Indiana's loan to Muncie school district has no immediate rating impact

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The new Indiana law allowing Ball State University to take over the financially distressed Muncie Community School Corp. and giving the district a cash infusion won’t immediately boost the district’s credit, according to S&P Global Ratings.

The rating agency said on Friday that key to the Muncie school district’s credit performance will be Ball State’s ability to reduce and realign operating spending “over an extended period within a fragile and limited revenue environment.”

S&P rates the school district at a speculative-grade BB-minus.

“[The loan] does not have any immediate credit implications for our underlying rating on the school corporation as we had considered a state loan to be likely during our most recent review of the rating, and the effects of university oversight remain to be seen,” S&P wrote.

Legislation Gov. Eric Holcomb signed May 14 provides the district with an interest-free, emergency loan to eliminate a $10 million cash deficit. The deficit exists because the school corporation used proceeds of its $10 million series 2014 general obligation bond sale to support operations rather than planned capital improvements.

“We understand it has to replenish these funds in order to complete the projects,” S&P said. “The ability to use loan proceeds to repay this deficit, as opposed to generating cash on hand, allows it to proceed with the planned capital spending while also stabilizing its cash position.”

Another key feature of the law allows Ball State University to govern the financially challenged school district.

Ball State, which is in Muncie, will create a seven-member panel to operate Muncie schools. Four of the members would be required to live in the school district. The board replaces the current state-appointed emergency manager and locally elected school board.

Ball State President Geoffrey Mearns said the board will report to the public.

"They are a public school board, they’ll have public meetings the way any school board would," Mearns said. "The only difference is how they get to that seat, not how they operate once they’re in that position.”

The state has given permission for current MCS emergency management team Administrator Assistance to stay on for two months to help the new board.

Ball State says nominations for possible board appointees will begin immediately. Ball State trustees will meet June 25 to announce school board appointments. That board begins its duties July 1.

The bill says the university has two years to come up with a comprehensive plan for the district’s future. Mearns said Ball State will follow a financial plan drafted by Administrator Assistance for the upcoming school year. In it, he says “virtually all staff” will keep their jobs and will be paid the same as this current school year.

The state in a first-time action took full control of the Gary district and partial control of the Muncie district last year. The state then expanded its oversight of Muncie.

S&P Global Ratings downgraded the Muncie Community School bonds by one notch from BB on Jan. 26. It had cut the rating to junk in August, lowering it to BB from BBB-plus.

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