School Group Seeks Payment of Taxes in Thrift Bailout

By Peter Schmidt — May 09, 1990 5 min read

Washington--Fearing that the ongoing federal bailout of bankrupt savings and loan associations could lead to the nonpayment of millions of dollars in local tax debts, the National School Boards Association and other groups are seeking regulations requiring the government to meet local obligations for properties it takes over.

In an April 25 letter to L. William Seidman, chairman of the Federal Deposit Insurance Corporation--who also heads the new Resolution Trust Corporation, which is administering the costly bailout--the groups asked the fdic and the rtc to issue regulations clarifying and strengthening the taxing authority of state and local governments under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

In the absence of such rules, the letter said, there is “no reasonable basis for assuming” that the F.D.I.C. and the R.T.C., when acting as a conservator or receiver of the assets of insolvent institutions, “will provide [states and localities] with notice of real property in their possession, pay taxes on real property in their possession in a timely manner, or, with respect to the sale and transfer of assets, pay recording and filing fees when due.”

The letter urges the F.D.I.C. and the R.T.C. to draw up rules that would require both agencies to notify state and municipal governments when they take over property; pay property taxes on time; pay recording and filing fees when a property is transferred to the final owner; and deduct and pay any taxes, penalties, or costs of collection owed by government-acquired savings and loans.

The letter also asks the two agencies to accord state and local taxing authorities “special secured status” that would place them ahead of other secured creditors when the debts of the thrift institutions are paid.

Without such regulatory assurances, the letter said, state and local governments have no way of knowing what their losses may be as a result of the bailout, and “may find that it is impossible to estimate revenues” as they draft budgets for the next fiscal year.

“While we do not believe it is the intent of the F.D.I.C. or R.T.C. to undermine the prudent fiscal management and effective operation of state and local governments,” the letter said, “we also believe that the absence of reliable guidance today may result in the needless loss of basic public services and programs tomorrow.”

David M. Barr, a spokesman for the F.D.I.C., said his agency received the letter on May 1 and would take 10 days to respond.

In addition to the n.s.b.a., the letter was signed by the Government Finance Officers Association, the International City Management Association, the National Association of Counties, the National Conference of State Legislatures, the National Governors’ Association, and the National League of Cities.

Losses Unpredictable

Katharine L. Herber, a legislative counsel for the n.s.b.a. involved in the drafting of the letter, said the law governing the bailout stipulates that the F.D.I.C. and the R.T.C. pay taxes on real property, which most school districts use as their funding base.

But, she added, both agencies are exempt from paying personal-property taxes, which many states rely on in generating revenues to fund appropriations for education, and from liens, which generally are placed on privately owned property for which back taxes are owed.

Moreover, Ms. Herber said, the agencies can challenge the valuation of real property they acquire under receivership, thus reducing the taxable value of such property.

The NSBA official explained that, because state and local taxing authorities are currently unable to identify how much property the F.D.I.C. and the R.T.C. have in their possession, and have no way of predicting how much property the agencies may acquire in the future, they have no way of knowing how much revenue they stand to lose as a result of the federal bailout.

Experts say that, even with the kind of regulations the NSBA and the other organizations favor, every state is likely to face some loss of revenue as a result of the wave of hundreds of bankruptcies in the savings and loan industry. They agree that the most significantly affected states are likely to be in the South and Southwest, with Texas having the highest concentration of insolvent savings institutions.

Michael A. Resnick, associate executive director for federal relations for the n.s.b.a., said school districts could suffer “a substantial blow” if the F.D.I.C. or R.T.C. takes over significant amounts of property within their boundaries.

Unless these districts are notified of which property has come under federal control, Ms. Herber noted, the districts probably would not know the full extent of their revenue losses until all taxes were collected in late fall, long after the July 1 start of most state and local governments’ fiscal years.

Passing the Buck?

Mr. Barr of the fdic said last week that his agency had completed most of the revision of its regulations required by last year’s bailout legislation. He added that the agency’s regulations were constantly changing and that it could adopt new rules at any time.

Ms. Herber said that it was too soon to say whether the agency would give a sympathetic hearing to the request for new regulations.

But Frank H. Shafroth, director of federal relations for the National League of Cities, said he has repeatedly raised the issues outlined in the April 25 letter during and since the Congressional drafting of the bailout act, and so far has been ignored. He accused the federal government of “deliberately trying to pass the buck to the local governments.”

A spokesman for the House Banking Committee said the issues raised by the state and municipal organizations were not raised in the Congress during debate over the legislation, and that “long-standing legal and Constitutional precedent” was followed in giving the F.D.I.C. and the R.T.C. the tax exemptions allowed in the measure.

Of the approximately 2,900 thrift institutions now in existence, the official estimate last summer was that 560 required federal intervention because they had too few assets to pay off their obligations to depositors and other debts.

In April, the Bush Administration gave the go-ahead to a plan to shut down 141 thrifts by the end of June at a cost of $51 billion, Mr. Barr said. Estimates of the value of the property that the federal government may need to take over in order to bail out the institutions have ranged from $50 billion to $500 billion.

A version of this article appeared in the May 09, 1990 edition of Education Week as School Group Seeks Payment of Taxes in Thrift Bailout