Real-Estate Roulette

Of the 400,000 homeowners in Philadelphia, only 3 percent receive property-tax bills based on the true value of their real estate.

For the remaining 387,000, the amounts they are charged are wrong, and often wildly so - derived from assessments that, on average, are 39 percent off the mark, according to an analysis by The Inquirer.

The appraisals border on the randomness of Ping-Pong balls popped from a lottery machine, with winners and losers.

The neighborhoods where assessments are too high, and residents pay too much, include some of the poorest in the city. The most egregiously overassessed houses typically have market values under $69,000; their owners are overbilled $116, on average. The inflated appraisals, however, are not limited to distressed blocks. Nearly the entire Northeast, Mount Airy and Olney are overassessed.

Neighborhoods in the southern half of the city - with the notable exception of Southwest Philadelphia - are generally underassessed and homeowners undercharged. On the price scale, the properties with the most flagrantly lowball assessments tend to be above $200,000; those taxpayers get an average break of about $500 a year.

When Pennsylvania rated the accuracy of assessments in its 67 counties two years ago, the four adjacent to Philadelphia were in the top third. Chester County was No. 3 and Montgomery County No. 6, even though they had not conducted mass reappraisals since 1998.

Philadelphia came in 47th - startlingly low considering that, at least in theory, it reassesses annually and should have the most up-to-date values.

Last summer, in an exceptional push, 80 percent of all properties in the city were reappraised. The stated intent was to fix the increasingly glaring errors that were drawing fire from homeowners all over the city, who have complained that they could make no sense of the numbers or judge whether their bills were fair.

The new assessments, however, are just about as fallacious as the previous figures.

"They are so out of whack, it's unbelievable," said Robert P. Strauss, a property-tax expert and professor of economics and public policy at Carnegie Mellon University in Pittsburgh.

At The Inquirer's request, Strauss and Kevin Gillen, a real estate expert at the Wharton School of the University of Pennsylvania, conducted separate analyses of Philadelphia appraisals. The results of both studies were similar to The Inquirer's.

In recent years, as properties have appreciated, "assessment accuracy has worsened dramatically," Gillen concluded.

Throughout Pennsylvania, as in dozens of states, real estate levies are provoking historic levels of taxpayer wrath. And the temperature is rising, boosted by rate hikes imposed by cash-starved school districts and municipalities even as home prices sag. Critics and defenders agree that property taxes in Pennsylvania are increasingly chaotic and inequitable.

Philadelphia's system is all that, and worse. Article 8 of the Pennsylvania Constitution requires all assessments to be "uniform" – that all properties be taxed consistently at the same percentage of market value. The Inquirer analysis shows that is not the case in Philadelphia.

The property tax put $940 million into Philadelphia's coffers last year. Of that sum, $547.6 million went to the school district.

It is the job of the Board of Revision of Taxes - a seven-member panel appointed by county judges and independent of city government - to make sure every property owner is charged a fair share of the annual ante by accurately evaluating real estate.

That hasn't been happening.

This month, The Inquirer gave the board a summary of findings from the newspaper's analysis of publicly available BRT data. Administrator Barry Mescolotto, speaking for the board, said last week that he had not yet dissected the results but that, in general, such studies included too many atypical sales - for example, parent to child for $1 and sheriff's sales - that skewed the calculations.

Mescolotto said, however, that the board was well aware that its assessments lacked uniformity in many cases.

"There are uniformity problems," he said. "We're doing our best."

Although the BRT is technically outside his purview, Mayor Nutter said in an interview Friday that "the current system just doesn't work." As a councilman, he had called for the board to be abolished. He now says that the agency can right itself, but that the system "needs to be changed yesterday."

The most famous beneficiary of the BRT muddle has been State Sen. Vincent J. Fumo. City evaluators had put a market value of $250,000, and an assessment of $80,000, on his 27-room Spring Garden mansion - even as he tried to sell it for $6 million. This year, after a bombardment of publicity, the board revalued his home at $953,000, raising the assessment to $305,000. His bill will bounce from $6,611 to $25,205 by next year.

