Documents obtained by Halfway To Concord indicate possible misconduct by the Contra Costa County Assessor’s office in advance of Chevron’s (NYSE: CVX) property tax appraisal hearing to be held Monday, April 2. The hearing before the Contra Costa County Assessment Appeals Board will decide the valuation of Chevron’s Richmond, CA refinery as the basis for property taxes.
In its brief, Chevron alleges that under the direction of Gus Kramer, the Assessors’ Office pulled appraisal numbers out of the air, destroyed evidence documenting how it prepared its appraisal, while fabricating tax roll values for 2007-2009. Chevron is seeking up to a $73 million tax refund before the appeals board, saying the Contra Costa Assessor’s Office overvalued the Chevron Richmond facility by billions.
Chevron says that during the hearing, the board heard evidence that:
The process for assessing Chevron’s taxes in Richmond was badly flawed, and that the bills were purposefully miscalculated. Additionally, Chevron maintains that the assessor’s office deliberately over estimated the value of the refinery, falsified certain work documents and destroyed others. Since 2004, with no explanation, Contra Costa County has more than doubled the taxable value of the Richmond refinery.
In a recent Richmond Confidential post, Assessor Kramer is quoted as stating, “There’s no incentive for me to come up with a bogus number,” he said of his process. “It’s as honest as the day is long.”
Yet, in its post-hearing reply brief, Chevron alleges that Assessor Kramer, in violation of basic ethical standards, refinery appraisal best practices, and California property tax laws fabricated tax roll values for the Chevron Richmond facility; and promoted a multi-billion dollar valuation without presenting evidence, records, or other supporting documentation.
Chevron says that Kramer may have picked a number out of the air and told staff to make the numbers work by reverse engineering records including tax value rolls to fit the higher appraisal.
According to Chevron, the original appraisal analysis the County Assessor submitted for the hearing, and a subsequent second appraisal were troubling considering the lack of any evidence to support the claims made in the first and then Kramer disagreeing with his own consultants Baker & O’Brien (B&O) in the second.
The first appraisal came under critical scrutiny because staff destroyed scratch paper, notes, machine tape, and any other documents used to come to final values approved by Kramer. Thus staff was unable to document how it arrived at appraisal figures. One staff member said during the closed hearing that he had used his “assessor and appraiser judgement” to select potential values that ranged form $1.623 billion to over $6 billion.
Chevron says the second approach conjured by B&O, interjected arbitrarily weighted scenarios using questionable assumptions about margin cycles and a complex statistical massage that also overstated valuations.
In contrast, Chevron argues that the correct full cash values prepared by its appraiser Stancil, are $1.8, $1.4, and $1.15 billion for the period 2007- thru 2009, respectively.
According to a Chevron spokesperson:
If that decision is made in Chevron’s favor, the company will notify the County Auditor Controller’s Office to hold the tax refund while it works with the County Assessor’s Office to reach a fair and equitable settlement to the property tax dispute over the process for assessing the property value of the refinery, or until it becomes clear that settlement is not achievable.
The goal is to achieve a fair and transparent process for calculating taxes going forward, which will bring greater stability to Contra Costa County’s local communities and agencies, and help mitigate the impact on local agencies.
The County should be able to publicly document how it calculated taxes for companies like Chevron. Chevron should not have to sue to obtain fundamental fairness. Contra Costa County’s cities and agencies should be able to know, in advance, that they can count on the process the County Assessor’s Office employs to generate their revenues.
KEY EXCERPTS FROM CHEVRON POST HEARING BRIEF
In this case the Board is asked to determine the value of a large and complex property, Chevron U.S.A. Inc.’s (“Chevron”) Richmond Refinery (“Refinery”), for the January 1, 2007, 2008 and 2009 lien dates. Chevron respectfully submits the Board must find that the preponderance of the evidence overwhelmingly supports the values requested by the taxpayer: $1.8, $1.4, and $1.15 billion for the respective tax years, which are the values put forth by Stancil & Co.1
The Board received 35 days of testimony and evidence.2 Chevron presented a very well-qualified appraiser, Stancil, with a great deal of experience in appraising refinery properties.3 The appraisal prepared by Stancil was standard and traditional in approach,4 well-reasoned and thoroughly documented. Stancil analyzed the Refinery under all three valuation approaches and drilled down to obtain all the facts needed for each approach. They studied and documented how the refinery industry economics, the federal and California environmental laws, and other pertinent “outlook” factors were changing during the years before and during the tax years here at issue. They then applied each of the three valuation approaches in accordance with recognized appraisal methods and techniques and in compliance with California property tax law.
In the end, Stancil chose to rely primarily upon its income approach, and used the cost approach and comparative sales approach conclusions to check or confirm their income approach conclusions. Stancil’s appraisal work was done the way traditional appraisal work is supposed to be done: They explained and documented all of their assumptions along the way. The analysis and the calculations proceeded step by step, were easy to follow, and led to logical and reasonable conclusions. These are indeed the conclusions which the Board should adopt.
