[Congressional Record Volume 143, Number 115 (Thursday, September 4, 1997)]
[Senate]
[Pages S8827-S8831]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY (for himself, Mr. Durbin, Mr. Coverdell, Mr. 
        Shelby, and Mr. Kyl):
  S. 1149. A bill to amend title 11, United States Code, to provide for 
increased education funding, and for other purposes; to the Committee 
on the Judiciary.


                the investment in education act of 1997

  Mr. GRASSLEY. Mr. President, I rise today to introduce the Investment 
in Education Act of 1997. This bill will close gaping loopholes in the 
current bankruptcy code which allow companies that declare bankruptcy 
to cheat schools out of badly needed education funds. This bill has the 
support of Senator Durbin, the ranking member on my subcommittee. In an 
effort to work in a truly bipartisan way, I have reached out to the 
administration and have made several changes in the bill to accommodate 
the White House. As of now, I have received very positive signals from 
the administration and I'm optimistic that the administration will come 
out in favor of the bill.
  As we all know, our Nation's educators face difficult challenges 
every day, whether from crumbling facilities or classes that are too 
large because a school district can't afford additional teachers. Money 
won't solve every one of the problems facing our schools. But 
protecting funding for education from losses due to bankruptcies will 
do a great deal of good. That's why I believe that the Congress should 
enact the Investment in Education Act quickly to stem a federally 
created drain on already scarce education resources.
  As President Clinton has said, the era of big Government is over, and 
we have a responsibility in Congress to make certain that Federal 
laws--like the bankruptcy code--do not tie the hands of State and local 
governments. My bill will close bankruptcy law loopholes and provide 
millions of education dollars without raising taxes or spending any 
additional Federal money.
  Under current law, the bankruptcy code allows a Federal judge to 
retroactively lower the assessed value of a bankrupt debtor's 
property--often in

[[Page S8828]]

direct conflict with State laws. And another part of the bankruptcy 
code artificially subordinates local property tax revenues.
  All of this lowers the amount of money available for education since 
education is overwhelmingly dependant on local property tax revenue. In 
fact, there have been instances in which school districts have had to 
refund money they have already received and spent. In this way, the 
bankruptcy code is taking money earmarked for education and spending it 
instead on administrative costs such as lawyers' fees. We need to close 
these loopholes to put kids, and not bankruptcy lawyers, at the top of 
our Nation's priorities.

  During a hearing which I chaired before the Subcommittee on 
Administrative Oversight and the Courts, I found out about a school 
district in Texas that lost enough money in one case to provide 375,000 
meals for needy children. And I heard testimony about a school that 
could not rebuild its kindergarten which had been destroyed by a 
tornado as a result of money lost in a bankruptcy case earmarked for 
the school. In the State of Texas alone, between just a few school 
districts, about $70 million earmarked exclusively for education are 
currently at risk. Because the Administrative Office of the United 
States Courts does not keep comprehensive records on this, we don't 
know how big this problem is. But we know that it's a substantial 
problem. I say let's fix it now.
  The Investment in Education Act will close these bankruptcy loopholes 
so that there will be more money for meals for needy children, more 
money to pay for teachers' salaries, and more money to repair 
dilapidated schools. By passing my bill, we can ensure that our 
schoolchildren get the education dollars they need.
  Finally, section 3 of the Investment in Education Act will be of 
great help to children who are owned back child support. Section 3 of 
the bill will permit children and spouses to go into the exempt assets 
of the bankrupt debtor in order to make sure that unscrupulous 
deadbeats can't get out of paying child support by hiding their assets 
in bankruptcy. I don't think that Congress ought to let the bankruptcy 
code stick it to kids and so my bill corrects that.
  This bill has bipartisan support and has been endorsed by the 
National School Boards Association and the Iowa Association of School 
Boards. And as I mentioned earlier, I am optimistic that the 
administration will come out to support the bill. I know that time may 
be short, but since this bill has bipartisan support, I hope that we 
can pass it quickly. Mr. President, I have several letters supporting 
my bill and several news articles regarding the negative effect of 
bankruptcy on education. I ask that they be entered into the Record and 
that the bill be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 1149

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Investment in Education Act 
     of 1997''.