In April, the BRT said it was reexamining more than 500 other high-end properties for errors.

But that may be another violation of state law, which prohibits selective, or "spot," reassessments.

"That's the way I see it," said Joseph Bright, a Center City lawyer and tax specialist. "I've taken the statute, and I've turned it sideways and upside-down. The case law is very clear."

BRT spokesman Kevin Feeley said no law had been broken. "The board feels it has acted fairly and uniformly," he said last week.

Fumo and other owners of the targeted properties have argued that assessments are out of whack everywhere in the city.

And they are.

The southwest edge of Center City is one of the most underassessed sections in Philadelphia. But you could not prove it by Lisa Parsley.

Eight years ago, she and her husband, Edward, bought a three-story rowhouse in the 2300 block of St. Albans Street, where it sits amid similar homes fronted by a brick courtyard and a garden.

Judging from sales data, St. Albans residents are enjoying quite a bargain. On average, homes on the block have sold in recent years for $425,000. Yet the city says they are worth $65,000. That would compute to an 85 percent tax savings equaling $9,520 per property. Streets Commissioner Clarena Tolson, for instance, pays $1,893 on her corner home - one of the higher bills on the block.

Inexplicably, assessors valued the Parsleys' house at $350,000, translating into a tax bill of $9,200. The Parsleys appealed to the BRT and won a temporary reduction, but their house still carries the highest assessment on the block.

"It's completely nonuniform and random," said Lisa Parsley, a psychiatric nurse.

The Parsleys are neither poor nor elderly, but many of the city's overassessed homeowners are. And they haven't the energy or the resources to fight the tax man, 78-year-old Marcel Pratt points out.

"They don't want to complain," he said. "They just want to live their days out."

Pratt lives next to a trash-strewn lot on Farson Street in West Philadelphia, near the 52d Street stop of the wall-shaking Market-Frankford El. Assessors say his tiny home is worth $15,000, which he believes is more than anyone would pay. What mystifies him, he said, is why the assessments are similar on almost every building on the block, including ones that sold in recent years for $52,000, $72,000 and $150,000.

The assessors, Pratt said, "should be ashamed of themselves."

How did Philadelphia assessments get so out of kilter?

In short: a rocketing housing market versus deskbound assessors.

The 67 city evaluators are each responsible for about 8,600 properties. But unlike mortgage-company appraisers, they inspect the interiors of only 10 percent of the houses and spend two days a week looking at exteriors, said Mescolotto of the BRT.

The evaluators' work is done mainly at computer terminals, where they monitor sales data, track trends, and estimate changes in values on whole blocks of properties for the next round of revaluations.

Under standard appraising practice, recent sales are considered the best measure of market value.

From 2001 to 2006, however, BRT evaluators failed to keep pace with run-ups in real estate values and did not take into account varying rates of appreciation among neighborhoods. In a hopeless game of catch-up, they fell so far behind that their numbers became meaningless.

The BRT says the problem resulted from an out-of-control real estate market. The BRT's critics say the issue is more basic.

"They come up with numbers on a piece of paper," Bright said of the BRT's real estate evaluators. "But they don't really assess."

With last summer's mass reappraisal, the BRT had the incongruous task of raising assessments while property values were leveling off or falling.

It produced a surreptitious tax increase - without City Council having to take heat for it.

Since 1989, the millage has been frozen at 82.64. In other words, for every $1,000 of assessed value, a property owner pays $82.64.

Increasing the assessments on 388,000 residential and commercial properties last summer meant an estimated extra $45 million collected, which constitutes a 5 percent tax increase. Of that, $19 million goes to the city and $26 million to the schools.

Even if it functioned flawlessly, Philadelphia's property tax would be a bafflement to homeowners.

Under the city's so-called fractional system, an assessment is supposed to be 32 percent of market value. So a property assessed at $32,000 should be worth $100,000.

Mescolotto said last week that the BRT's assessments were close to that mark.

