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the January 2007 Conservation Easement Performance Audit Report #06P-01. I believe only
recommendation #2 pertains to DOA. Our response appears below:

Recommendation #2

We recommend the Department of Administration develop procedures to allow for the integration of
conservation easement data in the Cadastral system.

Response :

We concur. The Department of Administration will work with the Department of Revenue and the
Montana Natural Heritage Program to develop procedures to incorporate conservation easement data
into the Montana Cadastral Framework Database.



Enclosed is our Corrective Action Plan.




Enclosure



CC: Dick Clark, CIO, ITSD

Stu Kirkpatrick, GIS Services Bureau Chief, ITSD
Mike Wingard, Auditor, Legislative Audit Division
Angus Maciver, Auditor, Legislative Audit Division
Randy Wilke, Department of Revenue
Sue Crispen, Montana Natural Heritage Program



RECEIVED

JAN 1 1 2007
LEGISLATIVE AUDIT DIV,



Page A-3



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Montana Department of Revenue




Dan Bucks Brian Schweitzer

Director Governor



January 12, 2007

RECEIVED

Mr. Scott Seacat, Legislative Auditor JaN A 5 2007

Legislative Audit Division LE^'SLATSYE AUDIT DIV.

Room 160, State Capitol
P.O. Box 201705
Helena, MT 59620-1705

Re: Performance Audit of Conservation Easements

Dear Mr. Seacat:

The Department of Revenue responses to the audit recommendations and conclusions
are as follows.

RECOMMENDATION #1

We recommend the Department of Revenue ensures county-level conservation
easement data is compiled consistently by:

A. Providing guidance and direction on easement data collection to county
clerk and recorders through local department staff; and

B . Updating CAMA to include conservation easement attribute fields.



Partially Concur with Recommendation 1A: The current law requirements for Clerk
and Recorders and the Department of Revenue in the area of conservation easements
is straightforward. The law does not indicate that the Department of Revenue should
guide or direct locally elected Clerk and Recorders on how they should collect, record,
compile and forward conservation easement information to the Department of Revenue.
Department of Revenue staff has been instructed to work with their local Clerk and
Recorder in order to ensure that copies of conservation easements are provided to the
Department of Revenue. Department of Revenue staff has been instructed to maintain
files containing conservation easements. Clerk and Recorders have not requested any
additional information pertaining to this statute. The Department of Revenue does not
have the authority to guide or direct county Clerk and Recorders. If the legislature
wants the Department of Revenue to have authority to direct Clerk and Recorders in the



Page A-5

Customer Service (406) 444-6900 ▲ TDD (406) 444-2830 ▲ www.mt.gov/revenue



area of conservation easement collection, recordation, and compilation, the legislature
should expressly provide that authority. The Department of Revenue is quite willing to
make regular requests of Clerk and Recorders for conservation easement information
through its local staff.

Concur with Recommendation 1B: The Department of Revenue has updated its
legacy computer assisted mass appraisal system (CAMAS) to include conservation
easement attribute fields for those conservation easements it has been provided. The
Department of Revenue acquired the geographic information system (GIS) information
on conservation easements from the Montana Natural Heritage Program. That
information was matched with the department's cadastral information to identify those
parcels in the Natural Heritage Program database. The Department of Revenue
identified a user defined field in the CAMAS database and placed the descriptive code,
CE, to identify each parcel that has a conservation easement.

In addition, the new Property Valuation and Assessment System (PVAS) will have
specific field locations and drop down boxes that will identify conservation easements
and the specific conserving agency.



The Department of Revenue welcomes the opportunity to address some of the
audit conclusions with the intent of helping the Legislative Auditor make the audit
report as accurate as possible:

Conclusion on page 15 (second paragraph) - The audit indicates that, "The majority
of property covered by conservation easements is classified as agricultural for tax
purposes."

Comment: Real property falls into three property tax classes: Class 3 -agricultural,
Class 4 - residential/commercial and Class 10 - forestland. The data in Table 6
indicates that there is more Class 10 - forestland taxable value on properties with
conservation easements than Class 3 - agricultural taxable value. Due to the large
difference in tax class rates that are applied to these two property types, property, in
terms of both taxable value of property and number of acres with conservation
easements, is dominated by land classified as commercial forestland. Possibly, the
sentence referenced on page 1 5 of the audit should be adjusted to reflect that the
majority of property, in terms of taxable value and acreage, covered by conservation
easements is classified as forest land for tax purposes. Also, consideration should be
given to adjusting figure 2 to reflect that both agricultural land and forest land make up
the vast majority of the tax classification for conservation easement properties.



Conclusion on page 17 (third paragraph) - Audit language says, "Easements are
created primarily on private property usually classified as agricultural."



