Opinion ID: 1179468
Heading Depth: 1
Heading Rank: 5

Heading: calculating the assessment ratio for the comparison class

Text: As discussed earlier, the department conducted a ratio study to determine the county's level of assessment of comparison class property during the 1993-94 tax year. To complete its study, the department audited 123 county accounts, out of a total of 23,707 accounts, and used the results of those audits to estimate the true market value for all the comparison class property and to calculate a final assessment ratio for that class. The department's study used a stratified sampling that organized the 123 accounts into five separate strata based upon their assessed values, with the first stratum containing the largest accounts and the fifth stratum containing the smallest. [29] In designing and conducting its study, the department consulted with an expert on ratio studies, Dr. Gloudemans. The department's audits consisted of conducting book and on-site audits of several assets randomly selected from the 1993-94 personal property return for each sample account (sample one), as well as an audit of several additional assets examined during an on-site inspection (sample two). The sample one audit primarily served to verify that the county had valued reported property correctly. The sample two audit served to broaden the sample base and to identify any additional assets that might have been omitted from the owner's personal property tax return. After completing the audits, the department applied its valuation factors to calculate an audited value, i.e., an estimated true market value, for each sample of selected assets. For some accounts, the auditors also noted any lump sum adjustments that, in their judgment, would ensure that the results of the audit accurately reflected the true market value of all the property in the account. Next, the department applied a formula to those numbers, which was developed by the department and approved by Gloudemans, in order to estimate the total true market value for each sample account. The department then calculated an assessment ratio for each account, by dividing the total assessed value for each account by the estimated true market value for each account. The department next used the assessment ratios for each sample account to determine an overall assessment ratio for each of the five strata. To do so, the department calculated three measures of central tendency, [30] that is, three methods for determining the most central ratio figure, for each stratum: the median, the mean, and the ratio of aggregates. The median, or midpoint, simply represented the middle ratio figure in each stratum. The mean, or average, was calculated by adding all the ratios in each stratum and then dividing that figure by the number of accounts included in each stratum. The ratio of aggregates, which computes an assessment ratio based upon aggregated total sums, was calculated by adding the assessed values for all the accounts in each stratum and then dividing that figure by the sum of the estimated true market values for those accounts, as determined by the department's formula, mentioned in the preceding paragraph. The department then calculated three measures of central tendency for the entire sample, which ignored the effects of the stratification, in an analogous manner. Finally, the department used the results from each stratum to calculate a composite result for the entire study that weighted the results under each stratum by the corresponding estimated market value of that stratum. The department first calculated an estimated market value for each stratum, again based upon each of the three measures of central tendency, by adding the total assessed values for the accounts in each stratum and dividing that figure by the median, mean, and ratio of aggregates for that stratum. To determine three final, weighted assessment ratios for the entire study, the department then added the assessed values of all 123 accounts and divided that figure by the sum of the estimated true market values of the five strata, calculated based upon the three measures of central tendency, as described in the preceding sentence. The results of the study are illustrated as follows: Assessed Number of Ratio Value of Total Sample of Accounts Number of Accounts Median Mean Aggreg's Stratum in Stratum Accounts Drawn (%) (%) (%) ---------------------------------------------------------------------------- 1 $3,520,680 + 38 16 100.00 101.16 100.12 2 $951,250 to 162 20 100.00 101.93 101.36 3,520,679 3 $273,150 to 568 20 97.70 96.30 96.00 $951,249 4 $66,960 to 2,141 20 100.00 99.75 100.40 $273,149 5 $3,000 to 20,798 47 100.00 104.48 91.32 $66,959 ---------------------------------------------------------------------------- Totals 23,707 123 100.00 101.53 100.11 ---------------------------------------------------------------------------- Final Weighted 99.53 100.65 97.69 Results According to the department's study, then, the assessment ratio for the comparison class during the 1993-94 tax year was between 97.69 and 100.65 percent. The department contends here that, because the median is the most appropriate method of central tendency to use in this case, the assessment ratio for the comparison class was 99.53 percent. At trial, the airlines challenged the department's study in several respects. For example, the department's audit reports in some instances were not complete and, therefore, did not always reliably reflect accurate values of the sample assets. The evidence also demonstrated that the auditors did not conduct a sample two audit for some accounts. Further, the auditors made the lump sum adjustments, some of which were substantial, based solely upon their judgment, as opposed to following any established procedure. Finally, the airlines also challenged the validity of the department's formula for calculating the estimated market value for each sample account and demonstrated that it had been applied differently in a few instances. We agree that the airlines have demonstrated several problems with the department's ratio study. However, of all the evidence presented at trial, we conclude that the department's study provides the best estimate of the assessment ratio for the comparison class. As discussed earlier, the Bahl study was based upon national figures compiled for the purpose of estimating the GNP and other national product and income figures, and is unpersuasive. By contrast, the department's study, even with its flaws, is based upon actual audits of personal property that is part of the comparison class. In our view, although neither study demonstrates precisely the value of comparison class property and thus of the accompanying assessment ratio, the department's study provides the more reliable estimate of those figures. The airlines make two additional challenges to the department's study that may affect the final calculation of the assessment ratio for the comparison class. We now turn to those issues.
