Author: Bureau of Local Assessment
The Commissioner of Revenue is responsible for valuing taxable personal property for of all landline telephone companies with such assets situated in the commonwealth (under MGL Chapter 59, §39.) The Commissioner assigned the Division of Local Services’ Bureau of Local Assessment (BLA) to handle valuation. Our consultant develops a valuation table and Economic Obsolescence (EO), we collect the returns, and calculate the value. The Commissioner of Revenue annually issues fair cash valuations of taxable telephone personal property to telephone companies and boards of assessors to be posted by June 15th. Telephone companies and boards of assessors have the right to appeal by July 15th with the Appellate Tax Board (“ATB”) claiming that the Commissioner’s certified values are “substantially too high or substantially too low.”
Verizon New England, Inc. is a centrally valued telephone company whose taxable telephone personal property (poles, wires, underground conduits, wires, pipes and generators) is valued by the Commissioner. Verizon owns property in every Massachusetts community and is the largest telephone company (71% of FY2023 telephone values) in Massachusetts. Verizon operates a regulated legacy landline telephone system originally created with copper lines. Verizon also operates an unregulated fiber system known as FIOS in about one-third of Massachusetts communities.
While the Commissioner has litigated two valuation cases concerning Verizon’s property, each fiscal year’s central valuation can be appealed and requires a full valuation hearing. Verizon filed over 1,000 appeals for fiscal years 2010 through 2017. The prior settlement resulted in refunds that all municipalities agreed to and paid, allowing many communities access to overlay accounts. Many municipal officials expressed the opinion that the settlement delivered financial certainty by eliminating future appeals for FY2018 through FY2022, a critical component of their endorsement of the resolution.
The prior Verizon settlement accomplished two goals. First, it resolved all appeals relating to Verizon’s FY2010-FY2017 central valuations that were pending before the ATB and any municipal appeals. Second, the settlement sought to ensure the elimination of litigation for FY2018 through FY2022 with an agreed upon depreciation methodology for the valuation of Verizon’s property that arrived at fair cash value.
As we neared the end of the original Verizon settlement, the Commissioner explored whether continuing the settlement was appropriate and under what terms. The Commissioner and Verizon discussed the potential of an extension agreement. Initially the Commissioner requested, and Verizon provided, information then analyzed by BLA staff and our telephone consultant George E. Sansoucy, P.E., LLC. Before engaging in negotiations with Verizon, the Commissioner contacted Attorney Anthony Ambriano from Sassoon Cymrot Law, LLC who represented some municipalities in the original settlement to determine interest in a settlement extension. Attorney Ambriano, on behalf of his municipal clients, was provided Verizon’s data responses and participated in the ensuing negotiations.
The Commissioner’s endorsement depended on support of municipalities affected by the resolution. Based on input from various municipal interests and for stated reasons, the Division of Local Services, with counsel for the Commissioner, believes the settlement extension is in the best interests of municipalities. We then asked boards of assessors, in consultation with appropriate municipal officials, to evaluate their support, or concerns regarding the settlement extension. This group indicated substantial support.
The Commissioner agreed to value Verizon’s taxable personal property for FY2023-FY2027 in accordance with the same Reproduction Cost New Less Depreciation methodology that’s been the basis for telephone central valuations for the past 16 years (the “RCNLD Methodology”) using an agreed upon depreciation schedule that makes limited, but municipality-favorable adjustments to the schedule used in FY2022. The critical inputs for the Commissioner’s RCNLD Methodology once the property is trended to replicate cost-new are: (1) service life of each property category. (2) property’s depreciation floor; and (3) percentage of any reduction of economic obsolescence (“EO”) deducted from the values.
The new schedule continues to address two issues affecting valuation of Verizon’s personal property: first, the valuation of the legacy copper cable along with fiber optic cable used in support of the historic landline telephone system throughout the Commonwealth; second, the fiber to the premises (“FTTP”) property installed in support of Verizon’s FiOS voice, data and video.
As wireless voice communications and internet communications services have affected the telecommunications industry and undercut the long-established primacy of the landline telephone system, the Commissioner’s methodology for FY2018 to FY2022 had incorporated a 35% EO deduction for Verizon’s legacy property. Recognizing the evolution of telecommunications, the prior agreement addressed valuation differences between the FiOS FTTP property categories and the legacy system by providing smaller and declining EO deductions for FTTP property. The valuation of FiOS FTTP property tended to increase as the EO deduction was lowered and the valuation of traditional landline systems continued to decrease.
