The $10 million question: Who put Muncie schools into a tailspin?

MUNCIE — One year ago this month, the chief financial officer at Muncie Community Schools blew the whistle on fiscal mismanagement of the district. 

The CFO, Bruce Perry, named names during a school board meeting in the auditorium at Southside Middle School.

He got the crowd of two hundred or so riled up. They shouted and applauded. Twice, school security chief Chuck Hensley threatened to shut down the meeting after the crowd became boisterous.

A week later, Perry mysteriously left the community, less than two months after his arrival. His reason did not become public knowledge — until now.

He was one of the people recently interviewed by The Star Press in connection with a review of years of school board meeting minutes, audit reports, financial reports the district filed with the state, a video of the whistleblower meeting and other records to try to answer the question so many people in Muncie want answered:

Who was responsible for blowing the school district's $10 million bond issue of 2014?

It was largely that misappropriation that brought district overspending to a head, sending the city's school system into a tailspin, onto the desks of heavy-handed state lawmakers, into the hands of state-appointed emergency managers and now to the brink of being taken over by Ball State University.

► Whodunit? How did MCS get into this mess?

Perry was described as being nervous and overwhelmed by the size of the crowd when he walked onto the stage the night of the meeting on Feb. 28, 2017.

Nearly a third of the school district's 120 or so funds had negative cash balances at the end of 2016, he started out..

"That's really unfortunate, and it's an erosion that's happened over a long period of time," he said.

A lot of the deficits were in funds "that were not really the school's money," he explained.

Hundreds of thousands of dollars in college scholarship funds, for example. Pre-paid school lunch funds of more than $50,000. A Ball Brothers Foundation "Operation Bearcats" fund that was supposed to have more than $70,000 to help with the merger of Southside and Central high schools. Hundreds of thousands of dollars in employee funds "that we have an obligation to divvy out" to retirement plans, to the government for payroll withholding taxes, to insurance companies, etc.

"We really don't have $556,000 in scholarship monies for college as of Dec. 31," Perry said, referring to one of several scholarship funds. "I'm telling you that money is not sitting in the bank because of a lack of discipline in the past."

He continued: "As I shared this information in a few administrative team meetings, I wondered to myself, 'Does the whole team understand the concept of what's going on here?' " 

He called the "biggest breach of all" the misuse of revenue from $10 million in bonds, aka debt, issued in 2014 that was supposed to fund "capital projects" — including HVAC upgrades and other improvements to school buildings, such as Fieldhouse repairs, upgrades to the Central High School planetarium, and district-wide roof repairs.

"We don't have that money, but we should," Perry said. "To cover those things, those monies that people trusted us or we went out and borrowed, we would need to have $14,011,647. It's kind of a daunting number. I know the issues … run deep and are personal and I am not from the community. I get that. But you guys have a checkbook problem that has not been addressed."

Applause broke out. It was silenced by Hensley, standing between the audience and the school board (and Perry) sitting on the stage. "Let's be orderly," he said. "Let's be orderly. If not, I'm going to shut the meeting down."

Perry produced records — displayed on a big screen on the stage — indicating that by Oct. 1, 2014, or within several months of receiving the proceeds from the $10 million bond issue on May 28, 2014, "we are spending it … so we spent $3.1 million, but only $243,000 of that on projects."  Most of the $3.1 million was spent to cover deficits in other funds.

Within a year of the bond issue, or by April of 2015, $6 million of the $10 million bond revenue had been spent, but only about $461,000 of that on projects, he said.

And by March of 2016, or within two years of issuing the bonds, $8.4 million of it had been spent — only about $500,000 of that on projects. By the end of 2016, only $162,000 of the bond revenue remained, "so effectively all of that money is gone," Perry said.

He added that he was "being nice about it" when he calculated the date that the bond money was gone. "The $10 million was probably spent long before this," he said.

"Bonds have certain purposes, you know," Perry went on. "This is … a gradual and not so gradual erosion. We should have had a lot more money to begin with in May of 2014. So the problems occurred before the general obligation bond money came in. The cash balances should have been much healthier … but they weren't, and when you don't have healthy cash balances, it just creates a lot of dysfunction. It puts a lot of pressure on a lot of people … It's disappointing to see how quickly this G.O. bond was spent. It makes me question what was going on at that time or before then, as far as decision-making and the people that were participating in the decision making."

