The decision may mean that the bureau has to tighten its language on district spending, said Carl Rogers, the district's attorney, so that it does not falsely accuse other districts in the future.
A bureau representative contacted Wednesday said she could not immediately comment.
In 2011, the bureau alleged that Shiprock Associated Schools, Inc., which is funded by the bureau, had wrongfully allocated $72,800 in grant money two years earlier. The bureau demanded that the district pay back the money. In return, the school district took the bureau to court.
"The government said the district was unlawfully spending money. We said, That's nuts,'" Rogers said.
Most of the district's money comes from the Indian School Equalization Program, which funds Indian Country schools.
The district receives two kinds of funding from the program, one chunk for student-related costs and another for administrative. The amount for each is based on a formula created by the bureau. It gives a certain percentage to each category based on a number of factors, many of which are related to the size and composition of the student populations.
In 2009, the district used monies to pay for administrative expenses that usually are meant for student-related expenses, court documents said. Audits are conducted to ensure the funding is spent in the proper categories.
Money granted for administrative costs that year did not cover actual costs. Those administrative costs were supposed to be about $695,000, but the amount the district used exceeded that number by $72,800, according to the audit.
The district requested that it be allowed to use student funds "to pay for the School's over-expenditure of its Administrative Cost grant," court documents said.
And, in that case, the district was allowed to use monies from student funds, court documents said.
The district argued that its situation was an exception, which may become a rule in the near future.
"It wasn't enough to cover the costs. We had no money," said Frank Todacheeny, district executive director, though he was not in the position at the time.
The grant money available for administrative costs shrinks every year because the percentage for administration goes down each year, Todacheeny said. And, he added, it is only expected to worsen in the near future with this year's across-the-board automatic cuts that are part of the "sequestration" process.
Shiprock Associated Schools likely will not be the only district to find it necessary to dip into one fund to help pay for expenditures that used to be covered by another.
"There are going to be hundreds of schools that are going to close if they don't make this happen," Rogers said.
Rogers, who represents bureau-funded school districts nationwide, said he knows others that already are running into similar problems. Rogers is working to make the decision a precedent so as to prevent the issue from recurring, he said.
The bureau still could appeal, he said, though it is unlikely.