Struggles of Gary, Ind., schools lead to another state loan

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DALLAS -- Indiana has approved a $3.2 million loan to Gary Community School Corp. to help the fiscally distressed district stay afloat and meet December payroll and other costs.

The new loan is the sixth approved for the school corporation in 2017.

The school corporation, under the state appointed emergency management of MGT Consulting Group since July, promised a more long-term resolution to its financial troubles at a meeting with the state’s distressed unit appeals board on Tuesday.

"We're not simply placeholders," said Peggy Hinckley, the emergency manager for the state-appointed Gary Schools Recovery LLC fir , MGT subsidiary that's running the district. "We have to bring significant reductions and we're working on one or two in the next few months." She told the board a business plan focused on reduced spending will be presented by the end of the year and will begin to reduce the need for borrowing.

Tuesday's loan, approved by the Distressed Unit Appeals Board and the Indiana Board of Finance, is the latest ongoing state support needed to keep the ailing district afloat.

Under the emergency manager, four loans have been authorized since May. Prior to the designation as a distressed political subdivision, three other loans were authorized while the financial specialist was in place, in 2015, March 2017, and April 2017.

The loan will be used to pay Cigna, the district’s health insurer, for overdue employee health insurance premiums and meet payroll through mid-November.

The district is behind in premium payments to Cigna. In early 2017 Gary and Cigna reached an agreement for the district to make payments on debt of over $2 million. Gary agreed to stay current with monthly premiums and pay an additional $150,000 per month.

The district also said it would not have enough cash on hand to meet its Nov. 10 and Nov. 24 payroll without assistance from the state.

The DUAB also approved a contract with the accounting firm of Laszlo & Associates to represent the district in talks with the Internal Revenue Service in an attempt to possibly reduce the significant tax liability created when the school district failed to remit taxes it withheld from employee paychecks to the IRS on a quarterly basis. The district owed the IRS about $8.4 million as of last month. That includes $2.6 million in penalties and interest.

The contract calls for the accounting firm to receive 12% of what it recovers from the IRS in a settlement. The IRS has liens against all the district's schools and properties. It failed to make payroll taxes in 2013 and 2014 and part of 2015.

The district disclosed the IRS has placed liens on properties and accounts held by former interim chief financial officer Michael Washington, who was fired by the school board in 2015.

The liens restrict the school district from selling any unused real estate of which Hinckley said there are presently approximately 28 parcels. The liens also negatively affect the ability of school district to pay past due debts that it has incurred in the ordinary course of doing business and allow the IRS to be able file levies against the bank accounts of the school district at will.

Hinckley said that interviews are beginning this week in the search for a chief financial officer and a chief academic officer.

Gary Community Schools is dealing with more than $100 million in debt and $25 million of red ink in its operating budget. The district is designated as a distressed political subdivision which specifies the powers and duties of a Gary district EM over finances and academics.

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