     SEC. 2. TREATMENT OF CERTAIN LIENS

       (a) Treatment of Certain Liens.--Section 724 of title 11, 
     United States Code, is amended--
       (1) in subsection (b), in the matter preceding paragraph 
     (1), by inserting ``(other than to the extent that there is a 
     properly perfected unavoidable tax lien arising in connection 
     with an ad valorem tax on real or personal property of the 
     estate)'' after ``under this title''; and
       (2) in subsection (b)(2), after ``507(a)(1)'' and before 
     the comma following thereafter insert ``(except that such 
     expenses, other than claims for wages, salaries or 
     commissions which arise after the filing of a petition, shall 
     be limited to expenses incurred under Chapter 7 of this title 
     and shall not include expenses incurred under Chapter 11 of 
     this title)''; and
       (3) by adding at the end the following:
     ``(e) Before subordinating a tax lien on real or personal 
     property of the estate which has arisen by virtue of state 
     law, the trustee shall--
       ``(1) exhaust the unencumbered assets of the estate; and
       ``(2) in a manner consistent with section 506(c) of this 
     title, recover from property securing an allowed secured 
     claim the reasonable, necessary costs and expenses of 
     preserving or disposing of that property.''.
       ``(f) Notwithstanding the exclusion of ad valorem tax liens 
     set forth in this Section, claims for wages, salaries and 
     commissions entitled to priority under Section 507(a)(3) or 
     claims for contributions to an employee benefit plan entitled 
     to priority under 507(a)(4) may be paid from property of the 
     estate which secures a tax lien, or the proceeds of such 
     property subject to the requirements of Subsection 724(e).''
       (b) Determination of Tax Liability.--Section 505(a)(2) of 
     title 11, United States Code, is amended--
       (1) by striking ``or'' at the end of subparagraph (A);
       (2) by striking the period at the end of subparagraph (B) 
     and inserting ``; or''; and
       (3) by adding at the end the following:
       ``(C) the amount or legality of any amount arising in 
     connection with an ad valorem tax real or personal property 
     of the estate if the applicable period for contesting or 
     redetermining that amount under any law (other than a 
     bankruptcy law) has expired.''.

     SEC. 2. ENFORCEMENT OF CHILD AND SPOUSAL SUPPORT.

       Section 552(c)(1) of title 11, United States Code, is 
     amended by inserting ``provided that, notwithstanding any 
     federal or state law relating to the enforcement of liens or 
     judgments on exempted property, exempt property shall be 
     liable for debts of a kind specified in Section 523(a)(5) of 
     this title,'' at the end of the subsection.
                                                                    ____

                                               Iowa Association of


                                                School Boards,

                                Des Moines, IA, September 2, 1997.
     Hon. Charles E. Grassley,
     U.S. Senator, Hart Senate Office Building, Washington, DC.
       Dear Senator Grassley: I am writing to thank you for 
     introducing and sponsoring ``The Investment in Education Act 
     of 1997''. This important legislation will pump millions of 
     badly-needed dollars into schools by closing loopholes in the 
     federal bankruptcy code which unscrupulous debtors use to 
     avoid paying delinquent property taxes. These delinquent 
     taxes go to fund important education programs such as school 
     lunch programs for needy children and school construction and 
     renovation projects. Thus, a loss of these revenues mean 
     fewer school lunches, school buildings in disrepair and fewer 
     teachers, since property tax revenues also fund teachers' 
     salaries.
       This federally created drain on local revenues intended for 
     education, if not checked in the near future, will obviously 
     have a devastating impact on our ability to provide our 
     children with a quality education. Companies which declare 
     bankruptcy should not be allowed to use federal law to 
     shortchange our children's education.
       With the federal government turning more power over to the 
     states, Congress has the responsibility to remove federal 
     laws--like these bankruptcy loopholes--which tie the hands of 
     local government. ``The Investment in Education Act of 1997'' 
     is a step in that direction. It increases education funding 
     by returning lost revenue to schools instead of raising taxes 
     and without sending local revenues to Washington.
       On behalf of Iowa's 377 school districts, thank you for 
     your leadership in finding a solution to this problem.
           Sincerely,
                                             Ronald M. Rice, E.D.,
     Executive Director.
                                                                    ____

