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County of Douglas v. Nebraska Tax Equalization and Review Commission

Supreme Court of Nebraska

April 27, 2017

County of Douglas, appellant,
v.
Nebraska Tax Equalization and Review Commission, appellee.

         1. Taxation: Appeal and Error. Under Neb. Rev. Stat. § 77-5019(5) (Cum. Supp. 2016), appellate review of a decision by the Tax Equalization and Review Commission on a petition for review is conducted for error on the record of the commission.

         2. Judgments: Appeal and Error. When reviewing a judgment for errors appearing on the record, the inquiry is whether the decision conforms to the law, is supported by competent evidence, and is neither arbitrary, capricious, nor unreasonable.

         3. Administrative Law: Judgments: Evidence: Words and Phrases. An agency decision is supported by competent evidence, sufficient evidence, or substantial evidence if the agency could reasonably have found the facts as it did on the basis of the testimony and exhibits contained in the record before it.

         4. Administrative Law: Judgments: Words and Phrases. Agency action is arbitrary, capricious, and unreasonable if it is taken in disregard of the facts or circumstances of the case, without some basis which would lead a reasonable and honest person to the same conclusion. Agency action taken in disregard of the agency's own substantive rules is also arbitrary and capricious.

         5. Appeal and Error. When reviewing cases for error appearing on the record, an appellate court reviews questions of law de novo.

         6. Pleadings: Judgments: Appeal and Error. A trial court's decision to grant or deny a motion to reconsider is reviewed for an abuse of discretion.

         7. Pleadings: Judgments: Motions to Vacate: Appeal and Error. The abuse of discretion standard applies to an appellate court's review of a trial court's grant or denial of a motion to vacate or amend a judgment.

         [296 Neb. 502] 8. Judgments: Words and Phrases. An abuse of discretion occurs when a trial court's decision is based upon reasons that are untenable or unreasonable or if its action is clearly against justice or conscience, reason, and evidence.

         9. Administrative Law: Judgments. An administrative agency that is authorized to exercise quasi-judicial power is impliedly authorized to reconsider its own decisions.

         Appeal from the Tax Equalization and Review Commission. Affirmed in part, and in part reversed.

          Shakil A. Malik, Deputy Douglas County Attorney, for appellant.

          Douglas J. Peterson, Attorney General, and L. Jay Bartel for appellee.

          Heavican, C.J., Wright, Cassel, Stacy, Kelch, and Funke, JJ.

          Wright, J.

         I. NATURE OF CASE

         The Tax Equalization and Review Commission (TERC) issued an order to Douglas County to show cause why TERC should not order the adjustment of the valuation of three subclasses of residential real property in Douglas County. After a show cause hearing at which Douglas County appeared, TERC ordered the proposed adjustments. Douglas County filed a motion to reconsider, which TERC overruled. Douglas County petitioned for review with the Nebraska Court of Appeals. It subsequently filed a petition to bypass, which we granted. We affirm in part, and in part reverse.

         II. BACKGROUND

         In April 2016, TERC held its statewide equalization hearing. The State of Nebraska's Property Tax Administrator (PTA) (the head of the property assessment division of the Nebraska Department of Revenue[1]) submitted reports for each [296 Neb. 503] county to TERC. As required by Neb. Rev. Stat. § 77-5027 (Cum. Supp. 2016), the reports analyzed the level and quality of assessment of the classes and subclasses of real property within each Nebraska county and made nonbinding equalization recommendations.

         The report for Douglas County analyzed residential real property by dividing it into six valuation area subclasses (areas) based on geography and other common features of each area. The report analyzed the assessment-to-sales ratios within these areas. The assessment-to-sales ratio is the ratio of assessed value to sales price, calculated for every property sold in an arm's-length transaction. These ratios are based on the sales in the state "sales file."[2] The assessment of each class and subclass of most kinds of real property is required by statute to fall within 92 to 100 percent of actual value, as measured by an indicator of "central tendency, " such as the median, mean (average), or weighted mean ratio.[3]

         Three of the areas in Douglas County had median assessment-to-sales ratios outside the statutory range: "Area 2" had a median of 104.82 percent, "Area 3" had a median of 89.77 percent, and "Area 4" had a median of 90.08 percent. The overall median ratio for residential real property in Douglas County was 92 percent.

         The report recommended increasing the valuation of Areas 3 and 4 by 7 percent. It reached this conclusion on the basis of a variety of statistics that showed that the true level of value for both areas was 90 percent of market value, which is below the statutory range.

