The method used to appraise the tax value of gas wells in Stevens County is “not correct or appropriate” according to a report commissioned for Stevens County and released at their latest meeting.

The method is or has been used for at least nine years, possibly since the early 1990s, in nine Southwest Kansas counties covering much of the Hugoton gas field, the ninth highest producing field in the U.S. in 2010.

The report was prepared by Richard J. Miller and Associates, a petroleum engineering consulting firm in California specializing in the market value appraisal of oil, gas and geothermal producing properties.

Stevens County Appraiser Tom Fuhrmann, part owner of Landmark Appraisals in Ulysses, also serves as county appraiser for Grant, Haskell, Morton and Stanton counties where he uses the same gas well appraisal method. Other Landmark appraisers use the method in Greeley, Hamilton and Kearney counties.

An April 2010 article by KansasWatchdog.org raised questions about the appraisal method. Analysis of data provided by Fuhrmann showed Stevens County would have collected a total of $21 million more in gas well property taxes for 2005-2009 by using the state’s Oil and Gas Appraisal Guide method rather than Fuhrmann’s method.

The article led to a public meeting in Ulysses a month later where officials from several counties asked Fuhrmann to explain his method. Stevens County Commissioner Gary Baker said at the time, “Why is it that we’ve got this set of counties out here that does it one way and everybody else in the state does it differently? That’s enough for us to ask the question, why is that? Does that mean anything?”

The Kansas Constitution calls for a “uniform and equal basis of valuation and rate of taxation of all property subject to taxation.”

According to the Miller report, ”There is currently no industry group or taxing authority that recommends or approves the use of comparable sales as a method of valuation for oil and gas properties.” Fuhrmann’s method uses comparable values to calculate a market value, primarily the value of the recoverable gas remaining in the well.

Appraisers commonly use comparables, sales of nearby and similar property, to determine the value of houses and some other properties, but most details needed for useful comparison are not available on gas wells.

“There is a large array of physical and economic factors that influence the estimation of value of oil and gas properties but most of these cannot be ascertained from published material,” Miller says in his report.

Fuhrmann, interviewed by phone Saturday, said he has used what he calls the “in place value” method to determine a market value for gas wells for nine years and disagrees with Miller’s conclusions. “If I don’t believe the guide is setting a market value on a property, I’m required by statute to intervene and deviate from the guide and put on a value that I believe to be market value.”

Miller declined to speak about the report when contacted by phone. His report, though delivered and paid for, said he would like to discuss with Fuhrmann the details of his method before rendering a final opinion.

Fuhrmann said he did communicate with Miller by mail and email and once by phone prior to a July 19 fall that left him paralyzed and in a Wichita hospital until Saturday.

Another report dated Sept. 30, commissioned by Landmark and delivered to Landmark co-owner Terry Lawhon, spoke in favor of Fuhrmann’s method. The report’s author, John Cooper, was the oil and gas department manager at the Department of Revenue from 1979 to 2002.

Cooper said criticism of appraisal methods is endemic to the valuation process, “because complete information is never available, due to many reasons, including proprietary information.”

Cooper’s report included a table comparing 2008-2010 valuations of 25 gas well leases in Stevens County. The table shows Fuhrmann’s method produced values 6.15 percent lower than the Guide method values. “This is well within the guidelines and meets the requirements of the Kansas statutes,” the report states.

The report does not say how the 25 leases were selected from 2,227 wells in Stevens County. A review of Fuhrmann’s own figures comparing values for all wells in Stevens County show much larger differences between the Guide appraisal method and the “final” appraisals produced by Fuhrmann’s calculations: 2006 – 20.98 percent; 2007 – 8.78 percent; 2008 – 13.69 percent; 2009 – 28.95 percent, and 2010 + 29.25 percent.

One of the sources cited by Miller, and a driving force behind the inquiry into the appraisal method, is William Verner, a retired minerals appraiser who owns gas wells in Stevens and Grant counties and lives in Nevada. In 2006 Verner noticed irregularities in appraisals on some of his wells and began communicating with Fuhrmann.

In 2008 he won a small claims case contesting Fuhrmann’s appraisals of 28 of his wells over two years. Fuhrmann appealed the case to the Court of Tax Appeals and said a COTA case is the only way to resolve the disagreement.

Verner said he dropped the case for several reasons. He said communication with COTA showed any decision there would only apply to the property and year in question, not whether an appraisal method is appropriate. His lawyer said the appeal would cost Verner more than $20,000. The Property Value Division of DOR also agreed to meet with Verner to discuss the appraisal method only if he wasn’t involved in an active case.

