March 2021 - FITZGERALD LAW GROUP, P.C.

Assessor Kaegi addresses “Structural Racism” and other issues at the City Club

Cook County Assessor Fritz Kaegi addressed the City Club today. Below is a text version of his presentation.

Thanks for starting us off here, Ed. Before I begin my comments, I wanted to take stock of where we all are today. This last weekend, I was at a memorial for a friend and mentor … done virtually, of course, and I reflected on what we’ve all been through. Not even one year has elapsed from Illinois’ first death from COVID-19. In the country we now have more than half a million dead from the virus. We have millions suffering from lingering effects, and millions of survivors who could not be together to comfort each other in mourning. Us survivors are coping but taking real hits—jobs lost and businesses shut, life disrupted, families living with complete exhaustion and ever-present risk.We need to express gratitude to those around us for stepping in to stop the virus, and for helping us to carry through. The County Board, President Preckwinkle, Mayor Lightfoot and her team, and so many others have delivered in this time of crisis.I wanted to thank you at the City Club, and you members out there, for sustaining this irreplaceable organization. I’m looking forward to the day when we’re back in person.Joining us today are many members of the Assessor’s Office, all of whom have performed admirably during an incredibly difficult time. The work they did in 2019 made it possible for everything we did in early 2020, just before the virus hit.

We launched online exemptions for the first time, expanded the types of appeals you could file online, and created a new call center system. With the relaunch of our website and the implementation of auto renewals of senior exemptions, we were able to handle the immense challenge of pivoting from in-person public service to remote public service just as the full effects of COVID-19 caused all of us to rethink how we worked and lived. As citizens of this County, you should know that the staff of the assessor’s office delivered under extreme circumstances, carrying on through a deadly pandemic and coping with epic economic disruption that touched directly on our work; all while switching our systems midstream. They kept the public and each other safe, showing patience and flexibility even as all of us felt pushed to our limits, and beyond. This year, our staff implemented yet another way to make things easier on vulnerable populations, by processing exemption auto-renewals for low income seniors, persons with disabilities, and veterans with disabilities. This was made possible through a bill passed by the general assembly to make life a little easier for the hundreds of thousands of people most vulnerable due to COVID-19. As we faced down this pandemic, I’m proud of what we accomplished together and am grateful for the work they do, as dedicated public servants.I want to let everyone watching today know that we even as we accomplished all this, we were frugal. Every day, we try to show the public that we know the value of a dollar. Here’s how we’remaking good use of our resources.2

In Cook County, we serve more property owners per full-time employee than any of the other large jurisdictions, which you can see here. And we do it by spending less per parcel than any of those places.How did we do it? Not only with great effort, flexibility, and patience, but also the indispensable backing of Cook County Board President Preckwinkle, our County commissioners, and the Bureau of Technology. They funded and supported our technological transformation and our efforts to reinforce our staff with training, new talent, and data. Each day, we’re in the trenches together modernizing the office for our County’s betterment.

Today, & our equity frame

So, today we’ll talk about–A study of commercial assessments by the gold standard for our field–the results of our suburban reassessments–the impact of COVID-19–the upcoming reassessment of Chicago–closing the data gap that helps create some assessment disparities.But first,

I want to talk about why it’s so important to get this work right and what it means for theaverage property owner’s bottom line. Because that underlies each of these topics. In our property tax system, assessments are interconnected. Each property owner needs to care about how everyone is assessed, not just their own assessment, because otherwise that property owner may be picking up the tab for others through a higher tax rate. Because in Illinois, our property tax rates float, they’re not fixed. The rate you pay depends on how big the base of assessed value is. The bigger the base, the lower the rate.Let me show you here what happens if part of the system is off-kilter.3

Let’s say we’ve done our job correctly and perfectly mirrored market values in our assessments.In our example here, commercial buildings’ assessed value is a million, and homeowners’ values sum to a million. So the base is two million.Folks who own property here have a school district, town, and other local services funded by property taxes. Incidentally roughly two thirds of property taxes are for schools. In our state, this thing called a levy is the amount of money that will be collected for these bodies, regardless of the size of the assessment base over on the left.So what does this mean for a homeowner? Let’s say she owns a bungalow with $20k AV. She’sthen 1% of the base, $20k divided by $2m. If she’s 1% of the base, she has to pay 1% of the levy. So her property tax bill is $4000.But let’s say the system, perhaps through inadequate data and valuation practices, undershoots market values by 50% and only assessescommercial at 50% of where the market is. In that case, our base is now $1.5m, with homeowners now representing 2/3 of the base. Now remember, the levy over on the right does not change. In our state, levies are lump sums that must be collected regardless of how assessments are set; assessments just determine how the levy is distributed after the tax rate isset. 4

