenly think that any appraised value lower than the market value is appropri-ate,
whether the appraised value is too high or not. For example, an owner of a $ 100,000
home could be appraised at $ 95,000 instead of the more appropriate $ 82,000 level and not
become alarmed because $ 95,000 is still less than market value. The effect, however, is
that this homeowner would pay more property tax than necessary. The International As-sociation
of Assessing Officers and other experts recommend appraising property at its
full market value. To do so, however, will require a change in Arizona's statutes.
The State should eliminate a second valuation: the limited property value portion of the
property tax. Added in 1980 to limit increases in property taxes, this component adds
further confusion for the taxpayer and is unnecessary. Other controls, such as levy limits,
have subsequently been put in place to control property tax growth, rendering the lim-ited
property valuation obsolete.
Finally, DOR should consider redesigning Notice of Valuation cards to include more in-formation,
such as tax impact statements, to improve understanding of the property tax.
DOR Needs More Authority to Enforce the
Equity and Uniformity of Property Values
( See pages 14 through 20)
DOR has limited authority to ensure that property is valued equitably and consistently in
Arizona. DOR can issue equalization orders to county assessors when the median value
of properties in an area is significantly above or below the State's adopted standard of 81
or 82 percent of full market value. The equalization order's intent is to equalize property
values between different areas in the State to help ensure that the property tax burden is
shared fairly statewide. If areas are not equalized, school districts in one area of the State,
for example, may receive more or less state aid to education than is appropriate. To help
ensure that the property tax burden is shared fairly by property owners within an area,
DOR can request that a county assessor reappraise properties within a specific area when
property values vary significantly. This helps ensure that property owners within an area
are paying their fair share of property taxes relative to everyone else within that area.
DOR's efforts to achieve property value equity between areas have had limited success.
DOR has limited authority to enforce equalization and no authority to enforce reapprais-als.
DOR's equalization enforcement options are weak ( not allowing county assessors to
issue property valuation notices) or not practical ( filing suit to remove the county asses-sor
from office). Therefore, in an attempt to work with county assessors to effect equaliza-tion,
DOR tried a different approach to equalization in 1991 and 1993, one which placed
more trust in county assessors to address property appraisal problems. Previously, DOR
issued equalization orders when were identified. Under the new approach,
equalization orders were not issued if county assessors wrote a letter of intent to comply.
Unfortunately, county assessors did not equalize in all cases, with compliance dropping
off to 57 percent in 1991 and 1993, as compared to 87 percent compliance in 1989.
In addition, little has been done to address the widespread problems with the consistency
of property values within areas of the State. For the last three equalization periods ( 1989,
1991, and 1993), approximately 96 percent of the commercial property areas, 66 percent of
the vacant property areas, and 27 percent of the residential property areas in the State
suffered from problems with the consistency of values. In these instances, statutes only
allow DOR to " request" county assessors to reappraise properties within the areas where
property value consistency problems exist.
Other states provide their departments with the authority to withhold state funds until
equalization or consistency problems are addressed. The Legislature should consider pro-viding
DOR the enforcement authority needed to help ensure that all areas of the State
and individual property owners pay their fair share of taxes.
Improved Methods Needed for
Equity and Consistency Analyses
( See pages 22 through 24)
DOR can improve its assessment of equity and property value consistency by adopting
some additional methods and revising others. DOR currently cannot take equalization
action on those areas of the State that do not have a sufficient number of property sales
during a specified time period. When areas are not subject to potential equalization ac-tions,
any potential problems with property owners paying more or less than their fair
share of taxes are not addressed. For equalization years 1989,1991, and 1993,244 out of
745 total areas were not able to be subject to potential equalization actions. When a suffi-cient
number of property sales during a specified time period is not available, the Inter-national
Association of Assessing Officers ( IAAO) recommends other methods be used
when possible, such as extending the time period from which sales are drawn, to gener-ate
enough data to analyze.
DOR also needs to adjust and adopt statistical methods to help ensure the validity of its
equity and consistency analyses. To assess equity and the consistency of property values,
DOR performs sales ratio studies. A part of this analysis includes eliminating properties
that have extremely high or low sales ratio values. DOR's current practice excludes all
sales ratios above or below certain fixed points. This is appropriate, according to IAAO
standards, if no more than 5 percent of the sales ratios are discarded. DOR, however, does
not check how much data is eliminated and we found, in one instance, that 19 percent of
the sales ratios were discarded. Eliminating too many sales ratios could skew the results
that DOR uses to assess equity and consistency. Finally, DOR needs to utilize a statistical
reliability measure when consistency is good to help ensure that the results of its sales
ratio analyses accurately portray the characteristics of the areas being evaluated and
equalization actions are supported.
DOR'S Centrally Valued Property
Audit Function Needs to Be Improved
( See pages 26 through 29)
While centrally valued properties ( CVP) account for approximately 26 percent of the total
tax base in the State of Arizona, the DOR CVP audit function has done little to ensure that
information reported by these taxpayers is accurate and complete. DOR, rather than the
15 county assessors, values properties such as utilities, mines, railroads, airlines, and pipe-lines
that typically lie within two or more counties or states. We found that DOR's audit
function has been ineffective. Only 16 audits were performed between September 1993
and March 1995. Of those, only two were finalized with the taxpayer. DOR has not devel-oped
any performance measures to evaluate the effectiveness of this audit function. In
addition, auditors have not incorporated or utilized professional auditing standards.
DOR stated that CVP productivity problems were due to initial misclassification of CVP
auditor positions. DOR has since reclassified one position and has developed a written
audit program that addresses some auditing standards. The Department, however, lacks
needed statutory authority to assess back taxes, penalties, and interest if DOR determines
that the CVP taxpayer has underreported property tax information.
DOR Needs Better Controls
Over Property Tax Data
( See pages 31 through 33)
Controls over property tax data are inadequate. DOR needs to assist individual counties
in developing adequate controls over the input of property tax data into county computer
systems. Even though DOR relies on this data, DOR has not issued data control proce-dures
to the counties. In addition, DOR has few controls in place to review and ensure the
validity of data received from the counties. In addition, DOR's own record retention policy
for property tax information is unclear. Further, DOR does not have an appropriate disas-ter
recovery plan. In the event of any major software or hardware failure, DOR may not
be able to perform its required functions.
Table of Contents
Introduction and Background ............................................................... 1
Finding I: Arizona's Property Tax System
Could Be Improved ............................................................................ 6
Property Tax Considered
Most Confusing Tax ................................................................................................... 6
Arizona's Property Valuation
Standard Can Mask Inequities ................................................................................ 8
Limited Property Value
Is Unnecessary ......................................................................................................... 1.. 1
More Can Be Done to
Improve Public Awareness ..................................................................................... 1. 2
Recommendations ................................................................................................... 1.. 3
Finding 11: DOR Needs More Authority
to Enforce the Equity and Consistency
of Property Values ........................................................................... 1 4
Two- Step Process for Determining
Equity and Consistency ............................................................................................ 1 4
DOR Needs to Improve
Its Equalization Process ............................................................................................ 15
No Authority to Enforce Property
Value Consistency Standards ................................................................................... 17
Recommendations ..................................................................................................... 20
Table of Contents ( cony)
Finding Ill: lmproved Methods Needed
for Equity and Consistency Analyses ............................................ 22
Recommendations ..................................................................................................... 24
Finding IV: DOR's Centrally Valued Property
Audit Function Needs To Be Improved .......................................... 26
Audit Function Was
Ineffective and Unproductive ..... ........................................................................... 27
Department Bid Not Consistently
Adhere to Auditing Standards ............................................................................... 27
Additional Statutory
Authority Needed .................................................................................................. 28
Recommendations ...................... ... ..................................................................... 29
Finding V: DOR Needs Better Controls
Over Property Tax Data ................................................................... 31
Recommendations .................................................................................................... 3. 3
Other Pertinent Information ............................................. .-.. ................ 35
Agency Response
Appendix A .......................................................................................... a- i
Table 1
Table 2
Table 3
Table 4
Table 5
Table 6
Table 7
Property Tax Revenue Distribution
Calendar Year 1994 ......................................................................... 1
Process for Calculating Property Tax ............................................ 7
Number of Areas with
Inconsistent Property Values ........................................................ 19
Number of Total Areas Statewide That
Have Not Been Subject to Potential
Equalization Actions by DOR ...................................................... 22
Centrally Valued Property vs.
Locally Assessed Property
for Tax Year 1994 ............................................................................ 26
Property Classification in Arizona .............................................. 37
Comparison of Current Requirements
and Recommended Practice for Sales
Ratio Study Adjustments ............................................................ a- ii
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Revenue ( DOR) Property Valuation and Equalization Division, pursuant
to a May 5,1993, resolution of the Joint Legislative Audit Committee. This audit is the
second in a series of four audits. The audits are conducted as part of the sunset review set
forth in Arizona Revised Statutes ( A. R. S.) 9541- 2951 through 41- 2957.
Property Tax Funds
Schools and Government
Property tax revenues benefit school districts, special districts, and county, city, and state
governments. In calendar year 1994, nearly $ 2.8 billion in property taxes was levied in
the State of Arizona. These taxes were distributed to school districts, special districts, and
county, city, and state governments. Table 1 illustrates that school districts are the pri-mary
recipients, receiving approximately 62 percent of property tax revenues. Cities and
counties receive approximately 27 percent, with special districts and the State receiving
the remainder.
Table 1
Property Tax Revenue Distribution
Calendar Year 1994
Source: Auditor General staff analysis of data contained in the Arizona Department of Revenue 1994 Annual Report.