                                                         Office of


                                       Sioux County Treasurer,

                                   Orange City, IA, July 29, 1997.
     U.S. Senator Charles Grassley,
     ATTENTION: John McMickle,
     Senate Hart Building,
     Washington, DC.
       Dear Mr. McMickle: Thank you for taking the time to discuss 
     the issues and concerns regarding bankruptcy and its affect 
     on local taxing bodies here in Iowa.
       I have been following with interest the proposed changes to 
     the Federal Bankruptcy statutes as presented by the National 
     Association of County Treasurers and Finance Officers 
     (NACTFO) and concur with the findings and recommendations in 
     their report. I believe that you have a copy of the report, 
     entitled ``Local Governments Recommendations for Reform of 
     the United States Bankruptcy Code''.
       Following our conversation of July 23, I did send an e-mail 
     message to all County Treasurers in Iowa, requesting 
     information on the affect of bankruptcy on tax collections. 
     To date, I have had a limited response to that request. 
     Approximately ten percent of the treasurers have contacted 
     me. Overall, their indications are that the statutes do not 
     present any big problems in Iowa. The main concern would be 
     the delay in payment of the taxes due.
       An example here in Sioux County is to the point. In the 
     Boyden-Hull School District, $13,457 in taxes remain 
     uncollected due to bankruptcy by two property owners. $7,806 
     of this amount due is to go to the local community school 
     district, if and when collected. These dollars are needed by 
     the local school to keep programs running.
       We have been fortunate in the Iowa Bankruptcy Courts to not 
     have any judges that want to adjust amounts due on our 
     priority claims for taxes. We have usually received the 
     amounts that we file with the courts, although usually 
     without interest due to late payment.
       My reading of the proposed changes indicates that the 
     judges would not have the latitude to change amounts due, 
     nationwide, and that would serve us well. Both of the

[[Page S8829]]

     cases affecting the Boyden-Hull School District are filed 
     outside of Iowa and we are at the mercy of the local 
     bankruptcy judges on collection.
       Thank you for your interest in the affect of this 
     legislation at the local level. If I may answer any further 
     questions that you or the Senator would have, please contact 
     me.
           Sincerely,
                                                  Robert R. Hagey,
     Treasurer.
                                                                    ____



                                         Polk County Attorney,

                                    Des Moines, IA, July 31, 1997.
     Senator Charles E. Grassley,
     Chairman, U.S. Senate Committee on the Judiciary, 
         Subcommittee on Administrative Oversight and the Courts, 
         Hart Senate Office Building, Washington, DC.
       Dear Senator Grassley: John McMickle of your office was 
     kind enough to send me a copy of your proposed ``Investment 
     in Education Act of 1997'', amending sections 724(b) and 
     505(a) of the Bankruptcy Code. I do not practice regularly in 
     Bankruptcy and so may not be as qualified to comment as many 
     of the people you will be hearing from, but I do represent 
     Iowa's largest county in its attempts to collect overdue 
     property taxes in those situations where Bankruptcy Court 
     involvement is unavoidable. I would strongly support your 
     attempt to reduce the impact on local governments of the 
     Bankruptcy Code's artificial lien priority shifting and pre-
     emption of state law.
       As you know, because of Iowa's consolidated tax system, a 
     County is responsible for collecting taxes not only for 
     itself but for the cities, school districts and other public 
     bodies in the jurisdiction. The Treasurer is an involuntary 
     creditor. He or she cannot evaluate and react to lending 
     risks the way a normal creditor can. The Treasurer cannot 
     police the debt or collateral or take additional steps to 
     protect the County when a debtor is in trouble. Taxes are 
     limited, so the County cannot build a reserve fund if it sees 
     danger ahead. It is difficult to reduce general relief or 
     quit collecting garbage or layoff teachers when economic 
     conditions result in delayed tax collections. That is often 
     when people look to government for additional assistance.
       In Iowa, state law requires a wait of 21 months or more 
     after a missed September local tax payment before property 
     can be taken to pay the tax debt. This is reasonable 
     protection for property owners who may be in trouble. 
     Government is, after all, a service, not a business trying to 
     make money off of the debt. Our procedure does, however, 
     often result in local taxes being put off while other more 
     aggressive creditors are paid. To then allow these creditors 
     priority over local taxes, as the present section 724(b) does 
     in many instances, seems eminently unfair. These junior 
     lienholders were aware of tax priorities at the time they 
     took their liens and to allow them to jump over local 
     government seems, to me, to be a pure windfall. Your bill 
     would correct this by keeping everyone in the same lineup to 
     which they originally agreed.
       We have had particular problems dealing with out of state 
     bankruptcies involving Iowa properties but 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. We have often lost 
     moderate payments simply because we cannot fly off to another 
     state or hire a lawyer there to explain our case. Your 
     proposal to reduce the impact of section 724(b) would also 
     indirectly, but greatly, benefit Iowa local governments in 
     this regard.
       Finally, as to your proposal to limit the retroactive 
     impact of section 505(a), I can only say that in my own 
     experience I have found this section to be used primarily as 
     a negotiating tool by debtor and junior creditor lawyers in 
     Chapter 11 cases, who use the threat of redetermination to 
     browbeat the County into compromising taxes to provide a 
     larger income stream for junior lienholders. I strongly 
     support your bill's effort to limit the impact of this 
     section on local government as well.
       Thank you for your consideration and good luck in 
     convincing your associates of the desirability of your 
     proposals.
           Very Truly Yours,
                                               Michael J. O'Keefe,
     Assistant Polk County Attorney.
                                                                    ____