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Comment: This statement should also include forestland, and non-qualified
agricultural land. Small, local nonprofits are increasingly focusing on smaller properties
that are found in the Class 3, non-qualified agricultural classification (20 to 160 acres in
size). The statement might say, "Easements are created primarily on private property
usually classified as agricultural, forest land, or nonqualified agricultural land."



Conclusion on page 28 (last paragraph) - The audit indicates that , "Statute assigns
responsibility for collecting information relating to conservation easements to DOR... As
the state agency assigned as the collection venue for this data, DOR bears
responsibility for ensuring local governments follow standard procedures."

Comment: While the statute may assign responsibility for collecting information
relating to conservation easements to DOR, there is no statutory authority for the DOR
to tell local elected clerk and recorders how they should collect, record, compile and
forward easement information to the DOR, or to require local governments to follow
standard procedures in this area that have been developed by the Department of
Revenue. As previously stated, DOR staff have been instructed and trained to work
with their local Clerk and Recorder to help ensure that copies of conservation
easements are transferred to the DOR. Unfortunately there is no requirement under
current law that requires a filer notify local Department staff that a conservation
easement has been recorded. Without that type of requirement the Department will not
be aware that it should be looking for a copy of a conservation easement from the Clerk
and Recorder.



Conclusion on page 29 (first paragraph) - The audit advises that even in situations
where counties were reporting easement data to DOR, local staff had received no
instruction on what to do with the information. Agreements were generally reviewed to
ensure provisions did not affect agricultural tax classifications, but no further actions
were taken.

Comment: The statute is unclear regarding what the DOR is supposed to do with this
information. The statute states that local Clerk and Recorders must provide the DOR
with a copy of the conservation easement. The DOR's primary concern has been the
impact the easement would have on the property's land classification and assessment.
DOR staff has been instructed to send conservation easements to the Forest and
Agricultural Management Analyst in Helena if they believe that the easement might
have an impact on the assessment of the property. The correct assessment and
classification of conservation easement properties has been addressed in DOR training
courses and in the DOR forestland and agricultural assessment manuals. Local DOR
staff has been instructed to maintain files containing conservation easements and
restrictive land covenants for future reference. Until recently, there has been no
concerns registered with respect to the manner in which Department staff have



Page A-7



compiled the information. It would be helpful if the audit language would reflect the fact
that local staff has received instructions on what to do with the information.



Conclusion on page 29 (fourth paragraph) - DOR should also develop procedures
to ensure conservation easement attribute data is collected and maintained in statewide
management information systems.... Updating CAMA to include fields for conservation
easement attributes would allow DOR to maintain statewide data in a consistent manner
for all new conservation easements.

Comment: The audit language references the collection and maintenance of
conservation easement attribute data in statewide management information systems. It
could become problematic for the department to specify how data is collected and
maintained in another agency's statewide management system. If the reference to a
statewide management system is the Department's CAMA system, then the Department
believes it has previously addressed the concerns in the audit. As previously identified
in the response to recommendation 1B, The Department of Revenue has updated its
legacy computer assisted mass appraisal system (CAMAS) to include conservation
easement attribute fields for those conservation easements it has been provided. The
Department of Revenue acquired the geographic information system (GIS) information
on conservation easements from the Montana Natural Heritage Program. That
information was matched with the department's cadastral information to identify those
parcels in the Natural Heritage Program database. The Department of Revenue
identified a user defined field in the CAMAS database and placed the descriptive code,
CE, to identify each parcel that has a conservation easement.

In addition, the new Property Valuation and Assessment System (PVAS) will have
specific field locations and drop down boxes that will identify conservation easements
and the specific conserving agency.

Since the information has been previously identified and given a unique descriptive
code, it would be helpful to indicate that, "The DOR has developed procedures to
ensure conservation easement attribute data is collected and maintained in its statewide
CAMA management system. The Department's CAMA system includes attribute fields
for conservation easements. That allows the Department to maintain statewide data in
a consistent manner for all new conservation easements. In addition, those
conservation easements that are currently known to the Department have been
identified using those fields.



Conclusion on page 31 (first paragraph) - DOR is the only state agency referenced
in statute relating to compilation and reporting of conservation data.

Comment: Current law states that local Clerk and Recorders must provide the DOR
with a copy of the conservation easement. The statute doesn't appear to reference the
compilation and reporting of the conservation easement data. In fact in paragraph 3 on



Page A-8



page 31 of the audit, it states, "Statute does not clearly assign a role to any specific
state agency relating to the reporting of conservation easement data." Possibly the
conclusion on page 31 could be rephrased to say, "While the DOR is the only state
agency referenced in statute relating to conservation data, there is no clearly assigned
statutory role for any state agency relating to compilation and reporting of conservation
data."



Conclusion on page 31 (third paragraph) - DOR has not been actively maintaining
information relating to easements through the Property Tax Assessment Division or the
CAMA system.

