CHICAGO — The Pontiac City School District located outside Detroit stepped closer to a state takeover Friday when a state review team declared it to be in a state of financial emergency.

The announcement came two months after the school district missed a debt payment, and after it dipped into a debt retirement account to cover payroll, according to the state team's report.

Pontiac schools is located in the city of Pontiac, about 25 miles outside Detroit, which has been under state control since 2009. The school district has six elementary schools, a middle school and high school.

The six-member team appointed last month by Gov. Rick Snyder to investigate the school's finances. said Friday it found a financial emergency. Snyder now has 10 days to determine whether he agrees with the finding.

If Snyder affirms the emergency, he has four choices under Michigan's new emergency management law for distressed governments. He can appoint an emergency manager, agree to enter into a consent agreement with the district, allow it to begin a so-called neutral evaluation process with a mediator, or, if the district asks for it, grant permission for aChapter 9 bankruptcy filing.

Snyder in early July signed into law a pair of bills broadening state power over troubled school districts, but the laws apply only to districts with 2,400 students or less. Pontiac has 5,500 students.

The team said the district's 2012 general fund deficit quadrupled since 2009, and now totaled nearly $38 million. It had $33 million of unpaid bills to vendors by the end of June.

The team also said the district dipped into debt retirement funds to cover payroll, a "manifest violation of state law," according to the report. "The circumstances surrounding this matter warrant further inquiry by appropriate authorities," the report said.

The district is also facing a $7.8 million judgement against it for unpaid premiums for health care for its employees, even though it continued to collect employee payments. Under the court order, the district has 10 years to pay the judgement.

Financial audits for the last three years show general fund revenues were overestimated by nearly 13% in 2011, the team said in its report.

"These significant variances between budgeted revenues and expenditures and actual revenues and expenditures, in concert with an apparent inability of school district officials to accurately monitor revenues and expenditures throughout a given fiscal year and to then amend school district budgets accordingly, rendered the adopted budgets, and in many instances the amended budgets, effectively meaningless," the report said.

The school district missed a May 1 debt payment for $1.4 million for general obligation limited-tax bonds it had issued in 2006, making it one of two districts in Michigan to default on a debt payment, along with Buena Vista School District.

Moody's Investors Service said the Pontiac default was the first by Moody's-rated public school in the U.S.

The bonds are insured by Syncora, which covered the payment. The district still hasn't paid the insurer, according to the review report.

Moody's in early June downgrade the district's issuer rating two notches, to B3 from B1, and lowered the general obligation limited-tax bonds to Caa1 from B2. The rating remains on review for further downgrade. Pontiac has $15.7 million of outstanding GO limited-tax bonds.

House Democratic Leader Tim Greimel, who represents Pontiac, said the state should increase its funding for schools.

"No one disputes the severe mismanagement of the Pontiac School District," Greimel said in a statement. "However, more can be done at the state level to provide adequate funding to all schools in Michigan."

Greimel also criticized emergency managers as focused on short-term solutions as opposed to what's best for students.

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