         The report also recommended that no change be made for Area 2 because "[t]he quality statistics . . . suggest [that] values are not uniform and widely vary from the median ratio." The statistics in the PTA's report indicated that there was a high level of dispersion and lack of uniformity in the ratios in [296 Neb. 504] Area 2. There was a lack of uniformity between higher- and lower-value properties in the area. The higher-value properties were underassessed, and the lower-value properties were overassessed.

         The report indicated that the statistics for Area 2, such as the median, were skewed by a significant number of low-value sales. The median for Area 2 was 104.82 percent. But excluding sales of properties under $15, 000, the median ratio of Area 2 was 100.45 percent; excluding sales under $30, 000, the median ratio was 96.21 percent. The report concluded, "Considering the ratio study statistics for the strata of sales above $30, 000[, ] the valuations [of Area 2] are considered acceptable."

         TERC issued an order to show cause why it should not increase the valuation of Areas 3 and 4 by 7 percent and decrease that of Area 2 by 8 percent. At the show cause hearing, Chief Field Deputy Jack Baines of the Douglas County assessor's office testified that there was a low-average sales price in Area 2, which, when combined with a small number of higher-price sales, tended to skew the data and skew the median ratio. He explained that with lower value properties, smaller differences between the assessed value and sales price would cause a greater difference in the assessment-to-sales ratio.

         As to Areas 3 and 4, Baines believed that the data underlying the statistics in the PTA's report was unreliable and that no changes should be made. Baines was new to his position. He testified that some of the assessment practices and procedures that he observed upon his arrival, such as not validating sales for the state sales file to make sure they qualified as arm's-length transactions, rendered the sales file data unreliable. Because he believed the sales file data was unreliable, he concluded that the statistics calculated from that data were unreliable. He argued that under generally accepted mass appraisal techniques, no changes should be made, because the data was unreliable. Baines stated that the correct course would be to correct the appraisal model and reappraise properties going [296 Neb. 505] forward without making any blanket equalization adjustment. Baines' testimony and the details of the PTA's report are discussed in more detail in our analysis.

         The PTA was asked whether any of Baines' testimony affected her recommendations. She stood by her recommendations as contained within the report to increase the valuation of Areas 3 and 4 by 7 percent and that no change be made for Area 2. TERC voted to increase the valuation of Areas 3 and 4 by 7 percent and decrease that of Area 2 by 8 percent.

         Prior to the issuance of TERC's written order, Douglas County filed a motion to reconsider and offered as additional evidence an affidavit from Baines. The motion and affidavit explained that Douglas County had compared the sales data submitted to the state by the county in its annual "Assessed Value Update" (AVU). The county discovered that many of the sales that it categorized as nonusable non-arm's-length transactions in the AVU were included in the data for the PTA's report. But the state had not given the county notice that it disagreed with the county's categorization of those sales, as required in regulation. The motion requested that TERC grant a hearing and reconsider and vacate its prior order.

         The TERC commissioners voted 2 to 1 to deny the motion to reconsider and on the same day issued a written order adjusting the valuation as it had voted to do at the hearing. Douglas County appeals TERC's order and the denial of its motion to reconsider. We granted Douglas County's petition to bypass the Court of Appeals and moved this case to our docket.

         III. ASSIGNMENTS OF ERROR

         Douglas County claims that TERC's decision to decrease the valuation of Area 2 and increase the valuation of Areas 3 and 4 failed to conform with the law, was unsupported by competent evidence, and was arbitrary, capricious, and unreasonable. It also claims that TERC's denial of its motion to reconsider was arbitrary, capricious, and unreasonable and constituted an abuse of discretion.

         [296 Neb. 506] IV. STANDARD OF REVIEW

         Under Neb. Rev. Stat. § 77-5019(5) (Cum. Supp. 2016), appellate review of a decision by TERC on a petition for review is conducted for "error on the record of [TERC]." When reviewing a judgment for errors appearing on the record, the inquiry is whether the decision conforms to the law, is supported by competent evidence, and is neither arbitrary, capricious, nor unreasonable.[4] An agency decision is supported by '"competent evidence, '" '"sufficient evidence, '" or '"substantial evidence'" if the agency could reasonably have found the facts as it did on the basis of the testimony and exhibits contained in the record before it.[5] Agency action is arbitrary, capricious, and unreasonable if it is taken in disregard of the facts or circumstances of the case, without some basis which would lead a reasonable and honest person to the same conclusion.[6] Agency action taken in disregard of the agency's own substantive rules is also arbitrary and capricious.[7] When reviewing cases for error appearing on the record, an appellate court reviews questions of law de novo.[8]

         V. ANALYSIS

         1. Principles and Explanation of Equalization, Mass. Appraisal, and State Sales File

         Before reviewing TERC's order decreasing the valuation of Area 2 and increasing the valuation of Areas 3 and 4 and its denial of Douglas County's motion to reconsider, it is necessary to review the background principles and the legal framework of equalization, mass appraisal, and the state sales file.

