Gary Schools on Track for Indiana's First Emergency Takeover

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CHICAGO — After years of financial problems, the school district in Gary is poised to become Indiana's first local government to be taken over by an emergency financial manager.

A bill passed in connection with the state's new two-year budget creates a pathway for the state takeover. Officials said they are still working on key details, including how to select the financial manager and his or her powers.

Most likely the manager would have the ability to open labor contracts and make other financial restructurings. The state board overseeing the process can authorize the school district to put off debt payments on state school loans and recommend a new no-interest loan from the state's common school fund.

"It will be a first, and it will be very interesting," Dennis Costerison, a public school lobbyist and executive director of the Indiana Association of School Business Officials, said of the expected Gary takeover. "We've never had a district go this far before."

Like the city of Gary itself, the Gary Community School Corporation has suffered from severe financial problems tied to falling population and property tax caps. The city has among the highest number of charter schools in the state, and the district's enrollment has fallen to just over 7,000 in the 2014 school year from 11,798 in 2009.

With the loss of students, its state aid has dropped to $63 million in fiscal 2014 from $109.8 million in fiscal 2009, according to bond documents. Its general fund balance has fallen to a negative $6.6 million in 2013 from a positive $9.3 million in 2009. Under property tax reform that took effect in 2008, the general fund no longer gets any property taxes, and is funded entirely with state aid.

The school district suffered a fresh blow in the May 5 election when voters rejected a referendum that would have raised additional revenue.

The district is made up of one preschool, 11 elementary schools and five middle/high schools. Like the city, Gary's school district is not rated by any ratings agency.

Sen. Earline Rogers, D-Gary, who sponsored the school bill with the support of Senate Republican leaders, said the Gary bill could be a template for other troubled districts in the future.

"The Gary Community School Corporation stands as a poster child for the impact of recent state policies on school corporations," said Rogers. "We can learn from Gary and it will put us in a position to take care of other school corporations or look into the future and make sure this doesn't happen to other school corporations."

The new Indiana budget also revamps the state school funding formula to make funding more closely follow students, a move that will mean less money for poor urban districts like Gary and Indianapolis and more for suburban districts that are seeing a growth in student enrollment.

Rogers said she began working on the latest bill when some of the school district's creditors emailed her.

"We started talking to the school superintendent and we had the mayor come and members of the school board, and we talked with them about what they saw as a problem and what we as a state might be able to do."

Rogers said she shies away from the word "takeover."

"We wanted to make sure it was a situation where it was cooperative as opposed to the state board coming in and taking over," she said.

The bill authorizes a little-used state board called the Distressed Unit Appeals Board to oversee the new emergency management process. The DUAB was created in 2008 to help distressed local governments deal with property tax losses, but so far has only managed a few units.

Under the legislation, DUAB will hold a public hearing on the Gary district's finances. The state board will then select three financial managers and the Gary school board will choose one of them. The manager will have a 12-month tenure.

DUAB will also be allowed to "delay or suspend" the district's principal and interest payments on loans from the Indiana Common School Loan Fund and recommend to the state board of finance that it make an interest-free loan with a six-year maturity.

"In a fashion it kicks the school board and the superintendent to the curb," said Costerison. "It's a big step, but if Gary believes that they need this help and they can't get it done themselves, then they'll go this route."

Micah Vincent, chair of DUAB and general counsel and policy director for the Indiana Office of Budget and Management, said the board has yet to work out the fine print of the takeover.

"There're lots of details that we have to work out but we'll get those worked out in short order," Vincent said. "There's a lot more we'll be bringing forward in the next month or so."

Vincent said he expects to hone the plan over the next month, and that DUAB will hold the public hearing this summer. He said the board will be looking at other states' programs, including that of Michigan, which is considered to have a relatively strong emergency management program.

An emergency manager will likely begin his or her tenure with a comprehensive audit of all areas of the school district from "bookkeeping to bill paying," Vincent said.

He declined to comment on whether the process or the emergency manager would have the ability to restructure bond debt, but noted that the current law only allows for the restructuring of state loan debt.

The school corporation has $30.5 million of direct debt. That includes $13.8 million of general obligation bonds, and $16.4 million of state loans. It has another $44.3 million of underlying debt from Gary Building Corp. mortgage bonds.

Its debt service fund had a negative ending balance of $349,000 as of fiscal 2013, an improvement from the $669,000 deficit in 2012 but down from the $2.4 million positive balance in 2009, bond documents show.

The district's last bond issue was in April, when it floated $2 million of unrated general obligation judgment bonds. Bonds with a final 2025 maturity and a 3.5% coupon sold at a spread of 161 basis points to the Municipal Market Data's top-rated benchmark. A chunk of the bonds yielded 3.65% in February, the most recent trading, according to MMD.

Officials from the Gary school district did not return calls for comment. But Rogers and others said that the measure has local support as well as the support of Republican legislative leadership.

"There's no pushback whatsoever," Rogers said. "This is a community that is losing population and has a high poverty rate, and this is mirrored in the schools. People in Indianapolis understand the special problems we have and the difficulty we're having coping with the problems."

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