Illinois School Board Journal
September/October 2007

Linda Dawson is IASB director of editorial services and Journal editor.

Local property taxes play such a huge role in school district finances that when a large business in town appeals its assessment, it may mean the difference between life and death for a district if that appeal is granted.

Sometimes, a business will file an appeal in the hopes that no one will notice. Murray Energy, the parent company of American Coal, filed an appeal with the Illinois Property Tax Appeal Board for its Galatia Mine 2000 assessment rate in the summer of 2001.

Luckily, the local taxing bodies in the southern Illinois county of Saline were paying attention. And though it took six years to reach an agreement, the results could be beneficial not only for those involved in this case, but for other school districts and local taxing bodies fighting assessment appeals.

The agreed settlement represents a novel approach or at least one that in the view of a Chicago attorney who has represented school districts in tax cases for more than 30 years has never been used before. The attorney is Frederic Lane of Robbins, Schwartz, Nicholas, Lifton and Taylor who represented the taxing bodies.

The settlement sets an aggregate baseline assessment of $16.5 million that will remain in place for the next 10 years on eight parcels of land that American Coal owns. But what is unique is that the assessment level also is tied to coal production at the company's Galatia Mine.

If annual production at the mine is more than the 2006 level of 7.2 million tons of clean coal, then the company's aggregate baseline assessed valuation can increase by up to 4 percent a year. And the aggregate assessment base cannot go below $16.5 million for the next 10 years.

For example, Lane said if clean coal production increases in 2007 by 5 percent at the mine, the valuation will be 104 percent of the $16.5 million base and a new base will be established. In 2008, if production increased another 5 percent, then the valuation would be 104 percent of the new base.

If production decreased by 7 percent in the following year, the base would only decrease by 4 percent. And if production decreased the next year by another 5 percent, the base assessment would go to $16.5 million, but no lower.

What the settlement does is give Galatia CUSD 1 and Eldorado CUSD 4, the two school districts involved in the lawsuit, and the other taxing bodies (Saline County, Southeastern Illinois College District, Saline Valley Conservancy District and Raleigh Township) a stable source of taxes from American Coal for at least the next 10 years. It allows those taxing bodies to gain financially at a reasonable rate if the mine does well, as well as preventing the tax base from dropping out from under them precipitously if times are bad financially.

"This agreement with American Coal gives the school districts a solid source of revenue from the mine for the next 10 years which will benefit the students" said Gary F. Siebert, former superintendent of Galatia and current superintendent of Eldorado.

The solid source of revenue also extends to the other taxing bodies in the area as well.

While some elements of the settlement involving the property assessed may be unique to coal mining operations, the theory clearly has applicability in other tax cases, according to Lane. "There are 12 other mines in the state that have preparation plants classified as pollution control facilities," he added, affording an opportunity to use the same formula for assessment and valuation in those areas for certain.

Necessary background

To understand just how unique the settlement is, it's important to understand the assessment process itself and the history of this case in particular, Lane said.

Most property assessments are done locally. Valuation is generally based on an appraisal of the property, and then that property is taxed on 33.3 percent of that amount.

The Property Tax Code, Lane said, stipulates that if property is certified as a pollution control facility, then the fair cash value for assessment purposes is based on the property's economic productivity and the assessment process is done by the state Department of Revenue instead of the county. The state then uses its own formula, which values the pollution control facility at what is known as "scrap value." The fair cash value of the certified pollution control facility as "scrap" value is set by the Department of Revenue at 1½ percent of historic original cost and then the actual tax assessment is 33.3 percent of that, or one-half of 1 percent.

Portions of the American Coal property in Saline County have been certified as pollution control facilities since 1985, when the property was still owned by Kerr-McGee. Murray Energy purchased the property in 1998.

Suit and settlement

In the summer of 2001, Lane said, Saline County residents kept hearing from American Coal that things were terrible financially. Then American Coal filed a claim that all of its surface assets should be included in the pollution control certification for assessment by the state, and that nothing should be assessed locally. That would have meant a decrease from $950,000 to just $7,000 in property tax generated by American Coal's property at the Galatia Mine.

