CHICAGO – Indiana expects to put in place emergency managers for fiscally troubled school districts in Gary and Muncie by early summer, implementing a cornerstone of state oversight legislation signed last month by Gov. Eric Holcomb.

Senate Enrolled Act No. 567 paved the way for the first state school district takeovers.

It gives sweeping powers to emergency managers who will manage the finances of Gary Community School Corp. and Muncie Community Schools with the goal of righting their fiscal courses. In Gary’s case, a financial advisory board will aid the emergency manager. The legislation also provides fiscal help through grants and loans, some of which could be forgiven.

William A Wirt HS in gary indiana
William A. Wirt High School is among Gary Community School Corp.'s facilities. The district will be led by an emergency manager.

Holcomb said he expects the legislation will bring stakeholders together to help the districts.

“We have to get this right…the kids ultimately are the ones that are caught in this crossfire,” Holcomb said.

The state’s Distressed Unit Appeals Board will manage the oversight process and receive reports from the districts’ managers.

The initial bill solely impacted Gary schools but the House added Muncie. Gary officials sought the state intervention, seeing few other alternatives to tackle a crisis that's led to late vendor payments, delayed payrolls, and annual operating deficits as its books are weighed down by a $100 million debt burden. Muncie was opposed, arguing it was on the path to solving its fiscal woes with deficit reduction plans.

Under the legislation, the Muncie district is designated a “fiscally impaired school corporation.”

That status, which is distinct from the designation as a distressed political subdivision, terminates on Jan. 1. By Dec. 1, the DUAB will hold a hearing to gather public input on progress made by the district and emergency manager toward achieving financial stability and by the end of the year will decide whether or not to declare Muncie Community Schools as a distressed political unit or release it, according to DUAB documents.

The DUAB is currently seeking candidates for the role of Muncie EM and after interviews, expected in June, plans to appoint an EM by June 30.

Muncie is struggling with a negative cash balance of $11 million that’s projected to shrink to $9.4 million by the end of the year. The district’s compounded structural deficit over the last decade rose to $23.7 million in 2016 and “cash flow is at a crisis point,” the district warned in a May 1 presentation to the DUAB.

The district is struggling with faster-than-projected enrollment declines and limited revenue raising options due to state property tax caps. It lacks additional bonding authority and has “no ability to fund capital projects within the current funding pattern,” according to the district report.

Judgment bonds may have provided one avenue for borrowing but the district anticipated a “negative impact” on its “already tenuous bond ratings.” On the plus side, all of the district’s debt, which requires about $7 million in annual debt service payments, is to be retired by 2023.

S&P Global Ratings put the district’s underlying BBB-plus rating on CreditWatch with negative implications in March due to “a significant deviation in 2016 financial results from an expected trend.”

The district previously cut annual spending by $8 million and is working to trim another $1.3 million. The district has outlined plans to review existing vendor contracts to further reduce costs in food service, facilities management and nursing services and is reviewing additional options with its teachers’ union for reducing health insurance costs.

Muncie's enrollment this year is 5,700, down from 6,800 in the 2012-2013 school year, according to Indiana Department of Education data.

S&P analysts cited the district’s decline in its ending reserve position to negative 18% at the end of 2016 from a positive 1% at the end of 2015. “We believe that the district's credit quality may no longer commensurate with a 'BBB-plus' rating,” S&P wrote. The creditwatch placement is expected to be resolved in June. The district participates in a state credit enhancement program that raises its debt rating to AA-plus.

Once the EM starts, he or she will manage efforts to implement the district’s deficit reduction plan and would be charged with the goal of achieving financial stability, ensuring payment of debt obligations, and better aligning personnel and facilities with revenue and enrollment needs. Unlike Gary, the oversight doesn't extend to academics under the current designation.

Based on the current designation, the EM’s powers include the ability to negotiate and enter into labor contracts, set salaries and compensation, outsource services, close facilities, and sell or lease properties. The EM will must sign off on spending, most contracts, loans, and hiring, and must report to the DUAB monthly.

The DUAB could terminate the fiscally impaired designation if the district “has developed and is implementing a deficit reduction plan” and “the action taken by the school corporation to implement the deficit reduction plan have resulted in progress toward achieving financial stability.”

If released at the end of the year, the EM position would end January 1. If designated as a distressed political subdivision, the emergency manager assumes all powers, authority and responsibilities granted to emergency managers of school corporations.

“I think what we’re looking for is to put the school corporation on the trajectory where it’ll be able to continue to provide quality education and also be able to be in a sustainable financial position for the long haul,” DUAB Chairman Micah Vincent said at a public hearing earlier this month.

Despite cuts, the Gary district remains more than $100 million in debt and has a $25 million hole in its operating budget. It enrolls 5,800 students this year, down from 8,900 in 2012-2013 school year.

The legislation designates the district as a distressed political subdivision and specifies the powers and duties of a Gary district EM over finances and academics. The manager is charged with naming a chief financial officer and chief academic officer and the legislation establishes a four-member fiscal management board and its role in advising the EM.

Gary Mayor Karen Freeman-Wilson has the power to make one appointment. She chose retired Gary Sen. Earline Rogers.

The EM selected in the coming weeks will hold broad powers over spending, contracts, hiring, and budgets.

“The annual budget adopted by the emergency manager for the school corporation must dedicate a significant part of the school corporation's budget to eliminating the school corporation's outstanding financial obligations,” documents say.

As the district has struggled with solvency, some at the state level considered dissolving or consolidating the district with other nearby districts, but local leaders were opposed.

The district has been relying on state loans to cover payroll. It’s long struggled with declining enrollment that impacts state aid levels, mounting bills, and limited revenues in part due to property tax caps imposed in 2008.The district’s enrollment has been hurt from competition from charter schools.

The Gary district was the first school district to be overseen by a financial specialist. The financial specialist process was written into statute specifically for the district.

In July 2015, at the direction of the DUAB, the school corporation picked Jack Martin, a former emergency manager of Highland Park schools in Michigan and Detroit Public Schools, to serve as its financial specialist.

Martin has been working to cut expenses but the district’s situation grew more precarious after voters last fall rejected a referendum to increase property taxes. It marked the second time in 18 months that the Gary school corporation lost a tax referendum. The latest asked voters to approve about $8.7 million of new taxes annually over the course of seven years.

To be released from the designation, the district must maintain a structurally balanced budget for at least two years, hold no unpaid or past due critical contractual financial obligations or vendor payments, and must have a fiscal plan in place that maintains financial solvency for at least five years after the termination of the distressed status.

"The Distressed Unit Appeal Board is working towards an appointment of the emergency manager for the Gary Community School Corporation in late June/early July but may extend past this date to identify the best candidate,” said Jenny Banks, director of communications for the Indiana Department of Local Government Finance.

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