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Testifying in front of the State Senate today, Chancellor Joel Klein mentioned that the Department of Education and the state had reached an agreement, finally, on how the city will spend $387.5 million in restricted funds.

The money is part of the Campaign for Fiscal Equity settlement, which promised annual funding increases to needy school districts. To get the funds, districts must develop a plan, called a Contract for Excellence, that shows that they will spend the money on certain kinds of programs and to help the neediest students.

The state and the city have wrangled in the past over how much flexibility the city should have over allocating the funds. The agreement, quietly released yesterday, signals that the state has approved the city’s Contract for Excellence for this year and will disburse the funds.

The breakdown of spending in the DOE’s final plan (shown by program type above) is similar to what the department originally proposed back in July. The department will pay for a mix of school-based and citywide programs such as special education, prekindergarten, classes for students learning English, and principal training. (View plans by district.)

One thing that appears to have been yanked since the July plan: bonus pay for high-scoring schools. In July, the DOE proposed paying for the school-wide bonus program using Contracts for Excellence money. That’s not listed as an approved use of the funds in the plan released yesterday.

Most districts had their plans approved at the beginning of October. One possible reason for the delay in the DOE’s approval: a reprise of what insiders described as a bitter battle between state and city officials over the spending rules back in 2007, the first year the new funds were doled out.

Klein alluded to a drawn-out battle during his testimony in Albany. “They were tough but they were cooperative,” Klein said about state education officials with whom the DOE negotiated.

This contract might be the last one the DOE negotiates for a while: Governor Paterson has said the fiscal crisis could cause the state to delay disbursing the rest of the Campaign for Fiscal Equity funds. Outgoing Education Commissioner Richard Mills today urged the state not to stop increasing funding for needy districts.