The Property Tax System
Must Be Equitable
To ensure fairness and taxpayer confidence, the property tax system must distribute the
tax burden equitably. Arizona's constitution and statutes require that similarly valued
properties be assessed and taxed consistently. A. R. S. 542- 14l. A( 1) specifically states that
the DOR shall:
"[ E] xercise general supervision over county assessors in the administration of the state
property tax laws fm the purpose of insuring that all property is uniformly valued fm
state property tax purposes."
It is important that property values be consistent and accurate since property values are
the basis for apportioning the cost of government. When similar properties are not valued
consistently, the tax burden is not fairly distributed. Further, equity and property value
consistency are important because the formulas that distribute state funds such as state
equalization aid for public education are based on property values.
Counties and DOR
Have Significant Roles
in the Property Tax System
Arizona's counties and DOR administer the property tax system in the State. Elected county
assessors are primarily responsible for establishing accurate, equitable, and complete prop-erty
appraisals based on market value. Although the State of Arizona does not receive a
significant portion of property tax collections, the Arizona Department of Revenue plays
a significant role in the administration of the property tax system. The Department has
the authority and responsibility to ensure that all property is consistently valued. Fur-ther,
when inconsistency exists, the Department may request the assessor to conduct field
appraisals in the area of the discrepancy. This request could come in the form of an equal-ization
order or a reappraisal order. However, in extreme cases the Department can pur-sue
a statutory special action in the courts if the assessor fails to follow a request it has
The Department assists and oversees the county assessors to ensure that all property is
consistently valued. Some examples of important assistance responsibilities include:
Standard Appraisal Models - These models assist the county assessors in determin-ing
property values. For example, the Department develops mass appraisal models
that provide the assessors with methods for collecting, analyzing, and processing data
to produce values. Further, other standard appraisal methods, including the construc-tion
cost system and land system, are developed and maintained by the Department
for the assessors' use.
4 Technical Assistance - The Department provides ongoing technical assistance to
individual counties on valuation and assessment issues.
4 Direct Staffing - The Department provides direct staffing for projects such as
recanvassing and updating tax rolls. For example, in calendar year 1994, the Depart-ment
assisted Cochise County with the Bisbee historic property recanvassing project.
Currently, the Department is extensively assisting Maricopa County in adding new
properties to the tax rolls.
The Department also has general supervisory authority over the 15 county assessors. This
oversight responsibility includes performing sales ratio studies, conducting audits of
county assessors' offices, and administering a training and certification program for county
property appraisers.
4 Sales Ratio Studies - These studies compare, for a given time period, a parcel's
appraised value ( established by the county assessor) to its selling price. Moreover, the
study provides a measure of the quality of appraisals and the inequity between ap-praised
values that may exist within a county or statewide. In addition, the ratio stud-ies
are an internal quality control procedure for both the Department and the county
assessors. The Department can use the sales ratio studies to determine if reappraisals
are needed.
4 County Assessor Audits - The Department conducted management audits of six
county assessors' offices from 1992 through 1994. These audits included reviews of
the counties' valuation processes, records retention systems, and operating proce-dures.(')
4 Training and Certification Programs - The Department's property appraiser certifi-cation
program ensures that properties are appraised using similar techniques state-wide
for property tax purposes. The Department also provides continuing education
and maintains required standardized manuals for all county assessors and their staff.
(') After 1994, DOR stopped audits of the county assessors until a new audit approach is developed.
In addition to assistance and oversight, the Department is required by statute to annually
value 13 industries within the State. These industries, called centrally valued properties
( CVP), include all utilities, railroads, airlines, pipelines, water companies, mines, and
other complex or geographically dispersed properties. The Department determines the
values of these industries using information provided by the taxpayer. Once the indus-tries
are valued, the Department notifies the counties of the values to be entered on their
tax rolls. Counties use tax roll values to levy and collect property taxes.
The Department also audits the centrally valued properties. The audit function should
ensure that the taxpayer- reported information DOR uses in its valuation process is valid
and complete. The audit function should also verify DOR's original valuation and collect
any additional taxes owed.
Organization, Budget, and Staffing
The Property Valuation and Equalization Division is divided into two sections: Valuation
and Assessment Standards and Equalization. Most of the Division's staff are located at
DOR's main office in Phoenix; however, staff are also located in field offices around the
In fiscal year 1994- 95, the cost to appraise property and administer the property tax sys-tem
statewide was approximately $ 28.7 million, and involved nearly 800 FTEs. The Prop-erty
Valuation and Equalization Division was appropriated approximately $ 3.3 million
of General Fund monies and 77 FTEs for Division operations. According to the 15 county
assessors, in fiscal year 1994- 95 they employed a total of 720 FTEs and spent approxi-mately
$ 25.4 million to establish property values within their counties.
Audit Methodology and Scope
Our audit work concentrated on the role that the DOR Property Valuation and Equaliza-tion
Division plays in the Arizona property tax system. This audit does not specifically
address the various county assessor roles in the property tax system.
We utilized a variety of methods in our analysis including extensive interviews with all
15 county assessors, property tax experts within Arizona and in other states, and a review
of the 1989 Fiscal 2000 study conducted by the Arizona Joint Select Committee on State
Revenues and Expenditures.
As DOR has statutory authority to ensure the consistency of appraised property, we de-termined
the adequacy of the Department's role by examining the last three equalization
sales ratio studies performed by DOR. An equalization sales ratio study is generated
every two years; therefore, we attempted to analyze the equalization process back to cal-endar
year 1989.
Our report presents findings and recommendations in five areas:
H The need to make Arizona's property tax system less confusing and more equitable
for taxpayers.
H The need for more authority to enforce the equity and consistency of property values.
H The need to improve statistical analyses of equity and consistency.
H The need to improve the CVP audit function,
H The need to improve the controls over property tax data.
The audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Director of the Department of
Revenue, DOR staff, and the 15 county assessors for their cooperation and assistance dur-ing
the audit.
The property tax system is confusing to taxpayers and can mask significant tax inequities.
Under the current system, property is appraised at 82 percent of full market value. Be-cause
homeowners and other property owners are most familiar with the full market
value of their property, they may assume any appraised value below full market value -
even when it is an overappraisal - is in their favor. The low valuation standard of 82
percent can also mask inequities between taxpayers' tax bills. In addition, the limited
property value component of the property tax system should be repealed. Created by a
constitutional change in 1980 in response to concerns of rapidly escalating property val-ues,
it has been supplanted by statutory limits on how much local governments can in-crease
their annual tax levies. DOR can assist county assessors in making the property tax
system less confusing by redesigning annual Notice of Valuation cards to include more
information regarding property appraisals and the projected impact on property taxes.
Property Tax Considered
Most Confusing Tax
Many property owners in Arizona lack a clear understanding of how the property tax
system works. Poor public awareness is understandable since Arizona's property tax sys-tem
is among the most complex in the nation.
A 1990 national poll commissioned by a tax research foundation found that taxpayers
ranked the property tax as the most unfair tax. One property tax expert believes taxpayers
generally have a low opinion of the property tax because they lack a clear understanding
of how the system works. For example, he points out that few property owners under-stand
the jargon of assessed value, assessment ratios, equalization, tax levies, and other
aspects of the property tax system and its administration. As a result, few taxpayers un-derstand
the relationship between property taxes and assessment, which in many cases
can lead to property owner complaints and unnecessary appeals.
Arizona's counties and DOR administer the property tax system in the State. Elected county
assessors are primarily responsible for establishing accurate, equitable, and complete prop-erty
appraisals based on market value. As shown in Table 2 ( see page 7), county assessors
Table 2
Process for Calculatinq Propertv Tax
County Assessor estimates a property's value using the follow-ing
appraisal models. ( a)
W Cost Approach Appraisals
W Market Comparison Approach
W Income Approach Appraisals
Step 2: Determination of Property's Legal Class
County Assessor determines the property's legal class ( from
among 12 current property classes) and selects the correspond-ing
assessment ratio ( ranging from 1 to 100%).
Step 3: Calculation of Property's Assessed Value
From Full Cash Value( b1
County Assessor calculates the property's assessed value by
this formula:
Appraised Value X Appropriate Assessment Ratio = Assessed Value
The assessed value is derived from Full Cash Value and is the basis for secondary
property taxes such as budget override levies and service of bonded indebtedness.
County Assessor uses a statutory formula to calculate the pro-perty's
limited property value, which is multiplied by the appro-priate
assessment ratio.
The assessed value derived from limited property value is the basis for primary
property taxes such as general operating and maintenance expenses of jurisdictions.
( d) Limited property value is defined as the previous year limited property value
increased by either 10 percent or 25 percent of the difference between the previous
year limited property value and the current full cash value, whichever is greater.
Source: Auditor General- staff analysis of process for calculating property tax.
rely on standard appraisal techniques such as market comparisons, replacement cost, and
the income approach to estimate a property's full cash value for property tax purposes.
Assessors determine the property's classification from among the 12 current property
classes and calculate the property's assessed value by multiplying the appraised value by
the corresponding assessment ratio. In addition, assessors in Arizona need to make addi-tional
calculations to determine an assessed value from the limited value for each prop-erty
which is used in determining the primary property taxes. When all properties are
assessed and the taxing jurisdiction has determined the amount of revenue needed to
fund operations during the fiscal year, the jurisdiction levies a tax rate on assessed value
to cover planned expenditures.
Many people familiar with Arizona's property tax system, including property tax ex-perts,
current and former DOR administrators, and county assessors, believe it is unnec-essarily
complex. Many people we interviewed agreed that, as a result of the complexity,
the vast majority of property owners are unfamiliar with how Arizona's property tax
system works. During our review, we identified several factors that appear to cause con-fusion
among property owners, including a statutorily mandated property valuation stan-dard
that is well below full market value, and the limited property value.