According to The Inquirer's analysis of the BRT's own data, however, the assessment on the average property is just 12.2 percent of its market value - nowhere near 32 percent.

Strauss, of Carnegie Mellon, reached a similar conclusion. How the BRT could contend that "assessed values in Philadelphia were close to 32 percent of market value is a mystery to me," he said. "It probably reflects some special kind of magic that only those officials in Philadelphia and Harrisburg possess. They probably also believe that the Eagles won the Super Bowl."

The wide spread between assessments and market values found in the Inquirer, Wharton and Carnegie Mellon analyses is largely the result of radical real estate appreciation from 2000 to 2006. As home prices rose, the assessments represented a smaller and smaller portion of the properties' worth.

In the most dramatic cases, such as in booming parts of South Philadelphia and Northern Liberties, assessments are as little as 6 percent of market value. Conversely, in low-end neighborhoods where prices were stagnant or fell, hundreds of homes are assessed at 32 percent or more of market value.

Such haphazardness has deprived homeowners of any understanding of their tax bills, any way of determining whether their bills are fair, and any standard by which to appeal them to the tax board.

It also flouts the state constitution's demand for "uniformity." For the constitution's purposes, what matters is that all properties are assessed at the same percentage of market value, be it 10 or 32 or 100.

The state is supposed to keep tabs on that.

Like the other Pennsylvania counties, Philadelphia is required to report all real estate sales each month to the State Tax Equalization Board, the agency responsible for the quality of assessments. However, it has no staff to monitor the accuracy of the data, former executive director Thomas Connolly said. Counties are essentially on the honor system.

The Inquirer analyzed the BRT's reports from 2006 (the latest year available) and found serious discrepancies and gaps. For instance, that May the board reported an average sales price of $48,759 on 863 sales. Four months later, the average price jumped to $209,238 on 968 sales.

No such inconsistencies were evident in the data sent to the state by the suburban counties, whose reported sales prices varied little from month to month.

After The Inquirer pointed out apparent irregularities in the city reports to him, Gregory J. Schoffler, the state tax board's executive director, said he would meet with BRT officials next month to discuss the numbers.

Said Schoffler, "We need to sit down with them very shortly."

Homeowners who appeal their property-tax bills to the BRT will find the cards stacked against them, in more ways than one.

The confusion that afflicts the system works to Philadelphia's advantage.

Consider that aggrieved property owners bear the burden of proving that their assessments are out of line with comparably valued real estate. At any given price level, however, Philadelphia's assessments are as similar as ants and elephants.

For example: On the 250 properties that sold for $125,000 last year, the assessments ranged from $3,808 to $32,256 - in other words, from 3 percent to 26 percent of market value.

Without an accurate "common level ratio" - a percentage that is identifiable and fixed citywide - property owners have no firm data with which to argue their appeals.

The Board of Revision of Taxes hears and decides all appeals. It is the same agency responsible for hiring the assessors.

Taxpayers who do not like the board's decision can appeal to Common Pleas Court, whose judges appoint the board members.

In the 2008 appeal period, the BRT rejected 5,000 appeals - or 85 percent - and granted reductions in 879 other cases. Homeowners who filed appeals said their hearings had only added to their confusion and frustration.

Mark J. Ratkus, an economics professor at La Salle University, owns a home in the 5200 block of Westford Road in Olney, where property values have stagnated in the last two years. In August, appraisers raised his assessment.

When he examined the other assessments on his street, he could find "no linkage" between them and actual market values, he said.

Irked, Ratkus appealed - and lost.

He said BRT members had told him that he should consider himself lucky, that even though prices in his neighborhood had been falling, he had escaped tax increases during the previous four years when homes appreciated.

Their rationale, Ratkus said, "didn't make any sense."

Ianthe B. Lane lives in the 1200 block of East Johnson Street in East Germantown, another street where the numbers appear to defy logic. Almost all the houses on the block where her two-story stone home sits carry an assessment of $26,336, including one with crumbling front steps. The annual tax bill comes to $2,176.

