Shortchanging Our Schools: Undertaxed properties plague some of Kentucky's poorest districts

(Reprint with permission from the Lexington Herald Leader)

JACKSON — Superintendent Arch Turner left Breathitt County’s schools in a shambles three years ago on his way to prison for vote buying. The Kentucky Department of Education has taken over the district to repair lagging student performance and dilapidated buildings while somehow trying to balance the budget with layoffs and program cuts.

Darrell Watts, facilities director at Breathitt County Schools, at the old swimming pool at Sebastian Middle School. The area's only public pool is no longer in use and has been drained, but it holds rainwater that comes in through the leaky roof. HERALD-LEADER
Darrell Watts, facilities director at Breathitt County Schools, at the old swimming pool at Sebastian Middle School. The area’s only public pool is no longer in use and has been drained, but it holds rainwater that comes in through the leaky roof. HERALD-LEADER

Apart from his shoddy leadership, Turner undermined local schools in a more subtle fashion, as did many of his neighbors, possibly without realizing it: He paid less in property taxes than he should have given his house’s fair market value.

Undervalued property, and the diminished tax payments that result, is a problem that plagues some of Kentucky’s poorest school districts as they search for more revenue from their own communities because of wavering support from the state and federal governments.

Turner owns a two-bedroom house on Main Street in Jackson, the county seat. In 2012, state Department of Revenue appraisers examined his house and valued it at $49,000. But Breathitt County’s property valuation administrator said it was worth $40,400, nearly 20 percent lower. Based on the PVA’s assessment, Turner paid $212 in annual property taxes, about $45 less than he would have on the state’s appraisal.

Forty-five bucks isn’t a huge loss, but it adds up. From 2008 to 2012, on average, Breathitt County’s residential property was assessed at 89 percent of fair market value, as determined by sales prices for homes that sold. That ranked it at the bottom of Kentucky’s 120 counties, according to a Herald-Leader analysis of state data. The statewide average was 96 percent. Anything under 90 percent accuracy concerns state revenue officials who monitor the PVAs’ performance.

Breathitt County farm land was assessed at an average of 61 percent of its value during that period. Not enough commercial land sold in most years for an accurate sales analysis, but state appraisals in 2012 suggested that some businesses along Ky. 15 in Jackson — an apartment complex, a gas station, an office building — were assessed at 75 percent or less of what they should have been.

Low assessments mean less money for Breathitt’s cash-strapped schools, which doesn’t surprise the people who work in them.

“I’m sure our assessments aren’t where they need to be,” said Derek McKnight, principal of Breathitt County High School. “I can tell you personally that I would not agree to sell my house for as low as it’s assessed at. And I’m sure that’s true for other people here, too.”

In Breathitt and other Eastern Kentucky counties, the trouble goes even deeper. A $36,900-a-year state tax break for people who collect federal disability benefits, as thousands of people here do, shields millions of dollars in residential property from taxation. Values also are reduced when property owners appeal PVA assessments because coal companies’ surface mining scarred their land.

Overall, Breathitt County’s anemic property tax structure bleeds hundreds of thousands of dollars every year from the city and county schools, local governments, the library, the health department and other public services. It leaves one of the nation’s poorest places even more dependent on state and federal aid — on other people’s money — to survive.

And yet, there does not seem to be much interest in facing the situation, said Larry Hammond, a longtime educator whom the state Education Department has installed as Breathitt’s acting school superintendent.

Hammond’s attempts to squeeze more school revenue out of Breathitt County have been met by loud protests at public hearings, outraged newspaper editorials, even a lawsuit filed against him by area residents. This month, anticipating another decline in state aid, Hammond is looking for ways to chop $712,916 from the district’s 2015-16 budget so it will balance. More layoffs seem possible despite crowded classrooms, he said.

“The gaps between Kentucky’s school districts have widened again, not just on their ability to support their local schools but also on their willingness to support them,” Hammond said. “I hate to describe it like this, I hate to use this word, but it’s really a welfare mentality. People just don’t want to pay anything for their schools. They figure someone else will send them the money, so they don’t have to do anything.”

‘What we’re given’

“We’re used to getting by on what we’re given, which isn’t much,” said Jason Fugate, a teacher at Breathitt County’s Marie Roberts-Caney Elementary School. The school is the hub of Lost Creek, a tiny community about 10 miles southeast of Jackson.

“The air conditioning went out last spring when it was pretty hot,” Fugate said. “We got by with box fans. It was bearable, though you are sitting there and sweating, and it can get uncomfortable for the kids, who are trying to concentrate on taking their tests.”

Jamie Mullins-Smith, who has a daughter in the school, said kids and teachers were becoming ill.

