Protecting the District and Its Tax Base

School districts have two primary sources of in-State revenue. The first is State Aid, revenue received from the State of New York. The second primary source of school district revenue is real property tax payments, received from residential and commercial property owners located in the school district, based upon their property’s assessed value. Property owners can challenge the assessed value in a tax certiorari proceeding and seek to reduce their overall tax payments, as well as to recover any payments made based on the alleged excessive value.

A subset of real property tax revenue is that revenue received based upon negotiated agreements for payments in lieu of assessed and levied taxes (PILOTS). Typically, those negotiated payments are significantly less than what the property would generate if it were assessed as commercial or industrial property, in exchange for perceived value to the community.

We urge school boards to focus on defending their tax base, including those traditional real property tax payments and the payments in lieu of taxes, as a means of revenue preservation. This means getting involved in the process. The level of school district involvement in tax certiorari proceedings and PILOT agreements is likely to determine whether revenues dissipate or are preserved. Experience demonstrates that, by defending their interests in tax certiorari proceedings and participating in PILOT agreement negotiations, school districts protect their tax base.

A. Tax Certiorari Proceedings

Simply put, a tax certiorari proceeding is a legal challenge to the town’s assessment of the property value and request for the court to order the assessor to reduce the assessment. If taxes have been paid based upon what is determined to be an erroneously high assessment, the excess taxes would be repaid, with 9% statutory interest. Although the proceeding is based on action by the town or other municipal assessor, school districts are directly impacted ,because, if the taxpayer is successful, the school district must refund tax payments (an expense) and suffer the loss of its assessment base (a revenue reduction) in future years.

There are two types of tax certiorari proceedings, residential proceedings filed under Article 5 and commercial proceedings filed under Article 7 of the Real Property tax law. We recommend that school districts participate in the defense of large commercial proceedings filed under Article 7. We do not recommend that school districts intervene in the smaller proceedings filed pursuant to Article 5.

Typically, tax certiorari petitions are served on the school district in August, based on the Spring assessment. We recommend school districts forward the petitions to our office so that we can assist in evaluating the petitions and determining whether school district direct involvement is warranted. Once a school district becomes a party to the proceeding, the proceeding may not be settled without the consent of the school district. The school district’s representation in the proceeding ensures that its interests are protected during settlement negotiations, both in terms of maintaining the tax base and potentially reducing any amount to be refunded based upon the higher assessment, and/or reducing or eliminating the interest payment.

In most tax certiorari proceedings, the school district’s exposure is approximately 60% of the requested reduction in the total tax payment due to the school’s proportionate share of the total tax liability. The town and county or city will share the balance of the refund exposure, depending on the municipal tax rates. The town, which by law is designated as the primary defendant since it is the town’s assessment that is being challenged, typically has much less at stake than does the school district. As a result, a town may conclude that it is more cost effective to settle a tax certiorari proceeding than to spend its revenue defending the claim. Although a school district may leave the defense of tax certiorari proceedings to the town, the money it saves in defense costs may be offset by its reduced revenue if the town settles the matter at a substantially reduced assessment. When tax certiorari matters are settled, the agreed upon reduced assessed value generally is required to remain in effect for three years. In addition, the school district may be required to pay substantial tax refunds with statutory interest accruing from the date on which the property owner paid what is determined to be an excessive property tax, While leaving the defense of the tax certiorari proceeding to the town may save the school district money on defense costs in the short term, it may find itself bound to an unfortunate outcome that is more financially painful, especially over the long-term, through reimbursement to the taxpayer and continuing revenue losses from too great a reduction in assessed property value.

B. Payment in Lieu of Tax Agreements (PILOTS)

Solar companies, developers and businesses frequently seek tax abatement from industrial development agencies (IDA) or pursuant to Real Property Tax Law exemptions. A PILOT Agreement is a negotiated agreement to make an annual Payment in Lieu of Property Taxes. It is available if the property qualifies for an exemption under the Real Property Tax Law. School districts have rights under the General Municipal Law in these transactions. It is important that the school business official analyze these proposed transactions to protect the school district’s interests. Consulting with legal counsel in this analysis is recommended. Failure to review and actively participate in these negotiated transactions may result in the loss of significant revenue for school districts.

We have saved our school district clients significant tax dollars and preserved their tax base by assisting in the assessment of pending tax certiorari and PILOT matters to determine those which warrant the District’s intervention, and then by having a seat at the table and martialing the data and legal arguments to defend their interests.

If you have questions or would like our assistance with these matters, please contact Joe Shields, Katherine Gavett or Jeff Lewis.