{"id":2717,"date":"2020-12-18T11:33:23","date_gmt":"2020-12-18T17:33:23","guid":{"rendered":"https:\/\/illinoistax.org\/?p=2717"},"modified":"2020-12-21T13:52:56","modified_gmt":"2020-12-21T19:52:56","slug":"cook-county-property-tax-assessment-reform-the-perfect-storm-of-who-pays-what-mike-klemens","status":"publish","type":"post","link":"https:\/\/illinoistax.org\/?p=2717","title":{"rendered":"Cook County Property Tax Assessment Reform: The Perfect Storm of Who Pays What? – Mike Klemens"},"content":{"rendered":"

Cook County Property Tax Assessment Reform: The Perfect Storm of Who Pays What?<\/u><\/strong><\/h3>\n

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December 2020 (73.7)<\/strong><\/p>\n

by Mike Klemens*<\/p>\n

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Following the issuance of the first tax bills that reflect assessments completed by Assessor Fritz Kaegi, Cook County is experiencing the perfect storm in property taxation. The storm has: (1) an assessor elected on and pursuing a reform agenda, (2) assessments that are not (and traditionally have not been) uniform, (3) business property owners who already pay taxes based on a higher percentage of their value than do homeowners in Cook County or businesses in neighboring counties, (4) a system that few understand, and (5) a pandemic that has upended the economy.\u00a0 For individual property owners, what matters is how much they pay, but, as illustrated by the reaction to recent tax bills,\u00a0 by the time property owners get their bills it is too late to do anything about it. Business property owners saw the largest increases in tax bills after the North Triad was reassessed, and fear a repeat when Chicago is assessed next year.\u00a0 In this article, we will try to piece together: (1) the situation Assessor Kaegi inherited, (2) the effects of the 2019 reassessment, and (3) a look forward.<\/p>\n

Basics \u2013 Dividing up the bill
\n<\/strong>The concept behind the property tax is simple; the assessment process divides up tax bills based on the value of property (invoking the concept of relative share).\u00a0 Take a simple example, a hypothetical taxing district with two properties \u2013 House A valued at $100,000 and House B valued at $200,000 \u2013 whose only function is to maintain a gravel road.\u00a0 If the annual regrading and re-graveling of the road costs $3,000, the taxing district would impose a 1 percent tax. House A would pay $1,000 and House B $2,000.<\/p>\n

If there were a real estate boom and the values of the two houses in our example doubled, the tax rate would be cut to 0.5 percent and the bills would be unchanged.\u00a0 Conversely, if there was a real-estate crash and the values of both houses were cut in half, the tax rate would double to 2 percent and both property owners would pay the same amount.\u00a0 It\u2019s all about relative share.<\/p>\n

Only two things change the homeowners\u2019 bills: (1) if the cost of maintaining the road goes up the bills will too.\u00a0 If the annual cost rises to $3,300, House A would pay $1,100 and House B would pay $2,200 (the relative shares stay the same); or (2) a change in relative values \u2013 If homeowner A put on a big addition increasing House A\u2019s value to $200,000, House A\u2019s bill would increase to $1,500 while House B\u2019s would drop to $1,500.<\/p>\n

What seems straightforward in our over-simplified example gets complicated in the real world.\u00a0 Cook County has 1.8 million parcels of property, some assessed at 10 percent of market value and others at 25 percent.\u00a0 Further complexity comes from homestead exemptions of varying sizes on owner-occupied residences.\u00a0 Finally, along comes the state issuing a multiplier to bring the overall level of assessment in the county be 33.3 percent of market value.\u00a0 No wonder it\u2019s difficult for a property owner to determine her\/his relative share.<\/p>\n