Arizona's Property Valuation
Standard Can Mask Inequities
Arizona's property valuation standard is confusing to taxpayers and can mask significant
tax inequities. Property valuation standards are used to ensure that property values are
consistent at the local, county, and state level. Arizona's use of a standard that is well
. below full market value, however, confuses property owners and may perpetuate prop-erty
tax inequities. To make the property tax system more understandable and equitable,
Arizona should adopt a property valuation standard that is closer to full market value.
Bnckgrollnd - Arizona's constitution and statutes require that all property be appraised
accurately, consistently, and at full cash value ( FCV). FCV is synonymous with market
value. According to the International Association of Assessing Officers ( IAAO), market
value is defined as the most probable price that a property would sell for in a competitive
and open market, assuming that the buyer and seller are acting knowledgeably, sufficient
time is allowed for the sale, and price is not affected by special influences. Although
market value is equivalent to full cash value in Arizona, A. R. S 542- 141. C requires that
DOR target a median full cash value of 82 percent of the recent sales price for comparable
residential property and vacant land and a median of 81 percent for commercial prop-
(') The S2 and 81 percent property valuation standards are used to determine the level or overall ratio at
which properties are appraised in individual market areas, across counties, and throughout the State.
erty. cl) Since it is not possible for a mass appraisal system like that used in Arizona to
value all properties at exactly 82 or 81 percent of their recent sales prices, assessors are
given a 10 percent " window"(') on each side of the 82 and 81 percent target ( 74 to 90
percent for commercial property and 73 to 89 percent for residential and vacant property)
to account for any mass appraisal error.
The 82 percent target is no longer valid - The 82 percent target, however, is no longer
methodologically valid. The median target of 82 percent was established to account for
various factors at work in the Arizona real estate market in the 1980s such as high interest
rates and a sluggish real estate market. However, with improved economic conditions,
several DOR reports since 1990 have found the 82 percent target no longer appropriate
and recommended that the property valuation target be moved closer to full market value.
A review of the factors that make up the 82 percent standard found that two adjustments,
abnormal time on the market and a second mass appraisal error adjustment, were not
necessary. Two other adjustments, for creative financing and personal property, should
be made on a per- parcel basis, rather than across the board for'all properties as is cur-rently
done. Correcting these problems would result in a methodologically correct valu-ation
standard of 100 percent with a 10 percent allowance for mass appraisal error. A
more detailed analysis of these factors is found in the Appendix ( see pages a- i through
a- ii).
A low valzration standard can ntislead property owners and mask inequities - Arizona's
property valuation target of 82 percent for residential and vacant land and 81 percent for
commercial property can mislead property owners and mask significant tax inequities.
Property owners tend to be most aware of the full market value of their property and may
not understand that the appraised value is different. A 1993 study commissioned by DOR
found that even when there is relatively consistent appraisal, more than 10 percent of the
properties will be overappraised by as much as 15 to 25 percent and nearly another 10
percent of the properties will be overappraised by more than 25 percent. In addition, an
equal number of properties will be similarly undervalued. Further, the study concluded
that while some taxpayers are being overappraised, and therefore overtaxed, the low
property valuation target helps to keep most properties well under market value, which
is likely to prevent most property owners from knowing their appraisals are incorrect.
For example, with a median property valuation target of 82 percent and good uniformity,
it is possible that two residential properties in Maricopa County, each with a sales price of
$ 117,000, could have significantly different appraised values, ranging from $ 81,549 to
$ 110,331, and significantly different property tax bills, ranging from $ 1,018.55 to $ 1,378.03.( 2)
However, both property owners may think their property is under- appraised because
both appraised values appear to be below market value.
('' The 10 percent " window" equates to 10 percent of the 82 percent and 81 percent targets, or 8.2 and
8.1 percentage points, respectively.
( 2) With a property valuation target of 82 percent, a home with a sales price of $ 117,000 should have an
appraised value of $ 95,940 (. 82 x $ 117,000). If the home is underappraised by 15 percent the appraised
value would be $ 81,549 ( 35 x $ 95,540). A home of the same value which is overappraised by 15 percent
would have an appraised value of $ 110,331 ( 1.15 x $ 95,540).
Several property tax experts we spoke with agree that a property valuation standard well
below market value, like that used in Arizona, can confuse property owners and allow
tax inequities to continue. One expert referred to the low standard as a " fudge factor,"
whereby most properties are appraised at a level well below market value to reduce the
volume of taxpayer appeals. In fact, some experts believe assessors generally have a natu-ral
inclination to keep values low to minimize appeals. Despite this, however, several
county assessors in Arizona told us that the current property valuation standard is too
low and that it needs to move closer to full market value.
Arizona should adopt a better valuation standard - To make the property tax system
less confusing and more fair, Arizona should raise its property valuation standard closer
to full market value. IAAO and other property tax experts support using a valuation
standard closer to market value. Moreover, most states that have adopted sales ratio stan-dards
use a property valuation standard closer to market value.
According to the IAAO and other experts, state property tax systems should use a median
property valuation standard that approximates full market value with a window of 10
percent on each side. According to the IAAO, "[ Tlhe overall level of appraisal of the jurisdic-tion
and each major class of propwty sholild be befween .90 and 1.10, although jurisdictions rrray
set nlore stringent standards." Experts believe that this standard helps ensure that legiti-mate
appraisal errors are not concealed by low appraisals overall, while making reason-able
allowances for errors caused by appraising many properties in a short time. Al-though
some assessors are concerned that changing the standard would significantly in-crease
appeals, several other assessors told us that while appeals would probably in-crease
in the short- term, they would most likely drop off as property owners better un-derstood
the system. Similarly, a recent DOR commissioned report indicated that mov-ing
the standard closer to market value should not overburden the county assessors with
taxpayer appeals.(')
Raising the property valuation standard closer to full market value could cause a shift in
the property tax burden. To ensure that the property tax burden is appropriately distrib-uted,
taxing authorities and the Legislature could consider adjusting property tax rates to
compensate for an increase.
Setting the valuation standard at full market value ( with a window of plus or minus 10
percent) would bring Arizona in line with the IAAO standards and many other states.
. Twenty of the 30 states with appraisal systems similar to Arizona use this or a stricter
standard. Some states, including Colorado and Iowa, set the valuation standard at full
market value with a window of plus or minus 5 percent. A higher standard should pro-
(') Gloudemans, Robert J., " Analysis and Recommendations on Sales Ratio Standards," ( prepared for the
Arizona Department of Revenue), January 15,1993.
vide property owners with more meaningful information, which should enable them to
monitor the accuracy of their appraisals more easily and seek correction of appraisals that
are too high in comparison to other properties. In fact, experts have found that higher
appraisal levels contributed to greater consistency of appraisals overall in several states,
including Minnesota, Virginia, and Wisconsin.
Limited Property Value
Is Unnecessary
Since 1980 Arizona has had two distinct valuation bases for each parcel of property: full
cash value and limited property value. Although the creation of limited property value
was intended to restrict the growth in property taxes, other measures such as levy limits
have made it unnecessary. To simplify the property tax system, the Legislature should
consider eliminating limited property value.
In 1980 the Arizona Legislature proposed the creation of a second form of property valu-ation
called limited property value. The Legislature was concerned with an initiative
advocating property tax reforms akin to those found in California's Proposition 13, which
effectively froze property taxes for established homeowners. Arizona voters, anxious to
limit the effect of inflation on property taxes, approved the constitutional change creating
limited property value in a special election in June 1980. Limited property value is a
reduced representation of full cash value and is the basis for calculating primary property
taxes, which account for the majority of the property tax burden.
Limited property value colzfuses property owners - The concept of limited property value
is confusing to taxpayers. Limited property value is defined as the previous year limited
property value increased by either 10 percent or 25 percent of the difference between the
previous year limited property value and the current full cash value, whichever is greater.
In 1983, just three years after the creation of limited property value, a study conducted by
the Governor's Task Force on Assessment Practices recognized that property owners do
not fully understand the dual value system of full cash and limited property values. Simi-larly,
a recent DOR study found that having two taxable values for each property sub-stantially
complicates the property tax system. Many county assessors told us that having
both a full cash value and a limited property value confuses property owners and re-quires
assessors and their staff to spend valuable time and resources explaining the con-cept
to taxpayers. In addition, some county assessors told us that a dual valuation system
increases the chance for administrative and clerical errors, which, if left uncorrected, could
lead to property tax rates being levied on inaccurate values.
Other ~ tzeanso f constraining property taxes exist - Many people familiar with Arizona's
property tax system agree that limited property value is not needed as there are other
mechanisms that limit the effect of rapid increases on property taxes. A 1989 report of the
Joint Select Committee on State Revenues and Expenditures recommended simplifying
Arizona's property tax system by eliminating the distinction between full cash value and
limited property value. In addition, some experts question the value of having a dual
valuation system, since the difference between limited property value and full cash value
for property in most counties is negligible. According to data from DOR, limited property
value statewide was approximately 97 percent of full cash value during tax year 1994.
The Committee and property tax experts believe existing constitutional levy limits, which
limit the increase of property tax levies to 2 percent over the previous year, are effective in
restricting the growth in property taxes.
More Can Be Done to
Improve Public Awareness
To help improve public awareness of the property tax system, DOR should help county
assessors provide more information to property owners. Specifically, DOR could rede-sign
Notice of Valuation cards to include more information regarding property apprais-als
and the projected impact on property taxes.
