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Districts must take action to be notified of changes in assessments, PILOTs

For most school boards, the “tax cap” found in Education Law section 2023-a casts a long shadow over school district budget deliberations. While it is often referred to as a “2 percent cap,” the law does not place a specific percentage limit on district spending, nor does it limit allowable percentage increases in property taxes on individual properties. Rather, it places a limit on the growth of the total tax levy that a school board can raise without first obtaining supermajority (60 percent) approval from the voters.

However, attorneys who represent large commercial or industrial property owners are adept at using an appeals process to obtain changes in assessments under the New York State Real Property Tax Law. In many jurisdictions, school districts receive notice of and actively participate in these proceedings for the purpose of protecting their tax base. When a property is subject to a PILOT, these proceedings can result in less revenue from PILOTs than expected. In the era of the tax cap, this circumstance effectively erodes a school district’s tax base and can sabotage its good-faith efforts to make calculations regarding allowable tax levies.

Three factors are involved:

  1. Due to a patchwork of statutory provisions that have not been harmonized with each other, school districts may find themselves in the dark regarding the progress of the “tax certiorari” proceedings that property owners can use to challenge assessments unless they intervene and actively participate in the proceedings. Districts’ calculations of the maximum allowable tax levy can be made wildly inaccurate if (a) assessors or courts decide to alter the assessment of a large commercial entity and (b) a local Industrial Development Agency (IDA) subsequently reduces the amount owed in PILOTs based on that change.

  2. When the school district is aware that a tax certiorari proceeding could potentially result in a reduction of a PILOT, it lacks clear authority to account for this possibility in tax levy calculations. While the mandates of the tax cap which have been interpreted by the Office of the State Comptroller as requiring school districts develop a “good faith estimate of the amount [of PILOTS] you expect to receive,” neither the comptroller nor the State Education Department has provided definitive guidance on the appropriate method of estimating PILOT revenue
  3. Good-faith efforts by school districts to use what they consider the best available information in tax cap calculations can still lead to public criticism by the state comptroller. In at least one audit, the comptroller frowned upon a district’s anticipation of a reduction in PILOT revenue based on the progress of a pending tax certiorari proceeding.

School board members should be aware of these issues and the ways they make school districts vulnerable to profound budgetary problems.

Understanding assessments and tax certioraris
Certiorari is Latin for “to be informed of” or “to be made certain in regard to.” Ironically, school districts in New York State have limited ability to be kept informed of the progress of tax certioraris, a process under the state Real Property Tax Law that a property owner (or sometimes a tenant) can use to challenge the assessed value of a property as established by a local assessor.

Usually, assessments are prepared by individual towns. In certain instances, a county (such as Nassau County) operates as the assessing unit. Assessments are used to determine the amount of real property taxes owed on the property or the amount which would be owed on the property if it was not entitled to a tax exemption.

The tax certiorari process typically involves an administrative review of property assessments and can also involve a judicial proceeding that requires the filing of a petition in state Supreme Court under Article 7 of the Real Property Tax Law.

The process begins with an assessment – a governmental determination of the value of a property as of a fixed date each year. This date, otherwise known as the “taxable status date,” varies depending on the jurisdiction. Assessments are “tentative” for a specified period of time, during which the property owner or tenant may ask the assessor to reconsider the assessment.

Many homeowners have successfully challenged their tentative assessments, and the stakes are higher when large commercial enterprises use the same process.

At the conclusion of the time allowed for the administrative review process, the assessment becomes “final.” At that point, a property owner or tenant may challenge the final assessment in court. This is commonly called a tax certiorari proceeding.

Sometimes a property owner or tenant is successful in the tax certiorari proceeding after years of paying taxes based on an incorrect assessment. In such case, they often are entitled to a refund. For instance, in Steel Los III/Goya Foods, Inc. v. Board of Assessors of Nassau County (2008), the New York State Court of Appeals found that a property owner in Nassau County was entitled to credits under the Nassau County Administrative Code toward future PILOT payments as the result of a successful tax certiorari proceeding.

Such a sequence of events for a large commercial entity such as a power plant or casino can produce nothing short of a financial calamity for the local school district. In most jurisdictions, school districts are responsible for payment of their proportionate share of refunds. (In Nassau and Suffolk Counties, laws exist to insulate school districts from financial liability for assessment errors.)

A special case involves property owners that have negotiated PILOTs with their local IDAs. The property owner may even seek a prospective reduction of a fixed amount owed under an existing PILOT agreement using the reduced valuation as the basis for seeking such a reduction. When they are successful – which is common – this can be a major blow to the finances of the local school district. PILOTs and tax levy calculation

A PILOT enables a commercial business to pay less than the total amount of property taxes that otherwise would be owed if the property was taxed based on its full assessed value. Under state General Municipal Law Section 854(17), IDAs are empowered to authorize a lower amount in recognition of a property owner’s plan to develop or improve a property for the perceived benefit of the community. Public authorities may also be granted PILOTs; New York State Public Authorities Law section 1020-q authorizes PILOTs for properties owned by the Long Island Power Authority.

Property owners seek to have existing PILOTs revised based on expansion or renovation plans or, as previously discussed, changes in assessments.