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Cook is Different
\n<\/strong>We have two different property tax systems in Illinois, Cook County and everywhere else.\u00a0 As authorized by the Illinois Constitution, Cook County classifies property. See Cook County Assessment Process above<\/strong>.\u00a0 The effect of Cook\u2019s classification is to shift tax burden off residential property owners onto commercial and industrial properties.\u00a0 The shift and the effects of classification and of homestead exemptions are illustrated in Table 1<\/strong>,which uses data from the Department of Revenue\u2019s 2018 sales ratio studies to project for the various classes the market values, equalized assessed values, and the equalized assessed values after homestead exemptions.\u00a0 From the data, residential (Class 2) property comprises 76 percent of market value and 58 percent of taxable value.\u00a0 On the other hand, commercial property comprises 13 percent of the market value, but 31 percent of the taxable value. Both classification and homestead exemptions account for the shift onto commercial and industrial property.<\/p>\n

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Cook County\u2019s triad system is also unique. Each is reassessed once every three years and then the assessments remain unchanged for two years, except for the state multiplier.\u00a0 The result is that, in any given year, the assessments in two of the three triads will be out of date, which can have an impact when property values are changing rapidly.<\/p>\n

The Chicago Triad has the most property value and the south suburbs the least.\u00a0 Chicago has more than half the residential (Class 2 defined as six units or fewer), nearly 70 percent of the commercial property value, and 80 percent of apartment value.\u00a0 Table 2<\/strong> gives the 2018 EAV by Triad and class of property.<\/p>\n

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Cook County property owners are also a litigious bunch.\u00a0 The Cook County Board of Review annually hears 400,000 challenges to assessments.\u00a0 And at the state level, Cook County has 40 percent of the state\u2019s population but accounts for nearly 80 percent of the challenges at the Property Tax Appeal Board.<\/p>\n

Historical Context
\n<\/strong>Before we start, let\u2019s look back.\u00a0 In Cook County and all across Illinois, property values boomed and grew 7 to 9 percent a year from 2000 to 2009.\u00a0 Then came the real estate crash and values tumbled for four consecutive years, falling nearly 25 percent between 2009 and 2013.\u00a0 Total Cook County property values have still not climbed back to their pre-crash levels.<\/p>\n

Outside View
\n<\/strong>The annual sales ratio study conducted by the Illinois Department of Revenue offers an outside view of the assessments in Cook County.\u00a0 The study is part of a statewide process of equalizing assessments so that they meet the Constitutional requirement that property tax be \u201clevied uniformly by valuation.\u201d\u00a0 The department is charged to bring the level of assessment in each county to 33.3 percent of market value.<\/p>\n

A strength of the study is that it is a purely ministerial function whose results have no cost or benefit to state government, and the methodology has remained unchanged over the years.\u00a0 The department\u2019s studies were challenged and upheld by the Supreme Court in Airey v Department of Revenue<\/em> in 1987 and Advanced Systems, Inc. v Johnson<\/em> in 1989.<\/p>\n

A weakness of the study for policymakers is that the study looks backward, so lags what is happening in real time. To conduct the sales ratio study the department starts with sales price and assessed value data on the Real Estate Transfer Declarations filed with each property sale.\u00a0 They exclude the value of personal property included in the sales price and throw out sales between related individuals or companies and those with other factors indicating that a sale was not an arms-length transaction between a willing seller and a willing buyer.<\/p>\n

For each arms-length sale, for the five classes of property on which they do the Cook study (vacant, residential, apartment, commercial and industrial) they compute an assessment sales ratio by dividing the previous year\u2019s assessed value by the sales price.\u00a0 They do this so an assessor can\u2019t do selective reappraisal (sales chase) and only reassess properties that sell to show a higher level of assessment and receive a lower multiplier. The result is an assessment sales ratio.\u00a0 They array those ratios for the properties in each of the five classes from high to low and the one in the middle is the median ratio.\u00a0 Then, to account for using the previous year\u2019s assessment, the department adjusts the current median ratios by any reassessment done in the sale year.<\/p>\n

