If the Seattle School District doesn't change the way it operates, it will be insolvent and taken over by the state in about 18 months, its finance director warned yesterday.

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If the Seattle School District doesn’t change the way it operates, it will be insolvent and taken over by the state in about 18 months, its finance director warned yesterday.

“To avoid bankruptcy, we have to make some very tough decisions,” Seattle Public Schools Finance Director Steve Nielsen said during a budget work session. He later clarified that school districts technically can’t go bankrupt: They’re placed into receivership by the state.

It’s the most dire official assessment to date of the financial health of the state’s largest school district.

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During the work session, Nielsen and Budget Manager Linda Sebring outlined a list of options for closing a $12.2 million budget gap next year and a $19.1 million budget gap in 2006-07.

These gaps assume the district maintains the same level of educational services provided by this year’s $443.7 million budget, without any funding for $18.5 million in initiatives Superintendent Raj Manhas says he needs next year to begin implementing a five-year plan. The board unanimously decided to delay a vote on Manhas’ plan until Jan. 19.

School Board President Brita Butler-Wall called the budget presentation a “shocker.”

“None of this even deals with the priorities we want to get to, to make sure we educate every student,” she said.

The district has been in financial turmoil for the past four years: Auditors found sloppy budget practices, poor oversight and communication breakdowns largely responsible for $36 million in deficits that accumulated from 2001 to 2003. The district absorbed the costs by raiding reserves and laying off staff.

Since then, the district’s fixed costs, such as medical benefits, bus service and utilities, have risen faster than revenue, including reductions in federal grants and enrollment. Last year, the district trimmed $6.2 million overall. And this year the district exhausted one-time reserves and eliminated nearly 70 full-time-equivalent positions, about 1.3 percent of its employees.

“In the past we’ve done these shavings,” Sebring said. Now, “we’re looking at true activities to eliminate.”

Though Seattle is one of the best-funded districts in the state, Nielsen said it is straining because it operates more schools and offers more generous services than other large urban districts. Solving the problem will require political will, he said.

Added Sebring: “All we’re doing is pushing the snowball downhill, and it’s getting bigger. We’re going to run out of the ability to push it.”

Staff members have urged the board to consider assigning most students to their neighborhood schools, consolidating buildings and reallocating cost savings to the classroom. Other suggestions: Charging students fees on a sliding scale for participating in athletics and redirecting money earmarked for major renovations and school construction.

Last week the district had pegged next year’s budget gap at $9 million.

Nielsen revised his estimate to $12.2 million after learning that the Legislature, faced with lower-than-expected returns in state-employee pension funds, may vote on a proposal that would force the district to increase contributions to employee pensions. Some of the district’s 5,126 full-time equivalent positions are entirely covered by grants or local levy revenue, and the district wouldn’t receive state funds to increase contributions for those employees.

In other business, the board voted 4-3 to proceed with water-quality improvements next summer. Up to six schools will have their potable-water-piping systems replaced for less than $5 million. The district is exploring piping replacement, installation of a parallel drinking-water piping system or epoxy lining. Board members Mary Bass, Darlene Flynn and Sally Soriano voted no.

The board also approved the addition of 84 parking spaces at Roosevelt High School in a way that preserves the school’s regulation football/soccer field and four-lane track. The city required the district to add the spaces, which will cost $500,000 to $1 million.

Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com