  Schools Turn To Income Tax--Most Districts Already Charge An Income 
                  Surtax. Should Des Moines Join Them?

       Iowa school districts increasingly are turning to a new 
     tax--an income surtax--to supplement the property taxes and 
     state aid they've long relied on.
       A movement is under way for Des Moines to join the trend.
       The school-district income surtax may not be familiar 
     everywhere. It has not been used by the schools in most of 
     Iowa's largest cities, but 204 of the state's 379 school 
     districts now use it to raise extra money for education.
       It's a simple concept that can raise a lot of cash for 
     classroom programs, new school buses, asbestos abatement, 
     routine maintenance, and remodeling. It works this way: A 
     school district approves a levy(ies) for one or more of those 
     purposes, either by a vote of the school board or citizens, 
     and designates the income surtax as a source of revenue.
       Each person in the district who pays state income taxes is 
     then charged an additional amount to meet that obligation--up 
     to 20 percent of his or her state income-tax bill. On a state 
     tax bill of $200, at the maximum 20 percent rate, you'd send 
     the state an extra $40 to be returned to your school 
     district. (Counties may also use the income surtax for 
     emergency medical services. Taxpayers who live where both 
     their school district and county have an income surtax don't 
     pay more than 20 percent combined.)
       Think of the income surtax as a tip-automatically tacked 
     onto a restaurant tab, and districts have been increasingly 
     hungry for it.
       Why? Growing pressure on their budgets, including higher 
     expectations in general, more low-income students who need 
     help to succeed and aging buildings that need to be renovated 
     or replaced.
       Iowa law first allowed use of the income surtax for school 
     districts in 1972, under restricted circumstances. Use of the 
     income surtax increased after lawmakers OK'd an ``enrichment 
     levy'' in 1975, which let school districts spend extra local 
     money on educational improvement through either the income 
     surtax, property taxes or both. But the explosion in the 
     number of districts with an income surtax came when the 
     ``instructional support levy'' replaced the enrichment levy 
     in 1991, with state money part of the bargain.
       From Ackley-Geneva to Woodbury Central--and in districts 
     like Ames, Decorah and Sioux City--the income surtax raised a 
     total of $27.2 million statewide for the 1996-97 school year 
     that ended June 30. That compares to $1.9 million just 10 
     years earlier. Of that $27.2 million, $24.6 million went to 
     the instructional support levy (which also got $43.3 million 
     in property taxes and $14.8 million in state money, with the 
     state paying less now than it originally promised).
       The income surtax raised another $72,000 for the 
     educational improvement levy, a one-time opportunity for 
     school districts to boost their budgets that could be put in 
     place only in the 1991-92 school year and continued until 
     rescinded by the school board. (Just four districts have it). 
     The income surtax raised nothing in 1996-97 for the asbestos 
     levy. It raised $2.5 million for the physical plant and 
     equipment levy.
       Who has the income surtax? Rural school districts 
     predominantly, where the push for it began as a way to reduce 
     reliance on property taxes and keep school budgets healthy, 
     although plenty of cities participate. Iowa City, for 
     example, raised the most--$2.6 million--this past school year 
     for the instructional support levy. In the immediate Des 
     Moines area, only the Bondurant-Farrar, Southeast Polk and 
     North Polk school districts have the income surtax.
       The surtax has been proposed for the Des Moines school 
     district as a means to move ahead the $315 million Vision 
     2005 plan for updating its 63 buildings.
       Residents of the Des Moines district paid $124.5 million in 
     state income tax in 1996. Based on that year's incomes, each 
     1 percent of surtax would bring in about $1.2 million for the 
     school district. The talk is of needing nearly $12 million 
     annually from the surtax, which would require nearly a 10 
     percent rate.
       Part of the appeal of the income surtax is that it spreads 
     the tax burden more equitably than property taxes or sales 
     taxes, and businesses are likely to support it since they 
     don't pay it. Part of the drawback is that it stands to 
     increase the differences in tax burdens among local school 
     districts, perhaps putting Des Moines at a further 
     competitive tax disadvantage.
       Somehow Des Moines has to settle on a way to come up with 
     money it needs for its schools, and a tax increase of some 
     sort is inevitable.
       Whether that ought to include the income surtax needs a 
     careful look, one taken knowing that many other Iowa 
     communities have found that it works for them.
                                                                    ____


