New London - The City Council on Tuesday night will consider a proposed remedy to the problem created by both the Board of Education and city counting some or all of a state reimbursement as revenue in their budgets for the current fiscal year.

At the heart of the dispute, which threatens to create a budget shortfall of almost half a million dollars, is an annual state grant the city receives for transporting any student who attends an out-of-district magnet school. The city budgeted the grant as $370,000 in revenue, but the Board of Education also accounted for that money in its budget.

When the state issues any kind of funding or reimbursement, it goes directly to the city Finance Department, which acts as the financial agent for the entire city. School officials argued that the Finance Department should not hold on to that money, but rather pass it along to the school system.

The proposed solution, put forth by city Finance Director Jeff Smith after meeting with district administrators, would result in the first $370,000 of the reimbursement going to the city to fulfill the revenue stream it budgeted. The remainder of the reimbursement - estimated by school officials to be roughly $240,000 - will go directly to the school system.

Exacerbating the problem is the fact that the school district was planning to use some of the student transportation money to pay for the renovations it made to Harbor School over the summer and it now has a deficit in its maintenance budget, Interim Finance Director Melissa Flores-Seijo said last month.

Smith's proposed solution calls for the city to assume the costs of the renovations at Harbor School and pay for them through the still-active school construction account for Nathan Hale and Winthrop magnet elementary schools.

"Since this work was undertaken because our two new elementary schools did not have sufficient capacity, it would be appropriate to charge these costs to the capital program for those two schools," Smith wrote in a letter to Mayor Daryl Justin Finizio and City Council President Wade A. Hyslop.

The goal of the proposal, Smith wrote, is "to find a way out of this dilemma that will leave both the district and the city whole during the current fiscal year."

Smith said he and Flores-Seijo spoke about the state transportation funding months ago, as budgets for the current fiscal year were being compiled. At the time, Smith said, he was told that state-appointed Special Master Steven J. Adamowski had instructed Flores-Seijo to add the money to the Board of Education's budget.

Smith said he did not remove the revenue from the city budget because he felt he did not have the authority to do so unless a policy-making body made that decision.

School districts and municipalities in the state handle magnet school transportation grant money in different ways. In New London, Smith said, the accepted practice has always been to count the state reimbursement as revenue in the general government budget.

A review of city and school district budgets for the last four fiscal years showed that the transportation funding was not included in the school budget before the current fiscal year. Rather, it had been counted as revenue in the city's general government budget each year.

Moving forward, Smith wrote, the City Council and Board of Education will have to come to an agreement about the way the city will handle magnet school funds, including the possibility of establishing a special revenue fund for all magnet school revenues and expenditures.

"We need a better understanding of how to budget for an all-magnet school district," Smith wrote.

Particularly as the district tries to build itself into the state's first and only all-magnet school district, Smith said, it will be crucial for the city and school system to iron out an agreed-upon method for handling all magnet school funding.

"We are embarking on a whole new way to educate and run our schools," he wrote. "The one mistake, if we want to enjoy the continued support of the public that we enjoyed at the polls this past November when the magnet school plan was approved, is not providing totally transparent budgets."

The City Council meets Tuesday at 7 p.m. on the third floor of City Hall.

c.young@theday.com

Twitter: @ColinAYoung