235-page state audit: Financial disarray plagues Gary school district

The 235-page audit, which focused on the period from July 1, 2014, to June 30, 2016, points to missing records and an ongoing absence of internal controls over most accounting procedures that made it difficult to gauge an accurate picture of the district's finances.

Many of the findings echoed those found in the prior 2012-14 audit, released in 2015, which led Indiana State Board of Accounts state examiner Paul Joyce to question whether the district could continue as a going concern given its financial liabilities.

Joyce could not be immediately reached for comment Friday.

According to the report, the district failed to establish a review of payroll claims to ensure employees were paid correctly. A school board-approved salary schedule or collective bargaining agreement was not provided for audit.

Among the other findings, the audit reported the district did not make pension payments to the Indiana Public Retirement System, so the state began withholding payments.

The district also failed to pay its food service provider for student meals even though it had received a federal grant.

The litany of repeated financial issues led the General Assembly to establish a takeover law earlier this year. The state hired Gary Schools Recovery LLC to run the fiscal and academic operation of the district with Peggy Hinckley serving as emergency manager.

Her firm is required by the state to develop a system of internal controls by next month.

Hinckley said Friday that the district's failure to establish proper accounting methods under former fiscal manager Jack Martin underscored the reasoning for the state to take over the struggling district.

Lack of basic accounting controls

Incomplete records and the failure to establish basic accounting standards continued to plague the district, as irregularities were cited in multiple areas, including how it spent money on payroll, incoming and outgoing accounts, special education, Title I federal funds and food services, the report said.

The district ended its fiscal year in June 2016 with more than a dozen accounts in the red — including its general fund (its main checking account) and others funding debt service, transportation, special education and technology. The district was overdrawn by nearly $20 million total across all of its accounts because it spent more than it received, the report showed.

The school board was cited in the report for failing to meet "responsibilities to taxpayers" by ensuring "adequate budgeting, accurate accounting and informative reporting of all financial transactions and the establishment of sound business practices for effective and efficient operation of all schools."

In her written response, Hinckley accepted nearly all of the audit's findings and agreed to submit a plan to the state to fix cited issues by January.

School board and superintendent cited

The report also cited Superintendent Cheryl Pruitt and school board members for charging expenses to the district's credit card that were not properly validated or justified. A complete credit card statement was provided to state auditors only for one claim and partial statements for other claims, leaving incomplete records for the audit.

Either school board members, Pruitt or a school attorney charged $568 for 12 meals without presenting receipts justifying it as a business expense, the report showed.

Pruitt charged $257 in gasoline purchases on a district credit card during the audit period, according to the report. Her contract inked in December 2016 provides a $1,000 per month vehicle expense allowance requiring her to personally pay for gas and maintenance. A school board member also charged gas directly, rather than submitting a mileage reimbursement request, the report showed.

On Friday, Pruitt disputed that she improperly charged gas expenses to a district credit card, saying it could have been used during frequent trips to Indianapolis. Pruitt said she would be willing to acknowledge and repay any disputed expenses. She referred additional comment on the audit to Hinckley.

An unidentified school board member charged $3,176 for six hotel stays without receipts and justification as a business expense.

School board President Rosie Washington said she was unaware of which board members may have submitted those expenses. She disputed the accusations, saying she believed that board members had not been given credit cards for several years.

When asked whether the audit's findings could damage the school board's case to eventually return the district to local control, Washington expressed frustration that its members no longer had the authority to respond to state auditors.

"We were not allowed ... after that meeting was held (delivering findings). I did ask if the board could come together and look at those citations (more closely) so we could comment on it. I was denied that," she said. "The only response they wanted would come from Peggy Hinckley."

Unpaid bills

The Gary school district had $16,971,524 in unpaid vendor bills as of July 2017, according to the report. Those included:

•Pensions: Due to a failure to keep up with employee pension payments on each paycheck, the Indiana Public Retirement System garnished $7,844,469 from the district's state and federal funding between May 2014 and June 2016.

•NIPSCO: The utility company successfully sued the Gary district for $5.2 million after it failed to make a single payment between July 2014 and March 2015, requiring monthly payments. It now owes $1,032,963.

•Phone bills: Gary failed to make any payments on its phone bill between November 2013 and March 2017. It owes $407,548.

•Gary Sanitary District: In late 2014, the district paid its 2013 bills. Between February 2016 and June 2017, it did not make a payment. It owes $548,615.

•Unemployment taxes: The district failed to pay unemployment taxes for a more than three years between October 2013 and January 2017. In April 2017, it signed a payment arrangement requiring it to make back payments and the current balance until October 2019. It owes $525,277, not including past interest.

•Internal Revenue Service" href="http://www.chicagotribune.com/topic/business/internal-revenue-service-ORGOV000010-topic.html">IRS: After failing to pay part of its payroll taxes in mid- to late 2013, Gary now owes $7,128,444, not including penalties and interest. In 2015, the IRS inked a deal where the district pays $10,000 per month. As of July 2017, Gary had paid $270,000 toward that debt.

•Health insurance: The district owes $3,564,161.

•Transportation: The district owes $430,316 to bus vendors.

•Service union benefits: $797,773 is owed for unpaid service union employee benefits.