Gary and Muncie, Ind., districts look to state for short-term loans

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DALLAS — Emergency managers for Indiana's Muncie Community School Corp. and Gary Community School Corp. are looking at short-term loans to cover operating costs as they work on longer-term fixes for the districts’ financial woes.

MGT Consulting Group, appointed as emergency manager in July to lead Gary schools out of financial distress, said that ongoing state support is necessary due to the projected loss of 500 students compared to last year and because the district’s fiscal condition is "in total disarray."

Emergency managers for Muncie and Gary provided an update to the Distressed Unit Appeal Board, commonly referred to as DUAB, on Tuesday, reporting on where finances stood six weeks after the state directed a takeover of the districts under first-of-its kind legislation.

The DUAB approved Gary’s request for a $3.1 million state loan to help cover costs as the district looks for a more long-term solution. Gary Community Schools is dealing with more than $100 million in debt and $25 million of red ink in its operating budget.

The loan will be used to pay Cigna, the district’s health insurer, for overdue employee health insurance premiums and meet payroll through mid-October. The district's past debt to Cigna is between $3 million and $4 million. The district has been unable to take advantage of possible lower rates with Cigna or other insurers because of the liability.

State Sen. Eddie Melton, D-Merrillville, a non-voting member of the DUAB, said he hoped the state would consider a bigger investment for Gary to stem the boomerang effect of the district returning to DUAB every few months and going deeper in debt. "We cannot cut or loan our way out of this," Melton said. "We have to figure out a more proactive approach."

MGT Consulting told the DUAB that the district owes $40 million for past state loans, another $40 million in private loans and $15 million on school construction bonds. The district also owes $8.5 million in legacy accounts payable to vendors and the IRS.

Gary is designated as a distressed political subdivision which specifies the powers and duties of a Gary district EM over finances and academics.

Administrator Assistance, the state appointed emergency manager for Muncie Community Schools, is also knocking on the state’s door for short-term loans of up to $4.5 million to help meet expenses in October, November and December.

The Muncie emergency management team said on Tuesday that some progress has been made in reducing the district’s $11 million deficit and said that the general fund deficit forecast for 2018 is $8 million to $9 million. However, it has also lost nearly 500 students since the last school year, putting enrollment at 5,000. The district potentially faces a $3 million loss of state aid as a result.

Around $9 million of Muncie’s $11 million budget gap was caused by the misuse of nearly all of a $10 million bond issue that was supposed to finance school improvements. To stay afloat, the district used the funds to to cover operating expenses instead. The district's management pooled all funds, including the debt service and bond proceeds, which resulted in draws of $9.5 million on the 2014 general obligation bond proceeds fund. That fund has not been replenished, and officials put a hold on the projects that the bond proceeds were intended to finance.

S&P Global ratings cut Muncie Schools’ rating to junk in August, lowering it to BB from BBB-plus.

Muncie is currently designated a fiscally impaired district – which differs from the Gary label. If it can’t turn around its fiscal condition by the end of this calendar year, the DUAB will designate the district as a "distressed political subdivision" and the emergency manager would remain but would assume all powers, authority and responsibilities granted to emergency managers of school corporations.

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