Notice of Valuatiotz cards could be inzproved - Currently, DOR provides each county
assessor Notice of Valuation cards, which assessors use to notify property owners of the
proposed valuation of each parcel of real property located in the county. Notice of Valu-ation
cards contain critical information on the property including the parcel number, le-gal
property class, current and previous yeafs full cash value and limited property value,
the net assessed value, and other important information. We found, however, that the
Notice of Valuation cards do not provide the property owner with adequate information
on the property's total appraised value expressed in terms of full market value. Accord-ing
to both IAAO standards and property tax experts, property owners need to have clear
information on how assessed value relates to market value when the two differ. Accord-ing
to one expert, providing taxpayers with more information should enable them to
better monitor their assessments and allow them to " detect and seek corrections of incor-rect
assessments." Moreover, other states that have property valuation standards below
market value, such as Illinois, provide property owners with information on the notice
cards regarding their property's full market value.
Property owners should receive tax impact statements - In addition, DOR could help
county assessors improve public understanding of the property tax system by redesign-ing
Notice of Valuation cards to include tax impact statements for property owners. Tax
impact statements provide each property owner with useful information on how prop-erty
tax bills are calculated. According to IAAO and other experts, tax impact statements
are useful because they help property owners understand what their property tax pay-ment
will be, based on proposed local budgets, and how it compares to their previous
year's tax bill. Several states, including Florida and Utah, have strong truth in taxation
laws that provide property owners with detailed information on their property taxes.
According to officials from these states, tax impact statements have been successful in
improving public understanding of the property tax system.
Redesigning the annual Notice of Valuation card to include additional information will
require some DOR staff and computer programming time. In addition, since the rede-signed
notice may be larger than the current notice, counties may have higher printing
and postage costs. DOR should work with county assessors to ensure that the redesigned
notice includes useful information and is cost- effective.
1. To improve the property tax system, the Legislature should consider taking steps to
make the system less confusing. Specifically:
a. The Legislature should consider amending A. R. S. $ 42- 141. C to replace the current
property valuation standard with the IAAO recommended valuation standard of
- 90 to 1.10 of full market value.
b. The Legislature should consider eliminating limited property value. This would
require a constitutional amendment and a public vote.
2. To improve public awareness of the property tax system, DOR should assist county
assessors in providing property owners with better information on their assessments.
Homeowners, other property owners, counties, local governments, schools, and the State
can be impacted financially when the property tax system is not administered to ensure
equity and consistency. A two- step approach is necessary to ensure that property values
between different areas of the State, as well as within the same area, are equitable and
consistent. DOR's recent approach to helping ensure equity between different areas of the
State appears to have been less effective than past efforts, and the process suffers from
lack of enforcement authority if county assessors do not comply with the Department's
orders to equalize property values. In addition, problems with the consistency of prop-erty
values exist within geographic areas of the State, but DOR has little authority to
address those problems.
Arizona statutes and DOR's own administrative rules require the Department to ensure
the equity and consistency of property values. As indicated in Finding I, equity and con-sistency
are paramount to ensure taxpayers are treated fairly and have confidence in the
property tax system. The Department uses sales ratio studies as the basis for ensuring
equity and consistency. Sales ratio studies compare county assessors' appraised property
values to the properties' most recent sales prices. The Department compares the results of
these studies to established standards to make determinations concerning the equity and
consistency of values of various property types in specific areas of the State. DOR is then
required to take action to remedy any problems.(')
Two- Step Process for Determining
Equity and Consistency
Determining if property values are equitable and consistent is a two- step process. The
first step is to determine if the appraisal level in an area is comparable to the appraisal
levels in other areas of the State. If one area's appraisal level is understated, it can create
inequitable tax burdens among areas of the State. For example, the appraisal level is an
important element in determining how much state aid to education a school district re-
(') DOR is required to take action based on sales ratio studies generated in odd- numbered years only.
ceives. If the appraisal level is understated, a school district may receive more than its fair
share of state aid. In addition, the appraisal level can impact state sales tax distribution to
the counties as well as the amount of property tax revenues the State receives. When the
Department finds that the appraisal level for an area is understated, it can order the county
assessor to make an overall adjustment to the property values.
The second step in determining if property values are equitable and consistent is to deter-mine
if all properties within the same area are appraised at the same level. This ensures
that the tax burden is distributed fairly among taxpayers within the area. If property
appraisal levels are inconsistent within an area, some property owners in that area may
pay more than their fair share of taxes while other property owners may pay less. If DOR
determines that appraisals within an area are not consistent it may request the county
assessor to reappraise the area, according to A. R. S. 542- 14l. A( 6).
DOR Needs to Improve
Its Equalization Process
DOR needs to revisit its equalization process to make it more effective in helping to en-sure
that property appraisal level standards are met. cl) DOR's modifications to the equal-ization
process placed more trust in county assessors to rectify problems with property
appraisal levels; however, the Department's ability to enforce equalization was eroded.
DOR needs additional enforcement authority to ensure that its equalization orders are
carried out.
I Modificatio~ rsp laced nzore trust in cousrty assessors, but eroded DOR's ability to etlforce
compliance - DOR amended the equalization process for the 1991 and 1993 equalization
years to better encourage county assessors to rectify property appraisal problems identi-fied
by DOR. DOR's previous process required equalization orders be issued to county
assessors when the property appraisal level in an area fell outside the Department's stan-dards.
The modified process allowed the county assessor to write a " letter of intent to
comply" in lieu of an equalization order being issued. If a county assessor did not write a
" letter of intent to comply," then DOR would issue an equalization order.
The modified process, however, impacted DOR's ability to enforce equalization. Under
the original process, the Department's rules provided DOR with the sanction to not allow
county assessors to mail out property valuation notices until the county had corrected
property appraisal problems specified in equalization orders. According to an October 8,
( I) The equalization process is the process by which DOR informs county assessors that property ap-praisal
levels fail to meet the standards established by the Department.
1992, internal DOR memorandum from the manager of the Research and Equalization
unit to the assistant administrator of the Division of Property Valuation and Equalization,
DOR could not invoke its enforcement sanction. This occurred because the modified pro-cess
eliminated the issuance of equalization orders for counties that wrote letters of intent
to comply, but subsequently did not comply.
"... one of the disadvantages of the Voluntary Equalization Program is that once we agree to
it and do not issue a fmmal equalization mder, then we do not have the enfmcement authm-ity
that comes with a fmmal order. This enfmcement authority ( compliance checking) is
very weak anyway ( as discussed later), so there isn't much loss, but we do lose that stand-ing.
Therefore, since we entered into those agreements, we cannot do much about those
counties that did not comply."
Modifications did not reszllt in increased corizpliance - DOR's modifications to the equal-ization
process for years 1991 and 1993 did not result in increased compliance by county
assessors with the Department's equalization standards. For 1989, county assessors com-plied
with 27 out of 31 equalization orders issued. Two orders were not complied with,
and two areas did not have enough sales to check compliance. For 1991 and 1993 com-bined,
12 of the 28 areas that county assessors had specified in letters of intent to comply
still remained out of compliance when checked later in the same year. DOR issued an
equalization order to one market area that subsequently came into compliance.
Stronger enforcet~ zentt ools needed - DOR needs to revisit its equalization process and
seek legislation for more effective means of ensuring compliance with equalization stan-dards.
The current enforcement options are weak and impractical. DOR should be pro-vided
stronger compliance enforcement tools similar to those used in other states.
Currently, the Department has two weak compliance enforcement tools. The first tool,
pursuant to DOR's administrative rules, requires the Department to notify the county
assessor in writing if he/ she has failed to comply with an equalization order. The county
assessor is then prohibited from mailing Notices of Valuation to taxpayers until he/ she is
notified by the Department that the order has been complied with. DOR personnel point
out that this tool cannot be used in many instances. The data used to check compliance
with an equalization order is oftentimes not available until after the county assessors are
required to mail the Notices of Valuation to the property owners. Further, four counties
print their own Notices of Valuation, rather than DOR printing them. According to DOR
personnel, these four counties have sent out their Notices of Valuation in the past when
the Department has prohibited them from doing so.
The second tool, a statutory special action in the courts, has never been used by DOR
against a county assessor. Under its statutes the Department can request that a statutory
special action be filed against the county assessor by the Arizona Attorney General. A
statutory special action seeks a court order to compel a county assessor to comply with
the equalization order, with the risk of being held in contempt for not doing so. DOR
personnel state that this compliance tool is inappropriate and difficult to use because of
the burden of proof necessary to pursue it, as well as being time- consuming.
Some states impose fiscal sanctions when counties fail to comply with orders to improve
equity and uniformity. A high- ranking Arkansas official feels that funding impacts are
the most effective compliance enforcement mechanisms because, " whenever you with-hold
money, it really gets people's attention because it impacts their schools, highways,
and local governments." The following examples present two different ways states cur-rently
impact county funding for failing to comply with orders to bring property values
into compliance with set standards:
In Colorado, a county is required to comply with a September reappraisal order by
May 1. If the county is found to be in compliance by May 1, the county is then required
to repay any excess state aid to education it received. If, by May 1, the county is still
not in compliance with a reappraisal order, the State can do the reappraisal itself or
hire a firm to do it. All expenses of the reappraisal are charged back to the county, in
addition to any excessive aid to education received.
In Arkansas, state funds are withheld from the county until it complies with a reap-praisal
Authority to impose fiscal sanctions would enable DOR to penalize counties that do not
comply with equalization orders. However, statutory changes are needed to provide DOR
with this authority,
No Authority to Enforce Property
Value Consistency Standards
Although there appears to be significant problems with the consistency of property val-ues
within many areas of the State, DOR has no statutory authority to address these prob-lems.