Houses nearby have values that are comparable, if not higher. But the assessments range from $16,064 to $19,744, with tax bills that are $300 to $600 lower than on Lane's block.

Like Ratkus' house, Lane's was part of the August sweep. Evaluators pegged its worth at $215,000, which she thought was much too high. The BRT rejected her appeal, without any stated reason.

Lane said she had implored the board, in vain, to send an appraiser to inspect the house. "I cannot understand how you can assess someone's home," she said, "if you haven't been to it."

Back on St. Albans Street, Lisa Parsley was so angry that she, too, protested to the BRT. She armed herself with homemade color-coded charts showing her assessment to be as much as seven times her neighbors'. When she asked the board how it could be so out of line, she said, one member responded: "We have no idea."

In February, without explanation, the BRT lowered Parsley's assessment by 74 percent, from $112,000 to $28,800. However, that is still as much as 50 percent higher than other houses on her street. The board also informed her that the reduction would be in effect only for the current tax year, leaving Parsley further mystified.

Brett Mandel's contempt for the Philadelphia property-tax system makes the news from time to time.

A former assistant city controller, Mandel is head of the tax-activist group Philadelphia Forward. He also owns a home in the 2300 block of Lombard Street in Center City. He bought the three-story rowhouse for $416,000 in 2002, and since then values in the neighborhood have appreciated nicely.

Mandel was well aware that his property was "dramatically underassessed," he said. According to city evaluators, its market value was just $158,000. In August, they raised it to $169,800, nudging up his annual tax bill by $312. Mandel knew he was still getting a big bargain.

He appealed anyway. He argued on the ground of nonuniformity - that assessments on properties of comparable value were not only lower but also higher than his. They are so out of whack across Philadelphia, he has contended, that it's wrong to raise any homeowner's taxes.

The board wound up rolling back Mandel's new assessment - but not everyone else's in the city.

"It's crystal clear that the system needs reform," Mandel said. "There's something broken here."

There is an oft-voiced solution to the chaos and inequity that dog Philadelphia's property-tax system: Blow the whole thing up and start over.

Even the BRT has wanted to do it - for more than six years.

In 2002, the board announced a two-step master plan to upgrade the agency's computer power and make the property-tax system easier to understand. The overhaul was supposed to take place by 2007. Clearly, it didn't.

The BRT already has spent more than $4 million on new computers and the development of statistical models that accurately analyze market trends. It's a work in progress, as assessors still are learning how to use the new equipment, Mescolotto said.

The second step is far more politically perilous: the conversion of assessments to actual market values, ending the bewilderment of the fractional system.

The "full value" project would make the system fairer. Property owners could figure out more easily whether their assessments were close to reality. Each would pay the correct amount - neither subsidizing neighbors nor being subsidized.

Under full value, all assessments would be revised to 100 percent of market value. In other words, a house worth $100,000 would be assessed at $100,000, not $32,000 or $12,000.

Residential assessments would, on average, be about eight times higher than they are now. In turn, millage would have to be reduced to one-eighth of what it is.

While the city would collect the same amount of money overall, individual taxpayers would notice a difference in their bills - for many, a big one.

According to an Inquirer analysis, 39 percent of property owners would see their taxes increase $100 or more, and 37 percent would get decreases of at least $100. The average increase would be $910, the average decrease $985.

The steepest hikes would hit parts of Center City and South Philadelphia. Neighborhoods enjoying the greatest relief would include Southwest and Northeast Philadelphia.

For now, though, the project is rocking between the waves.

The BRT argues that before it can implement the changes, City Council must adjust the millage rate - something it has not done in 20 years.

Councilman Frank DiCicco, who represents areas that would take the biggest hits, has said that Council would not change the millage until the BRT provided a detailed analysis of the new system's impact on homeowners.

Several measures before Council are aimed at mitigating the ill effects - among them, capping tax increases for homeowners whose properties have appreciated wildly. But if those proposals were enacted, DiCicco said, they would require special approval from the state General Assembly.

The overhaul is on indefinite hold.