Here's why two Indiana school systems went broke. And others are in danger.

One of hundreds of protesters in Muncie in February, opposing the uncertain future for Muncie Community Schools' teachers and school buildings.

About a block from Tim Smith’s office on the north side of Anderson, there’s a yard sign supporting rival Pendleton Heights athletics.

“Square in the heart of Anderson, Indiana,” said Smith, the interim superintendent of Anderson Community Schools. 

Anderson lost more than 300 students to neighboring South Madison Community Schools last year, the district that includes Pendleton Heights.

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In all, state data shows 1,500 students living in Anderson Schools' boundaries chose to go to one of 23 other public school districts last year. Another 700 would-be Anderson students used the state’s voucher program to attend a private school on a public scholarship.

And public charter schools in Anderson enrolled nearly 1,200 students — students who may not live in the area, but chose to go to school in Anderson. Just not at Anderson Community Schools.

In Anderson, those enrollment losses conservatively account for more than $15 million in lost state dollars from a $92 million budget.That's because the money follows kids to whatever school they choose.

Anderson Community Schools superintendent Tim Smith photographed in Anderson, Ind., Monday, Nov. 20, 2017.

“We’ve had years where we’ve lost hundreds of kids,” Smith said. “It’s impossible to plan for.”

Anderson — like many public school districts, to a degree — has been ravaged by a decade of changes to Indiana’s education law.

In the rush to overhaul education, state lawmakers abandoned decades of commitment to the traditional public school system, pushing forward even as districts started closing schools, cutting programs and losing teachers.

They developed a system that encourages free-market competition with other public schools, charter schools and private ones — creating a sink-or-swim mentality that already has helped push Gary and Muncie schools into such a deep financial crisis that the state was forced to take them over.

They may not be the last.

An IndyStar analysis of the factors driving Gary and Muncie schools to the financial brink found at least a handful of other school districts suffering similar effects — school districts such as Anderson, Michigan City Area, Crawford County and Elwood.

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Lawmakers driving changes to school funding formula said they were designed to make the system more fair for schools and taxpayers. They say new competition for students holds schools accountable for the way they spent public dollars and the education they provided students.

“I think it’s worked really well,” said recently retired Sen. Luke Kenley, an architect of laws that attached school dollars to students and not schools.

Traditional public school leaders across the state, though, say the way Indiana funds them only deepens the disparity in education between wealthy and impoverished areas.

Through a series of new laws and policy changes passed at a blistering pace, they say the state knowingly destabilized traditional public school funding, crippling some urban and rural school districts and creating a system of winners and losers that shows no sign of slowing.

Statewide, the big question now is how many more school districts are headed toward the precipice.

The Forest Hills Elementary building now houses the Anderson Community Schools' administrative offices in Anderson, Ind., seen on Monday, Nov. 20, 2017.

Rush to change

Starting in 2001, the state began rerouting money for public schools to remake itself as a champion of school choice. First, lawmakers created a public charter school system. Second, they started what would become the largest voucher program in the nation — arguably the most hotly-contested change of the decade.

The idea was to give children in failing schools a way out, through privately-managed public charter schools or the voucher program that funnels public education money to private, often religious, schools in the form of scholarships for students from low- and middle-income families.

What started out small — just 11 charter schools in 2002, and a drop out of the deep bucket of public money going towards schools — became huge.

Now, 80 charter schools enroll some 40,000 students and receive more than $300 million in taxpayer dollars per year that previously went to traditional public schools. And nearly 35,000 students received $150 million in vouchers, making the program larger than the state’s largest school system and rivaling enrollment in charter schools.

While charters and vouchers were growing, the number of school-aged kids in Indiana wasn't. Traditional public schools were made to fight these new public options over the same number of kids — essentially, fighting to keep their doors open.

"When we had charter school options or when we had voucher options, then the public schools had to do a better job to satisfy the parents so they'd leave their child in the public school," Kenley said.

The result may be most visible in Gary, where charter schools now enroll nearly as many students as the troubled Gary Community Schools system, which has lost more than half of its student body in the last 10 years.

Gary’s public schools have been plagued by larger community problems: extreme poverty, staggeringly high crime and decades of economic decline.

Kenley points to local mismanagement of money that led to the district’s roughly $100 million debt.