Using sales ratio studies to measure property value consistency, DOR has identified
numerous instances of inconsistent property values within areas of the State. DOR, how-ever,
only has statutory authority to " request" that county assessors rectify consistency
problems. The IAAO recommends and other states use reappraisal orders to address con-sistency
Measuring property value consistency - DOR calculates the coefficient of dispersion
( COD) in its sales ratio studies to measure whether property values within areas are rela-
tively consistent.(') In an area with a low COD, properties' ratios of appraised value to
market value are similar. As a result, the tax burden is distributed much more equitably
among the taxpayers. In an area with a high COD, two properties' ratios of appraised
value to market value can be very dissimilar. As a result, some taxpayers in that area
could potentially pay more than their fair share of property taxes while others could
potentially pay less than their fair share.
The following examples illustrate the COD's importance in determining the consistency
of property values:
In 1993, the Holbrook market area in Navajo County had a high COD of 42.40 for
vacant property. The high COD indicates that consistency among ratios was poor. As
a result, some vacant property owners may have paid more than their fair share of
property taxes, while others may have paid less than their fair share.
In 1993, the Sedona market area in Yavapai County had a low COD of 14.57 for vacant
property. This low COD indicates that consistency among ratios was good. Therefore,
the tax burden was distributed much more equitably among vacant property owners
in this market area than in the Holbrook market area.
Mntzy instnlzces of iltco~ tsistelltp roperty vnlries - According to our analysis of DOR's
sales ratio studies, approximately 96 percent of the commercial areas, 66 percent of the
vacant areas, and 27 percent of the residential areas in the State that had an adequate
number of sales to be subject to equalization actions had inconsistent property values in
1989,1991, and 1993. Table 3 ( see page 19) illustrates by property type and year the num-ber
of areas with an adequate number of sales and the number found to have inconsistent
property values.
Renpprnisal orders needed, but lzo autlzorihj to order or enforce - Although the most
effective way to address instances of inconsistent property values is to issue reappraisal
orders, the Department does not have authority to do so. Because reappraisals can be
costly, DOR would need to work with the counties and the ~ e~ islatutroe d evelop an
appropriate approach.
The IAAO recommends that reappraisals be performed in areas where the consistency of
appraisal is unacceptable. Similarly, in a 1991 DOR internal memorandum, the manager
of the Research and Equalization Unit acknowledged that " reappraisal[ s] [ are] the only
(') The coefficient of dispersion measures the average deviation of properties' appraised values from
the median property value within a county or market area. IAAO standards for appropriate COD's
range from 10 percent or less to 20 percent or less, depending upon the property classification. A
" low" or acceptable COD meets the IAAO standards, whereas a " high" or unacceptable COD ex-ceeds
the IAAO standards.
Table 3
Number of Areas with
Inconsistent Propertv Values
Commercial 1989 11 11
1991 8 8
1993 - 8 - 7
Total -- 27 2- 6 96%
Vacant 1989
Residential 1989
") Commercial property is evaluated by county. Vacant and residential property is evaluated by market.
( b) Only areas with 25 or more sales were subject to potential equalization actions in 1989; only areas with
30 or more sales were subject to potential equalization actions in 1991 and 1993. See Table 4, page 22,
for the total number of areas in the State by property type for 1989,1991, and 1993.
Source: Auditor General staff analysis of DOR's 1989, 1991, and 1993 sales ratio studies.
way to address the lack of [ consistency] found in valuations statewide." Moreover, the
manager recommended that the equalization process be modified to include the issuance
of reappraisal orders in instances of inconsistent property values in order to ensure prop-erty
owners in the State are treated equitably. In addition, other states, such as Colorado
and Utah, order reappraisals when property value consistency standards are not achieved
and state that consistency is important because it impacts whether taxpayers are being
treated fairly.
DOR, however, has no authority to issue and enforce reappraisal orders in instances of
inconsistent property values. Instead, the statutes provide that DOR can only request a
county assessor to reappraise. To date, DOR has not requested a county to reappraise
when consistency of property values was found to be poor.
If granted the authority to order reappraisals based on inconsistent property values, DOR
would need to develop a program and a process to address the issue. Because the costs
can be significant, DOR should work with county officials to develop methods that would
be most cost effective. Regarding cost, a Utah state official estimated a reappraisal to cost
$ 15 to $ 25 per parcel, but pointed out that there are ways to decrease this amount. In
addition, he explained that a reappraisal involves high up- front costs, but once the reap-praisal
is done, much lower costs are needed to continue to ensure that taxpayers are
treated fairly. These costs ' include the costs to maintain the models used to help generate
property values.
1. The Legislature should consider providing DOR with additional authority to enforce
equalization orders.
2. The Legislature should consider providing DOR with the authority to order reap-praisals
based on inconsistent property values.
FINDING Ill
The Department of Revenue should adopt better statistical methods to be utilized in sales
ratio studies for equalization purposes. First, the Department should use additional meth-ods
to ensure that all areas of the State can be subject to potential equalization actions.
Second, the Department should adopt a more appropriate method for eliminating outlier
data from its sales ratio studies. Finally, the Department should use a reliability measure
in its sales ratio studies in order to present confident conclusions about the reasonable-ness
of property values.
Metlrods available to ensure tlrat all areas carr be subject to potential equalizatiotr ac-tions
- There are methods DOR can implement to ensure that as many areas in the State
as possible can be subject to potential equalization actions. Currently, if an area does not
Table 4
Number of Total Areas Statewide
That Have Not Been Subject to Potential
Equalization Actions by DOR
Commercial 1989
(*) Commercial properties are evaluated by county. Vacant and residential properties are evaluated by
market area.
Source: Auditor General staff analysis of DOR's 1989,1991, and 1993 sales ratio studies.
have enough property sales in a specified time period, DOR cannot take any equalization
actions on that area. In 1989, DOR required property sales of at least 25 within the speci-fied
time period to be evaluated in the sales ratio studies. In 1991, DOR increased this
sample size requirement to 30 or more sales to be more consistent with statistical require-ments.
As a result, our analysis indicates that in 1989,1991, and 1993 combined, 244 areas
out of 745 total areas were not able to be subject to potential equalization actions, as illus-trated
in Table 4, page 22.
When an adequate number of sales within the specified time period is not available, the
IAAO recommends that the time period from which sales are drawn be extended or that
the sales be supplemented with independent appraisals. Because supplementing sales
with independent appraisals is a time- consuming, labor- intensive process, DOR may want
to first try extending the time period from which sales are drawn. In any case, DOR needs
to ensure that as many areas in the state as possible are able to be subject to potential
equalization actions.
More appropviate nzetltod for elilszinating data front sales ratio studies stecessary - The
Department should adopt a more appropriate method for eliminating outlier data from
its sales ratio studies. Before the median and COD are generated in sales ratio studies, it is
appropriate to determine if any ratios are outliers; that is, if any ratios are extremely high
or extremely low. The Department's current outlier elimination method was designed to
compensate for problematic data provided by the county assessors. As a result, DOR
eliminates all ratios above 200 percent and below 25 percent from the sales ratio analyses.
According to the IAAO, only the most extreme ratios on each side of the median should
be eliminated, until no more than 5 percent of the data have been excluded. In addition, if
the method results in more than 5 percent of the data being eliminated, additional analy-ses
should be performed to make sure that legitimate ratios are not being discarded. DOR's
method for eliminating outliers has resulted in the Department eliminating more than 5
percent of the data from some of its sales ratio studies. However, DOR does not typically
perform additional analyses when this occurs. As a result, the Department may deter-mine
that an area meets the specified standards for equity and consistency when the
area's property values are not equitable and consistent. For example,
DOR performed a sales ratio study on vacant property in Maricopa County using
sales from January 1,1994 through September 25,1995. Sales and parcel information
was provided to the Data Quality and Equalization Group for the generation of sales
Section 6.6, paragraph 2 of Standard on Ratio Studies approved July 1990 by the International Asso-ciation
of Assessing Officers.
ratio statistics after a number of initial processing steps had been performed. During
this time period, 17,510 sales were identified. From this population, a number of tests
indicated whether each sale should be included or excluded from the study. For ex-ample,
one test determined if the sales affidavit property type and the assessor's use
code matched. The Department eliminated 8,714 sales with non- matching codes, as
well as an additional 26 that failed other tests. DOR performed no checks to determine
if any of these sales were in fact valid and should have remained in the study. Finally,
DOR eliminated all remaining sales with ratios above 200 percent and below 25 per-cent.
As a result, 1,708, or 19 percent, of the remaining 8,770 cases were eliminated as
compared to the 5 percent maximum recommended by IAAO standards.
Department personnel state that they are currently in the process of developing a statisti-cally
appropriate method for identifying and eliminating outliers.
Reliabilihj lneasuve should be used - Finally, DOR should use a reliability measure in its
sales ratio studies when the CODs fall within the standards in order to present confident
conclusions about the reasonableness of property values. A reliability measure is a statis-tical
tool that indicates the degree of confidence when generalizing a sample's character-istics
to the population from which the sample was drawn. Currently, the Department
does not use a reliability measure and, therefore, cannot conclude with a certain level of
statistical confidence that property values in an area do not meet the standards and an
equalization order is needed. The IAAO recommends that confidence intervals be the
reliability measure used in sales ratio studies and also points out that it is important for
property values to be consistent in order for the confidence intervals to be good.
1. DOR should implement methods to ensure that property values in as many areas of
the State as possible can be analyzed for potential equalization actions.
2. DOR should adopt a method for eliminating outliers from its sales ratio studies that
conforms with the IAAO standards of no more than five percent of the data being
3. DOR should use a reliability measure in its sales ratio studies when the CODs fall
within the standards in order to ensure that equalization decisions are appropriate.