So in this case, our homeowner is still assessed just as she was before, at $20k. She’s still assessed accurately. But look what happens to her tax bill on the right. It’s gone up over $1000 to $5320. Why? Her home is now a bigger piece of the base. She’s picking up part of the tab for properties that are underassessed.This is why she has a stake in making sure the whole system is assessed fairly, because everyone’s assessment is interconnected, because we’re all dividing up the cost of government amongst ourselves based on the assessments.This is why our office is focused on accuracy, on eliminating assessment disparities, because accuracy in assessments has huge implications for equity. In each of the areas that follow, the changes we have made have focused on eliminating assessment inaccuracies and disparities that can make our system inequitable.

IAAO

These disparities are why I asked the International Association of Assessing Officers—which is the gold standard in this field–to examine the assessments in place as we found them and compare them to the prices paid in commercial property transactions in the County in 2018. They compared those commercial property sale prices with the system’s estimated market values. These market values were determined by the prior administration and the Cook County Board of Review, prior to our administration taking office. As I noted in the beginning, we need to consider residential and commercial assessments together. The Civic Consulting Alliance found problems in residential assessments in Chicago in5

2018, but they did find that in aggregate residential values were on target: homes were not, on average, over- or under-assessed. But the IAAO report found significant underassessment of most commercial properties. Overall, they found commercial properties were about 40% underassessed County-wide in 2018, and 50% underassessed in Chicago.The pattern was troubling in DEEPER ways, too. Larger commercial properties were assessed at lower rates than small businesses and the values showed a lack of uniformity in many cases, creating the potential for unfair tax disparities. Outlying neighborhood commercial properties also tended to be assessed at a higher rate. In short, some people were getting a break while others were making up the difference. As we saw in the earlier example, assessment disparities can mean that the annual financial impact of this underassessment can be really big for those who are assessed accurately.

Process improvements at the outset

This is why it was so important to focus on reducing distortions and eliminating these disparities as we reassessed the suburbs over the last two years. The first thing we did was to commit ourselves to transparency, by showing our work. No more black box valuations, which were a source of endless complaints in the commercial community. We also committed ourselves to eliminating sources of bias, favoritism, and conflicts of interest. This meant doing things like making commercial appeals anonymous to our analysts, implementing an ethics code forbidding campaign contributions from practitioners who practice before us, and requiring evidence to be based on professional standards. For example, an appraisal actually had to meet the federal standards that a bank would require. 6

For those of you who don’t know, there’s a small subset of the appraisal industry whose entire purpose is to argue that a double bacon cheeseburger is in fact a salad. If only it worked like that, all of us quarantined at home might be feeling a little slimmer. Unprofessional practices by appraisal mills hurt equity if they are taken at face value, because they can throw commercial assessments off kilter, injuring everyone else, not to mention bringing disrepute on honest appraisers who respect industry standards. Having high-quality standards and using better data are key to making assessments more accurate and fair.

Suburban reassessments

Now, I’m about to show you the results from the South Suburban reassessment, but I can’t help but plug our report of the North Suburban Reassessment. It provides lots of new data and graphics, where you can see how we took action to realign the system, and also calculate for yourselves the impact of changes to assessments on properties in your community.[show some of the beautiful graphics]The report has great data and charts showing you our sources, and the reasonable basis for thedata we use, which no one disputes in its accuracy or authoritativeness. Actually, we showed sources that institutional investors can look up for themselves and track each day. Here’s one example.7

And I gotta say, it has some striking cover art contributed by world famous Chicago-area artist Chris Ware, with scenes and buildings from throughout the county.So, here are the results from our reassessment of the South Suburbs. Several things to note here.1.

Note that the base grew overall.

The residential base grew, even after COVID-19 adjustments.

The commercial base grew more, also after COVID-19 adjustments.

With better modeling techniques, we dramatically improved regressivity in residentialassessments.

All these trends were a basic continuation of what we observed in the north suburbs, where we realigned the base with more accurate commercial assessments than the ones we inherited.