The latest study, reflecting the status of assessments when Kaegi became assessor, compared 2018 sales to 2017 assessments and then adjusted the median levels for 2018 reassessments.\u00a0\u00a0 Two points pop out:<\/p>\n

(1) All five classes of property were underassessed.\u00a0 Table 3<\/strong>\u00a0shows the statutorily mandated \u201cordinance level\u201d of assessment and actual countywide median assessment levels for each class.\u00a0 This is not shocking because, when property values were increasing, the South Triad assessments were one year old and the North Triad two years out of date in 2018.<\/p>\n

(2) Assessments are not uniform, with assessments of commercial, industrial and apartment properties particularly bad.\u00a0 The Coefficient of Dispersion (a statistical measure of the average assessment error) exceeded 50 percent in those classes, standing at 51 percent for both industrial and commercial and 55 percent for apartments. The residential\/COD was 23 percent.<\/p>\n

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It\u2019s worth noting that the lack of uniformity is nothing new.\u00a0 The 2000 sales ratio study, before the beginning of the real estate boom, shows CODs for apartments, commercial and industrial averaging nearly 45 percent.\u00a0 A perfect COD of 0 would mean that every property sold at the market value established by the assessor.\u00a0 That will never happen even if the assessor were perfect, because we all know of properties that were sold for more or less than we thought they were worth.\u00a0 The standards for sales ratio studies set by the International Association of Assessing Officers says CODs should be between 5 and 15 in \u201clarger urban markets.\u201d\u00a0\u00a0 A COD of 50 means that, on average, a property that should have an assessed value of $1,000,000 would be assessed at $500,000 to $1,500,000.\u00a0 For a more detailed discussion of COD\u2019s see, Tax Facts<\/strong>, \u201cCoefficients of Dispersion Explained<\/em>,\u201d July\/August 2015<\/span><\/a>.<\/p>\n

The last 10 years of COD changes are shown on Chart 1<\/strong>\u00a0for the three largest classes of property.\u00a0 After volatility associated with the real estate market moved from boom to bust in 2009, the uniformity measures returned to historic levels and have stagnated the last two to three reassessments.<\/p>\n

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Chart 2<\/strong>\u00a0illustrates the last 10 years of changes to median assessment levels.\u00a0 Again, there are ups and downs during the real estate crash.\u00a0 The most consistent level has been for residential assessments.\u00a0 The most significant change has been in Class 3 (apartments) which \u2013 abetted by a 2009 Cook County ordinance change that dropped the level of assessment from 16 to 10 \u2013 have\u00a0 fallen from a 12.71 percent level to 6.70 percent.\u00a0 See Tax Facts<\/strong>, \u201cA Fresh Look at Illinois Property Taxes,\u201d<\/em> November, 2017<\/span><\/a>.<\/p>\n

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IAAO Study
\n<\/strong>In September Assessor Kaegi released a sales ratio study he commissioned from the International Association of Assessing Officers (IAAO) of the assessments of commercial property: the IAAO study defined \u201ccommercial property\u201d for this purpose to include apartments (Class 3), commercial (Class 5A), and industrial (Class 5B) in Cook County in 2018, the last assessment before Kaegi took office.\u00a0 The study compares 2018 market values assigned by the previous Cook County Assessor to 2018 sales prices.\u00a0 The IAAO study found that market values determined by the assessor were 61 percent of the actual market value countywide, lower than any of the class-specific levels calculated by the Department of Revenue in its study of the same year.<\/p>\n

Table 4<\/strong> shows the results of the two studies, by property class.\u00a0 Although both studies are for the same year, there are distinctions between the department\u2019s and IAAO\u2019s studies that may help explain the differences in their results.\u00a0 The IAAO study included many more sales, 1,611 in total, than did the department\u2019s, which included only 555 sales.\u00a0 In Table 4, because of the way the IAAO study is presented, we used a weighted average of the medians presented for the three classes combined into the category of \u201ccommercial\u201d.<\/p>\n