As explained above, the department calculated three measures of central tendencythe median, the mean, and the ratio of aggregatesfor each of the five strata in its study and for the study as a whole. The airlines do not challenge the department's calculation of the three measures for each individual stratum. They contend, however, that only the ratio of aggregates should be used to calculate an estimated market value for each stratum, in order to merge the data from the five strata into a final result. See 325 Or. at 560, 943 P.2d at 192 (explaining that calculation). It follows, they argue, that the final assessment ratio based upon the ratio of aggregates is the only valid result of the department's study. The department responds that the selection of the appropriate measure of central tendency is a matter of judgment, depending upon the nature of the sample used. The department further contends that the final assessment ratio based upon the median is the most representative result of its study. The Tax Court agreed. 13 OTR at 369-70. The evidence presented at trial offers some support for the contentions of each party. Gloudemans testified that the ratio of aggregates can be advantageous as a measure of central tendency because it weights each ratio based upon the estimated value of each sample account and, therefore, will reflect any systematic biases, represented by a series of extreme ratios, in either larger or smaller accounts. However, the ratio of aggregates also will be affected adversely by isolated, extreme ratios that are not reflective of a systematic assessment bias. On the other hand, according to Gloudemans, the median is not affected by extreme high or low ratios, be they isolated or reflective of a systematic bias. The median, therefore, is the more appropriate measure of central tendency if the sample is relatively small and if it contains isolated, extreme ratios. Gloudemans also testified that other jurisdictions most predominantly use the median in ratio studies, rather than the ratio of aggregates. He concluded that the median was the most appropriate measure to use in this case, for two reasons. First, the sample size was relatively small. Second, because the study was stratified into five strata based upon equal assessed values, and because he had determined that no systematic assessment biases existed within any of those strata, the advantages offered by the ratio of aggregates did not apply to the study. Bahl testified that the ratio of aggregates is the only appropriate measure to use when calculating the estimated market value for each stratum, in order to merge the data into a final result. Although Gloudemans maintained that the final assessment ratio based upon the median was the most appropriate result here, he agreed that, in many cases, it is better to use the ratio of aggregates to calculate estimated market value. The parties also offered different passages from the same IAAO text, Property Appraisal and Assessment Administration, to prove the appropriate measure of central tendency. Chapter 20 of that text, entitled Sales Analysis and Mass Appraisal Performance Evaluation, which was written in part by Gloudemans, explains the advantages and disadvantages of each measure. The airlines emphasize the following passage, which relates to the general use of the ratio of aggregates, from that chapter: The [ratio of aggregates] weights each ratio in proportion to its [audited value], whereas the mean and median give equal weight to each [audited value].      Because of this weighting feature, the [ratio of aggregates] is the appropriate measure of central tendency for estimating the total dollar value of a population of parcels. International Association of Assessing Officers, Joseph K. Eckert, Ph. D., ed., Property Appraisal and Assessment Administration, 529-30 (1990) (emphasis added). The department, however, points to an appendix to chapter 20 that describes the process of combining different groups of property from a stratified sample and states, in part: [T]he [ratio of aggregates] gives equal weight to each dollar and is appropriate if the objective is determination of full market value. If an equalization action is being contemplated, however, then the median could be used, because it is less influenced by outlier [i.e., isolated and extreme] ratios and thus tends to be the most stable measure of central tendency. Id. at 611, Appendix 20-5 (emphasis added). Finally, the parties cite case law that they claim supports their competing contentions. We do not find that case law to be directly on point. For example, two circuits have concluded that the ratio of aggregates must be used to calculate a final assessment ratio in sales ratio studies conducted in 4-R Act litigation. Those cases, however, involved merging the values of different types of property assessed in different manners, such as real with personal property or centrally assessed with locally assessed property, a task for which the ratio of aggregates is better suited than the median. See Atchison, Topeka and Santa Fe Ry. Co. v. Lennen, 732 F.2d 1495, 1505 (10th Cir.1984) (When, as here, categories of property that are subject to different methods of appraisal must be factored together to produce the assessment ratio for [the comparison class], each category should be factored in proportion to its share of the total true market value of all such property, by using the ratio of aggregates); ACF Industries, Inc. v. State of Ariz., 714 F.2d 93, 95 (9th Cir.1983) ([T]he median approach would ignore legitimate classifications which are fundamental to Arizona's tax system.). In Southern Ry. Co. v. State Bd. of Equalization, 712 F.Supp. 1557, 1568-70 (N.D.Ga.1988), the court approved using the ratio of aggregates to estimate the value of real estate in the state's ratio study. However, the court emphasized that the ratio of aggregates was most appropriate in that case because the median would ignore the state's assessment trends. Id. at 1569. The Fourth Circuit has approved the use of the median in determining final assessment ratios in two cases. However, the cases did not involve stratified samples and, consequently, are not helpful to our determination here. See CSX Transp., Inc. v. Board of Public Works, 95 F.3d 318, 324 (4th Cir. 1996) (because the properties at issue were of the same type and were assessed under the same assessment method, and due to practical variations in the assessment process and fluctuations in market values, the median was the most appropriate measure of central tendency); Clinchfield R. Co. v. Lynch, 700 F.2d 126, 130 n. 5 (4th Cir.1983) (the standard practice in sales-assessment ratio studies is to use the median). After considering all the evidence, we conclude that the department may use either the ratio of aggregates or the median to estimate the true market value of the property in each stratum, in order to merge the data and calculate a final assessment ratio. The most persuasive evidence relating to this issue is contained in the IAAO text, quoted above, which states that, in studies conducted for equalization purposes that use stratified samples, either the ratio of aggregates or the median may be used to estimate market value. In short, the evidence does not demonstrate that the ratio of aggregates, rather than the median, must be used exclusively. Consequently, we reject the airlines' contention to the contrary.
