The Ypsilanti Community Schools Board of Education and Superintendent Scott Menzel, far right, at the district's first official meeting on Monday, July 1, 2013. At Thursday's special meeting, the board approved an agreement that will allow the district to pay back its debt over 13 years.

Amy Biolchini | AnnArbor.com file photo

Previous coverage:

• Ypsilanti Community Schools to launch on Monday
• WITH VIDEO: First day for new Ypsilanti Community School district: 'Our work really begins now'

Beginning with its 2014 financial audit, Ypsilanti Community Schools' books will no longer show an operating deficit.

The Ypsilanti Board of Education Thursday authorized school officials to consolidate and refinance the unified district's $18.8 million debt and to proceed with an agreement with the Michigan Finance Authority to pay back that debt over a 13-year period.

The Michigan Finance Authority met Thursday morning in Lansing to approve the agreement and repayment period from its end. The district called a special board meeting for Thursday evening to set the wheels in motion on its side as well.

The new unified district inherited $18.8 million in debt from the former Willow Run Community Schools and Ypsilanti Public Schools. About $11.2 million of that total is the combined operating deficits from Ypsilanti and Willow Run, which began operating in the red during the 2009-10 and 2005-06 academic years, respectively.

The other approximately $7.6 million in debt YCS has an obligation to pay back is owed to the Michigan Finance Authority for money each district borrowed in 2012 to address cash flow issues and make payroll at certain low points in the year.

Because of the way Michigan disburses its per-pupil foundation allowance payments and because many districts no longer have fund equities or reserves to float money from to cover bills and pay staff in between aid payments, many districts have to borrow money from the state finance authority at the beginning of the year to ensure teachers and administrators won't go without pay during periods of low cash flow.

YCS Superintendent Scott Menzel said there are 240 Michigan districts that participate in the MFA's state aid note borrowing program.

Menzel originally had hoped for 15 years to pay back the $18.8 million debt. However, the Michigan Department of Treasury and the Finance Authority had their sights set on 10 years. So the 13-year repayment period was a compromise.

The MFA is issuing bonds rather than notes to pay off Ypsilanti's maturing debt and to raise the cash upfront that's needed to run the district. The difference between selling notes and selling bonds are the terms of maturity, YCS' legal counsel explained Thursday. Bonds generally are long-term investments.

The interest rate on the debt will be fixed once the bonds are sold. YCS officials are expecting an interest rate in the range of 3 to 6 percent.

YCS will pay off the debt in the amounts of $1 million the first year, $1.5 million the second year and $2 million in years three through 13, Menzel said.

The money for paying off the debt will be taken off the top of the district's state aid payments and will go directly to the treasury department.

Per the MFA agreement, the money for the loan will come from the district's state aid payments for January through July of each school year. There are seven state aid payments during that period.

Despite having the $18.8 million in outstanding debt, this agreement will make it look like the new unified district is operating in the black and will remove YCS from Michigan's growing list of school district's operating with a budget deficit.

Brian Marcel, the assistant superintendent of finances and operations for the Washtenaw Intermediate School District, who has been assisting YCS with this arrangement, essentially said the agreement turns the $18.8 million — from the state's standpoint — into more of an outstanding bond, rather than an outstanding debt.

The $18.8 million will be recorded in the district's budget as a revenue source and immediately will give YCS a $7.6 million positive fund balance.

"You are only guaranteed that for the one year," Marcel said to the board. "The financial decisions the district makes beyond the one year impacts whether that $7 million goes up or down."

The YCS Board of Education asked many questions Thursday night about the MFA agreement and about the future financial stability of the district. A few trustees expressed concerns about the money to pay back the debt being taken off the top of the district's per-pupil foundation allowance seven months of the year.

President David Bates stressed how the board and the district must work together to be intentional about attracting new families to YCS and increasing student enrollment.

Both Ypsilanti and Willow Run struggled in the past eight years with losing students to charter schools and nearby districts. Data reports compiled by school officials show that, together, the districts lost nearly 2,400 children in that time period.

For the 2013-14 academic year, YCS will receive $7,563 per pupil from the state. Taking $1 million from the district's per-pupil foundation allowance to pay down the debt essentially is the equivalent of 132 students more the district will have to attract to maintain its budget, Menzel said.

Danielle Arndt covers K-12 education for AnnArbor.com. Follow her on Twitter @DanielleArndt or email her at daniellearndt@annarbor.com.