“They just couldn’t take that kind of heat all day,” she said.

In 2013, as the Breathitt County school district postponed long-overdue building repairs for lack of money, local taxpayers provided only 11 percent of the district’s $25 million in revenue, down from 14 percent a year earlier. Most of the money to educate the district’s 1,820 students comes here from Frankfort and Washington.

Acting as manager of the district, Hammond and the state Education Department chose to overrule Breathitt’s elected school board and raise the countywide property tax rate enough for a 4 percent revenue increase. That’s the most the law allows without a chance for voters to repeal it.

School taxes barely had been touched in five years. The higher rate brought in just $76,938 more. But it was enough to anger several dozen residents, who sued Hammond to demand that taxes be lowered again and their money refunded. They claimed “immediate and irreparable injury, loss and damage.” The case is pending in Breathitt Circuit Court.

A Herald-Leader review of land records shows that at least 16 plaintiffs in the lawsuit don’t own land in Breathitt County, so they don’t pay property taxes here, an observation that Hammond’s lawyers also made in court filings. Most of the remaining plaintiffs pay between $50 and $300 a year in school taxes. Some pay nothing. As disability check recipients, they get tax breaks that exceed the assessed value of their homes.

Jason Bailey, director of the Kentucky Center for Economic Policy in Berea, sympathizes with poor school districts — up to a point. Bailey supports redistributing money from wealthier communities to places like Lost Creek. Kentucky is constitutionally required to provide “a system of common schools,” which makes the state responsible for equitable funding regardless of where students happen to live, he said.

Still, Bailey said, not enough effort is made in parts of Kentucky to collect money from local sources.

“I do think the poorer counties should do what they can,” he said. “Their elected officials should be doing what they’re supposed to do to raise adequate revenue for schools and other services.”

Relying on outsiders

If Breathitt County wants a better education for its children, then it must pay for that, Hammond said.

“Historically, undervalued properties here combined with low tax rates have left us reliant on outside funds. And obviously, in recent years, those outside funds have not kept up very well,” Hammond said.

The schools need $29 million in repairs with only about $1.1 million in bonding authority to tackle it, Hammond said. Roofs leak. Heating and air conditioning systems malfunction. Old ventilation systems produce moldy, dusty air that causes problems for some students and teachers. Crooked external doors don’t close tightly enough to be safely secured. The area’s only public swimming pool, behind Sebastian Middle School, is filled with scummy rainwater that pours through the shredded ceiling above it. The pavement on every campus is pockmarked with potholes.

Classrooms are crowded to the maximum sizes allowed by law. There is little money available to expand innovations as Hammond wants, such as electronic tablets in the hands of students, gifted learning courses, dual enrollment programs that provide college credit, and advanced instruction in math, science and engineering. The best and brightest don’t get the same opportunities here that they do in a wealthier school district, such as Fayette County’s, he said.

“I don’t see anything on the horizon to make me think the funding situation in Breathitt is going to change dramatically,” Hammond said. “It’s a tremendous challenge. If we doubled the local tax bills, it would be a different situation. But the reaction — it would be very bad. They would take it poorly. It just wouldn’t happen, not here.”

Dependence on outsiders is nothing new in Breathitt County. It has a “mailbox economy” based on government checks. Sixty-one percent of the county’s personal income consists of public assistance payments rather than salaries and wages from jobs. The collapse of Eastern Kentucky’s coal industry in recent years only aggravated this.

Local property owners say they simply can’t afford the taxes that higher assessments would bring.

Brenda Shouse owns one of Breathitt County’s better homes: 2,128 square feet, brick exterior, tucked behind a gated fence on 11/2 wooded acres several miles south of Jackson.

In 2010, state Revenue Department appraisers examined Shouse’s home and valued it at $109,500. The county PVA assessment was $73,800, just two-thirds of the state appraisal. Based on the PVA, which prevailed for several years, Shouse’s county tax bill was $669. The schools got $304.

Shouse said she was unhappy last summer to open a letter from the PVA and learn that her property assessment finally was rising to about $90,000 — a belated compromise between the PVA and the state.

“I understand they need more money for the schools, I do understand that,” Shouse said. “But it’s gonna be very painful for me if my taxes go up. I’m in the coal business. I own tractor-trailers that are supposed to be hauling coal, and it’s a struggle already.”

‘It’s always worthless’

Ervine Allen Jr., 69, a former land manager for Eastern Kentucky coal companies, has been Breathitt County PVA since 1997. He was re-elected without opposition to another term last year.

To determine what property is worth for taxation, Allen said, he and his four employees check sales prices, physical improvements, mortgages, business income and other factors that help decide a parcel’s fair market value.

