CHICAGO – Credit pressures have eased on a junk-rated suburban Chicago school district stung by a fiscal mismanagement scandal that led to regulatory and criminal scrutiny.

Will County Community High School District 210, known as Lincoln-Way District 210, lost its investment grade status in 2016 over the scandal, which included the misuse of bond proceeds. Now its finances have begun to turn the corner, said Moody’s Investors Service.

The rating agency this week shifted its outlook to stable from negative on the Ba1 rating that impacts $246 million of outstanding debt.

Lincoln-Way school district
Lincoln-Way school district

“The stable outlook reflects the district's improving financial operations and the expectation that reserves will grow going forward, but remain narrow for some time,” Moody’s wrote. The district is located about 40 miles southwest of Chicago and has an enrollment of 6,882 students.

Operating reserves of about $7.2 million are expected to remain narrow and will require the district to rely on cash flow borrowing. Before 2017, the district has posted six years of operating deficits. Improvements were seen in fiscal 2017 through savings achieved largely by closing one of the district’s four high schools and through changes to service contracts.

For fiscal 2018, the district has budgeted for an operating surplus of about $3.7 million. However, the district may close the year with a larger addition to its fund balance thanks to state aid and the sale of district property, Moody’s added.

The district had $20 million in outstanding cash tax anticipation warrants at the close of fiscal 2016, which decreased to $15.5 million at the close fiscal 2017. The district issued a total of $27 million during the course of fiscal 2017 and the board has authorized the same level of borrowing for fiscal 2018.

As of March 14, the district had drawn $13.1 million of the authorized $27 million with the expectation of drawing a total of $23.5 million by fiscal year end. The district has told Moody’s improving finances should end its reliance on such borrowing by 2022.

Significant operating and liquidity improvements could drive an upgrade that would restore it to investment grade.

The district’s strained balance sheet stems from “poor management practices of prior administrators,” Moody’s noted. The district misappropriated bond funds from 2008 to 2012.

A probe by the Securities and Exchange Commission and Department of Justice is still underway. Criminal fraud charges were filed last September against the former superintendent, Lawrence Wyllie, accusing him of using bond proceeds to inflate the district’s apparent fiscal health.

“As a result of the scheme, defendant Wyllie fraudulently caused Lincoln-Way to assume at least $7 million in additional debt by the fraudulent issuance of bonds, on which Lincoln-Way continues to pay interest, as well as suffer a loss of at least $80,000 in school district funds that were misappropriated and misused by Wyllie for his own personal benefit,” reads U.S. Attorney documents.

The indictment marked the first action by authorities stemming from the Lincoln-Way district's fiscal mismanagement. The charges suggest securities fraud because Wyllie is accused of misleading investors.

Moody’s cut the district to junk in late 2016 after having slapped it with a five notch hit to Baa3 the previous April over its weak finances and use of short-term borrowing to deal with fallout from the improper accounting of past bond proceeds.

Moody’s said the district has recently implemented a number of enhanced financial policies and procedures, including the maintenance of 5-year operating projections and a fund balance policy that requires the district to achieve a 3% surplus each year until it reaches 33% of budgeted expenditures. The district has hired a new superintendent, finance director, and assistant superintendent of business operations, Moody’s added.

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