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Because the IAAO study breaks sales into minor classes, it provides one striking\u00a0 insight: rental condominiums made up 21 percent of all sales used in the study were the most uniform of any minor class in the study (COD of 6.27 percent) and nearly the most underassessed (median level of assessment of 50 percent).<\/p>\n

What the Two Studies Say
\n<\/strong>Both studies represent the status of assessments when Assessor Kaegi took office \u2013 2018.\u00a0 In Cook County\u2019s cycle, that is the point when countywide assessments are at their highest level, because Chicago has the largest portion of property values and was just reassessed.\u00a0 However, the assessments for the north suburbs were two years old (two years of growth) and those for the south suburbs were one year old (one year of growth).\u00a0 That means all levels of assessment will be below their ordinance levels in a rising market, even if they were properly assessed during their reassessment year.<\/p>\n

We asked the assessor\u2019s office about the different results for median levels of assessment in the two studies, as illustrated in Table 4 and they suggested, given the lack of uniformity in assessments\u00a0 (both studies had comparable measures of COD and Price Related Differential), the difference was not significant.\u00a0 We agree.<\/u><\/p>\n

However, we do believe that the underassessment of apartments, documented in both studies, affects the conclusions of the IAAO study.\u00a0 Apartments represented 45 percent of the ratios used in the study, were the most significantly underassessed of the three Cook County classes combined in the IAAO study, but account for only 12 percent of the EAV in Cook County.\u00a0 Further, as illustrated in Table 2, nearly 80 percent of underassessed apartments are in the Chicago triad, helping explain how the IAAO study\u2019s median level of assessment for commercial properties (at 52 percent) was lowest in the Chicago Triad.<\/p>\n

Two other factors are significant: (1) the IDOR methodology of comparing sales to the previous year\u2019s assessment \u2013 despite the complications and confusion it adds \u2013 avoids selective reappraisal (sales chasing).\u00a0 A study by the Civic Consulting Alliance has identified selective reappraisal as a problem in Cook; and (2) the IDOR methodology starts with data from the Real Estate Transfer Declarations which allow it to exclude personal property included in the sales price, while the IAAO study did not.\u00a0 We believe the personal property exclusion may help explain why the IDOR study had somewhat higher median levels of assessment than did the IAAO study. Even with the uncertainty added by lack of uniformity, the difference in\u00a0 medians was in the direction we would anticipate.<\/p>\n

North Triad\u20142019 Taxes
\n<\/strong>The first triad to be assessed by Assessor Kaegi was the north suburbs, for 2019 taxes payable in 2020.\u00a0 According to a report by Cushman & Wakefield, a Chicago commercial real estate firm, the assessor boosted commercial and industrial assessments in aggregate by 74 percent and residential by 16 percent in the north\u00a0 triad.\u00a0 The Cook County Board of Review sharply reduced those increases, cutting them by two-thirds.\u00a0 During the reassessment, it was suggested tax rates would drop substantially, but it was not clear how much those higher assessments would reduce rates or what the impact of the Board of Review\u2019s actions would be on rates.<\/p>\n

The answer came a year later when the Cook County Clerk calculated tax rates.\u00a0\u00a0 According to the clerk, total taxes billed in Cook County rose from $14.9 billion to $15.6 billion, a 4.1 percent increase.\u00a0 Our simplistic example showed us that tax bills go up when (1) the amount requested by the local government (the levy) increases or (2) a particular property\u2019s relative share goes up.\u00a0 With regards to relative shares, the clerk reported that the average single-family dwelling\u2019s market value in the north suburbs increased 10.58 percent, while the average business property saw an increase of 22.53 percent. Tax rates dropped just over 9 percent.\u00a0 That left the typical single-family owner paying about 2 percent more, while the typical business property owner saw taxes go up by more than 11 percent.\u00a0 There was a shift in relative share off residential property and onto commercial, industrial, and apartment owners.<\/p>\n