                   [School Board News, Aug. 19, 1997]

                  Schools Lose When Firms Go Bankrupt

       Your school system might be missing out on thousands of 
     dollars every year because corporations involved in 
     bankruptcy proceedings are able to get their tax obligations 
     cut.
       The Dallas public school system, for example, is losing 
     $450,000 during the current year, due to a federal law that 
     makes it virtually impossible for school districts to collect 
     tax revenue from businesses that have declared bankruptcy.
       Accordingly to Dallas Superintendent Yvonne Gonzalez, the 
     district could have used this money to hire 15 extra teachers 
     to reduce class sizes or provide $150 in school supplies for 
     more than 3,000 teachers. ``We anticipate an equal or greater 
     loss each year for the foreseeable future,'' she says.
       That's because Dallas, like most local school districts 
     across the nation, depends heavily on ad valorem taxes, which 
     are assessed on businesses and individuals based on the value 
     of property.
       When businesses declare bankruptcy, however, school 
     districts and other local governments tend to be last in line 
     to collect the back taxes owed by property owners. Lawyers 
     and banks holding mortgage liens are paid first. As a result, 
     schools often never see the money they are owed, and in some 
     cases, are required to refund taxes already received.
       NSBA supports federal legislation to correct this problem. 
     The Investment in Education Act would amend the federal 
     bankruptcy code to increase local revenues derived from 
     property taxes.
       The Senate Judiciary Committee's Subcommittee on 
     Administrative Oversight and

[[Page S8830]]