While centrally valued property ( CVP) accounts for approximately 26 percent of the total
property tax base in the State of Arizona, DOR's CVP audit function has done little to
ensure that information reported by the taxpayer is accurate and complete. Analysis found
the CVP audit function to be ineffective and unproductive. In addition, the audit function
has not consistently followed generally accepted auditing standards. Furthermore, DOR
needs additional statutory authority to administer an effective and productive audit pro-gram.
Centrally valued properties comprise a significant portion of Arizona's property tax base,
as shown in Table 5 below. By definition, CVPs are properties that often lie within two or
more counties or states, such as railroads and utilities. The Department, rather than the 15
county assessors, " centrally" values these properties due to the overlap between two or
more county assessor jurisdictions and because the valuation process is so complex. DOR
uses data supplied by the CVP taxpayers to value the properties; therefore, it is critical
that the information provided is accurate and complete. Concerned about inconsistencies
Table 5
Centrally Valued Property vs.
Locallv Assessed Propertv for Tax Year 1994
Locally Assessed - 74.2%
($ 220.127.116.118)
Centrally Valued - 25.8% \ ($ 5,979.045.1 68)
Source: Auditor General staff analysis of Arizona Department of Revenue data for tax year 1994.
in information being reported by CVP taxpayers, DOR restarted a CVP audit function in
1993, with two auditors and one audit supervisor. In the late 1970~ DO~ R had a limited
CVP audit function.
Audit Function Was
Ineffective and Unproductive
The Department of Revenue has had an unproductive and ineffective CVP audit pro-gram.
A review of the Department's CVP audits for the past two years found that, unlike
other states, the audits covered only a few taxpayers and did not provide any additional
tax revenue to the State. Between September 1993 and March 1995, the audit program
examined only 16 of the over 800 total CVP taxpayers in the State. The 16 audits consisted
mainly of Arizona water companies and other utilities. Further, the audits did not realize
any additional taxes and only 2 of the 16 audits were ever finalized with the taxpayer.
States with CVP audit functions, such as Utah, California, and Louisiana, conduct more
audits and realize additional tax revenues. For example, Utah and Louisiana conducted
approximately 30 audits in the same period. Further, California completed audits of For-tune
500 companies, including telecommunication companies, realizing additional tax
revenue of $ 445.20 per audit hour.
DOR management stated that CVP auditing productivity problems were due primarily
to the misclassification of the audit positions. As a result, auditors initially hired did not
have the appropriate skills to properly conduct audits. In addition, time was expended in
training. During the course of the audit, DOR began making changes, and to date has
reclassified one position. In addition, DOR has started an additional 17 audits.
In order to monitor the CVP audit program's effectiveness, DOR should develop and
utilize performance measures. Other states, such as California and Louisiana, recognize
the importance of measuring the impact of their audit programs. California measures
impact by determining revenue collected per audit hour. Further, Louisiana's legislature
established standards that set a minimum tax collection requirement based on the value
of taxpayers audited. Louisiana demonstrates compliance with this standard by measur-ing
the dollars collected through the audit process. Establishing performance measures
would enable DOR to ensure that audit resources are allocated appropriately and are
used effectively, thereby holding CVP taxpayers accountable.
Department Did Not Consistently
Adhere to Auditing Standards
The Department did not consistently follow any professional auditing standards while
conducting CVP audits. These standards are the minimum guidelines and responsibili-ties
recommended to perform an audit. The American Institute of Certified Public Ac-
countants ( AICPA) adopted and approved auditor guidelines and responsibilities referred
to as generally accepted auditing standards ( GAAS). The Western States Association of
Tax Administrators ( WSATA), and Utah, California, and Louisiana, three states with CVP
audit functions, all follow GAAS or standards that reflect GAAS. GAAS requires the au-ditors
Obtain a sufficient understanding of the taxpayers' internal control system in order to
determine if the information reported by the taxpayers for valuation purposes is valid
and complete. To date, DOR's auditors have not documented the internal control sys-tem
of CVP taxpayers as part of the audits they perform. Understanding the control
system can help the Department identify unreported items, such as significant equip-ment
purchases or significant increases in income.
Determine the nature, extent, and timing of appropriate audit procedures necessary
to further ensure the validity and completeness of taxpayer information. Currently,
the Department focuses primarily on determining if the taxpayers' information is con-sistently
reported. For example, DOR looks for inconsistencies or discrepancies in in-formation
reported by the taxpayer in prior years compared to the current year. Fur-ther,
DOR identifies these changes by comparing information reported to DOR to that
reported to other agencies, such as the Arizona Corporation Commission.
Utilize reasonable risk assessment criteria. Risk assessment could effect the overall
audit strategy including the selection of future audits. In DOR's 1994 audit schedule,
many of the larger CVP taxpayers were not audited. WSATA recommends that larger
and more complex companies be audited as frequently as every four years.
During the course of the audit, DOR was developing an audit plan and implemented it in
May 1995, after our review was completed. According to DOR management the audit
program incorporates audit standards.
Additional Statutory
Authority Needed
The Department lacks needed statutory enforcement authority to ensure CVP taxpayer
accountability. The Department needs additional authority to assess CVP taxpayers' back
taxes, penalties, and interest if DOR determines that the CVP taxpayer has underreported
property tax information. Currently, if DOR receives CVP taxpayer information and learns.
that an instance of underreporting occurred that affected the taxpayer's valuation in prior
and current years, the Department has the authority to only levy present year taxes, not
back taxes, penalties, or interest. Conversely, California, Utah, and Louisiana have the
authority to assess CVP taxpayers taxes, penalties, or interest back three to five years,
depending on the individual state. Enabling the Department to assess back taxes, penal-ties,
or interest when instances of underreporting are found can encourage CVP taxpay-ers
to voluntarily comply with tax laws.
1. To determine the effectiveness of the CVP audit function, the Department should de-v2lop
and utilize measures of program effectiveness and efficiency.
2. To improve the CVP audit program, the Department should consistently follow pro-fessional
auditing standards.
3. To increase the effectiveness of the CVP audit program, the Legislature should con-sider
amending A. R. S. 5542- 179.01( D) and 42- 179.03( E). These changes would pro-vide
the Department with statutory authority to assess back taxes, penalties, and in-terest
whether the taxpayer intentionally or unintentionally underreported.
DOR's controls over property tax data are inadequate. Strong controls over data are im-portant
because they provide reasonable assurance that the data is accurate and com-plete.
First, DOR does not ensure that individual counties have adequate internal controls
over property tax data. In addition, DOR has few procedures in place to review and en-sure
the validity of data received from the counties. Finally, DOR does not maintain data
in accordance with its own record retention policy and disaster recovery plan.
Strong controls over computerized property tax data are designed to prevent or detect
error or loss. Controls over data include policies and procedures that management has
implemented to reasonably ensure that valid and reliable data are obtained, maintained,
and fairly disclosed. In addition, these controls help assure the Department that it is re-ceiving
valid and reliable information.
Little DOR oversight of input of counhj property tax data - DOR needs to provide
adequate guidance and oversight of county assessor data input efforts. The county asses-sors
computerize property tax information that is used to generate the tax rolls and is also
used by DOR in sales ratio studies. Because DOR relies on data input by the county asses-sors,
DOR needs to provide the counties with data input procedures to help ensure that
the data are accurately input. Once the procedures are in place, DOR's county audit group
could be utilized to check the counties input procedures to ensure that they are using the
procedures appropriately to ensure reliable information. Accurate data input helps both
the counties and DOR ensure that property tax information is reliable.
DOR propevfij tax data corstrol problems - DOR lacks strong controls to ensure the accu-racy
and completeness of property tax data on the Department's computer system. For
example, four county assessors send computer tapes with their property data to DOR
which is then uploaded onto the Department's system, but the Department does not con-sistently
require the assessors to provide the data in a prescribed format. Thus, informa-tion
that is not recognized by the system is removed from future analyses. Further, the
Department does not consistently document the use of edit routines to check for data
validity. As a result, DOR may be using invalid or incomplete data in its sales ratio stud-ies.
The Department could use edits to monitor both data reasonableness and complete-ness.
For example,
W In January of 1995, DOR processed Santa Cruz County single family residential prop-erty
data through an edit check designed to reveal any residential properties with
assessment ratios other than 10 percent, the assessment ratio for residential property.
This edit check revealed 35 single family residential properties that had assessment
ratios of either 16 percent, that of vacant property, or 25 percent, that of commercial
DOR's lack of consistent use of strong procedures to test data may result in the Depart-ment
using incomplete or invalid data in its sales ratio studies. It may also allow discrep-ancies
that affect taxpayers to remain uncorrected. As a result, the Department may draw
inappropriate conclusions concerning the equity and uniformity of property values in the
State and cause some property owners to pay more or less than their fair share of the tax
Records retention plan - The Department needs to revise its records retention plan. DOR's
records retention plan inconsistently states how long DOR should retain documents re-lating
to property tax. One section of the plan states 10 years, whereas another section
states from 1 to 5 depending on the information. An appropriate records retention plan is
necessary plans are necessary to ensure that documents are retained for an adequate amount .
of time for review by interested parties. During our audit, DOR was not able to provide
us with the original 1991 and 1993 compliance sales ratio studies because DOR followed
the lesser guideline. Subsequent to our audit, DOR's management began revising the
records retention plan. In developing the new plan, DOR needs to ensure that documents
are retained for an adequate amount of time.
