The Gary, Indiana, Community School District gained state approval for a plan to settle an $8.4 million tax liability with the Internal Revenue Service, a key step toward resolving one of the obstacles to stabilizing its fiscal foundation.

The district is trying to reduce the roughly $8.4 million it owes to the IRS for a tax liability created when it failed to remit taxes it withheld from employee paychecks to the IRS on a quarterly basis.

In response, the IRS has put liens on all the buildings owned by the Gary Community School Corp. that prevents their sale, reuse by another entity or demolition.

William A Wirt HS in gary indiana
Gary Schools is looking to settle a significant tax liability with the IRS.

On Thursday, the Indiana Distressed Unit Appeals Board (DUAB) authorized the district's emergency management firm, Gary Schools Recovery LLC, which is led by Peggy Hinckley, to make a compromise offer to the IRS of paying $320,000 to settle the debt, with 20% of that amount already paid at the time the district makes the offer.

"It's important to know that this is just an offer only," said DUAB executive director Courtney Schaafsma. "It still has to go through multiple levels of approval at the IRS. However, because the dollar amount is at the point where DUAB would have to approve it, we felt it was important for DUAB to act before the offer was made.”

Settling with the IRS is one of several hurdles the district must overcome before it can regain its financial footing. Gary's debts include $40 million owed on past state loans, another $40 million in private loans, and $15 million on school construction bonds.

The district is designated as a distressed political subdivision which specifies the powers and duties of a Gary district emergency manager over district finances and academics. The manager holds broad powers over spending, contracts, hiring, and budgets.

On Tuesday the Indiana Senate approved a bill that would further insert the state into running the school district. The bill would also pave the way for Ball State University to take over the Muncie school district, which is also currently under emergency management. The House previously approved the bill, but must sign off on changes made by the Senate.

House Bill 1315 makes the Gary school board an "advisory board" to the Gary schools emergency manager and limits the board to four public meetings per year.

The legislation also eliminates a requirement that the emergency manager regularly consult with the local school board members, but her decisions would remain subject to oversight by the DUAB.

The emergency manager would also be required to hold a monthly public forum to keep Gary residents apprised of what's happening in their school district.

The measure additionally puts Ball State University in charge of operating Muncie Community Schools, and sets up a process for the state to monitor and assist other financially struggling school corporations.

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 recently expanded its oversight of Muncie.

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

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