More applause.

"Who were those people?" a board member asked.

The crowd began shouting. "(Superintendent) Dr. (Steve) Baule was not here," Perry said. More shouting. "Look at the dates," Perry said. More shouting. 

"Orderly, people, orderly," Hensley commanded. "If you don't like it, we'll close it."

Perry concluded: "To the best of my knowledge, I know who the superintendent was in 2014 (Tim Heller). I know who sat in my chair in 2014 (longtime CFO Mark Burkhart). And you know, I believe," he stammered, "everybody knows who they are. Is it Dr. Heller, I believe? Do I need to even say it?"

Members of the state's Distressed Unit Appeal Board (DUAB) repeatedly referred to the misuse of the $10 million bond issue as the largest factor ("the elephant in the room") in their decision to appoint an emergency manager to take control of the school district. It's a $10-million hole the district still hasn't dug itself out of. A school board member calls it "an albatross."

State lawmakers have cited the misuse of the bond as grounds for proposed legislation to authorize Ball State University to start governing the school district effective July 1 of this year. Sen. Tim Lanane, D-Anderson, recently called the exhausted bond revenue "the 10,000-pound gorilla in the room."

Why Perry left Muncie

Formerly the CFO at Baugo Community Schools in Elkhart, a district a third the size of Muncie, Perry came to Muncie in January of 2017 to be closer to his daughter and grandchild in Fishers.

He is now the CFO at Vigo County School Corp. in Terre Haute. In a recent interview, Perry said he never actually moved to Muncie. He commuted from Elkhart, staying in Muncie during the week and heading home on weekends.

"If I would have sensed a desire or willingness to fix the problem, I may have stayed," he said. "The magnitude of the problem was not the reason I left. It was the players and the attitude of the community, such bitter resistance to hearing what I said. They didn't believe what I said. Obviously, I know what happened since then. Reality has smacked them all in the face."

Former school board member Tony Costello and Muncie Teachers Association President Pat Kennedy "pretty much called me a liar for hinting that he (Burkhart) was responsible through negligence or other ways … Tony Costello was obviously friends with Mark and was there to defend his friend."

Kennedy this past week responded: "I am quite certain I never had a conversation with Mr. Perry let alone call him a liar … I question the validity of perceptions of a person who was a member of this community for approximately one month. The MTA was not made aware of Mr. Perry's departure until after the fact and reasons for the departure were never shared nor requested." 

Costello this past week responded: "The only time I remember speaking about Mark and Tim Heller in public was at a board meeting held at Southside Middle School in which the actions of former board members was questioned.

"I told the public that, not being a CPA or having expertise in finances, I rely on Mark Burkhart as CFO for financial information … When the Indiana State Board of Accounts after their audits approves the financial reports that are submitted by Mark, then I feel that I have acted in a responsible manner as a board member."

Perry responded: "I believe Ms. Kennedy referred to me (in remarks following Perry's presentation) as reckless for stating or alluding to the efforts of Mr. Burkhart and even went on to defend him and the positive working relationship that existed while he was at MCS. Mr. Costello was even more resistant and aggressive and it appeared that he was defending Mr. Burkhart far more than he was defending himself and the actions of the past board."

'Day of reckoning' arrives

After a career of 40 some years, Burkhart retired as CFO on July 1, 2014, but then returned for six months on Jan. 1, 2015, after his replacement, Chip Mehaffey, suddenly quit. 

During his brief tenure, Mehaffey kept a daily journal of his activities. The Star Press obtained a copy of the record. It shows he was quietly raising questions about the misuse of the bond issue as early as Aug. 18, 2014, when Mehaffey met individually with school board members.

► Ex-CFOs journal exposes costly MCS health insurance plan

"WHERE DID THE $10,000,000 GO?" reads an entry on that date. "Transfers into funds to make up losses — 'to balance some deficits.' "Can't sustain the model we have."

Another entry from that same date read: "Mr Burkhart was very proficient in fund transfers in making the dollars last as long as possible without affecting operations. This was done by delaying payments that were due in December for many years. This works as long as you have cash balances. In Mark's words, 'by doing this, there will be a day of reckoning.' I am meeting with you (school board members) because we have reached that point."

Toward the end of 2014, Heller asked Mehaffey on at least three different occasions whether "we will be able to make payroll through June 30, 2015, when Heller would retire," according to the journal.