“Nobody understands what the PVA does,” Allen said in an interview at his courthouse office. “I always tell people, we don’t set the tax rates and we don’t collect taxes. All we do is value their worthless property. And it’s always worthless — just ask them — until they get ready to sell. Then it’s made of pure gold.”

By all accounts, Kentucky is better at assessing property than it used to be.

In the late 1980s, the General Assembly began to give the state Revenue Department more authority over PVAs. A 1988 state report showed that property assessments were roughly half of what they should have been in two dozen counties, mostly in Eastern Kentucky, which could ill afford the lost revenue. The Elliott County PVA not only got his assessments wrong most of the time, he refused to install a telephone in his office.

“Some PVAs have expressed the belief that one of their functions is to ‘protect’ the citizens from ‘the state,'” the report said. “Others have stated that their primary concern is to get re-elected.”

Today, state revenue officials expect PVAs to assess residential property at no less than 90 percent of its fair market value, on average. The closer to 100 percent, the better, because even 10 percent off-target squanders a lot of money.

To monitor the PVAs, the Revenue Department does two things.

One: It compares real estate sales prices against PVA assessments for each property that is sold, to see how near the mark the PVAs hit. If a house sells for $120,000, for instance, what had the PVA assessed it at? $118,000, which is close? Or $75,000, which is not? This is the source of the “sales-ratio analysis” that the state typically uses to measure each PVA’s accuracy.

Two: Every two years, it sends teams of professional appraisers into each county to randomly select a handful of properties, examine them and estimate their fair market value. Then it compares the appraisals to the PVA assessments for the same properties. This is the source of the state appraisals that found low PVA assessments for the homes of Arch Turner and Brenda Shouse.

Breathitt County does not always do well in these evaluations.

“The residential and commercial property classes fell below the established guidelines,” the Revenue Department warned Allen in a 2010 letter. “You might want to place a greater emphasis on the residential and commercial properties when doing future reviews.”

In an internal note after the state’s 2008 appraisals in Breathitt County, one state revenue official wrote sympathetically of Allen: “Same as a lot of counties where the sales are down, it’s hard (for him) to get a true assessment on property. Ervine is always polite to me and does have an election to run this year.”

When Breathitt or any other county turns in assessments that are less than 90 percent, on average, the Revenue Department can urge the PVA to go back and reassess some parcels to raise its numbers. Or it can supplement the initial PVA scores from the first category (sales prices) with scores from the second category (appraisals) if doing so will boost the overall numbers.

One way or another, the PVAs should clear the 90 percent hurdle before their assessments can be certified for tax purposes, said David Gordon, executive director of the Revenue Department’s Office of Property Valuation. But some counties have a harder time than others, Gordon said.

“I believe that they don’t have a lot of sales in (Breathitt) County, especially commercial sales, and that’s a problem for them,” Gordon said. “Sales is one of the ways they base their fair market value, on what their property is actually selling for. When there’s not a lot of sales in your county, it’s hard to do. So we’ve been working with (Allen) and his staff to make sure their assessments are acceptable.”

Allen summed up: “It’s a very imprecise science, and we do the best we can do.”

Spiraling downward

He said he faces many obstacles.

Thirty-nine percent of Breathitt County’s housing is mobile homes, some isolated in mountain hollows, all but inaccessible from a paved road. The predominance of mobile homes is a big reason why Breathitt County’s median home value is only $47,400, compared with a median of $120,400 for homes statewide.

“Many of these trailers are not in very nice shape. I’m not sure how some of them can even be lived in, to be perfectly honest with you,” he said. “You can’t cause much revenue to be generated from trailers as your property tax base. And their value is not going up. Trailers don’t gain value over time, like regular houses do. Their value is spiraling. At best, we can only hope it’s spiraling slowly.”

Also, Allen said, there is constant pressure on his office to keep assessments low for the county’s 13,545 residents, one-third of whom live in poverty.

“They will come in here with tears streaming down their faces and tell us their house isn’t worth half of what we assessed it at,” Allen said. “Then a few years later, they go to sell the house and they demand twice what we had it assessed at. So suddenly, mysteriously, it just gained a lot of value.”

Money also gets wiped off the tax rolls when property owners go before the county’s Board of Assessment Appeals. The board is composed of three local property owners: one appointed by the county judge-executive, one by the county fiscal court and one by the mayor of the county’s largest city — in this case, Jackson. It can overrule Allen’s decisions and reduce assessments at taxpayers’ request.

At the board’s Aug. 9, 2013, hearing, for example, eight property owners appealed. All won reductions. With a few strokes of a pen, the board erased $558,500 from Breathitt’s tax base — the equivalent of nearly a dozen houses at the county’s median value.

