Education leaders said the $700 million California was eligible for could have helped pay for major school changes that were difficult to get through the legislature, like tying teacher evaluations to student test scores, firing staff at low-performing schools and allowing failing campuses to convert to charter schools.
"The absence of this money means many of the reforms contained in this application will be more difficult and slower to obtain," said Superintendent of Public Instruction Jack O'Connell.
Some partly blame the teachers' unions for California falling short.
While more than 300 school districts and county education offices signed the application promising to implement the reforms, federal evaluators in Washington DC noted neither of the state's two major teachers unions had done so.
Critics think that might have caused California to fall below the cut-off line.
"The labor has been fighting those reforms because they're more interested in what's good for them rather than what's good for the kids," Gov. Arnold Schwarzenegger said. "The Obama administration and Arne Duncan, the secretary of education, have been very clear that we want to create reform that is good for the kids."
"I think had there been a greater support and a buy-in from the teachers unions, the leadership of the teachers unions ? because rank-and-file teachers are ready to go -- that I think we would have passed the line," said Sen. Gloria Romero (D-East Los Angeles).
The teachers unions don't dispute that California could have gotten a higher score if they had thrown in their support, but said they were not consulted in the changes and are not convinced the reforms will work.
"It's not that we didn't buy into the reforms, it's that we've never been asked to participate in the creation or the direction of where California was going," said Jeff Freitas of the California Federation of Teachers.
Duncan hopes to have a third round of funding and has asked for more than a billion dollars in next year's federal budget.