In looking at the Ag Valuation process and the erosion of assessed value to market value over the last 2 to 3 decades one thing that stands out is the  Department’s long standing position that many types of income are “return to management” and not return to the “land productivity”.

This includes Loan deficiency payments and crop insurance indemnities. The following is an excerpt from an interested 3rd party to explain to the department their position that management decisions should not be included in the calculation. The Department seems to go along with it.

 

For instance, two farms of almost identical soil profiles and productive capability might

be situated just across a county road from one another. Basically, they are the same, in

terms of productivity. Loan Deficiency Payments (LDPs) and Market Loan Gains

(MLGs) depend upon individual decisions and more importantly; the timing of those

decisions. The two farms above may have identical crops, with the only difference being

the timing of when one farmer elected to collect an LDP or MLG.

Any attempt to incorporate farm program payments, based on production or enrollment

options in the last farm bill (ACRE versus traditional LDP and Counter-Cyclical Payment (CCP)), will ultimately result in some farms being over-valued and some under-valued. Another unintended consequence of basing taxable values on production or enrollment based decisions, is the impact of taxes on the value of a farm.

 

It is an interesting scenario and if that were the way ag property values were derived it might have merit. I will first state that I have not seen any definition of what productivity is from either the judicial system or the legislature.  The only known is that it is not market value.  It is deriving a value based on a modified income capitalization model.  The biggest problem is what type of income or economic gains are included and what expenses are subtracted. The Iowa Department of Revenue has previously argued that “average management” is the norm. It was used in the Southwest Iowa assessor’s case by the AG’s office.

 

The above scenario implies that the 2 farms in question would have different assessed values. In fact they would have the exact same assessed value as they have the same soils. Individual parcels assessed values are based on soil types.  The real effect of above scenario is that the value of the 2 farms would be based on the poorest management.  The farm not participating is setting the value for both. Just as the best management should not set the value, neither should the poorest.  That is where the “average management” should correctly be used. The average of the two or in real world case, county total payments divided by county acres, is correct. Crop program participation is above 90% on both farm program and federal crop insurance.  Approximately 90% of row crop acres are insured in the state. To imply that these are superior management has no basis. They are average management.

 

What would be the effect of including these type payments?  The net of crop insurance indemnities minus premiums in most case it would have leveled the dispersion of the county totals across the state. This will be even more the case next cycle as record high state yields are the case with a few counties having substandard yields in both 2008 and 2009.  The counties with the highest increases last cycle had the lowest indemnity minus premiums totals. They would have seen slightly lower valuation increases. Counties that had the lowest increase and netted a taxable loss tended to have difficulties in some year’s crop production and had larger net crop insurance payment. Statewide the net of indemnities minus farmer premium paid would result in $1.46 average addition income on every row crop acre in the state. If one excluded 2008 the net would have been a statewide reduction of value. The result would be some counties would not be dropping so dramatically and other counties would have slightly lower values. The lower values would have been in counties with the highest increases. The rollback insured the statewide taxable value being exactly the same.  Including crop net payments would just level value changes among counties. This leveling also is more closely matching actual net farm profit and market value of farm land.  The new ag factor would have been a more consistent number across the state as compared to the present 2 to 1 ratio 

 

The exclusion of Loan Deficiency payment in 2003 valuation was almost entirely responsible for the 19% drop in assessed value statewide that year.  LDP are not a factor today as prices are high. That 2003 artificial drop is taking 5-6 years to get back to even.  The tie to residential valuation caused residential taxable value to increase by lesser amounts resulting in commercial paying more of the total tax in any jurisdiction.

 

Before any one jumps to the conclusion that this change would result in big increases in ag taxes across the state keep in mind that the current 66% rollback, soon to go lower, will guarantee 10 years of 4% increase each year which ever way one calculates the values. The only exception to this would be a collapse of values. This potential collapse can only come from drastically lower state yields or lower prices.  Either would result in the programs in questions drastically increasing pay outs.  Doing the right thing would more uniformly spread the value across counties.  The same concept as what market does.  A model that more accurately reflects market trends seems a plausible goal..

 

The following is the administrative rule concerning the income from government programs.

 

Government programs: Gross income shall be one-half of the 5-year average amount of cash payments or equivalent (such as PIK bushels) including but not limited to diverted, deficiency and PIK programs  as reported by the USDA Farm Service Agency.

 

Deficiency is USDA jargon for subsidies to offset low prices.  That is what Loan Deficiency Payments, LDPs, are.

 

The loan deficiency payments are derived from a long standing program which crops were eligible for non recourse loans at set loan rates. Any time during the loan period the producer could buy the commodity at the county posted price and pocket the difference between the posted price and the loan price. This included establishing the payment at harvest time when prices are generally lowest which would maximize payment. The paper work required would involve filing out loan documents with lien searches and UCC filings with the producer immediately repaying the loan to get the market gain.  The only differences between the long standing loan program and the LDP is the government no longer takes legal possession of the commodity if even for a minute. This cut paperwork. The PIK program is another variation of the same principal and has been discontinued. The government took legal possession of grain but not physical possession. The Payment in Kind “PIK” were certificates to transfer back the legal possession.  The old loan program is included in the income capitalization and the new loan program is not. The changes in the programs are to minor to think that that the old was included and the newer LDP is not.

 

 

An important fact to keep in mind that recent rule changes have set the relationship between market and assessed as having strict meaning in ag building values.  Valuing fairly between counties was the main purpose of the rule. The assessed value must come from valuing all crops at the same ratio of market value to assessed value in all counties. The present system has the minor crops valued as an afterthought with in some cases very close to no value. The rational seems to be isn’t 49% enough of an increase.  A 55% increase on row crops and a 10% on grass crops may give a 49% increase statewide but it leaves those counties with a high percentage of the grass crops very short. It leaves them that way which throws both the balance of ag value across the state and across classes within individual counties skewed. 

 

 

Imagine if an assessor assigned a 40 CSR to a soil that should have a 70 CSR. This had been going on for 25 years.   The county totals would have been consistent every year and the balance would look the same every year.  It still would leave farms with a lot of that soil undervalued and consequently farms with none of those soils overvalued. Would the Department demand that the error be corrected immediately? The Formula is spreading value across the state in exactly the same fashion the CSR’s spread value across the county. It has to be done right to approach maximum fairness for all taxpayers.

 

Neil Morgan ICA

Ringgold County