Auditor General Jack Wagner Finds Significant Flaws in State Tax Equalization Board's Property Market Values

Says corrective action must be taken immediately, or work should be privatized

HARRISBURG, Pa., Feb. 10, 2011 /PRNewswire-USNewswire/ -- Auditor General Jack Wagner said today that his auditors found so many errors in the State Tax Equalization Board's revised property market values for 2008 that it has raised questions about the accuracy of the 2009 report and the coming 2010 property report, which is scheduled for release in July.

Property market values certified by STEB are used by the Department of Education and other state agencies to calculate and distribute over $9 billion in state aid to school districts, local libraries, volunteer firefighter relief associations, community colleges and other programs.

STEB, which was established in 1947 to balance disparities in county property market values, revised 2008 property market values in 424 of Pennsylvania's 501 school districts after widespread complaints about sudden fluctuations between 2007 and 2008 market values. However, Wagner said his auditors found a 65-percent error rate in a review of records from 70 municipalities. Among the significant errors found in the 70 sampled municipalities were:

• Market value calculations for 15 municipalities used incorrect property sales ratios;
• 21 municipalities were credited with sales of properties that did not exist, resulting in inaccurate market values; and
• Sales ratio worksheets for 19 municipalities contained multiple errors that contributed to incorrect market values.

Wagner's report, which is available to the public at www.auditorgen.state.pa.us, attributed most of the errors to a flawed computer system and human error, and it recommended that they be addressed immediately. While STEB has attempted to fix the problems that occurred in 2008, including revamping the existing computer system, Wagner said he did not believe that all of the mistakes had been corrected. The errors are significant enough that they could result in unnecessary tax increases in some school districts and municipalities, he added.

In a cover letter to his audit, Wagner recommended that Gov. Corbett and the General Assembly review how property values are established and whether alternatives to the State Tax Equalization Board should be considered.  He said that corrective measures must be implemented immediately; if not, the board should be abolished and incorporated into the Department of Revenue, or the work should be privatized.

"Property taxes are the primary funding source for local government in Pennsylvania, and so it's vital that the market value information used in the subsidy formula is accurate and reliable and ensures that some taxpayers are not being shortchanged while others are receiving more state aid than they deserve," Wagner said. "The burden falls on the State Tax Equalization Board to reassure taxpayers that it is fulfilling its duties.  The time has come for the Board to lead or get out of the way."

The State Tax Equalization Board is composed of three members, each appointed by the governor of the commonwealth for a term of four years.  The board's organizational structure consists of an executive director, who oversees the everyday operations, a director of certifications, who is responsible for the calculation of market values, and approximately 10 field and clerical staff.

Wagner's office was asked by several members of the General Assembly to review the board's process for annually calculating and certifying market values of taxable property after concerns were raised by school districts, the Department of Education, and taxpayers because of large variances between 2007 and 2008 market values.

News reports last summer documented some of the errors:

• In Montour County, Cooper Township's aggregate market value rose from $44 million to $98 million, and Liberty Township's aggregate market values jumped from $70 million to almost $103 million.
• In Snyder County, Penn Township's aggregate market value climbed from $189 million to just over $228 million.
• In Northumberland County, the city of Sunbury's aggregate market value rose from $210 million to $235 million.

News reports also reported that on June 26 school directors of the Hazleton Area School District approved a budget that contained a 2.75-percent property tax increase for residents in Schuylkill County, a 1.89-percent property tax increase for residents in Luzerne County, and a 2.9-percent property tax decrease for residents in Carbon County, as a result of inaccurate market values.

Wagner's audit covered the market value report for calendar year 2008, with follow-up activities that concluded Nov. 24, 2010. It resulted in two findings: that the Revised 2008 Market Value Report was incorrect and could adversely affect the recently published 2009 report; and that the lack of management oversight and lack of controls resulted in STEB's certifying and publishing inaccurate 2008 market values.

"It is absolutely critical to Pennsylvania taxpayers that the State Tax Equalization Board tightens its oversight of the accuracy of market value calculations because the errors contained in prior reports not only affect the current year's calculations and aid to school districts and other local governments, but also can have a long-term effect on future years calculations," Wagner said.

The State Tax Equalization Board, which originally released the 2008 market value report on June 30, 2009, subsequently reissued a revised report on Aug, 17, 2010.  

In a letter dated Oct. 15, 2010, Wagner's office suggested to the board that it consider conducting a 100-percent review of the 2008 revised market values to ensure accuracy prior to releasing the 2009 market value report.  However, in a letter dated Nov. 24, 2010, Chairman James A. Zurick indicated that, after careful review, the board went forward with release of the 2009 market value report without completing Wagner's suggested review. The board released the 2009 market value report on Nov. 19, 2010.  

Key deficiencies noted by Wagner's audit include:

• 21 of the 70 municipalities reviewed had sales for 25 property types totaling approximately $57 million but the properties did not exist in the municipalities.
• The market value database software was unreliable in producing accurate results because of logic errors, security concerns, and manipulation of data by STEB employees.
• State Tax Equalization Board management failed to promptly report to the board any computer or other concerns regarding calculating the original 2008 market values, including the execution of a contract in October 2008 for the services of a programmer at approximately $65 per hour to correct or modify the new computer system.
• The State Tax Equalization Board chose to use a computer system that was not adequately tested by management, and employees received neither training nor an operational manual.

Wagner made 12 recommendations to correct operational deficiencies, including:

• Immediately stop using the existing computer system and either correct the system deficiencies -- including security concerns, logic errors, and manipulation of data -- or replace the system;
• Perform a 100-percent review of the 2008 revised market value calculation of all municipalities, taking into account the errors noted in the audit report, and issue revisions that are needed;
• Once the review of the 2008 revised market value calculations has been completed, determine the impact of the 2009 market values and issue revisions, if needed;
• Management should provide information to the board in a timely manner;
• Develop and implement a system of quality controls for preparing and reviewing market value calculations to ensure the system is functioning as designed and the information is accurate;
• Ensure STEB employees who use the computer system are properly trained and that the computer system is adequately documented, tested, and approved by the State Tax Equalization Board prior to placing the system in live operation.

Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly.  He is the commonwealth's elected independent fiscal watchdog, conducting financial audits, performance audits and special investigations.  The Department of the Auditor General conducts thousands of audits each year.  To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department's website at www.auditorgen.state.pa.us.

SOURCE Pennsylvania Department of the Auditor General