Frustrated by Heller's and the school board's rejection of his proposal for a new teacher health insurance plan that would have saved the district millions of dollars, Mehaffey resigned in mid-December of 2014, less than six months after taking the job.

During an interview late last year, Heller told The Star Press the only expenditures he authorized or knew about from the bond issue were for construction projects costing a few hundred thousand dollars.

"I never authorized … moving that money," Heller said. "Mark has a report showing that when we left in June of 2015, I think it was $9.5 million still left in that construction fund. It also shows a year later $9.3 million in there."

On paper, anyway.

In a separate interview in December, Burkhart said of the bond revenue, "I think the issue is, it's being used by the district for cash flow …  At some point, when the general financial condition of the district is stabilized, that $9.3 million will be available to spend. Let's say over the next couple of years that cash balance builds up and the negative balance is eliminated, there would be access to that $9.3 million."

But the bonds were issued in 2014 for the badly needed HVAC upgrades and other capital projects. It's now 2018. How much longer can the district wait for adequate cash flow to undertake the projects? Without a loan from the state, it has been estimated by the current CFO that it could take a quarter of a century for the district to get out of the $10-million hole.

The intent was to have all of the capital projects finished by now, Burkhart acknowledged. But because of changes in the state's school funding formula, property tax caps, school choice legislation, declining enrollment and other factors, the projects "had to be put on the back burner," Burkhart said. "Eventually the money will be available for its intended purpose."

State Board of Accounts audit reports show the district had $14.3 million in cash in all 120 or so funds on June 30, 2014 (the end of the district's fiscal year). But $9.9 million of that cash was from just one fund: the bond issue.

A year later on June 30, 2015 — both Heller's and Burkhart's last day on the job — the district's cash balance in all funds had dropped to a little over $10 million — $9.5 million of which was from the bond issue.

That means if the district had spent all of the bond revenue by then, essentially there would be no cash left. The district would have been wiped out, unable to make payroll. In other words, the bond issue made up most of the district's cash balance. The money was being used to cover shortfalls in other funds.

That's what Burkhart and Heller left behind.

In his farewell remarks at a school board meeting, Burkhart noted that, since the early 1970s, the district had closed 26 facilities, opened three new ones and replaced two others. In the early 1990s, factories like New Venture Gear, Delco Battery and Delaware Machinery & Tool were among the top ten property taxpayers.

When Burkhart retired, Muncie Mall was the top taxpayer, followed by Walmart, utility companies, Marsh Supermarkets and Northwest Plaza shopping center. 

In the early 1990s, enrollment in the district was 9,223, and district employment was 1,974. When Burkhart retired, enrollment was 6,115 and district employment was 1,381.

In other words, during Burkhart's four decades at the school district, it downsized as the city's industrial base withered, enrollment declined, property tax caps were enacted, and the state changed the school funding formula. But according to Michael Hicks, a Ball State economist, the district failed to "right size."

The district's financial woes continued to worsen after Burkhart's exit. The cash balance in all funds dropped to $8.3 million on June 30, 2016, and to $4.4 million on June 30, 2017. There remained more than $9 million of capital projects waiting to be started on those dates. The work still hasn't started as of today. 

The financial picture actually looks worse than that. According to a biannual financial report Burkhart would have filed with the state, the district's expenditures for the year ending June 30, 2013, topped receipts by about $5 million.

Receipts exceeded expenditures by about $1 million in fiscal year 2014, but in fiscal year 2015, Burkhart's last, expenditures again eclipsed receipts, by about $4 million.

Burkhart told The Star Press that at the time of his retirement, the district had 100 or more funds. "You would not have 100 different checking accounts," he explained. "It's not practical. You have one major checking account for most if not all funds. That is a common practice."

But on page six of the school board's April 8, 2014, resolution authorizing the $10 million bond issue, there is a paragraph that reads, "The proceeds of each series of bonds shall be held in a separate account of the School Corporation and all interest earnings on such proceeds shall be transferred to the Debt Service Fund and used to pay interest on the bonds."