At least one lawmaker said state policies are also to blame.

“The narrative is that it’s only the fiscal management… that causes this issue,” said Sen. Eddie Melton, D-Merrillville, “which is not true.

“It’s a combination of fiscal management, as well as state policies that help contribute to it.”

A bill was filed in 2009 to put a freeze on new charter schools in Gary, to give the district time to adjust to massive funding losses as students left, and for the state to study the effectiveness of existing charter schools.

It never saw the light of day.

Instead, lawmakers pushed forward with fundamental changes in how Indiana schools are funded.

Patrons rally for Muncie Community Schools

Historically, schools' operational costs — salaries, textbooks, classroom supplies — were paid for with a mix of sales, income and property tax dollars. In 2009, property taxes were capped, stripped from the operational budget and lawmakers limited their use to pay for transportation costs, building repairs and other capital expenditures.

To pay for the day-to-day costs of running a school and educating students, districts were left completely dependent on the sales and income tax dollars that the state began awarding on a per-pupil basis, rather than allocating money per district.

The current method awards a base rate for every student and additional money for additional needs, such as high poverty and special education. Lawmakers say it is supposed to make school funding among districts and schools more fair. 

“The purpose of education is to provide education for children,” said Kenley, the legislative champion of these reforms. “It’s not to provide money for people to have or build a school corporation.”

Lawmakers also scrapped a 30-year provision that softened the blow when students left. Before, the money would fall off slowly — over a number of years — when a district lost a student. Now, it’s immediate.

“If you compare us before 2009 versus today, we had a lot more stable finances and sources of revenue before they made these changes,” said Lance Werner, chief financial officer at Michigan City Area Schools.

“We would have been better off under the old methodology, but unfortunately that is not the case. These are the cards that are dealt to us.”

The northwestern Indiana district loses more than 400 students through the voucher program. State data shows another 400 students transfer out of Michigan City for other public school districts.

As the funding changes were being implemented in 2010, then-governor Mitch Daniels approved a $300 million cut from its education budget to deal with a state budget shortfall caused by the recession.

This meant most districts would be hit four times: losing money from the massive state cut, from property taxes, from plummeting property values during the recession and from shrinking enrollment. That’s a lot of ways to lose.

At first, lawmakers set aside $50 million to help districts that would be hurt by the newly-passed property tax caps.

“Which tells me… when (lawmakers) passed the caps, they knew that there was going to be school districts hurt,” said Denny Costerison, director of the Indiana Association of School Business Officials.

But by last year, 40 percent of school districts were spending beyond their means, according to a legislative report. That same year, nearly a dozen public schools closed statewide, and twice as many closed the year before, most of them elementary schools.

For the third year in a row, the state’s largest school system is running a multi-million dollar deficit. Indianapolis Public Schools Superintendent Lewis Ferebee said the district has been hurt by changes to the funding formula.

“Hopefully there will be some fixes on the funding formula,” he said.

However the foundation of the school funding system likely won’t change. Despite seeing these effects, lawmakers rushed property tax caps into the state constitution the next year — effectively making them permanent — in a move to bolster Indiana’s image as a business-friendly state.

For schools, Costerison said, the consitutional tax caps are the worst of the changes. 

“We can’t touch them,” he said.

A 'death spiral'

Within a year of tax caps being implemented, Elwood Community Schools closed an elementary school, cut art, physical education and music for K-3 students and froze teacher salaries to combat an impending $2.5 million deficit.

The district was trapped in what Indiana University professor Chad Lochmiller calls a “death spiral” — a vortex that state laws created where school districts lose money, have to make unpopular cuts that drive away more students and, thus, more money with them.

Elwood has since reinstated the programs, but still consistently loses about two-thirds of its capital projects budget and nearly half its budget for busing to tax caps, said Superintendent Chris Daughtry. Elwood had to significantly reduce its staff to live within its means, driving up class sizes.

The district is relying on the same crutches Muncie did before that district fell into financial crisis — state waivers and low-interest loans to tide them over until taxes are collected.

“Elwood is not that far away from being in a situation that Muncie is in,” Daughtry said.

Money is still tight. There’s no buffer for emergencies. If a boiler breaks, that cost would come out of the operational budget and take away money for teacher salaries or textbooks.