     the Courts held a hearing on the bill Aug. 1. The bipartisan 
     measure will be formally introduced in September by 
     subcommittee chair Charles E. Grassley (R-Iowa) and Sen. 
     Richard J. Durbin (D-III).
       A description of the bill prepared by Sen. Grassley's 
     office notes that ``virtually every state has experienced 
     some revenue shortfall'' in school funding, due to two 
     provisions in the bankruptcy code. The issue has been getting 
     a lot of attention in Texas lately, however, because the 
     state experienced so many real estate bankruptcies in the 
     early 1990s.
       Elizabeth Weller of the Dallas law firm Blair, Goggan, 
     Sampson and Meeks notes that the Houston school district lost 
     $1 million in a single case. Weller, who represents some 200 
     clients on this issue, a third of whom are Texas school 
     districts, adds that in the past few years, the Fort Worth 
     Independent School District (ISD) lost more than $480,000 in 
     a total of four cases; the Dallas ISD lost nearly $450,000 in 
     six cases; and the Lake Worth ISD $357,000 in a single case.
       Section 505(a) of the bankruptcy code gives bankruptcy 
     judges broad power to overrule property valuation decisions. 
     This means a judge can decide to reduce a business's tax 
     burden to ensure that the company's debtors can receive more 
     of what they are owed.
       Debtors often seek to have the taxable value of property 
     reduced for as much as 10 years before the bankruptcy filing 
     and request a refund of taxes already paid. Current law 
     allows judges to approve these requests.
       The bill would amend Section 505(a) to permit a bankruptcy 
     court to reverse a property valuation decision only when the 
     bankruptcy debtor has the right to challenge such a decision 
     under applicable nonbankruptcy law.
       Section 724(b) requires that most other claims on a 
     bankruptcy estate be paid before ad valorem liabilities. 
     Thus, various expenses, including lawyers' fees, are paid 
     before and at the expense of tax liabilities, eventually 
     forcing local jurisdictions to accept much less in delinquent 
     back taxes than they would otherwise be entitled to receive--
     if they receive anything at all.
       The bill would amend Section 724(b) to provide that ad 
     valorem taxes protected by liens are paid ahead of other 
     expenses, increasing the likelihood that local jurisdictions 
     receive the same revenues they would have received if the 
     company didn't file bankruptcy.
       ``My clients are sympathetic to wage claimants and others 
     holding priority claims'' under the bankruptcy code, Weller 
     says. They are citizens that serve and protect,'' she says. 
     School districts are not asking for a special priority; 
     they just want to be treated like any other creditor.
       Weller says there's been ``definitely a lot more cases'' on 
     this issue in the past few years, even though there hasn't 
     been an increase in corporate bankruptcies as there has among 
     individuals. What has changed in that ``corporate attorneys 
     have become more aware of how they can use the law to avoid 
     paying taxes.''
       One of several examples cited by Weller involves the 
     bankruptcy of Merchants Fast Motor Lines. Taxes secured by 
     liens on personal property were reduced by a bankruptcy 
     court's application of Sections 505(a) and 724(b).
       That resulted in five county governments, three city 
     governments, and the school districts of Dallas, Houston, and 
     Irving losing a total of more than $70,890. The taxing 
     entities face the threat of additional tax losses when the 
     properties are sold.
       In some cases, a bank holding the mortgage on a property 
     demands that the seller declare bankruptcy so the taxes will 
     be reduced, thus increasing its profits from the sale.
       That's what happened to the Hurst Euless Bedford 
     Independent School District in Texas, which filed suit in 
     state court in May 1992 to collect delinquent taxes for a 
     company for 1989 and 1990.
       The day before the case was set to go to trial, the debtor 
     filed bankruptcy, attorney Barbara M. Williams said at the 
     hearing. The company succeeded in getting the taxes reduced 
     for 1989 and 1990, even though the debtor did not foreclose 
     upon the property until 1991. The property value was reduced 
     more than $1.5 million, and the school district lost more 
     than $61,000 in tax revenue. The debtor then filed a motion 
     to dismiss the bankruptcy.
       A single bankruptcy can have a major impact on a small 
     school district. For example, when the Lancaster, Texas, 
     school district was involved in a legal battle over the 
     bankruptcy and foreclosure of a country and western bar, it 
     succeeded in obtaining $150,000 in back taxes, Weller notes. 
     That money was enough to restore kindergarten for the 
     district's schoolchildren, which had been eliminated when the 
     school suffered severe tornado damage.
                                                                    ____



                        Lancaster Independent School District,

                                     Lancaster, TX, July 28, 1997.
     Senator Charles E. Grassley,
     Senate Judiciary Committee,
     SH-325 Hart Senate Office Building,
     Washington, DC.
     RE: Proposed Changes to Bankruptcy Code Sec. Sec. 724(b) and 
         505.
       Dear Senator Grassley: I am very pleased to write this 
     letter in support of your efforts to modify the Bankruptcy 
     Code to make revenue recovery easier for local governments. 
     As a small suburban school district, the Lancaster 
     Independent School District has felt the effects of debtors 
     using bankruptcy as a way to avoid paying ad valorem taxes. 
     In one particular case, a debtor avoided payment of taxes for 
     almost ten years before the tax-laden property was sold 
     through a bankruptcy plan to a new owner who paid the taxes. 
     As a result of this account being resolved, the School 
     District collected more than $130,000 and was able to fund 
     fullday kindergarten. I am attaching an article from our 
     local newspaper that describes the importance of the payment 
     of this account.
       Although the example I have given would not have been 
     specifically affected by your proposed changes to the 
     Bankruptcy Code, it represents the types of issues facing 
     local governments who cannot collect essential revenue 
     because of abuses of the bankruptcy process by property 
     owners. In our case, the issue was much more than a matter of 
     an individual paying his fair share of taxes. For Lancaster 
     ISD, this was a matter of whether or not we could provide 
     essential public services.
       Thank you very much for your actions on behalf of local 
     governments. Please let me know if I can provide any 
     additional assistance in this effort.
           Sincerely,
                                                        Bill Ward,
     Superintendent.
                                                                    ____