         [296 Neb. 507] (a) Equalization and Mass. Appraisal

         The Nebraska Constitution mandates that "[t]axes shall be levied by valuation uniformly and proportionately upon all real property . . . ."[9] To effectuate this mandate, the Constitution establishes TERC, granting it the "power to review and equalize assessments of property for taxation within the state."[10]

         TERC is required by statute to "annually equalize the assessed value ... of all real property as submitted by the county assessors on the abstracts of assessments."[11] In the exercise of this duty, TERC is granted "the power to increase or decrease the value of a class or subclass of real property in any county ... so that all classes or subclasses of real property in all counties fall within an acceptable range."[12]

         To assist TERC in its equalization responsibilities, the PTA is mandated by statute to prepare "reports and opinions" for each county; these reports must "contain statistical and narrative reports informing [TERC] of the level of value and the quality of assessment of the classes and subclasses of real property within the county" and may include nonbinding equalization recommendations.[13]

         TERC may equalize classes and subclasses of real property to ensure that they are within an "acceptable range"; an acceptable range of property valuation is defined in statute as "the percentage of variation from a standard for valuation as measured by an established indicator of central tendency of assessment."[14] For residential property, the acceptable range of assessed valuation is 92 to 100 percent of actual value. Whether a class or subclass of property falls within an [296 Neb. 508] "acceptable range" is to be determined by TERC "to a reasonable degree of certainty relying upon generally accepted mass appraisal techniques."[15] Generally accepted mass appraisal techniques include the standards promulgated by the International Association of Assessing Officers (IAAO).[16]

         Whether a class or subclass of real property is within an acceptable range is measured by an "Established Indicator of Central Tendency"[17] An indicator of central tendency is "[t]he result of measuring the tendency of most kinds of data to cluster around some typical or central value . . . includ[ing] the mean, median, and mode."[18] An established indicator of central tendency of assessment is one that is "utilized in generally accepted professional mass appraisal techniques."[19] Under both TERC's regulations and the IAAO standards, the preferred indicator of central tendency is the median.[20] Thus, TERC prefers that valuation data '"cluster"' around the median.[21]

         When studying whether a class or subclass of real property is within the acceptable range of assessed to actual value, actual value (i.e., market value) is often determined by looking to sales data. A "[s]ales ratio study" is one that uses sales data as a proxy for determining market value.[22] The PTA's reports use sales ratio studies to determine the value of residential property.[23]

         [296 Neb. 509] A primary tool for measuring the ratio of assessment to actual value is the assessment-to-sales ratio.[24] This ratio is calculated by dividing a parcel of property's assessed value by the sales price of that parcel of property. For example, a house with an assessed value of $95, 000 that sells for $100, 000 would have an assessment-to-sales ratio of 95 percent. Conversely, a house with an assessed value of $100, 000 that sells for $95, 000 would have an assessment-to-sales ratio of 105.26 percent. Thus, using this ratio and using the median as the indicator of central tendency for a class or subclass of property, the median assessment-to-sales ratio would need to fall between 92 and 100 percent to be within the acceptable range.

         The usefulness and accuracy of measures of "central tendency" such as median and mean depend on the "quality'' or "reliability" of the assessments.[25] Various tools are also used under professionally accepted mass appraisal methods to review the reliability of the measurements of central tendency.[26] The IAAO Standard on Ratio Studies[27] explains the importance of quality statistics:

The calculated measures of central tendency are point estimates and provide only an indication, not proof, of whether the level meets the appropriate goal. Confidence intervals and statistical tests should be used to determine whether the appraisal level differs from the established goal in a particular instance.
A decision by an oversight agency to take some action (direct equalization, indirect equalization, reappraisal) can have profound consequences for taxpayers, taxing jurisdictions, and other affected parties. This decision should not be made without a high degree of certainty that the action is warranted.

         [296 Neb. 510] The "Coefficient of Dispersion" (COD) is used to measure the uniformity of assessments.[28] The COD is the average difference between each assessment-to-sales ratio and the median assessment-to-sales ratio. To illustrate: Imagine a dataset with three ratios, 50, 100, and 110 percent. The median ratio would be 100 percent. The respective absolute differences between the ratios and the median ratio (100 percent) would be 50, 0, and 10 percent. These ratios would average to produce a COD of 20 percent. A lower COD indicates a higher level of uniformity of assessment-to-sales ratios, while a higher COD indicates less uniformity. Under TERC regulations and the IAAO standards, the acceptable range of COD for residential property is 15 percent or less[29]; that is, the ratios must be, on average, within 15 percent of the median ratio.

