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A lawsuit settlement between New Mexico Indian children and the Utah school system has gutted the LDS Indian student placement program and may force the closure of two federal Indian housing programs, according to testimony in federal court.

Nearly 700 out-of-state Indian students educated annually in Utah secondary schools now must pay more than $2,500 each year for their education or they won't be allowed to enroll here, said Douglas Bates, coordinator of school law and legislation for the Utah State Office of Education.Assistant Utah Attorney General John S. McAllister told a federal judge Monday the placement program run by The Church of Jesus Christ of Latter-day Saints likely will be phased out in the wake of a 1990 lawsuit against the Washington County School District. He also predicted the closure of Indian boarding programs in Sevier and San Juan counties.

McAllister announced the settlement of the suit during a hearing before U.S. District Judge Aldon Anderson.

Church officials said Tuesday that the church's Indian placement program will continue on a small scale. The LDS Church no longer will bring out-of-state students to Utah to be educated, officials said in a prepared statement. Instead, the Indians will be placed with families in their home states.

Approximately 450 Indians in the LDS program and more than 100 Indians in the Sevier County program have received free education in Utah annually since the two programs were started in the early 1950s, Bates said. More than 90 percent of the youngsters in the LDS program come from other states, he said. All of the students in the Sevier program are from out of state.

"I'm not sure how many Indians are in the San Juan program. We didn't even know it existed until a few weeks ago. But looking at all programs across the state, we've probably had between 500 and 700 Indian students from other states in our schools this past year," Bates said.

Free education for out-of-state youngsters stopped when Indian youngsters participating in a third program cried foul. Children with the Raindancer Youth Services Inc. sued Washington County School District in December 1990 after district officials told them they must pay for their education.

Raindancer brings Indians from New Mexico and Arizona to St. George for private and public education. Washington County educated Raindancer students for free in 1989, the first year the program operated there, Bates said. Raindancer supplemented Washington's public education with special programs for the youngsters.

But when program directors attempted to enroll 43 students in the already crowded Washington schools, district officials said they couldn't handle the load and required tuition.

The children sued, claiming it was not fair that out-of-state Indians brought here by the LDS placement program could get a free education and they could not.

The state agreed. "We've now drawn the line," Bates said. "No more out-of-state kids without tuition." The tuition varies from district to district, topping out at about $3,000 a year, he said.

State officials told the Bureau of Indian Affairs that it must now pay the state to educate youngsters in the Sevier and San Juan programs, Bates said. The federal government has refused and the program likely will be closed.

During Monday's hearing, attorneys for the state and Raindancer took two recesses to hammer out the final details of their settlement. The settlement will allow youngsters already enrolled in the program to finish their education here, said Matthew M.F. Hilton, attorney for the program.

The state's new policy also allows Indians already enrolled in other programs to finish their education, Bates said.

As part of the settlement, the state will pay Raindancer's legal fees. Bates declined to say how much that will be because the settlement has not been signed and filed with the court. Anderson gave both sides two weeks to finalize their agreement.

When the settlement is filed, the state will disclose the amount of fees it paid, Bates said.