                    [Today Lancaster, Aug. 10, 1997]

      Money in the Bank--LISD Receives Biggest Back Taxes Payment

                            (By Chuck Bloom)

       Gary Faunce is a happy man. Happier than usual.
       The Lancaster school district top finance man is breathing 
     a little easier with an infusion of more than $133,000 in 
     back taxes paid by the LISD's most notorious delinquent 
     account.
       Bear Creek/GID II, representing the Crystal Chandelier, 
     delivered payment of $133,377 July 24 to the district's tax 
     attorneys, Blair, Coggan, Sampson and Meeks, closing out a 
     ``difficult chapter'' in the district's financial life, 
     Faunce said.
       ``This helps us make next year's budget and it certainly 
     lifted us through this year's budget.'' he said. ``It has 
     been very helpful to fund a few programs.''
       Faunce said much of the funds would be earmarked to cover 
     the cost of full-day kindergarten in the LISD, which begins 
     this Monday for all 5-year-olds.
       The Crystal Chandelier, located at Bear Creek Road and I-
     35, was purchased by John Drain earlier this year, and worked 
     with BGSM to resolve the delinquent tax problem.
       ``With the property in the hands of a new owner, we are 
     hopeful that it will remain off the delinquent tax roll,'' 
     said Nancy Primeaux, BGSM regional manager. She said her firm 
     would monitor the GID account ``to ensure the property's 
     prior history is not repeated.''
       In addition, the district received $6,915 from Jordan 
     Tractor and Marine, plus payment on five other accounts, 
     Primeaux said.
       Needham Carpets, which is subject to seizure activity, had 
     its bankruptcy filing dismissed ``with prejudice'' by the 
     Bankruptcy Court. The ruling prevents Needham from filing for 
     bankruptcy for the next 12 months, and BGSM can proceed with 
     its litigation and seizure efforts.
       The LISD has been working under an extremely tight 
     financial cloud, due in part to the large amount of back 
     taxes owed.
                                                                    ____

                                                    North Carolina


                                     League of Municipalities,

                                                  August 14, 1997.
     Hon. Lauch Faircloth,
     317 Hart Senate Office Building,
     Washington, DC.
       Dear Senator Faircloth: We are aware of proposed amendments 
     to the Bankruptcy Code that will ensure better local tax 
     collection and administration when a taxpayer files for 
     bankruptcy. We support these amendments, included in Senator 
     Grassley's Investment in Education Act of 1997, that amend 
     Sections 724 and 505(a)(2) of Title 11 of the US Code.
       The amendment to Section 724 will prevent the property tax 
     lien from being subordinated to other liens when property is 
     sold free and clear of liens during bankruptcy. This is 
     already the case under North Carolina law, as has been held 
     and affirmed by our courts, if the tax collector reads the 
     notice carefully enough to understand there is to be a sale 
     free and clear of liens and if the collector knows to contact 
     the city or county attorney and request that an objection be 
     filed to the sale.
       Under existing Section 505, a bankruptcy court can 
     redetermine the value of property for tax purposes and 
     recompute the tax owed, if the debtor had not appealed the 
     value to the Board of Equalization and Review, and this is 
     true even though the time for making an appeal to the Board 
     has expired. This has happened in several cases in North 
     Carolina, and the taxes were always recomputed downward. The 
     proposed amendment to Section 505 prohibits a bankruptcy 
     court from making this reassessment if the time for making an 
     appeal under state law has expired.
       We appreciate your consideration and, in the interest of 
     more equitable property tax collection and administration, we 
     feel these are good amendments and would request your 
     support. Would you please share your position on the 
     amendments?
           Sincerely yours,
     Terry A. Henderson,

[[Page S8831]]

       Director of Advocacy.
     S. Ellis Hankins,
       Executive Director.
                                                                    ____