Disaster recovery plan - The Department lacks a disaster recovery plan for processing
computerized data in the event of a ma~ osro ftware or hardware failure.( l) D isaster recov-ery
plans are accepted practice for agencies such as DOR, which rely heavily on computer
processing of information. The purpose of a disaster recovery plan is to ensure that an
agency will be able to continue to perform its required tasks without undue interruption
in the event of a disaster. DOR does regularly back up information contained on its com-
(') The fiscal year 1993 financial audit of DOR performed by the Office of the Auditor General found that
DOR did not have a disaster recovery plan for computerized data in place and recommended that
DOR develop and implement a disaster recovery plan.
puter system onto tapes, but does not have any off- site location to run these tapes in the
event the Department's system cannot be utilized. Because DOR lacks a disaster recovery
plan for computerized data, in the event of any major software or hardware failure, the
Department may not be able to perform its tasks.
1. DOR can assist county assessors with improving the reliability of data input at the
county assessors' offices. The Department can do this by issuing data input procedure
standards and by using its county audit program to check compliance with the stan-dards.
2. DOR should use procedures to ensure the validity and completeness of data on its
computer system.
3. DOR should revise its records retention plan to ensure that important information is
retained for an adequate time period.
4. DOR should develop and implement an effective disaster recovery plan for computer-ized
During the audit, we collected information regarding the current property classification sys-tem.
Over the past 26 years, the number of property classes in Arizona has increased steadily.
Although many states use property classification to tax certain types of property differently,
having a large number of classes can confuse property owners and make administration of
the property tax system less efficient.
Classification systems enable taxing jurisdictions to assess different types of property at dif-ferent
percentages of value. Each class of property has an assessment ratio that is applied to
the property valuation to produce the property's assessed value. As a result, equally valued
property can have quite different assessed values and, therefore, property taxes may be sig-nificantly
different for similar properties.
N~ ilnbero f property classes has increased ntore in Arizona than in most states - The num-ber
of property classes in Arizona has increased significantly since the State adopted a classi-fication
system in 1968. The Arizona Legislature established a property classification system
after a state supreme court decision found the property tax system to be inequitable. The
original classification system was comprised of five separate classes, including mines and
standing timber; public utilities and railroads; commercial/ industrial; oil and gas property;
and a single class for residential, agricultural, and certain other property. Each of the classes
had a different assessment ratio ranging from 18 to 100 percent. Since 1968, however, the
number of property classes has grown steadily to 9 classes by 1988 and to as many as 13
classes in 1994, and finally 12, as of July 1995. In addition to the growth in classes, the Legis-lature
has changed assessment ratios, which are applied to the property valuation to produce
the assessed value of the property, a total of 66 times since 1968. For a list of current property
classes and assessment ratios, see Table 6 ( page 37).
A majority of states do not have property classification systems.(') A 1989 report found that
only 21 states have property classification systems. Of the 21 states that have classification
systems, 16 have 4 property classes or fewer while Arizona had the second highest number of
property classes with 12. In addition, during our audit we contacted 12 states identified by
experts as having effective property tax systems and found that all these states have fewer
classes of property than Arizona.
Having a large number of property classes may result in the tax burden being distributed
inequitably among various classes. The property tax is analogous to an inflated balloon; when
you push in on one side, the other side pushes out. When property taxes are reduced for
( I) Most states that do not have classification systems prescribe, in their constitutions or statutes, one legal
class for all assessed values.
owners of a particular class of property, the property tax burden becomes greater for other
property owners. According to property tax experts, a disadvantage of having a complex
property classification system is that property owners with substantial influence can secure
special tax treatment at the expense of other property owners,
Many classes can hamper administration - A complicated classification system also ham-pers
county and state administration of the property tax system. Several county assessors
told us that a complex classification system generates many telephone calls and visits from
concerned property owners. In addition, some county assessors and DOR administrators
believe excessive classification can cause taxpayer appeals or litigation, especially for mixed
use properties, such as mines, or commercial and residential historic property, which require
the assessor to apportion the property's value among several different classes. For example,
beginning in 1995, property owned by mining companies may fall into 2 different property
classes, each with a different assessment ratio ranging from 5 to 30 percent. One DOR admin-istrator
believes that it will be extremely difficult to reach agreement on how the companies'
assessed values are apportioned over the two distinct classes. Further, a complex classifica-tion
system that is constantly changing requires DOR to spend significant additional time
and resources revising property tax guidelines and answering questions from assessorsr of-fice
staff and confused property owners.
Many people familiar with Arizona's classification system, including property tax experts,
DOR administrators, and county assessors, believe the number of property classes should be
substantially reduced. In addition, a 1989 report issued by the Joint Select Committee on
State Revenues and Expenditures recommended the Legislature consider alternatives that
would reduce the number of property classes to three: residential, industrial, and vacant/
agricultural properties.
Table 6
Propertv Classification in Arizona
Class One
Class Two
Class Three
Class Four
Class Five
Class Six
Class Seven
Class Eight
Class Nine ( 8)
Class Nine ( H)
Class Ten ( B)
Class Ten ( H)
Class Eleven
Class B
Mines and Standing Timber
Utilities and Telecommunications
Industrial and Commercial
Agricultural and Vacant Land
Owner- Occupied Residential
Leased/ Rented Residential
Railroad, Airline, Private Car
Historic Property
Commercial Historic
Restored Commercial Historic
Residential and Commercial Historic
Restored Residential and
Commercial Historic
Leasehold Interest
Producing Oil and Gas Companies
(*) Amount too small to quantify.
Source: Auditor General staff analysis of Department of Revenue data.
Agency Response
December 5, 1 995
Mr. Douglas R. Norton
Auditor General
Office of the Auditor General
2910 North 44th Street, Suite 410
Phoenix, AZ 8501 8- 7243
Dear Mr. Norton:
We have reviewed the final report of your performance audit of the Division of Property
Valuation and Equalization of the Department of Revenue. In general, we do not
dispute the findings and recommendations in this latest report, subject to the following
The Auditor General Recommends Raising the Statutow Valuation Standard
Found in A. R. S. 8 42- 141( C)
The first recommendation of the Auditor General is that A. R. S. 5 42- 141 ( c) be amended
to increase the valuation standard. This is a policy decision of the Legislature which
will create a shift in the property tax burdens of taxpayers. The Department is currently
preparing an analysis of the implications of the proposal and will release it when it is
More Information Should be Provided to Property Owners
While the Department does not take exception to the recommendation that the
Department work with the County Assessors to assist them in providing property
owners with better information on assessments, this recommendation may necessitate
a statutory change, as well as increased funding for either the County Assessors or the
Department, depending on who will bear the financial burden of the increased costs of
printing and postage.
OTHER LOCATIONS: Tucson Government Mall - 400 W. CONGRESS - TUCSON
East Valley - 144011 460 E. SOUTHERN - TEMPE
Mr. Douglas Norton
December 5,1995
Page - 2
Finding II
The Department Continues to Improve Its Equalization Process
The Department is constantly seeking to improve all areas of operations, including its
equalization responsibilities. Arizona has long been nationally regarded as one of the
leading states in assessment administration through innovation and technical
advancement. The Department does this by trying new approaches; discarding those
that do not work well, and adopting programs that meet with success. The Voluntary
Equalization Program discussed in the Auditor General's report is one of several new
pilot programs that were tried during the 1991 and 1993 equalization periods. This was
an approach that was utilized by the Department during these periods, but is not a
continuing program. Although the program met with some success, it was not as
successful as originally hoped. Therefore, any use of this or a similar program will be
carefully scrutinized by the Department before being implemented in the future.
In trying new programs, some will succeed, and some will not. It is important, however,
that within the scope of its authority, the Department continue to seek new and
innovative methods to improve the property tax system for both the government
agencies that rely on the property tax and the property taxpayers.
The Department Lacks Authoritv to Enforce Propertv Value Consistency
The Department recognizes the importance of taxpayer equity and has strived to stress
the importance of equity to the various county assessors in The Department's
standards and guidelines. Improvements in statewide equity have been realized over
the past several years, although there are areas and property types where equity could
be improved.
The Department has discussed equalization based upon Coefficients of Dispersion
( COD) several times over the years, but has felt that there is insufficient statutory
authority to pursue COD equalization. If the Legislature desires to equalize based on
CODs, the costs of " curing" these equity problems will be significant. The only method
available for fixing high CODs is a property- by- property reappraisal, which may cost
between $ 20 to $ 30 per parcel to conduct. This would relate to a cost of approximately
$ 32 million based upon an average price of $ 25 per parcel and an estimate that 60% of
the state's 2.1 million parcels would need reappraisal.
If the Legislature amends the Arizona Revised Statutes to clearly provide authority to
issue equalization orders based upon CODs, the Legislature should provide the
requisite funding to embark on this new endeavor. This may also necessitate
increased staffing to perform these new duties.
Mr. Douglas Norton
December 5, 1995
Page - 3
Finding Ill
Methods are Available to Ensure that All Areas can be Subject to Potential
Equalization Orders
A problem that the report points out is that in areas where there are no sales or
insufficient valid sales for analysis, the Department does not take action. One possible
remedy for this situation is to use " appraisal ratio studies", where independent, expert
appraisals are substituted for sales in a ratio study. ( IAAO Property Appraisal and
Assessment Administration: pg. 543) Several states use this process to study areas
with few or no sales. The Department, however, does not have the staff to conduct
these appraisals and to request the assessors to appraise the properties as permitted
in A. R. S. 542- 141 ( A)( 6) would not meet the criteria of an " independent" appraisal.
