SAN DIEGO -- Reduced state funding could mean mid-year budget cuts that could cost the San Diego Unified School District as much as $40 million, district officials said Wednesday.

"We really believe the sky is falling," Superintendent Terry Grier said at a special Board of Education meeting. "We just don't know how much of the sky."

Board members were given the choice of:

expanding the number of students in each class

laying off employees in the departments of human resources, technology and budget

reducing purchases

altering bell schedules to lower transportation costs

or reallocating "categorical funds" from the state, which are funds meant for specific uses.

James Masias, the district's chief financial officer, said he believed the state would give school districts "unprecedented flexibility" with categorical funds for up to two years.

Grier said his staffers were trying to determine which categorical funds had been spent and which were available to help plug the budget gap.

Many of the cost-cutting ideas will require negotiating with labor unions already unhappy with teacher and staff layoffs over the summer.

Grier told the board members that union leaders understood the gravity of the situation.

Still, the San Diego Education Association, which represents teachers, does not plan to give up any benefits. The latest union contract will cost taxpayers $226 million more than the previous one.

District staffers and board members plan to lobby legislators for more money next week, but Grier said lawmakers have told him that the state is tapped.

The state could run out of money next month, and more funding cuts could be on the way as soon as Nov. 23, according to Masias.

"A perfect storm is brewing here that can cause serious damage to the San Diego Unified School District," Masias said.

In the spring, the district cut more than 200 probationary teaching positions and 1,200 staff employees to close a $53 million budget gap caused by state revenues that came in lower than expected.