Great Hearts was denied a second time after submitting an application to open a charter school in west Nashville.
The Metro School Board defied a state order to approve the application, prompting Great Hearts to take action.
Great Hearts has since withdrawn its plans to locate in Davidson County, after running into repeated blocks with the school board.
The state made the announcement early Tuesday morning to withhold October funds as a consequence of the district's refusal to follow state law during meetings held August 14 and September 11.
The money being withheld represents the non-classroom components of the state's Basic Education Program funding formula. They chose non-classroom funds to ease the impact on students.
In a news release, Tennessee Department of Education Commissioner Kevin Huffman stated, "We were all hopeful that Metro Nashville's school board would obey the law and avoid this situation."
He continued, "It is our job to enforce state law, and we have no choice but to take this action."
According to the release, the Metro School Board had multiple chances to comply with state law.
"The Metro Nashville School Board had two chances to follow the law, and twice it chose to not do so. This is the consequence," Speaker of the House Beth Harwell explained.
Lt. Gov. Ron Ramsey said he supported the decision to uphold the law and said it wasn't an "optional" law in Tennessee.
He went on to say that the school board's decision limited options for millions of parents and children in Nashville.
"This was not a decision that anybody in the state takes any pleasure in," Tennessee Governor Bill Haslam added.
He continued, "But we also think we are a state of laws [and] when state law is violated, not once but twice after proper warning from not only the state, but the [school] board's own attorney, we felt it was important to act."
Commissioner Huffman said the funds withheld amount to what the state would have passed on to Metro in Basic Education Program administrative money for the month of October.
"We were quite clear about what would happen if the law was violated again," he said.
"I don't think we are trying to teach the Metro School Board a lesson," added the commissioner. "When a state board decides to violate state law because they feel like it, that's when we have to take action."
By law, the Tennessee Board of Education can order a local school district to approve a charter school.
Great Hearts is the first group taking advantage of the new Tennessee law that opens up charters to all children, instead of limited numbers of disadvantaged students.
Metro Schools released a statement that said in part, "there are no funds earmarked for ‘administrative costs.' The BEP formula for non-classroom expenses includes utilities, student transportation, maintenance and other things that directly affect our 81,000 students and 5,000 classrooms. None of these items are in any way linked to charter school approval processes. We do not yet have a plan on how we will respond to this disruptive mid-year cut."
Newly-elected school board member Amy Frogge defended her vote and had blistering words for the Haslam Administration.
A statement from her read, in part, "I believe my vote was lawful, and I voted my conscience. A few people are now angry at five board members for voting against Great Hearts, and they've decided to take it out on 80,000 children. That's shameful."
Equally strong words on the other side of the issue came from Nashville Mayor Karl Dean who has been an ardent Great Hearts supporter.
He told Nashville's News 2, "This boils down to accountability and responsibility on the part of the school system."
"They need to do the right thing to make sure resources are going into our schools and not being diverted because they took an action they should not have taken," the mayor continued.
Nashville's News 2 spoke with parents regarding the withheld money.
"Three point four million dollars is a lot of money, even if we're talking about all the schools in Davidson County," Chanda Harper said. "That's still a lot of money when we're already fighting to get funding now."
She added, "We didn't deny it, so I feel like we shouldn't be punished."
Parent Parriss Jones said, "That's still not a reason to punish a whole school district by taking money back."
The next step is likely an emergency meeting at the Metro School Board to deal with the sudden loss of state money for its October spending.