The Assessor, on the other hand, could not figure out what he was doing in this case from beginning to end. He simply never could connect the dots.
The amounts which were put on the original roll each year were set by fiat or edict of the Assessor himself, with no foundation whatsoever. He ignored the cost approach prepared by his own staff and the income approach values prepared each year by his highly compensated outside consultant, Baker & O’Brien (“B&O”). Instead the Assessor dictated values to be put on the roll, for reasons which were never explained in this case, other than perhaps to somehow protect his litigating position in the prior set of years. The enrolled values for each year in issue here were: 2007: $3.413 billion; 2008: $3.43 billion; and 2009: $3.106 billion.
When the hearing was drawing close, the Assessor asked B&O to prepare new income analyses and to stop just short of stating value conclusions so that his office could claim they were not doing appraisal work. B&O contrived an entirely new and confusing multi-scenario income analysis based on supposed “cycles” and a seemingly sophisticated reversion to mean analysis. They then “weighted” the scenarios in a way that overstated the business enterprise value for each valuation date.
In response, Chevron’s evidence demonstrated beyond question that there was no mathematical or statistical basis that margin cycles existed at all (other than perhaps annual cycles), much less for the cycles asserted by B&O. Chevron’s evidence also made clear that there was no mathematical or statistical basis for B&O’s reversion to mean analysis. B&O also failed to document the basis for its “weighting” of the various scenarios. B&O’s results cannot reasonably or responsibly be relied upon or accepted.
The Assessor’s principal appraiser, Mr. Peter Yu, admitted that neither he nor anyone else in the Assessor’s Office had the expertise to do the complicated discounted cash flow (“DCF”) analysis needed for this appraisal. In arriving at the values presented by the Assessor at the hearing, Mr. Yu admitted that he had never even considered the enrolled values. Instead he did his own cost approach, but then essentially ignored the results. He then reviewed B&O’s July 2011 results and found he could not accept any of their scenarios, nor even their suggested weighted results or “most likely” indications of value.
Mr. Yu also looked at the intangibles analysis of a second group of outside consultants,
ParenteBeard, and, based on their analysis, came up with eight value scenarios or value conclusions for each year, which values were billions of dollars apart. Then Mr. Yu just chose a number somewhere in the lower part of the very wide range of possible conclusions, based solely on his “assessor and appraisal judgment.” Mr. Yu’s chosen values for this hearing were somewhat higher than the enrolled values— 2007: $3.555 billion; 2008: $3.65 billion; and 2009: $3.5 billion.
Mr. Yu left no appraisal documents or paper trail, no support, no calculations, no analysis, no backup, and no reconciliations to the outside consultants’ various conclusions. He did not review his conclusions with the outside consultants or anyone else in the office…except to get the approval from the Assessor. Amazingly, the basis for Mr. Yu’s “judgment” did not include any documented research of refining industry trends, outlook or economics, any experience working in the industry, or any substantive review of the data provided by Chevron to the Assessor for the Richmond Refinery.
Moreover, there is not any way for the Board to try to correct any one assumption made by Mr. Yu or his outside consultants. The problem is that Mr. Yu gave nothing but the vaguest and most subjective explanations of his assumptions. There is no objective calculation or analysis to correct or revise; the Board would simply have to trust Mr. Yu to ponder the requested change and come up with some new “assessor or appraiser judgment.” Of course, that is not the way competent appraisal work should be performed for any property, much less the largest property in the County.
Chevron submits that this Board cannot possibly conclude that the preponderance of the evidence supports either the roll values or Mr. Yu’s conclusions. Instead the evidence overwhelmingly supports the analysis and conclusions of the Stancil report.Thus, this Board should find that the correct full cash values here are $1.8, $1.4, and $1.15 billion, respectively for the three years at issue. Again, these are the values put forth by Stancil (not adjusted to exclude the overhead costs disallowed by the Board).
A. Assessor misconduct re determination of the roll values.
California law charges the Assessor with enrolling assessed values as of each lien date for each appraisal unit, which must be the lower of the Proposition 13 base year value or the Proposition 8 fair market value for real property. The Assessor declared that the enrolled values of $3.413 billion, $3.43 billion, and $3.106 billion, for 2007, 2008, 2009, respectively, were his determination of the Proposition 8 fair market value of the Refinery appraisal unit as of each lien date, opining that the Proposition 13 base year value was higher than such Proposition 8 value.7 Chevron contested the base year values and factored base year values in its 2007-2009 applications and during this proceeding.
