At a Pulaski County School Board meeting last summer, board President Jeff Shaneyfelt asked the district's business officer if the budget they were about to vote on - a budget that required dipping into the district's reserve funds to the tune of at least $5 million - was likely to land the district on the state's fiscal distress list. The answer was yes, Shaneyfelt said. So it didn't surprise him to learn that the state Department of Education has taken the first step toward doing just that. Pulaski County school officials got a letter in mid-February asking them for more detailed information about why the district's end-of-year balance has dropped over $11 million in the last three years. "I knew what was coming," Shaneyfelt said. "I'd been warning them [school board members] even before we did what we did last summer." The Feb. 13 letter starts the process of classifying a district as in fiscal distress, a designation that can lead to state takeover in just two years. The Department of Education sent letters last month to 43 districts that appear to meet one of the criteria for fiscal distress. Pulaski County's problem is a declining fund balance, the money that's left over at the end of each fiscal year, said Patricia Martin, the state's finance director. The school district's balance dropped from $23.3 million at the end of 2000-01 to $11.7 million at the end of 2002-03, and is budgeted to fall to $5.1 million at the end of the current school year. "If they continue at that rate of decline obviously they'd have trouble," Martin said. Shaneyfelt said district's problems stem mainly from $5 million in pay raises given this year to teachers and support staff. At the same time, the district's total operating fund and debt service fund revenues dropped by almost $1 million from fiscal 2002 to fiscal 2003. The district had very public battles with teacher and support staff unions this school year; teachers threatened to go on strike last summer, and bus drivers did strike earlier this year. The fix, Shaneyfelt said, will come from an estimated $10 million boost in state money the district is expecting next school year from the $400 million education tax package approved by the legislature last month. Without it, Pulaski County could have gotten through one more school year depending on its dwindling fund balance, Shaneyfelt said, but at the end of the 2004-05 school year, it would have been completely used up. "I don't even want to think about what would happen without that infusion of money," said Don Henderson, the district's superintendent. Henderson said district officials will have to "take a hard look" at employee raises in the future, because other spending has already been curtailed as far as possible. Also, the new state money isn't a pure windfall, it comes with some new state requirements on testing, curriculum, teacher pay and other expenses. The fiscal distress classification isn't a given. An internal committee at the Education Department will go over each district's response and decide whether the district should be classified as in fiscal distress. They'll notify the school districts, which will have a chance to argue their cases April 12. The bstate oard makes the final decision on fiscal distress designations. It's important to note, however, that the fiscal distress criteria consider only the stability of a district's fund balance, not the size of the balance itself. The state doesn't require - or even encourage - school districts to keep any minimum amount of money in reserve. Pulaski County's 2002-03 fund balance, depleted as it was from previous years, was still 9.2 percent of its overall revenue. The $23.3 million balance of 2000-01 was 19 percent of that year's revenue. The Little Rock School District, by comparison, has kept a steady balance of between $8.6 million and $9 million for the last three years - only about 5 percent of its total revenue. It's the first time Pulaski County has gotten a preliminary fiscal distress letter, and it's also the biggest district in the state to receive one, Martin said. But it's not the first district in the county: North Little Rock got a letter last year, but was able to explain its budget numbers to the department's satisfaction. North Little Rock Superintendent James Smith said he wouldn't have been surprised, however, if the district had gotten another fiscal distress letter this year - and, he said, he wouldn't have had a good explanation this time around. "We keep reaching into our balance to operate each year," he said. If the Pulaski County school district is put in fiscal distress, it will have to form a plan to solve its budget problems. The department will also send in its own financial experts to make recommendations . Under the new Omnibus Education Act passed last spring, districts in fiscal distress have two years to turn their finances around. If they fail, the state Board of Education can take action against the district, ranging from suspending the superintendent and/or the school board to forcing the district to consolidate with another district. That's a step, in Pulaski County's case, that at least one Central Arkansas legislator wouldn't mind seeing: At the end of this year's special session, Rep. Linda Chesterfield proposed reconfiguring all the county's schools in to two districts divided by the Arkansas River. The bill was referred to an interim study committee.