The final issue in this case involves the department's decision to exclude one account, number 83, from its final calculations. The Tax Court concluded that that account properly was excluded. 13 OTR at 370. As we shall explain, we conclude that it was permissible for the department to exclude the account. Account number 83 initially was included as a sample account in the fifth stratum of the department's ratio study. The department's audit of that account demonstrated that its total assessed value was far below its estimated market value. The department later learned the following history behind the account. Before the 1993-94 tax year, the property owner for account number 83 had failed to file a personal property return. Consequently, a county appraiser assigned an assessed value of $2,950 to the account, based upon a viewing of the assets observable in the front area of the owner's business. The county coded the account, under its letter coding system, as having a non-final assessed value, and the owner was fined a $10 late-filing penalty. Because the owner again refused to file a personal property return in 1993, the county rolled the earlier assessed value forward, together with an additional adjustment, and assigned an assessed value of $3,050 to the account for the 1993-94 tax year. The county also changed the account status code to a final, penaltyno filing received account. After the account status code had been changed to final, an auditor visited the site to audit account number 83 for the department's study. At that time, the department did not know the meaning of the county's letter status codes, including the codes assigned at various times to account number 83. The auditor concluded that the audited value for the account was $363,950, which was almost 12,000 percent higher than the county's assessed value. The resulting assessment ratio for account number 83 was 0.838, or less than one percent. The department's initial ratio study results, which included the assessed and audited values for account number 83, demonstrated that, under the ratio of aggregates, the county assessed the comparison class property at only about 87 percent of its true market value. The initial median result, however, was not significantly affected. After consulting with Gloudemans, the department decided to draw 24 additional samples for the fifth stratum and, after completing those audits, failed to discover any accounts as grossly undervalued as number 83. [31] At about the same time, the department also contacted the county and learned the history of that account. After consulting again with Gloudemans, the department concluded that it was appropriate to exclude account number 83 from its study. The department then recalculated the results without that account and reached the conclusions set forth earlier in this opinion. The airlines contend that the department improperly excluded account number 83 from its ratio study. They point to Bahl's testimony that the account was a valid data point and that the department violated accepted statistical principles when it omitted a valid data point after drawing its sample. The airlines further argue that the department provided conflicting explanations as to why the account was excluded. That conflict suggests, in the airlines' view, that the department's exclusion of the account was suspect. [32] They also accuse the department of excluding the account for the sole reason of obtaining a favorable result under the ratio of aggregates. The department responds that it properly excluded account number 83 from its study. The department emphasizes that the account was so highly undervalued, when compared to any other accounts in the study, that it must be deemed    an aberration which was not at all representative of the other accounts within the [fifth] stratum. Consequently, including the account would skew the results of the study unfairly. [33] The department also contends that the account was analogous to accounts under appeal, which were excluded from the study at the outset due to their lack of finality. Finally, the department points to Gloudemans' testimony that, under standards developed by the IAAO, it is permissible in most cases to exclude extreme data points, such as account number 83, from a ratio study. [34] We conclude that it was permissible for the department to exclude account number 83 from its study, for two reasons. First, Bahl and Gloudemans offered conflicting testimony, with no published documentation to support their respective contentions, that it either was or was not permissible to exclude the account. Faced with credible conflicting testimony from two qualified experts, we cannot conclude that the airlines have proved that excluding the account violated sound statistical principles. Second, we already have concluded that it is permissible to accept the department's final results based upon the median, rather than the ratio of aggregates, which was not affected by the extreme ratio of account number 83.
After reviewing the department's ratio study and the trial record, and having considering all the airlines' contentions challenging the validity of the study, we agree with the department that its study showed that, for the 1993-94 tax year, the county assessed comparison class property at 99.53 percent, or nearly 100 percent, of its true market value.