Verner’s research revealed what he contended was a flawed and inappropriate method for appraising the gas wells.

“Every year he averages a bunch of disparate natural gas sales from all over the western United States and applies this average to the gas reserves in southwestern Kansas,” Verner said.  “He knows virtually nothing about these outside sales, so he cannot relate them at all to the SW Kansas gas in the ground.  “

Verner also believes a COTA decision would only affect his appraisal and not prevent use of Fuhrmann’s method, meaning each year Verner would have to spend thousands of dollars to contest his appraisals, and an appraisal method he considers inappropriate would continue to be used.

Verner sent Fuhrmann, the Dept. of Revenue and Stevens County Commissioners detailed reports making his case against Fuhrmann’s method even though a change would likely produce a higher tax bill on his properties.

Senate President Morris, R-Hugoton, also received a copy of one of Vernon’s reports. He told KansasWatchdog.org in August that he has confidence in the appraisals done in Southwest Kansas. “I’m certainly not an expert on the appraisal process but I do feel comfortable with the people that we’ve had doing that in the past. Without getting into a lot of detail I think what’s been done has been fair and will continue to be fair.”

Another key contention against Fuhrmann’s departure from the Guide method is how often he does it.

Kansas law says a county appraiser is, “Obligated to follow the Oil and Gas Appraisal Guide prescribed by the Director of Property Valuation in valuing a taxpayer’s oil and gas properties. A county appraiser may deviate from the Oil and Gas Appraisal Guide on an individual piece of property only upon a showing of just cause and in a manner consistent with achieving fair market value.

Verner contends that Fuhrmann uses his method far too often, on virtually every appraisal in Stevens and other counties, and that he does not show a just cause for deviating from the appraisal guide.

Revenue Secretary Nick Jordan told KansasWatchdog.org in March he had seen reports from Verner, had no reason to disagree with his conclusions but said he did not believe he has authority to intervene or discipline a county appraiser. “I’ve had two or three meetings on this here to ask all the questions I can ask to see if there is something we can do or something that needs to be changed.”

Scott Wells, Assistant Revisor of Statutes for the state, said there are several statutes and an attorney general’s opinion that give the Kansas Department of Revenue responsibility and authority for supervising and disciplining county appraisers.

• KSA 79-1404 gives the Department of Revenue’s director of property valuation power and authority to require appraisers to assess all property of every kind and character, under penalty of forfeiture and removal from office, at its actual and full cash market value.
• KSA 2011 Supp. 19-431(b) gives the director the ability to suspend or terminate an appraiser who has failed or neglected to discharge duties as required by law.
• KSA 79-1456 says the appraiser is required to follow the policies, procedures and guidelines of the director in the performance of duties as an appraiser.
• KS AG Opinion 91-136 concludes, “Directives, guidelines, manuals and course instruction materials promulgated by the director of property valuation to assist county and district appraisers in determining fair market or use value of property and designed to achieve uniformity in appraisal are mandatory in the sense that the director, prosecutors and the board of tax appeals may take actions enumerated herein to penalize an appraiser for failure or refusal to comply with or follow such materials.

Mark Hixon, the 2010 president of the Kansas County Appraisers Association, said Fuhrmann’s method affects people across the state. “Even though you’re in a county that doesn’t have oil and gas production, because of the fact that there is a statewide mil levy for funding schools, you do have an interest in this. If someone is paying less than their fair share of the property taxes going into the school funding then you’re having to pay more than your fair share to make up for it.”

Verner isn’t the first to raise concerns about the appraisal process. In January 1990 the Wichita Eagle reported county appraisers believed the state’s appraisal guide was undervaluing gas leases and called for a sales-ratio study to compare what a property sells for to its appraised value.

In 1990 Anne Papay, then an appraiser for Grant and Stanton counties, told the Eagle a sales-ratio study, “would expose that we are not at 30 percent of market value.” She also said, “I’m real happy with what I’ve got. I just don’t want them (the Legislature) taking any of it away from me.”

Appraisers have continued to question whether the appraisal method used in the Hugoton gas field is fair and accurate. Mark Hixon, past president of the Kansas County Appraiser’s Association, said appraisers have on several occasions asked the Dept. of Revenue to look into the method without success.

Finney County Appraiser Mark Low told KansasWatchdog.org  gas well leaseholders have often asked him to adopt Fuhrmann’s appraisal method. “They’ve all asked,” Low says of gas well operators in Finney County. “They all want to use it, and I just tell them no. I’ve always done the Guide. I can’t justify what he does.”

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Gas well appraisal, Miller report

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Gas well appraisal, Cooper report

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Gas appraisal, Landmark value comparison 2006-2010