         The "Price Related Differential" (PRD) is a measure used "to determine whether properties of differing values are treated uniformly"[30] PRD is calculated by dividing the mean ratio by the weighted mean ratio.[31] Too high or low of a PRD indicates "vertical inequity, " either regressivity (underassessed high-value properties and overassessed low-value properties) or progressivity (overassessed high-value properties and underassessed low-value properties). A PRD of under 1 indicates progressivity, while a PRD of over 1 indicates regressivity.[32]

         Vertical inequities of the regressive or progressive variety are to be avoided.[33] Under TERC regulations and the IAAO [296 Neb. 511] standards, the acceptable range for PRD is 0.98 to 1.03 (98 to 103 percent).[34] Under the IAAO standards, "[unacceptable vertical inequities should be addressed through reappraisal or other corrective actions, "[35] rather than through blanket equalization changes.

         The "confidence interval" measures the precision of the sampling process, while the "confidence level" is the "degree of probability associated with a statistical test or confidence interval."[36] The confidence interval measures how reliably the sold properties represent all of the other properties in the class or subclass.[37] Generally, a larger sample size and greater uniformity of ratios result in a narrower confidence interval.[38]A narrower range of confidence interval indicates a greater reliability of a statistical measure (e.g., the median).[39] For example, Area 3 had a 95-percent median confidence interval of 89.43 to 90.28 percent, meaning that the true median is 95-percent likely to fall within that range. Under the IAAO standards, if any part of the confidence interval overlaps with the acceptable range, equalization is not appropriate.[40]The PTA's reports are required by regulation to include a 95-percent confidence interval for each of the measures of central tendency.[41]

         (b) Sales File

         The "sales file" is "a data base of sales of real property, including arm's length transactions, in the State of [296 Neb. 512] Nebraska" and is developed and maintained by the state PTA.[42]All sales in the sales file are deemed to be "arm's length'' transactions unless determined otherwise.[43] The sales file data is used by the PTA as the basis for her annual assessment ratio reports.[44]

         Nearly every real estate transaction in Nebraska requires the filing of a real estate transfer statement with a county register of deeds.[45] These statements require certain information about the transaction and conveyance, such as the amount of consideration paid.[46] The statements must be sent by the register of deeds to the county assessor.[47]

         The county assessors must provide supplemental information for each sale in the form of a sales worksheet.[48] The sales worksheet must indicate whether the sale is qualified as an arm's-length transaction for the sales file, providing an explanation for any sales deemed to be non-arm's-length transactions.[49] The transfer statements and the sales worksheets are sent from the county assessors to the Department of Revenue on a monthly basis.[50]

         The assessor's opinion as to whether a sale qualifies as an arm's-length transaction is presumed to be correct.[51] The Department of Revenue's property assessment division may [296 Neb. 513] override a county assessor's determination of whether a sale qualifies as an arm's-length transaction, but must give notice to the assessor of its decision in writing within 7 days.[52] And it may not overturn a county commissioner's determination that a sale qualifies or does not qualify as an arm's length transaction unless it reviews the sale and determines that the assessor is incorrect.[53] The process of disputing sales categorizations between county assessors and the Department of Revenue's property assessment division is set forth in detail in regulation.[54]

         On an annual basis, county assessors must provide the Department of Revenue and the PTA an "abstract of the property assessment rolls."[55] According to the regulations, the "County Abstract of Assessment Report" for real property consists of, among other things, the AVU, characterized as "the Report of [the] Current Year's Assessed Value for Properties Listed in the State's Sales File."[56] Generating the AVU, according to the state "Sales File Practice Manual, " is "the process of populating current assessed values for the sales already located in the state sales file" for use in the assessment-to-sales ratio for the PTA's report. That is, the AVU provides the state with the assessment information to match the sales information the state already has in its sales file through the real estate transfer statements and sales worksheets.

         The sales file is used as the basis for the PTA's comprehensive sales assessment ratio studies.[57] The PTA's sales assessment ratio studies are used in their annual reports and opinions for each county to aid TERC in its equalization duties.[58] [296 Neb. 514] The reports for each county "contain statistical and narrative reports informing [TERC] of the level of value and the quality of assessment of the classes and subclasses of real property."[59]

         2. TERC's Equalization Orders

         (a) Area 2

         TERC ordered an 8-percent decrease to the valuation of Area 2. Both the PTA's report and Baines in his testimony at the show cause hearing explained that the lower-value sales were skewing the data and that no change should be ordered for Area 2. TERC nevertheless ordered the decrease. Douglas County argues that this decision was unsupported by ...


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