"The taxing bodies, especially Galatia Schools, had to challenge the decrease in assessed valuation in order to keep the schools," Siebert said.

The Galatia school district stood to lose the most revenue, because about 40 percent of its local property tax assessment comes from American Coal property, he said. Loss of that much revenue would have been devastating to the district.

Because of the complex issues involved, and because each side knew relatively little about the other's business, the litigation took nearly six years.

"The taxing bodies learned a lot about how coal mines are assessed, and I am sure the coal company learned some about how schools are funded in Illinois," Siebert said.

"These cases tend to be time consuming and expensive," Lane said. The Property Tax Appeal Board is understaffed, he said, and the money budgeted by the state does not easily accommodate protracted litigation involving large industrial properties. It's more suited to settling disputes over homeowner valuations.

The Property Tax Appeal Board also is not like a court, he said. Their rules don't allow attorneys to take depositions or obtain discovery as in circuit courts throughout the state. However, if a suit is filed with the state Department of Revenue to challenge the assessed valuation of property, then depositions and discovery are allowed in the process. Lane filed a suit with the state, arguing the Galatia Mine certified pollution control facilities were not being assessed in accordance with their economic productivity.

Lane said a trial was held at the Illinois Department of Revenue, which could have determined what portions of the Galatia Mine were certified and which were not certified property, and that a preliminary order had been entered which seemed to favor the taxing districts.

While the two sides had tried to reach a settlement before, it wasn't until January 2007 when the Department of Revenue requested a meeting be held in Chicago before it issued a final decision that Lane's idea of tying the assessment with mine production emerged.

That January meeting led to the signing of the final agreement on May 10, 2007. In addition to creating an assessment "floor" and tying the assessment to coal production, the agreement contains a number of other provisions pertinent only to this particular case:

• Dismissal of another lawsuit over payment of transfer taxes from when American Coal took possession from Kerr-McGee;
• Stipulation that new construction on the eight disputed land parcels at Galatia Mine will not increase the assessment;
• Stipulation that new construction on other parcels at the Galatia Mine will be assessed normally; and
• Reimbursement to the taxing bodies of a large portion of the hundreds of thousands of dollars in legal fees that they have incurred.

With the assessment now tied to production, it's in the best interest of everyone in the area for the mine to do well. And it was in everyone's best interest to finally settle the prolonged lawsuit.

"American Coal is the largest employer in Saline County and the taxing bodies want the company to prosper and to provide a good education for their employees who have children in the school systems," Siebert said.

"The current relationship between the taxing bodies and American Coal is a good relationship which gives the taxing bodies and the coal company some stability for the next 10 years."

But the bottom line is, a group of taxing bodies in Illinois forged an assessment agreement that could be beneficial to others, including other school districts, Lane said. And Siebert said he can now empty two file drawers of material generated over the last six or seven years.

Similar but different than farmland assessment

The novel settlement reached by Saline County taxing bodies and Murray Energy, the parent company of American Coal, involves just one of the multiple layers used in the assessment of property in Illinois.

Generally people are most familiar with property taxes as they are assessed to home owners and many businesses — valuations that are set based on appraisals of property with taxes figured on the county level as a percentage of that valuation.

The American Coal settlement looked at an additional portion of the Property Tax Code that deals with pollution control facilities and their economic productivity, an assessment process that is determined at the state level.

Farmland assessments also begin with a formula that is set by the state, a formula that is also tied to productivity. According to Dwight Raab, a farm business analyst at the University of Illinois-Urbana/Champaign, the key to farmland valuation is that the assessed value is tied to the potential of the tract to produce a crop. Soil productivity indices are published by the U of I's College of Agricultural, Consumer and Environmental Sciences in "Bulletin 810."

"Local county assessors maintain a database of all farm parcels and the soils that make up each farm parcel," Raab said. "The Illinois Department of Revenue publishes a schedule of assessed values at each point on the soil productivity index scale. It is then merely a function of the databases and math to find the assessed value of a farmland tract."

The American Coal settlement presents a unique departure from the usual assessment process because it ties a business assessment with productivity at a mine on a sliding scale.

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