The Board determined that base year values had not been properly raised by Chevron and held it had no jurisdiction as to any base year issues.8 Chevron reissues all its arguments and objections on all base year issues and factored base year value issues. After the exchange of expert valuation reports and again at the commencement of this hearing, Chevron asserted that the Assessor was not entitled to a presumption of correctness (pursuant to Rule 321) because the Assessor had failed to disclose any evidence in support of his original roll values and because the Assessor was attempting to introduce evidence of values higher than the roll values without issuing a raise letter.9 The Assessor asserted that he was not required to explain his original roll analysis because he was defending the roll with new appraisal analysis.10
Over the Assessor’s objections, the Board ordered the Assessor to present evidence concerning the determination of the roll values and to produce his files to Chevron.11 The evidence ultimately presented at the hearing showed that: (1) the Assessor directly and arbitrarily determined the assessed values to be placed on the original 2007-2009 rolls for the Refinery and ordered his staff to prepare paperwork supposedly supporting his values;12 (2) the documents prepared by the Assessor staff for 2007 were a sham (i.e., they were manipulated to obtain the valuation ordered by the Assessor);13 and (3) whatever workpapers the staff created to support the 2008 and 2009 roll values have since disappeared.14
E. The Assessor’s final value conclusions presented at the hearing lack any credibility.
As discussed above, the Assessor engaged in serious misconduct in determining the initial roll values. The new appraisal analysis that the Assessor’s Office prepared for the hearing is equally troubling. Like the original roll values, the Assessor has no contemporaneous documents to support his final conclusions of value.282 The Assessor’s appraiser (Mr. Peter Yu) admitted that he had destroyed both the scratch paper and adding machine tape that he had apparently utilized to come to the final values approved by Assessor Kramer.283 This spoliation of relevant evidence shortly before the hearing is particularly troubling284 because Mr. Yu could not ultimately explain how he reached his final values except to say that he used his “assessor and appraiser judgment” to select a number for each year from a series of potential values that ranged from $1.623 billion to $6.708 billion.285 There is no support in property tax law for the notion that an Assessor’s discretion is so broad as to allow him to make multi-billion dollar determinations like these with no backup, support, reconciliations, workpapers or calculations.
a. The Assessor disagreed with his own consultants.
Mr. Yu also refused to accept the income approach conclusions of his outside consultant. Thus, he disagreed with B&O’s gross income projections and/or weighting (and/or other unidentified assumptions). He did not explain his disagreement in detail and said he performed no weighting of his own.286 The bulk of his testimony was comprised of vague references to various topics that could negatively impact revenue projections including his knowledge about the refining industry’s margins, the waning economy and the expenses of implementing environmental regulations.287
Unlike B&O, the Assessor’s Office considered both a cost analysis and considered at least one comparative sale (i.e., the 2007 Wilmington refinery sale).288 The Assessor also considered two different conclusions for intangible asset values which resulted in eight different possible income approach conclusions each year.289 In the end, Mr. Yu used only his “assessor and appraisal judgment” to pick a final value conclusion for each tax year (i.e., a value somewhere between his eight different income approach conclusions), without any backup except for some “scratch papers” that he threw away before the Hearing.290
b. Common sense dictates that no refinery buyer would accept the B&O or Yu approaches in a real market transaction. As a matter of common sense, no knowledgeable refinery buyer would utilize, much less rely upon, Mr. Yu’s “pick a number” approach to value. B&O provided four widely ranging business enterprise values, but did not provide a single opinion of value and did not perform an adequate appraisal. Mr. Yu’s eight value scenarios showed a range of values for each year from 1x to nearly 3x. Accordingly, if Mr. Yu, instead of Stancil, had been advising the potential buyer of this Refinery on each lien date, Mr. Yu would evidently have told the buyer the value could vary from 1x to 3x. That would be like a real estate broker telling a buyer that a prospective residential property could be worth anywhere from $200,000 to $600,000. This “appraisal” would be basically useless.
When pressed, Mr. Yu said the Refinery was worth 1.7x (i.e., $3.555 billion at January 1, 2007). Any knowledgeable buyer would then ask Mr. Yu how he got to that specific number, for example, whether there were some calculations, or backup, or comparables, or anything else to support that final conclusion. Mr. Yu would then have to say, that he had no such information. He would have to tell the buyer something like “I performed some calculations, discarded all evidence of those calculations and used my assessor and appraiser judgment to come up with values − and you will have to trust me on that.”
That is exactly what the Assessor has here told the Board and Chevron about the assessed value of the biggest property in the county: that it is worth somewhere between 1x and 3x, and you will just have to trust us on coming up with the specific final value. Moreover, Mr. Yu had no documented industry research or expertise on which to base his subjective judgment call. No buyer would accept this answer and neither should the Board. Instead the Board should recognize the experience and expertise of Stancil and their carefully documented, detailed and well-reasoned appraisal report employing recognized appraisal methods and techniques throughout, and accept the conclusions determined by that report.