School districts use information about PILOTs to build their budgets. The maximum allowable tax levy each year for a given school district is determined, in part, by taking into account the amount of PILOTs which were receivable in the past year and the estimated amount of PILOTs that will be receivable in the coming school year.

In short, for every dollar a school district expects to receive in PILOTs, the tax levy limit must correspondingly be reduced by a dollar. Accordingly, the more revenue from PILOTs that a district expects to receive, the less the district is legally authorized to levy in taxes under the tax cap.

The reverse is also true. If a PILOT is reduced, the district may be able to raise more money from taxpayers and stay under the tax cap.

Your school district’s initial calculation of the tax levy limit must be submitted to the state comptroller by March 1 of each year. The comptroller has indicated school districts should use a good-faith estimate of the amount of PILOT payments it expects to receive when preparing its budget calculations for the upcoming school year, but has not given specific advice on how to prepare such an estimate.

Suppose a school district is aware of a pending tax certiorari proceeding that could reduce a PILOT of $5 million per year to $2.5 million per year, based on a revised assessment. Currently school districts lack clear authority to account for that possibility in tax levy calculations.

Recently, there have been instances where a local IDA reduced a PILOT based upon a tax certiorari proceeding that was resolved shortly after the affected school district’s tax levy limit had been calculated. In such a situation, if the school district is not made aware that the PILOT will be reduced in sufficient time to adjust its tax levy limit calculation, the district may face a revenue shortfall. It is of critical importance that districts monitor any correspondence they receive regarding these matters, and, where necessary, consult with counsel.

Keeping apprised of potential changes to PILOTs
It is vitally important for school districts to be aware of amendments to PILOT agreements or the issuance of credits toward future PILOTs. However, this can prove to be a difficult task.

While school districts are entitled to receive notice from local IDAs of proposed PILOT agreements or revisions to PILOT agreements on properties within their boundaries, many districts have complained of not receiving official notices from IDAs in a timely manner (if at all). Any consequences for delays or oversights by an IDA generally would require legal action.

It is a good idea to have your school attorney in consultation with your business office review all existing PILOT agreements to determine the impact any possible revisions may have on the district’s tax levy.

If a school district faces potential liability from a tax certiorari proceeding, the property owner is required to serve a copy of the tax certiorari petition on the school district (this may not be the case in Nassau and Suffolk counties). Therefore, receiving a tax certiorari petition on a property that is subject to a PILOT agreement may be a warning sign that the PILOT can be reduced in the future.

Despite the obligation to provide school districts with notice of a PILOT agreement and of the filing of a tax certiorari (in most jurisdictions), the law does not currently require school districts to be notified of the resolution of a tax certiorari proceeding unless the school district’s counsel has taken action to intervene and actively participate in the proceeding. Nor are school districts required by law to be notified of a related reduction of a PILOT agreement or of credits issued toward future PILOTs from a property.

This undesirable situation makes it critical for school districts to actively monitor the status of tax certiorari proceedings to determine if, and when, a reduction will occur and become a party to the proceedings when courts permit it. As a practical matter, it may be beneficial for your district or its attorney to develop a good relationship with officials from your local assessor’s office and local IDA or agencies.

If it can be demonstrated that a district faces a loss of PILOT revenue from a tax certiorari proceeding, your district may find it prudent to intervene, even in those jurisdictions where a school is not responsible for refunds (such as those in Nassau and Suffolk Counties). At a minimum, this will ensure the district receives notice of any decision to reduce the PILOT amount!

Courts have recognized that a school district’s participation in a tax certiorari proceeding for the purpose of remaining informed as to its outcome may be necessary under certain circumstances. (see Matter of Promenade at Central v. Board of Assessors (Sup. Ct. Nassau County, Aug 7, 2017). This is particularly true for large properties that make up a significant portion of a district’s revenue.

Best practices on monitoring PILOTs and assessments
Since 2013, NYSSBA has sought legislation to hold school districts financially harmless whenever they experience the unanticipated, significant loss of revenue due to tax certiorari proceedings or the unexpected loss of a significant portion of the value of their taxable property. Until the governor and the Legislature create such a law, a school district’s best course of action is eternal vigilance.

School districts should monitor new and proposed PILOT agreements, and, to the extent possible, proposed changes to existing PILOT agreements. In addition, school districts should have a system in place to review and track tax certiorari petitions including those filed for properties which make PILOT payments.

Notably, some PILOT agreements prohibit the filing of a tax certiorari proceeding while the property is receiving financial assistance (e.g., a manufacturing facility might be built with the aid of tax exempt bonds). However, it may be necessary for the school district to act to ensure that such provisions are enforced. Attorneys for property owners have every incentive to seek reductions in their clients’ assessments, and filings are routine.

Your school district might be actively involved in tax certiorari proceedings. It is important to be mindful of the potential liability resulting from a pending tax certiorari proceeding on a PILOT property. In so doing, a district can determine which PILOT properties could potentially be a reduced as the result of the pending tax certiorari proceedings and take action as necessary to remain informed about the outcome of the proceedings.

If you have questions about the interplay between tax certiorari proceedings, PILOT payments and the tax cap, it would be prudent to consult with your auditors, and, of course, legal counsel.

Members of the New York State Association of School Attorneys represent school boards and school districts. This article was written by Christopher W. Shishko of Guercio & Guercio, LLP