While Verizon’s legacy landline telephone system has continued to lose customers, Verizon and the Commissioner have agreed to not increase the 35% EO deduction on the legacy network property categories, which is favorable to municipalities. At the same time, the Commissioner believes Verizon’s efforts to integrate more fiber optics into the legacy system potentially implicates multiple business formats which indicates to the Commissioner that a 35% EO deduction on new fiber added to the legacy system in the coming years may not be appropriate. The FiOS system is not distressed in the same way as the legacy system, but the increased use of cell service, streaming, and “cutting the cord” for cable TV has affected anticipated growth of the FiOS product.
The new schedule for the next five fiscal years incorporates adjustments that recognize lower EO deductions for new fiber optic property in the legacy system as well as lower EO deductions for the FiOS FTTP categories. For the legacy system, five categories of fiber optic property will be subject to a 25% EO deduction for property installed in 2021 and thereafter, rather than a 35% reduction by a simple continuation of the prior agreement. For the FTTP systems, the EO deduction was 16% for FY2023 just as it was for FY2022. However, thereafter the deduction is reduced as follows: 15% (FY2024), 14% (FY2025), 13% (FY2026) and 12% (FY2027). For the first year of installation of new FTTP property, there would continue to be no EO deduction as was also true under the FY2018 through FY2022 agreement.
Given the information available, we believe the new schedule will result in fair cash valuations for reported property for each of the ensuing five fiscal years. As part of the new agreement extension, Verizon will also agree to provide more detailed financial and accounting records that we believe will assist in evaluating the value of Verizon’s property across its various business platforms. As long as the Commissioner values Verizon’s property consistent with the new schedule, Verizon will agree not to file any petitions at the ATB challenging the valuation methodology except in response to a municipality filing an ATB petition seeking higher values in which case Verizon may, in certain circumstances, retain the right to argue for lower values in the ATB proceedings.
Verizon has made clear that its agreement to the terms of the schedule for FY2023 through FY2027 and the reduction of the EO deductions it includes does not mean that any future agreement would continue to trend the reductions. The Commissioner has also made clear that resolution under these terms does not mean that valuations after FY2027 will necessarily continue to include EO deductions at the same level as are set forth in the new schedule.
As with the FY2018 through FY2022 agreement, the Commissioner retains statutory power to ensure Verizon is accurately reporting original costs for all taxable personal property and that property is reported in correct categories. The parties would continue to use their best efforts to avoid any disputes over amount of property, original cost of property or categorization of property being valued, but any disputes would be resolved under the statutory appeal process – without litigation over methodology. Municipalities would have the right to request the property reported by Verizon in their communities per written request under terms specified.
Verizon and municipalities that signed agreements waive the right to appeal the Commissioner’s central valuations performed in accordance with the settlement extension for FY2023 through FY2027. Verizon retains the right to file a cross-appeal against a non-signing municipality that appeals and to seek a lower value under certain circumstances. Under the extended agreement with Verizon, the Commissioner will value Verizon’s centrally valued telephone property under the agreement terms whether or not a municipality executes the agreement.
The Commissioner considered an extension of the prior settlement given the perception that municipalities approved of the financial certainty that this type of agreement provided. The Commissioner also believes that an extension under the proposed schedule arrives at fair cash valuations consistent with his statutory obligation. That said, telephone property valuation is not an exact science and any proceeding before the ATB would certainly involve disputed opinions of value. Without an agreement there is a significant likelihood of litigation that could take years to resolve and expose municipal finances to significant refunds with interest.
The possibility of ongoing challenges to the Commissioner’s methodology during a time when the telecommunications industry is in transition from its historical role also favored seeking common ground for determining fair cash valuations. The stability and certainty of a definitive financial result coupled with an agreement that eliminated future valuation trials through FY2027 was a compelling argument in favor of resolution for all parties who participated in the negotiations. The attorney for the municipalities involved in these negotiations was part of the negotiation process that resulted in the agreement for FY2023 to FY2027.
In non-FiOS communities, valuations are expected to remain relatively stable and may increase to the extent Verizon adds property to its system in your community. To the extent this property is in the fiber optic categories subject to the reduced EO deduction of 25%, this agreement provides more value than under the prior agreement.
If your community is a FiOS community the EO for FTTP categories is the same for FY2023 as it was for FY2022, but will trend lower for FY2024 through FY2027 as indicated above. To the extent Verizon adds property to its legacy system in the fiber optic categories subject to the reduced EO deduction of 25%, this agreement will also provide more value than under the prior agreement.
Verizon provided no assurance that more non-FTTP property will be added in every community. Our records indicate that a.) in the past five fiscal years additional property in some of the non-FTTP fiber optic 5 categories were added in 322 Massachusetts communities, and b.) in the past three fiscal years additional non-FTTP fiber optic property was added in approximately 307 communities.
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| Date published: | December 1, 2022 |
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