"The current federal bankruptcy code depletes school resources. In effect, loopholes allow corporations declaring bankruptcy to get their tax obligations cut, and schools in Iowa and across the country are deprived of millions of dollars. I want to break down this federal barrier that stands in the way of substantial local education resources reaching students," Grassley said.
Grassley serves as chairman of the Judiciary subcommittee in the U.S. Senate with primary jurisdiction over federal bankruptcy law. In August, he conducted a hearing on Capitol Hill where local school officials traced revenue shortfalls to two sections of the bankruptcy code.
Testimony at the Grassley hearing revealed the way in which corporations are able to declare bankruptcy and lower their property tax liabilities in the process. Federal bankruptcy judges are allowed to lower the assessed value of a bankruptcy estate. Therefore, property taxes owed to the city or county are cut. In some cases, school districts are required to refund taxes already received. Most local school districts in Iowa and across the country depend heavily on property taxes paid by businesses and individuals.
"This federal provision specifically circumvents state law. Furthermore, it allows out-of-state judges to determine the fair market value of property in Iowa, for example. It's not right for local school districts to be at the mercy of federal bankruptcy judges," Grassley said.
Grassley said another provision of the bankruptcy code essentially tells local school districts to get in the back of the line. Federal law puts lawyers' fees and other creditors ahead of the tax liens owed to local governments. "Important services provided by local governments are left to scrape the bottom of the debtor's bankrupt barrel. Too often, that means students and teachers can be left empty-handed," Grassley said.
Specifically, the bill Grassley will introduce on Thursday would amend the code to permit a bankruptcy court to reverse a property valuation decision only when the bankrupt debtor has the right to challenge such a decision under applicable non-bankruptcy law. It also would amend the code to provide that property taxes protected by liens are paid ahead of other expenses.
In Iowa, one-half of all property taxes on average go to fund education. Grassley said that means one-half of the losses due to bankruptcy represents a loss of funds to education.
In a letter to Grassley presented at his August hearing to investigate this problem, Robert R. Hagey, Treasurer for Sioux County wrote that losses due to bankruptcies in Iowa drain money "needed by the local schools to keep programs running." He said in the Boyden-Hull School District, $13,457 in taxes remain uncollected due to bankruptcy by two out-of-state bankruptcy cases. Of this amount $7,806 is due to go to the local community school district, if and when collected.
In another letter submitted to the hearing record, Assistant Polk County Attorney Michael J. O'Keefe wrote "We have had particular problems dealing with out of state bankruptcies involving Iowa properties ... courts which do not understand the Iowa tax system and the fact that property is valued for tax purposes twenty-one months ahead of the first payment based on that value."
The Investment in Education Act of 1997 proposed by Grassley has been endorsed by Iowa Association of School Boards (IASB). "Companies which declare bankruptcy should not be allowed to use federal law to shortchange our children's education," said Ronald M. Rice, Executive Director of the IASB. Rice said the bill "increases education funding by returning lost revenue to schools instead of raising taxes and without sending local revenues to Washington." In a letter to Grassley this week, he wrote, "On behalf of Iowa's 377 school districts, thank you for your leadership in finding a solution to this problem."
The National Association of School Boards (NASB) also has endorsed the Grassley bill. While virtually every state has experienced some revenue shortfall in school funding due to these two provisions in the bankruptcy code, the NASB said the issue has been getting a lot of attention in Texas lately because the state experienced so many real estate bankruptcies in the early 1990s. According to NASB reports, the Houston school district lost $1 million in a single case. The Fort Worth Independent School District lost more than $480,000 in four cases. The Dallas Independent School District lost nearly $450,000 in six case and the Lake Worth, Texas, Independent School District lost $357,000 in a single case.
"In Iowa, we take pride in our academic excellence. Our schools are nationally recognized. And we welcome school enrollment that's projected to rise for the ninth straight year. Rising enrollment also adds to the pressures already bearing down on strained local education budgets," Grassley said. "I want to enhance the ability of local school districts to meet their funding needs by closing these federal bankruptcy loopholes. Congress has a responsibility to make certain that federal laws do not tie the hands of state and local governments."