Another approach is to extend the time period from which sales are drawn. This
approach would bring in additional sales only where sales were available and would
increase the number of areas that could be studied only marginally. There is a limit,
however, on how far back one should go. The older the sales, the less stable and
reliable is the analysis based upon those sales. In general, going back further than
three to five years ( depending on property type) would endanger the statistical
reliability of the analysis ( IAAO Properfy Appraisal and Assessment Administration: pg.
543). In some cases, a shorter time period produces the same result. For example,
with the recent trends in the Phoenix metropolitan market, sales as recent as 18
months old are not reflective of the market.
A combination of these two procedures is used by many states where sales are
supplemented with independent appraisals in sufficient number to achieve statistically
reliable sample sizes. This would require funding for appraisal staff and travel.
Methods for Eliminatinq Data from Sales Ratio Studies are Beinq Reviewed
Since the Department does not issue equalization orders based upon CODs, the ratio
studies used by the Department have been designed to accurately measure the level of
value, not necessarily the dispersion among the values. The purpose for which a ratio
study is designed dictates whether a given outlier methodology is appropriate and
whether it is providing a clear and accurate picture of the data being analyzed.
For example, since the COD measures dispersion or scatter in the data, the outlier
method used should not eliminate outliers that are valid indicators of dispersion. On
the other hand, if the purpose of the study is to determine, as accurately as possible,
what the average level of value is, then all data that would distort or bias that measure
should be eliminated.
Mr. Douglas Norton
December 5, 1995
Page - 4
The Department's ratio studies have been expressly designed to measure the central
tendency ( average) of ratios, and to do so, the center grouping of the data has been
selected, eliminating all data errors, whether the error is in the sale price or in the full
cash value. It is not the intent of the ratio studies to identify individual valuation errors,
but rather to measure the center of the distribution, or the average ratio between full
cash value and sale price. Other reports produced by the Department for the counties
identify individual valuation errors based upon ratios.
Standard statistical techniques found in any beginning statistical text contain outlier
exclusion methods such as plus and minus given standard deviations, interquartile
ranges, 10 and 20 percent trimmed means, and confidence intervals about the mean or
median. Almost all of these methods exclude 5% or more of the data and yet are
accepted statistical techniques.
The IAAO guideline of 5% is a compromise between accurate measurements of CODs
and valuation levels. As with all compromises, there are trade- offs, which weaken the
two purposes that have been compromised. Within the assessment profession, there is
controversy surrounding this recommendation. For example, Mr. Peter Davis of the
Kansas Division of Property Valuation, in a 1995 paper on the subject of ratio studies1
stated, " In over 80 percent of the counties in Kansas, the ratio study data does not meet
the assumption of a normal distribution when subjected to a powerful statistical test."
Kansas uses interquartile ranges for outlier control, which regularly exclude greater
than 5% of the ratios.
There is very little agreement in the ratio study community on outlier methodology.
Suffice it to say, as the report points out, that the Department is currently examining its
outlier methodology and attempting to identify statistically sound methods which are
based on the distribution of the data and which may be superior to those currently
employed by the Department.
The Use of Reliabilitv Measures
Confidence intervals are a complex topic at best. A confidence interval, as used with
ratio studies, is a range of ratios within which the researcher can, within a given
percentage of confidence ( go%, 95%, 99%), be confident that the sample measure
( ratio) adequately represents the total population.
Peter L. Davis, Ratio Study Tools for Small Jurisdictions and Rural Counties, Paper presented at the
1995 IAAO Conference on Assessment Administration, Chicago, IL, p. 5
Mr. Douglas Norton
December 5, 1995
Page - 5
Confidence intervals are powerful tools when the assumptions about the sample and
the population upon which they are based hold true, and they are applied to a single
sample set. They are not valid when used in a comparative method for equalization in
the presence of varying amounts of dispersion between jurisdictions.
Confidence intervals are based upon dispersion in the data. The greater the
dispersion, the wider the resulting confidence interval. What this means is that areas
of wide dispersion have a wider confidence interval than areas with little dispersion.
This fact penalizes assessors who are doing a good job with equity, and rewards
assessors who are doing a poor job with equity. Taken to extreme, an assessor could
manipulate the confidence interval to a point where they would never face equalization
even though their values are well below the required levels.
The Department recognized this weakness and stopped using confidence intervals in
1991. The only time confidence intervals should be used is when all jurisdictions being
measured with the confidence interval are within acceptable standards for dispersion
as measured by the COD, as recommended by the Auditor General's report.
Finding IV
Effectiveness of the Centrally Valued Property Audit Function
As was explained to the Auditor General's staff, the CVP audit function was ineffective
for the first several months of its existence because the audit positions were
misclassified. In fact, this program is barely two years old as of the date of this
response. The auditors were hired in the Fall of 1993, therefore, this program does not
have the history of other states surveyed by the Auditor General.
The positions were established as Revenue Field Auditors which are not required to
have any property valuation experience. Shortly after they were hired, the Department
recognized the problem and took steps to correct it. The auditors spent several weeks
in property valuation training during their first year as CVP auditors, as well as
spending countless hours with CVP appraisers learning the CVP valuation procedures.
In addition, one of the vacated positions was able to be reclassified a Property
Appraiser Ill. Other states ( California, Montana, Utah, New Mexico, Louisiana,
Wisconsin, Washington, and Idaho) have tried and have discovered, as Arizona has,
that to have an effective CVP audit function, you must use your most knowledgeable
and experienced CVP appraisers.
In spite of these shortcomings, the Auditor General's Office was able to locate only two
states that did more audits in the past 18 months than Arizona, and those two states
( Utah and Louisiana) do limited scope audits ( Louisiana audits only barge company
allocation factors). California, which has a long- standing comprehensive CVP audit
program staffed with fourteen experienced appraiserlauditors, completes approximately
seven audits per year, or one audit every two years per auditor.
Mr. Douglas Norton
December 5,1995
Page - 6
Of the top twenty- five centrally valued taxpayers in Arizona in terms of full cash value,
nine have been or are scheduled to be audited. The Department is progressing on its
The Department Does Have Auditing Standards
At the time the Auditor General met with the CVP audit staff, they were advised that an
audit program, based on Generally Accepted Auditing Standards, was being developed
and they were provided a draft copy of the audit program on February 23, 1995. The
audit program has since been finalized. Before the audit program was finalized, the
audit standards which were applied, while not as extensive and well defined as those
outlined in the final audit program, were nevertheless in accordance with Generally
Accepted Auditing Standards.
Currently the only body that certifies CVP assessment auditors is the Multistate Tax
Commission ( MTC) and the only approved certification class is sponsored by the
Western States Association of Tax Administrators ( WSATA). CVP's audit supervisor is
certified by MTC. The Department has modeled its audit program directly from the
WSATA training manual which follows Generally Accepted Auditing Standards. Other
CVP auditors will be certified at the earliest possible date.
CVP is a member of the MTC audit program which will start its first audit next fall
( 1996). The MTC has indicated that it would like the lead auditor selected for that audit
to be from Arizona ( primarily because of the progress Arizona has made in developing
an audit program).
Finding V
The Records Retention Plan is Being Reviewed
The Department is currently reviewing it records retention plan to insure consistent and
appropriate retention schedules.
Harold Scott
HS: pjs
Technical Problems with the
81 Percent and 82 Percent Targets
As noted in Finding I ( see pages 6 through 13), some of Arizona's current sales ratio
adjustments are inappropriate. Two adjustments, one for mass appraisal error and one
for abnormal time on the market, are unnecessary. Second, adjustments for personal prop-erty
and creative financing should be made to the sales prices of individual parcels when
applicable and not in all cases. These adjustments are used to arrive at the 81 and 82
percent targets mandated by statute.
Two adjustments inappropriate and unnecessa y - One adjustment for mass appraisal
error and the adjustment for abnormal time on the market are unnecessary. Since it is not
possible for a mass appraisal system to value all properties at the target ratio, room for
mass appraisal error is allowed. A range of plus or minus 10 percent of the median for
mass appraisal error is needed. However, the additional 10 percent downward adjust-ment
for mass appraisal error is not needed according to IAAO standards.
In addition, the adjustment for abnormal time on the market is inappropriate. DOR de-signed
this adjustment in the 1980s to compensate for the loss in opportunity cost the
seller suffers due to excessive exposure time needed to sell his/ her property. According
to a DOR economic advisory group, this adjustment is inappropriate and should be dis-continued
because the loss is unrelated to the value of the property. In addition, this
group noted that no appraisal organization recognizes it, nor is it allowed in VA, FHA,
HUD, bank, savings and loan, or mortgage company appraisals.
Two adjustments should be made on a per- parcel basis - The remaining two adjust-ments
for personal property and creative financing are appropriate, but as IAAO stan-dards
indicate, they should be made on a per- parcel basis, rather than using them across
the board as is currently done. Current practice can result in inaccurate medians and
coefficients of dispersion that fail to indicate the true relationship of properties' appraised
values compared to market values for an area. Adjustments for personal property and
creative financing should be made to the prices of only those properties whose sales in-volve
these special factors.
a- i
Table 7
Comparison of Current Requirements
and Recommended Practice for
Sales Ratio Studv Adiustments
( a) Percentage adjustment depends on type of property, i. e., commercial, vacant, or single family
@) The recomended practice is based on IAAO standards and recommendations from a DOR economic
advisory group.
First Mass Appraisal Error
Target Median Ratio
Second Mass Appraisal
Error Adjustment
Ratio Standard
Source: Auditor General staff analysis of DOR's adjustments to sales prices and IAAO adjustments.
a- ii
Downward adjustment ( 10%)
81% or 82%
+/- 10% of the target median
73% to 89% or 74% to 90%
Eliminate this adjustment
+/- 10% of the target median
90% to 110%
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