Audit of the Real Property Assessment Division

The Honorable Ernest Y. Martin, Chair and Members Honolulu City Council

A copy of our final report on the Audit of the Real Property Assessment Division is attached. The audit was conducted pursuant to Council Resolution 10-269, which requested the city auditor to conduct a performance audit of the Real Property Assessment Division (RPAD) of the Department of Budget and Fiscal Services. The audit objective was to evaluate the RPAD processes related to the classification, reclassification, valuation, and assessment of real property for taxation purposes. The audit was performed in accordance with generally accepted government auditing standards from June 2012 to September 2013.

The City and County of Honolulu has the authority to assess, tax, and collect real property taxes as authorized by the provisions of Chapter 8, Revised Ordinances of Honolulu. Real property taxes are the primary source (43%) of revenues for the city's general fund and totaled over $812.5 million in fiscal year 2012. The Real Property Assessment Division (RPAD) assesses and calculates taxes {or all real property within the City and County of Honolulu; and is responsible for ensuring real property assessment values are fair and equitable, based on market value, and in accordance with applicable standards and laws. RPAD annually provides the city council a certified assessment roll that is used to set the tax rates for the various land classes and to generate tax revenues for the city.

During our review, we found the following:

• Best practices established by professional tax assessment organizations help ensure tax classifications are based on accurate and reliable data. Our sample results indicated real properties were inconsistently classified because tax assessment staff was not following best practices such as performing physical inspections, focusing on data quality assurance, maintaining and updating databases, or complying with existing administrative policies and procedures. As a result, tax assessments were inconsistent and inequitable; exemption and dedication property requirements were violated, and taxes assessed did not reflect the highest and best use of the properties. For example, our sample showed care homes and skilled nursing homes were not paying the proper tax assessments, because land use. issues that might have affected classifications were not resolved.

• For tax year 2010-2011, RPAD attempted to resolve classification problems concerning residential class properties in mixed use zones by reclassifying them to the commercial or industrial class. The substantial increase in property taxes generated many property owner complaints and appeals to the city council. The city council subsequently passed resolutions 10-260 and 11-105 that authorized tax adjustments and attempted to resolve problems created when properties were reclassified from residential to commercial or industrial classifications. Our analysis of the properties listed in the resolution indicated the problems have not been resolved because the real property data listed in the resolutions were not accurate, reliable, or complete. As a result, non-qualified property owners received $381,744 in questionable tax adjustments.

• Upon successful application, the city provides a property tax exemption for historic residential properties listed on a historic register. The exemption usually reduces property taxes from a full assessment to the minimum of $300 per year. City ordinances and rules impose specific requirements for property owners to obtain and retain the tax benefits of the historic residential dedication. Our sample results identified many violations of and non-compliance with historical residential property dedication requirements. The violations existed because RPAD did not actively monitor and enforce compliance with the historic property dedication requirements; conduct inspections of the properties; and maintain current or accurate information on the properties. Real property tax assessment staff did not formally communicate and coordinate with the Department of Planning and Permitting to resolve issues regarding legally permitted uses of historic properties. Based on our sample, we estimate the city could increase tax revenues by over $555,000 if RPAD monitors and enforces historic property dedication requirements and cancels the historic property exemptions for non-compliant property owners.

• We also found other deficiencies including potential illegal or unpermitted commercial use of residential historic properties, incomplete compliance with historic property requirements, and data management shortcomings. The real property assessment staff needs to take immediate action to ensure property owners comply with the historic property requirements and to prevent abuses of the historic property dedication, given the substantial tax benefits granted.

• Real property taxes are the primary source of revenues for the city's general fund. The city council therefore needs assurance that the tax information provided by the real property assessment division is accurate. Our sample results showed many inconsistencies and inaccuracies in classifications, tax assessments, and real property tax payments because real property tax assessment staff was not following best practices, such as performing physical inspections; focusing on data quality assurance; maintaining and updating databases; maintaining adequate records about exempted or dedicated properties; or complying with existing administrative policies and procedures. For our sample, over $1.8 million in potential tax revenues could have been assessed or collected.

This report contains several recommendations for improving RPAD operations. The director for the Department of Budget and Fiscal Services disagreed with the audit results and recommendations. Based on our extensive sampling and analysis, our office stands by the audit findings and recommendations.

Read ... The Entire Report

SA: City lets $1.8M in taxes slip away, audit finds