Muncie Community Schools have an $18 million deficit. Last year, the district received about $9 million less for operational costs than it did just seven years earlier and lost an additional $7.5 million meant for busing and building repairs to tax caps.

A high school and three elementary schools have closed in the last three years. Teachers’ salaries and benefits have been cut, services like busing have been outsourced and the community has been kept on edge. Enrollment has dropped by about 2,000 students in the last 10 years.

Storer is one of three elementary schools closed last year by Muncie Community Schools as part of a deficit-reduction plan.

When each student brings with them an average of $6,500, that’s a huge hit.

The district ended up turning to the state for help before lawmakers appointed an emergency manager to assist earlier this year.

“The school district then has to decide what they’re going to do. Not pay staff?  Not to pay your bills?” said Muncie’s emergency manager, Steve Edwards. “Those are options that school districts look at, but we hope that that will never happen.”

Colleen Steffen knows the district may still have some tough decisions ahead.

She's kept a section of her Muncie garage dedicated to rally signs, ready to fight threats that her daughter’s elementary would close. This year, she’s preparing to fight program cuts the emergency manager said are likely coming.

“I found it really shocking, and also confusing, like how did this happen?” Steffen said. “And also sad, because I love this town and I feel like the people here deserve, at the minimum, a chance to improve themselves and no one is going to do that without an education.”

An unreliable way out

Watching the crisis in Muncie unfold is like looking into a parallel universe for Matthew Prusiecki.  The superintendent of Decatur Township Schools, Prusiecki said his district and Muncie were in nearly the same place five years ago.

They were about the same size, struggling with the impact of property tax caps and budget shortfalls. Both looked toward the same solution: a referendum.

Referendums allow schools to seek permission from voters to override the property tax caps. They can be a tough sell,  but they are really the only way for school districts to get a significant increase in money under the current system without a big influx of students.

Muncie put its referendum on the ballot in the fall of 2013. It failed. Six months later, in the spring of 2014, voters gave Decatur permission to raise taxes.

“It’s a fork in the road,” Prusiecki said. “I had a Plan B, if we didn’t win. We had (already) cut all the fat possible, so at that point it was looking at closing schools, cutting transportation services, cutting teachers and programs.”

Closing schools, cutting transportation services, cutting teachers — all things Muncie has done since then.

Decatur is now financially healthy, with a small amount of cash built up for emergencies. The district may not even need to go back to voters when its operating referendum expires. If Decatur does ask for voters to approve another referendum, Prusiecki said it will be smaller than the game-changing one voters approved in 2014.

That kind of community support may end up being the difference-maker. Those communities that can support a referendum become the winners in Indiana’s funding system, and those that can’t lose out.

“Eventually we’ll find we have some sort of equity problem,” said Larry DeBoer, professor at Purdue University.

City and suburban districts have seen the greatest success since the system started, while rural areas have a harder time passing referendums, according to Indiana University’s Center for Evaluation & Education Policy, which tracks the outcome of public school referenda.

The school district in rural Crawford County hasn’t even considered putting a referendum on the ballot. The district has lost nearly a quarter of its students, cut its teaching staff and scrutinizes every expense, but Superintendent Garry Derossett said the district will have to continue to do the best it can with what the state provides.

“When you have the poverty we have, (a referendum) is probably not in the cards,” he said.

Between 2008 and 2015, only half of the 128 referendums put on ballots passed.

During a public meeting in October, Sen. Brandt Hershman, R-Buck Creek, said he’s fine with those odds.

“Aren’t they 50-50?” Hershman said. “I don’t think that’s that difficult.”

Don’t say that to Bill Riggs.

Riggs, the retired superintendent of Mt. Vernon Community Schools, watched two referendums fail before the district finally passed one in 2014.

“It was a long set of years,” Riggs said.

From the first failure in 2010, Riggs said the district did everything it could to live within its means. It laid off teachers, cut programs and even shortened the distance its athletic teams traveled for games.

They also reached out to the state for help, from the Distressed Units Appeals Board that lawmakers created after putting tax caps in place.

The board deals with financially failing units of government, including schools  — another sign lawmakers were preparing for potentially detrimental impacts of property tax caps.

It doesn’t, however, offer any proactive oversight or work to identify districts with red flags. Instead, schools in trouble have to decide to ask for help themselves. And help is only offered under relatively extreme circumstances. The board is overseeing the takeovers in both Gary and Muncie.