Comment : The DOR used the Montana Natural Heritage Program data to identify
parcels in the state's cadastral database that have conservation easements. In
addition, the DOR created a user defined field in CAMAS for conservation easements,
and has been maintaining the identification of land with conservation easements in the
CAMAS for those properties it is aware of that have conservation easements.



Conclusion on page 40 (paragraph one) - As shown, there are significant
differences between the proportions of and trends in taxable value for the three property
classes when conservation easements are compared against statewide totals.

Comment: The audit reference pertains to Table 6 that reflects Trends in Taxable
Values for Montana Properties and Easement Properties. There are several factors
that influence the data presented in Table 6.

■ Montana reappraises all real property once every six years. Real
property is not adjusted up or down during this timeframe due to
market forces.

■ The legislature has chosen in previous reappraisal cycles to make
the statewide reappraisal valuation changes taxable value neutral.
However, for Class 4 property, the legislature has allowed the
increase in taxable value from new construction to be included in
the new Class 4 tax base. For Class 3 property, the Department
has not conducted any statewide reclassification. For example,
there are instances where higher valued farmland is classified as
lower valued grazing land. That will not be corrected until the DOR
completes reappraisal and the new values are used for tax
purposes in 2009. For Class 10 property, a change in the
landowner's forestland productivity grades would impact the
assessed value and thus, the Class 10 tax base. However,
changes in forestland productivity grades are extremely rare.

■ Individual property assessments can be adjusted during a
reappraisal cycle due to two factors - new construction and

Page A-9



destruction. New construction may be the addition of new buildings
or land use changes in Class 4, changes to productivity grades or
agricultural use changes in Class 3 and productivity changes in
Class 10 property. Destruction is the loss of physical structures in
Class 4 or natural disasters that destroy commercial timber in Class
10. Destruction cannot occur to Class 3 property (agricultural land
cannot be destroyed). Conversion to other uses as discussed
above, have resulted in taxable value reductions to Class 3 and
Class 10 properties.

Column One in Table 6 reflects the Taxable Value trends for the
past 6 years. Class 3 Agricultural Land shows a 0.5% increase.
This minor increase is due to the fact the Legislature has made the
reappraisal valuation of this property type taxable value neutral.
Additionally, assessment changes due to changes in agricultural
use or productivity will not occur until the current reappraisal cycle
has been completed on December 31 , 2008. Class 4
residential/commercial property shows a 20 percent increase. The
legislature has mitigated the statewide reappraisal increases, but
new construction has increased the tax base (new construction
overshadows destruction of buildings). Class 10 forestlands shows
a 20 percent decrease in taxable value. As with Class 4 property,
the legislature has mitigated any valuation increases, but
destruction of standing timber attributed primarily to forest fires has
decreased the statewide tax base.

Column Two in Table 6 reflects the Taxable Value Trends of
individual properties that contain a conservation easement.
Describing taxable value trends in this category is difficult to explain
without examining specific factors impacting each property in this
subset. It would be highly unusual for the 6-year trend in column
one to match the 6-year trend figures in column two. All three
property classes show an increase in taxable value. The legislature
has adopted mitigation measures each reappraisal that have
resulted in statewide taxable neutrality for those classes of
property. However, individual properties may go up or down. It
would appear that properties containing conservation easements
have generally seen larger than average market increases (even
agricultural and forest land valuations use agricultural commodities
and stumpage values). Additionally, it would appear that Class 10
properties with conservation easements have largely escaped
natural disaster losses or they have not been reported to the DOR.

Over the past several years, agricultural and forest land acres have
been converted to residential and commercial uses. While that has
resulted in a loss of taxable value for Class 3 and Class 1



Page A- 10



property, it has resulted in an increase in taxable value for Class 4
property. With that understanding, the table shows that properties
containing conservation easements seem to have experienced less
land use changes. Otherwise, the 6-year taxable value trend
associated with conservation easements would have been
significantly less when compared to the statewide taxable value
trend.



Conclusion on page 40 (second paragraph) - Because conservation easements
restrict the ability to have significant changes in land use, it should not be surprising that
changes in tax valuations for easement properties do not correspond with prevailing
state trends.

Comment : Conservation easements have virtually no impact on the figures shown in
Table 6. The trends shown in Table 6 are due primarily to decisions made by the
legislature regarding the classification and assessment of real property as described
above.



Conclusions on page 41 (second paragraph) - These circumstances indicate the
creation of conservation easements does have the potential to result in shifts in property
tax collections for local governments over the long term.

Comment : Conservation easements typically prevent most development from

occurring on property that is classified and assessed as agricultural or forestland.

Conservation easements are intended to maintain the current land use and

thus the current property tax status. Development changes the land use and thus the

current tax status. To the contrary of the audit statement, conservation easements tend

to maintain the status quo and do not typically result in measurable shifts in property tax

collections.



We appreciate, as always, the courtesy and professionalism of the legislative audit staff
- qualities they brought to bear in conducting this audit.




Dan R. Bucks
Director



PageA-11





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