         The Office of Salt Lake County Attorney, Douglas R. 
           Short, County Attorney,
                                                    July 29, 1997.
     Attn: John McMickle.
     Re amendments to 11 U.S.C. Sec. 505 and 724(b).
     Hon. Charles Grassley,
     U.S. Senator, Subcommittee on Administrative Oversight and 
         the Courts, 308 Senate Hart Office Building, Washington, 
         DC.
       Dear Senator Grassley: Salt Lake County's tax revenue, 
     including those of the several school districts located 
     within the county, has been adversely affected by 11 U.S.C. 
     Sec. Sec. 724(b) and 505. Both provisions discriminate 
     unfairly against governmental entities and take needed 
     governmental and school revenue and shift it to other 
     creditors of the estate.
       For example, because 11 U.S.C. Sec. 505 permits the 
     bankruptcy court to redetermine the value of property for tax 
     purposes, Salt Lake County and schools have lost substantial 
     tax revenue because debtors have been permitted to challenge 
     assessments without the necessity of complying with state 
     law.
       In one chapter 11 proceeding Salt Lake County and the 
     school districts lost $61,800 due to the provisions of 11 
     U.S.C. Sec. 505. In another chapter 11 proceeding the debtor 
     attempted to obtain a refund of taxes paid three years prior 
     to the bankruptcy filing and one post-petition year totaling 
     approximately $80,000. The county settled after the trustee 
     agreed to drop his pre-petition refund but lost approximately 
     $18,000 which the Trustee would not have been entitled to 
     under state law. Further, in 1996 the county and school 
     districts lost another $13,500 in a chapter 7 proceeding 
     because of section 505 jurisdiction. The above actions could 
     not have been brought had state law applied.
       Title 11, U.S.C., Sec. 724(b) is often used in this 
     jurisdiction to take county and school district tax money and 
     shift it to administrative expense and other priority 
     claimants. It should be eliminated or limited to federal 
     statutory liens. It is evident from the legislative history 
     of Sec. 724 and its predecessors that Congress never 
     contemplated the impacts of shifting local property tax 
     revenue away from schools and local governments, which 
     provide police and fire protection and other essential 
     services to estate property, to other creditors such as 
     chapter 11 administrative expense claimants and lienholders 
     junior to the tax liens.
       Thank you for considering the foregoing issues. 
     Unfortunately we are not able to present this in person. 
     However, your assistance is appreciated.
           Sincerely,

                                             Mary Ellen Sloan,

                                 Deputy Salt Lake County Attorney,
     Civil Division.
                                                                    ____



                          Treasurers' Association of Virginia,

                                                    July 29, 1997.
     Re Investment in Education Act of 1997.
     U.S. Senator Charles Grassley,
     Senate Hart Office Building,
     Washington, DC.
       Dear Senator Grassley: I am writing on behalf of the 
     Treasurers' Association of Virginia to express our support 
     for the Investment in Education Act of 1997. The membership 
     of the Treasurers' Association consists of over 180 county, 
     city and town treasurers throughout the Commonwealth of 
     Virginia. In Virginia, the local treasurer is responsible for 
     the receipt and collection, safekeeping and investing, 
     accounting and disbursement of local government revenue.
       Of primary importance to our members is the retention of an 
     effective ad valorem tax lien on real property. This lien is 
     paramount to all other debts under Virginia law. In giving 
     this lien the ultimate priority, the Virginia legislature 
     recognized the importance of real property taxes to Virginia 
     localities. Real property taxes are an indispensable method 
     of funding government functions including schools, police and 
     fire protection, sanitation and other essential government 
     services. Under the current bankruptcy scheme, however, this 
     first priority lien can be negated by a bankruptcy trustee 
     acting pursuant to Sec. 724(b).
       The legislation which you have proposed would rectify this 
     anomaly of the Bankruptcy Code. This legislation would exempt 
     a ``properly perfected unavoidable tax lien arising in 
     connection with an ad valorem tax on real or personal 
     property . . .'' from the scope of Sec. 724(b). This 
     amendment is consistent with the original legislative history 
     of this subsection, and reflects the primary importance of ad 
     valorem taxes and tax liens in the operations of local 
     government.
           Sincerely,
                                                   Kevin R. Appel,
     Counsel.

                          ____________________