Distressed Unit Appeals Board member Eric Bassler listens to members of the public and MCS officials at a forum on Nov. 13 inside the Northside Middle School. The DUAB will decide to keep or terminate the need for an emergency manager in the district come December.

In Mount Vernon’s case, their request was denied. Riggs said he was shocked and confused.

“You set up a board to help distressed schools and then tell them they don't qualify,” he said.

Voters finally passed a referendum in 2014, erasing the district’s debt. It took effect on the day of Riggs’ retirement.

“It was a complete turnaround,” he said. “It felt good, getting them out of debt.”

Left to fail?

Gary and Muncie set a difficult — and costly — precedent for the state. Lawmakers don’t want it to happen again, Costerison said.

“I don’t think the state of Indiana would allow a school district to walk in and throw the keys on the governor’s desk,” he said.

But that’s exactly what Sen. Dennis Kruse, R-Auburn, said could happen to Gary.

"If they can't get it together... I'm talking after six, eight, 10 years that they work on this," he said. "If they can't get it done, somebody ought to say, 'Maybe we should just not exist anymore.'"

Kruse said the state is willing to help struggling districts right the ship, but not indefinitely. Districts need to adjust to their new normal, he said.  

"When enrollment goes down, schools need to make adjustments to spend less," he said. "Many of them have not done that quick enough and have gotten themselves in a financial bind."

Rep. Tim Brown, R-Crawfordsville, said he's aware of other districts that potentially could follow in Muncie's and Gary’s footsteps. Brown declined to give IndyStar names, but he’s leading the charge to create a statewide system to monitor school districts’ financial health.

A model presented last month considered many of the same red flags IndyStar identified: rapid enrollment decline, use of referendums, significant tax cap losses, losses as the funding formula changed and communities with higher than average poverty.

Costerison is helping the state develop the system. The single report will likely make it much easier to understand a district’s financial situation than the current patchwork of public audits and budgets.

“In my opinion, if Muncie would have had something like this five or seven years ago, we wouldn’t be talking about this,” Costerison said. "The district would have had expert help sooner."

None of this, though, would change the fundamental challenges facing school districts like Anderson.

The district already knows it is in a tough spot, Smith said, having watched the city go through a long period of economic depression. Industry left, so people left. Those that stayed did so largely because they didn’t have the means to leave. When the school district turned to the community for help in 2010 with a referendum, it failed. The district had to close a high school.

Since then, Anderson has taken every hit doled out by state policy and continues to do so, Smith said. So the district is going to ask again for help from the community. Anderson is planning a referendum for the May 2018 primary ballot.

Smith said the district badly needs help paying for building improvements and raises for teachers to try to compete with wealthy districts in nearby Hamilton County. The referendum would raise $1.8 million over its seven-year life for teachers and $40 million for new school roofs and other upgrades.

It’s risky relying on a referendum for teacher pay, because there’s no guarantee voters will continue to support it when it expires. But, Smith said, it’s the only way a district like Anderson can give its employees a raise.

“Some communities don’t have an income level with extra, disposable income, even though they may want to do a good thing for their schools,” he said. “We believe our teachers deserve to be paid as other districts pay (their teachers).

“We are doing everything we can within our means, but those means are somewhat limited.”

Call IndyStar education reporter Arika Herron at (317) 444-6077. Follow her on Twitter: @ArikaHerron.

Call IndyStar reporter Emma Kate Fittes at (317) 513-7854. Follow her on Twitter: @IndyEmmaKate.

 

How we identified schools hurt most by the changes

Over the course of a decade, Indiana made massive changes to the way school districts are funded.

To identify school districts hit the hardest by these changes, IndyStar focused on five different red flags: declining enrollment, failed referendums seeking voter permission to raise taxes, losses in transportation funding from property tax caps, higher than average poverty and less funding from the new state formula.

Those districts that had at least four red flags were identified as suffering the most financially from the changes. In addition to schools in Gary and Muncie that have already entered state takeover, districts in Anderson, Crawford County, East Chicago, Elwood, Michigan City, Randolph Eastern, and Scott County District 1 are among those being impacted the most. 

See how your district fared in our interactive database online.