A last-minute agreement Thursday saved a popular online education program in the Steilacoom Historical School District.

K12 Inc., the Virginia-based company that provides the cyberspace curriculum, agreed to pay any fees that could result from a negative state audit of the program.

That bill – at least for now – could be $3 million.

Steilacoom School Board President Al Lawrence and other district officials were negotiating with the company before a School Board meeting Wednesday night.

But the deal wasn’t finalized when the board met, so it gave the company an ultimatum: Come up with language that’s acceptable to us by 3 p.m. Thursday or your contract for next year is canceled.

The final details were completed by K12 on Thursday and approved by the school district’s attorney, Lawrence said. Representatives for the district and K12 signed the agreement.

The district believes the contract already carried “hold harmless” language, making the company responsible for any costs associated with an audit, Superintendent Art Himmler said. But school officials wanted new wording to make it absolutely clear.

“We’ve always promised our taxpayers that our online school would not take any money away from our brick-and-mortar schools,” Himmler said.

A representative from K12 could not be reached Thursday.

Steilacoom’s largest school is its Washington Virtual Academy, which has 2,859 kindergarten-through-eighth-grade students across the state. The district also enrolls 2,725 kids in its seven traditional school buildings.

Steilacoom, Federal Way and Quillayute Valley school districts are battling the state Office of the Superintendent of Public Instruction over record keeping and documentation for their Internet students.

State auditors concluded last year that the three districts could owe anywhere from $80,000 to $5.3 million. The Internet academies are free to students, and the districts that operate them get money from the state.

Auditors, looking at records for the 2006-2007 school year, concluded that Steilacoom owed the state money because it didn’t have proper records releasing students from their home districts. The cases remain in dispute and likely won’t be resolved until summer, state superintendent’s spokesman Nathan Olson said Wednesday.

The state superintendent’s office has maintained that the districts owe the money; Steilacoom and the other two districts are rebutting that claim in formal responses.

Online education is new, and everyone is learning how to account for it, Himmler said. He told The News Tribune in December that the methodology used in the audit was flawed and that auditors used too small a sample to reach their conclusions.

The Legislature requested the audit.

Auditors contend their sampling showed that Steilacoom got overpayments from the state of $36,409, that Federal Way was overpaid $27,843 and Quillayute Valley $16,726.

But those figures were based on a small sampling of students – 19 of 1,000 in Steilacoom’s case. If the results were projected over the entire student population, Steilacoom could owe $3 million.

A costly loss by the school districts could severely cripple the burgeoning online education system in Washington, Himmler said.

“It’s larger than just us. The future of online education in Washington state is going to be shaped by what happens with these three districts,” he said.

Olson, with the state superintendent’s office, said the state audit “alerted us to the fact there are serious concerns about how online schools are managed.” Numerous bills pending in the Legislature would deal with management of online schools.

Steilacoom began its program about three years ago with just 11 students,. Himmler said. K12 provides the curriculum, packages of learning tools and programs, and maintains the Web site. Steilacoom hires and pays the teachers.

“It’s a good program. It gives kids who could not learn in a traditional school to get their education in a different setting,” said board President Lawrence.

Kris Sherman: 253-597-8659

Staff writer Debby Abe contributed to this report.