In most of that day’s appeals, property owners cited environmental damage from coal companies’ surface mining.

“This property has been mined for coal extensively over 60 years,” Harris Howard wrote in his appeal on behalf of Howard Land Management, a Prestonsburg company that owns 8,147 acres of timber land in Breathitt’s Big Caney community. “Most of it is not suitable for agriculture due to erosion from mining and hauling, mountaintop removal and surface mining.”

The PVA had valued Howard Land Management’s property at $1.04 million. The company insisted that it was worth only $514,285. The appeals board split the difference at $763,000.

Whatever coal contributed to Breathitt County’s economy in the past, it scarred this land enough to hurt its value for future generations.

Eleven percent of the county’s 316,971 acres either have been surface-mined or hold coal slurry ponds. In May 2009, scores of homes, stores, farms and an elementary school were wrecked in the Quicksand community east of Jackson after poor reclamation of surface mines exacerbated flooding from heavy rains, according to a lawsuit filed by 91 residents. Four coal companies reached a confidential settlement with the residents.

Disability checks

Another hole is cut in Breathitt County’s revenue net by state-authorized tax exemptions.

Kentucky awards tax breaks to homeowners who collect federal disability benefits or who are 65 or older. If they fall into one of these categories, they can write off part of their home’s value. The size of the exemption grows over time. In 2013, it was $36,000 — three-fourths of Breathitt’s median home value. This year, it’s $36,900.

As it happens, several thousand people in the county get disability benefits, and 14 percent of the population is 65 or older. So a whopping 28 percent of the value of residential property — $54 million — is shielded from taxation by those exemptions, with the disability exemption being more common. By comparison, only 7 percent of the value of residential property across Kentucky is covered by those exemptions.

Disability checks are so sought-after in Breathitt that school officials say parents sometimes keep children home for fear that attending class could make them ineligible for benefits.

Plenty of locals “drawing disability” would “suddenly get better overnight if they had a shot at a good job,” said Allen, the PVA.

“I see people act all crippled up when they’re really capable of working,” Allen said. “That’s a real challenge for us. All of the taxing districts lose out, the school districts lose out, anyone that relies on public money, because of those exemptions. It’s very frustrating.”

Among the five Breathitt County school board members last year, one claimed a disability exemption and therefore had no tax liability on a home assessed at $34,000. Another has alternatively used disability and old-age exemptions over the years to cut her home’s taxable value from $51,500 to $15,500, reducing her county tax bill to $146. As taxpayers, they gave little toward the schools they ran.

‘A real dilemma’

Rose Wolfe is mayor of Jackson. She owns a brick ranch house — three bedrooms, two bathrooms — on Panbowl Lake, a solidly middle-class neighborhood just north of downtown.

Wolfe’s home is worth different sums depending on where you look. Wolfe and her husband, Arthur, who died last month, paid $97,500 for it in 1991. It’s mortgaged at Citizens Bank & Trust for as much as $175,000 to secure a 2009 loan. The PVA assessed it at $126,700. And thanks to exemptions, it’s taxed at a reduced value of $90,700, less than the Wolfes spent on it 24 years ago.

The Wolfes claimed the disability exemption on their home until 2011, when they switched to the old-age exemption. (Arthur Wolfe, a disabled Vietnam War veteran, suffered from prostate cancer, his wife said.) Their 2013 county tax bill was $852, of which the schools got $374. Wolfe said she also paid about $270 in city taxes to Jackson on top of that.

It’s unrealistic to expect Breathitt County residents to dig deeper, the mayor said. The only major employers around town are the county and city school systems, a state Department of Highways district office and a small hospital, and none are hiring much, she said.

“People here want what’s best for their children. But you have to remember, we are an impoverished part of the state,” she said. “I don’t know how much more of the load people can carry. Forty percent of the people here work for minimum wage if they’re lucky enough to have a job at all. The burden of heavier and higher taxes is more than they can bear.”

Yet somebody must pay for Breathitt’s schools. Unless the state and federal governments decide to send far greater sums, which seems unlikely in this period of fiscal austerity, the schools will continue to struggle as many people here give nothing and even the nicer homes generate only a few hundred dollars a year.

“It works very poorly,” said Allen, the PVA. “I literally grieve that the tax base is so small, and it is, in my opinion, inevitably going to dwindle. We’re faced with a real dilemma, and I don’t know what the answer is.”

John Cheves: (859) 231-3266. Twitter: @BGPolitics. Blog: Bluegrasspolitics.bloginky.com.

Read more here: http://www.kentucky.com/2015/02/12/3691322_shortchanging-our-schools-undervalued.html?rh=1#storylink=cpy

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