The jury is still out on whether recent educational initiatives in the Midwest will rescue several financially troubled school districts.

With state aid falling and voters unwilling to approve an increase in property taxes, some schools are looking at privatization or the use of internal watchdogs to find waste in the budget.

Meanwhile, a number of states are trying to reduce property taxes and give schools a new fiscal footing by shouldering education expenses.

Public discontent is a big reason for the experimentation, according to one policy analyst. "There is a pervasive attitude that is starting to support more risk taking" said Mary Fulton of the Education Commission of the States, a group organized by the state governments.

In Chicago, school officials have hired a former Federal Bureau of Investigation agent to uncover savings within their school system.

In bailing out the Chicago school system last November, the Illinois General Assembly created the position of an inspector general to investigate waste, fraud, and financial mismanagement involving the Chicago Board of Education and its contractors.

To eliminate the board's budget deficits for the next two years, the Chicago School Finance Authority, the board's financial oversight panel, in February issued $410 million of general obligation bonds, as authorized by state lawmakers. The bonds were insured by Municipal Bond Investors Assurance Corp.

Proceeds from the bond issue will provide $175 million in the current fiscal year and $203 million in fiscal 1995.

State lawmakers approved the bonding authorization and other measures to assist the board after numerous court orders last year allowed Chicago schools to remain open. The order suspended an Illinois law that prohibits schools from opening if the board does not have a balanced budget. The board faced a $298 million deficit in its $2.74 billion budget for fiscal 1994 that began last September.

The $410 million bond issue represented the second time the Chicago board has relied on bonds to rescue it from fiscal ruin. More than a decade ago, the authority issued $573 million of bonds to alleviate the board's severe cash-flow problems.

Rating agency officials have said the board will fall off the financial cliff after 1995 if funding is not found to fill the hole left after the bond proceeds run out.

When Kenneth K. Holt starts his job next month as inspector general of Chicago' schools, he will bring 25 years of experience as an FBI agent to the position.

As an inspector general, Holt will have subpoena power and access to all information and facilities necessary to perform his job. Holt has been appointed for a four-year term with an annual salary of $78,000.

Inspector General's Brief

Under the state law, Holt will be required to report his findings to the General Assembly and the Chicago School Finance Authority, the board's financial oversight panel, on Jan. 1 of each year.

"We took the approach from the outset that the cost involved in setting up the inspector general would have to be offset by savings," said Barbara Holt, executive director of the School Finance Authority, who is no relation to the inspector general.

Holt said the inspector general initially will look at the known fiscal trouble spots in the 410,000-student school system. A recent audit of the board's facilities uncovered $7 million of excess charges - an indication that future investigations by the inspector general could unearth similar results, she said.

Once school finance expert said that he was not sure how effective the inspector general can be, given the funding available for the job.

"It's something the legislature did because it was tired of money being wasted in Chicago schools. They created the position but didn't fund it," said the expert, who asked that his name not be given. "Every dollar [the board] spends means less money in the classroom."

The board's outstanding general obligation debt is rated Baa by Moody's Investors Service and BBB-minus with a stable outlook by Standard & Poor's Corp. The School Finance Authority's debt is rated Baa 1 by Moody's and AA-minus by Standard & Poor's.

Catching a wave that has caught on in the school systems of cities such as Baltimore, some Midwest school districts are considering privatizing the management of their operations or some of their services.

In December, the financially troubled Minneapolis school district hired Public Strategies Group, a St. Paul-based consulting firm, to run the system. The firm's president, Peter Hutchinson, was named superintendent of schools.

Public Strategies Group already had a track record of putting out the school system's fiscal fires. The firm helped eliminate a $6 million gap in the district's $215 million general fund fiscal 1993 budget and assisted the board in drafting a balanced budget for fiscal 1994, which ends June 30.

But rating agency officials are waiting to see how the firm does now that it has sole control over the district's finances.

Michael Forrester, a director at Standard & Poor's, said the "potential is there for it to be positive." Officials at Moody's Investors Service could not be reached for comment.

The Minneapolis school district has about $72 million of GO debt, rated AA with a negative outlook by Standard & Poor's and A 1 by Moody's.

Michigan's Experiment

Dick Anderson, executive director of the Minnesota School Boards Association, said that it is unclear whether management by a private firm will make a difference in Minneapolis. The new teachers contact, yet to be negotiated, could be a handicap, he said.

At the same time, many states are changing the fiscal landscape for their schools.

Michigan, most notably, has an ambitious package of changes ready for July, when the state's fiscal year 1995 begins. State aid and not property taxes will become the schools' central financial support, and a flat annual per pupil grant will reduce gaps between put rich and poor districts.

In addition, schools will get an extra $10.1 billion a year when the state sales tax rises to 6% from the current 4%. Voters approved an the changes in March.

With the reforms, rating agencies say, low-spending districts will probably do a bit better and high-spending districts a bit worse, but the majority will end up where they are now. The reason is the state's School Bond Loan Fund program, which offers backing to most school debt and carries the same rating as Michigan does.

Thomas White, director of government relations for the Michigan Association of School Boards, said that school districts will need a few years to sort out what the initiative will do.

"It's clearly a settling time for us," he said. "There will be corrective legislation here and there to fill leaks in the dike. In the long run, it means a greater stability of funding. But it may mean less funding for some."

White added that school districts that spend more than their state grants may see a decrease in funding. But small districts, like the financialy troubled Kalkaska Public School District should see an increase in revenues, White said.

Kalkaska school officials are more pessimistic. The 2.100-student school district in northern Michigan gained national attention last year when it was forced to end the school year three months early because of a $1.5 million deficit projected for its fiscal 1993 budget.

Doyle Disbrow, superintendent of the Kalkaska district, said the school system will have a shortfall even with the extra money from the initiative. The new law makes districts, not the state, handle retirement expenses, and Disbrow said the district's grant of about $8.8 million in fiscal 1995 will be $90,000 short of those expenses.

Currently the district levies 17.603 mills. Under the new law, the district can hold a referendum to increase the levy to 18 mills. But, Disbrow noted, Kalkaska voters have defeated seven millage increases in the past two years.

Now the district may have to sell its fleet of 26 buses to eliminate a $500,000 shortfall in the current budget of $8.6 million, Disbrow said.

"We're trying to work on our cash flow," he said. "We don't know where we'll get the money. It's reached an ugly level."

The school district has about $1.3 million of unenhanced general obligation debt that qualities for Michigan's School Bond Loan Program.

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