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LA Unified has lost its appeal to the California Department of Education on how it spends hundreds of millions of dollars in state funds that are supposed to be directed to its neediest students.

The ruling reestablished the state’s opinion that LA Unified’s spending of $450 million over the last two fiscal years on special education does not qualify it as also having been spent on three needy subgroups — foster youth, English learners and low-income students. State law requires extra money be targeted to these groups and also provides extra state money for them.

“The complaint asserts that special education expenditures may not be counted as such ‘prior year expenditures’ because special education services are available to all students,” the ruling, which was issued Aug. 5, states.

The CDE had issued its initial ruling in May regarding how the district had allocated a total of $450 million for the 2014-15 and 2015-16 school years and in June gave the district until the 2017-18 school year to make the proper adjustments to how it sets its budget.

The district has also been the target of a lawsuit that was filed last year over how it was spending the disputed funds. The suit was filed by ACLU SoCal, Public Advocates and Covington & Burling LLP on behalf of Community Coalition South Los Angeles and LA Unified parent Reyna Frias. A 2015 study by UC Berkeley and Communities for Los Angeles Student Success (CLASS) coalition also found that the bulk of the district’s Local Control Funding Formula (LCFF) dollars “has seeped into the district’s base budget with … little apparent regard to the students who generate the new dollars.”

LA Unified had no immediate comment and will not finish its review of the appeal document until Wednesday, according to Greg McNair of LA Unified’s Office of the General Counsel.

In response to the lawsuit in 2015, the district issued a statement that said, “We believe that this group has misinterpreted the LCFF.  The Legislature clearly granted school districts – which serve  predominantly low-income students, foster youth and English language learners – the highest degree of flexibility in determining student program needs.”

At issue is the district’s accounting practices regarding the LCFF, which is part of a 2013 law giving greater flexibility to districts in how they spend state educational funds, along with extra dollars for the high-needs students in question. The CDE’s ruling says that by counting spending for “special education” as spending on services for low-income students, English language learners and foster youth, it deprives many students of the funds because not every special education student falls into those categories.

“The Complaint alleges that as a result of the inclusion of the $450 million of special education expenditures in the estimation of prior year expenditures, LAUSD shortchanged unduplicated pupils $126 million in increased or improved services in 2014-15, and $288 million in such services in 2015-16,” the CDE ruling states. “The Complaint further alleges the ‘deficit’ in expenditures on programs for unduplicated pupils will continue to build each year until it grows to $450 million annually at full implementation of LCFF (estimated to be in 2020-21).”

The ruling could be a financial blow to LA Unified, which is already facing hundreds of millions of dollars in budget deficits in the coming years, according to a report from an outside panel of financial experts that was issued in November.