The state may put the Juneau School District in a $2.28 million hole by disallowing an allocation of that amount from the city because it exceeds the statutory “funding cap” for education spending, according to a letter from the Alaska Department of Education and Early Development.

“A review of the district’s prior years’ financial statements confirms this is a continuing issue and must be addressed,” Lori Weed, the department’s school finance manager, wrote in the June 29 letter. While the state will not require the district to reimburse past “outside the cap” amounts, “this issue must be corrected” beginning with the current fiscal year that started July 1.

Weed, in an interview Wednesday, said the letter was sent because the state in recent years has failed federal disparity tests due to districts allocating “special revenue funds” for purposes like pupil transportation. The disparity test is a little-known rule involving areas affected by Federal Impact Aid, which for Alaska means proving there is less than a 25% funding difference between the highest- and lowest-funded districts.

“Providing additional local funding outside of the established funding cap creates inequity amongst Alaska school districts and has major repercussions on the above-mentioned certification from the U.S. Department of Education,” Weed wrote in the letter to the district.

Local school district and city officials said Wednesday they disagree with the state’s assessment, arguing numerous expenses such as student transportation and school maintenance are exempt from the cap, and similar allocations have been made by Juneau and other districts statewide for decades.

“Educating kids and the district administration, those things are paid for through the formula. And they are subject to the cap,” said state Sen. Jesse Kiehl, a Juneau Democrat who has spent more than two decades as a lawmaker and staff member at the Alaska State Capitol, and seven years on the Juneau Assembly. “Pupil transportation has a different formula. And there’s no cap — it’s a different section of law — the cap doesn’t apply to it. Maintaining school buildings isn’t paid for by the formula at all. And the cap doesn’t apply to Community Schools — that isn’t paid for by the formula at all, not one penny.”

Weed said that while Juneau is the only district to receive such a letter so far, similar letters stating the department’s position on “outside the cap” funding are being prepared to send to all other districts in the state, whether they are in violation or not.

“If they want to roll forward with this it won’t just be Juneau that will want to challenge it,” Juneau Board of Education President Deedie Sorensen said Wednesday. “I’m sure that municipal governments across the state will challenge it.”

The letter to the district coincides with the school board’s recent cut of about $760,000 in spending from its budget for the current fiscal year, including cutting two staff positions, as a result of Gov. Mike Dunleavy vetoing half of an increase in education funding approved by the Legislature. The veto left the Juneau School District — and many districts across the state — with major gaps in their budgets.

[Juneau school board makes cuts to cope with vetoed funds, eyes legal challenge to state]

“This looks just like one more attack on school funding,” Sorensen said.

City Manager Rorie Watt said the potential loss of the $2.28 million to the district’s $95 million budget would cause a major disruption to the district’s already bare-boned spending plan.

“It’s such a big piece of the district’s budget and if they have to forgo this amount of funding it’s going to have impacts to their operations,” he said. “I think there is a bigger question here, which is ‘What happens in other school districts?’ I think this is the start of something big.”

Watt said if the district can’t successfully challenge the state’s position, the Juneau Assembly will have to rescind the $2.28 million in funding.

Sorenson said school board officials, who discussed the state’s letter during an executive session Tuesday evening, aren’t yet considering the impact of losing those funds.

“I’m not going to prepare for an eventuality that I think is unlikely,” she said. “The aggravation factor I think across the state is going to be huge.”

Sherri Layne, acting municipal attorney for CBJ, said the city law department is waiting to hear what direction the school board wants to take in response to the letter before any action is taken.

“I think that if it’s non-instructional funding, then DEED is incorrect — but we don’t have enough information to determine what they have a problem with yet,” Layne said. “It may very well be a situation where it ends up in court, but I think it’s way too soon to know that yet.”

The Juneau Assembly is expected to receive an update regarding the letter at its upcoming Committee of the Whole meeting Monday evening.

• Contact reporter Clarise Larson at clarise.larson@juneauempire.com or (651)-528-1807. Contact Mark Sabbatini at mark.sabbatini@juneauempire.com.