In its most recent state audit report, published last September, the school district disclosed: "The 2014 GO Construction Bond fund had a balance on hand at June 30, 2016, of $9,398,655, which had corresponding debt of $9,695,000.  Therefore, the bond proceeds were never spent for the purpose of the issue and are on hand to assist in keeping total funds out of a deficit balance. This debt is scheduled to be repaid on January 15, 2024 …"

Playing games

Backers of Superintendent Baule say his predecessors ran up the school district's deficit while he is the one being run out of town — due to his aggressive efforts to tackle the budget deficit, including school closings and hard bargaining with the teachers union. The union has accused Baule and the current school board of "slash-and-burn" deficit reduction tactics. There was a campaign led by a retired MCS educator to get Baule fired. Baule's three-year employment contract ending June 30, 2018, was not renewed by the emergency management firm.

"Dr. Baule has been a great change agent," the latest CFO, Bob Coddington, wrote in his letter of resignation recently. "It is disappointing to see the programmed, systematic character assassination of him."

Perry reportedly was inundated with critical phone calls and messages the day after making his public presentation.

"At least three individuals in particular made strong and aggressive comments regarding my assessment of the financial situation and the decisions made regarding the spending of the 2014 bond money," Perry recalled this week.

The Star Press has obtained an email written by Perry to Baule discussing his resignation. It reads in part:

"I have observed that our Board is either inadequately informed or unwilling to make the tough decisions that an insolvent school corporation has to make. In addition, I have witnessed first hand the public disdain for the truth."

Perry said in an interview that he told school officials during a sequence of events after the public presentation that "I'm not going to play that game." 

What game? "The game was he (Baule) wanted to proceed with letting bids for the renovation projects paid for by money that didn't exist," Perry said in the interview. "I let him know I was not going to play that game. We were going through some efforts of engaging architects, vendors and bids and we know full well we are not going to do the projects because we don't have the money."

After Perry left, Baule proceeded with "the game," reportedly a public-relations stunt to demonstrate good-faith efforts to spend the bond money on projects for which the bonds were issued.

At a March 28 school board meeting, a few weeks after Perry quit, Baule announced to the school board that he was "delaying" the start of mechanical upgrades to Central High School and South View Elementary Schools.

He blamed the hold-up on the collective bargaining impasse between the district and the teachers union. Baule said he was awaiting a fact finder's ruling on the impasse before proceeding with the upgrades.

► MCS delays Central, South View upgrades

Baule declined comment for this article.

The 'Burkhart bill'

School board President Debbie Feick this week told The Star Press: 

"We are grateful for Bruce's contributions to the district … During Bruce's short employment with MCS, (neither) the board nor any member of the administrative team attempted to hide from our devastating financial crisis. We were steadfast and unfaltering in our mission to reinstate financial solvency for our district."

School board Vice President Andy Warrner added:

"I do not believe any one person or any one group is responsible for what happened to the MCS. It took a combination of people and events over several years to put us in this position. There is more than enough blame for many of us to share: school boards past and present, MTA, various individuals, (referendum) voters, and so forth. Some people were in denial for awhile and have awakened, and others are still in denial."

He went on: "Once most of our shareholders got on the same page, the MCS was able to end 2017 with a slight cash surplus and we project that we will run a surplus … in the 2018 year budget. However, none of this accounts for the money we have to come up with for the G.O. bond. That problem could be solved if the state would grant us an interest-free loan with a long-term repayment …"

Delaware County Prosecutor Jeff Arnold last year told The Star Press no investigative agency, such as a police department, Indiana attorney general or State Board of Accounts, had brought him any case to prosecute in connection with fund transfers at the school district.

"I think it was widely known without anybody doing anything about it," Arnold said. "I'm not going to bring forward my own case." It might be too late now under the statute of limitations to bring a criminal case, he added.

In every audit since at least 2005, Muncie Community Schools has been cited by the State Board of Accounts (SBOA) for overdrawn cash balances in various funds. For example, the negative balances totaled $10.7 million in 2014 and $9.9 million in 2015.

In every audit, SBOA wrote: "The cash balance of any fund may not be reduced below zero. Routinely overdrawn funds could be an indicator of serious financial problems which should be investigated by the governmental unit."

Under a bill enacted by the Legislature last year — some call it the "Burkhart bill" — public officers including school board members and CFOs who ignore accounting guidelines could be prosecuted and forced out of office.

Under that law: A public officer found guilty of "refusal to adopt or failure to use" systems of accounting and reporting adopted by the State Board of Accounts commits a Class C infraction and forfeits office.

Seth Slabaugh is a reporter at The Star Press who can be reached at (765) 213-5834 or seths@muncie.gannett.com.