The increase in the initial reassessments done for 2019 in the North Triad was greater than what would have been anticipated by the IAAO study, which put the North Triad median at 68 percent.\u00a0 Keep in mind, many would be higher, given the lack of uniformity demonstrated in both studies. The IDOR sales ratio study would indicate an even smaller reassessment increase.<\/p>\n

Equalization and the Multiplier
\n<\/strong>As mentioned earlier, the Board of Review ended up reducing 2019 assessments in the north triad, by $4.4 billion, erasing 2\/3 of the increases in assessments.\u00a0 This action provides one last insight to the 2019 results.\u00a0 To calculate the multiplier (used to \u201cequalize\u201d tax assessments across counties) the Department uses its last three sales ratio studies \u2013 in this case the 2016, 2017, and 2018 studies, adjusts each for reassessment done in 2019, and computes the three-year average median level of assessment.\u00a0 Given the substantial 2019 assessment increases, before the Board of Review reductions, the countywide level of assessment would have gone up and the multiplier would have fallen from the previous year\u2019s final level of 2.9109 to 2.7523, the tentative Cook County multiplier calculated by IDOR.\u00a0 After the Board of Review rolled back much of the increase, the final multiplier issued by the department rose<\/u> to 2.9160.\u00a0 In other words, the final level of assessment in the county fell slightly from 2018.\u00a0 The multiplier was applied to each parcel of property in Cook County, including those in the south and city triads, and while it increased EAV it did not change relative shares at all.<\/p>\n

It\u2019s worth noting that before the Board of Review reduced assessments, the department\u2019s three-year averages of median assessment levels were 26.60 for commercial and 26.91 for industrial, both slightly above the ordinance level of 25%.\u00a0 It seems unlikely that reassessments in just over a quarter of the county could boost the countywide levels for commercial and industrial property above the ordinance level.\u00a0 The final multiplier calculated after the Board\u2019s reductions set the levels at 23.23 and 22.93 respectively, both slightly below the ordinance level.<\/p>\n

Along Came COVID
\n<\/strong>As property owners in the North Triad were finally seeing the results of the 2019 increased assessments and Board of Review reductions, the economic effects of the COVID-19 pandemic began to be seen.\u00a0 Assessor Kaegi has announced plans to make changes in the 2020 assessments, both in the south triad being reassessed in 2020 and in the other triads as well.\u00a0 By comparing data from the townships where he had already provided initial assessments before announcing the adjustments, and then updated those assessments to reflect a COVID-19 adjustment, it appears that reductions to residential values will exceed those on non-residential properties, prompting further shift in relative shares away from homeowners onto business properties.\u00a0 But, like last year, the actions of the Board of Review are still unknown.<\/p>\n

We don\u2019t yet know what impact COVID will have on the market values of properties in the Chicago Triad, scheduled for reassessment in 2021.\u00a0 How empty offices resulting from increased work from home, low hotel occupancy rates, increased online shopping, and the general decline in traffic in downtown Chicago will affect property values in the loop and other business districts has yet to be determined.\u00a0\u00a0 So too is whether economic changes will impact the desirability of downtown residential condominiums and what that will that mean to their value.<\/p>\n

Conclusion
\n<\/strong>Property taxes are complicated, with many moving parts.\u00a0 Recognizing how those parts are interrelated helps to understand the consequences of proposed changes, which is particularly useful as Cook County\u2019s new Assessor pursues his mandate for (much-needed) reform.\u00a0 Adding to the complexity, of course, is the fact that property values in Cook County are in flux as a result of the economic repercussions of COVID 19.<\/p>\n

We can glean a number of useful insights from the two 2018 sales ratio studies described above.<\/p>\n

In terms of assessment uniformity, the assessor is correct to focus on long-standing problems.<\/u><\/p>\n