6. We’ll soon have a report on the south suburbs like we did for the north.

COVID-19 section

As I mentioned, our assessments in the south suburbs took into account the devastating effects of COVID-19. And we’re proud that they did.We were just starting to send out assessments in February 2020 when the effects of COVID-19 began to be seen here in Illinois. [fan chart showing impacts of COVID-19 on different classes]The individual sales transactions we prefer to use are reported with a lag of several months, but real estate capital markets told the story in real time. By the end of February, publicly traded portfolios of real estate were already taking hits, led by hotels and retail. By the end of March, serious distress was clear. Bond markets were showing distress with hotel and retail mortgages going on watch lists. Some commercial mortgage delinquency rates blew out from low single digits into the teens. The equity capital markets were saying hotel values were down as much as 40%, with retail down 30%, single-family homes down, while the market was also saying some kinds of real estate were up, like data centers. Then, the Governor and the President declared natural disasters, meaning that property owners could get relief for COVID-19 impacts during the appeals process.9

Now as you look at this chart, think back to the discussions we opened with today. Imagine having assessments reflecting a by now-out-of-date state of the world. Some kinds of real estate devastated, others going up. But then add an additional element of distortion by imagining that only a portion of the assessments would be appealed. In that case, only some properties would reflect the market impacts of COVID-19, but the majority of assessments would likely be frozen in place with pre-COVID-19 assessments. If we did nothing and stood pat, we would not only NOT reflect current market conditions, but we’d also create a notably more inequitable assessment roll, with some carrying the burden for others.The more equitable thing to do was recalculate assessments with these effects included. It wouldn’t be perfect because no matter when we made our valuation decision, conditions would continue to change afterwards. But at least the overall assessment roll would have the initial effects of COVID-19 reflected, saving property owners some of the costs and troubles of appealing during a pandemic, while creating a more equitable and up-to-date assessment roll. We published our first valuation document last May, noting all the data sources and methods used in our residential assessments, then a follow-up on our commercial assessments. You canfind those reports, along with community specific maps of our residential adjustments on our website..10

Chicago

Now, 2021 is one of our biggest challenges yet, more challenging in some ways even than 2020.First, we’re reassessing the City of Chicago, which represents fifty-two percent of the parcels in Cook County. So we’re doing more than half of our triennial reassessment work this year. We’reconfident we’ll meet this challenge as we have improved the quality of our residential modeling and are regularly meeting the IAAO standards for high-quality assessments. We’re also launching the opening phase of replacing our office’s whole software and hardware system of record. This is the beginning of our County’s deployment of the integrated property tax system from Tyler Technologies. It’s a long-delayed upgrade that moves us away from the aging mainframe platform used to power four offices involved in the Cook County property tax system. This upgrade will get us off the kind of green screen technology used in the movie

WarGames

and onto a modern platform used by assessor’s offices nationwide. It’ll also mean the data and methodology will be more transparent and easier to access than ever.We expect the trends that we observed in our reassessment of the suburbs to continue in Chicago. That is, we expect the residential and commercial base to grow, to close the disparity gaps observed in commercial reassessments, and to reduce the regressivity of residential assessments. All of these things will address the disparities and inequity identified by the IAAO.11

RPIE

With the world turned upside by COVID-19, we’re trying to make sure we have an accurate picture of local conditions facing commercial properties. We’re meeting with commercial property owners, chambers of commerce, and others. We’re seeking to independently verify neighborhood commercial data. And we’re encouraging folks to use our real property income and expense tool, known as RPIE. Every commercial parcel owner in Chicago this year received RPIE instructions in the mail. This tool helps us close the data gap that may have contributed to the disparities where smaller commercial properties tended to be assessed more highly than larger ones, especially in the neighborhoods where third party data is scarce. It lets owners tell us what real, on the ground conditions are like.Now, you would think a tool that gets assessments right at the beginning of the process would be welcomed by most people. It saves property owners money on the appeal process and certainly gets their assessment at a more accurate initial position. But it seems not everyone shares our enthusiasm for better data. We’ve seen more than a few letters and statements like this one from property tax firms, who instructed their clients not to fill it out.Why would these groups be opposed to our efforts to get better data? Why wouldn’t they want us to create fairer assessments from the beginning instead of forcing taxpayers to go through a costly and time-consuming appeals process? Yes, there will always be a need for appeals to 12

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Assessor Kaegi addresses “Structural Racism” and other issues at the City Club