As the city prepares to send school principals their individual budgets, another budget battle looms — one centering not on the amount of money, but on how it should be doled out.

At issue is a portion of new state funds regulated by so-called Contracts for Excellence, agreements school districts make with the state in which they promise to spend the money on six specific areas.

Next school year’s New York City Contracts for Excellence pot is expected to be about $385 million, up from $258 million this year, a state Education Department spokesman, Tom Dunn, said.

While the city’s Department of Education says principals should get to decide how to spend this money, a group composed of the teachers union, parent groups, and the Campaign for Fiscal Equity advocacy group yesterday held a rally arguing that the community should have a say in where the money goes.

The group is urging the Department of Education to delay sending schools the funds regulated by the contracts until after it develops a citywide plan for how they should be spent. The plan would be vetted by community members at public hearings required by state law.

“We absolutely want to make sure that this money is not used, as they say, to plug holes,” the Campaign for Fiscal Equity’s executive director, Geri Palast, said. “The public needs to be involved in developing a plan for how the money gets allocated.”

A parents group, the Coalition for Educational Justice, is urging the city to spend the funds on a middle school improvement plan it has drafted.

The United Federation of Teachers is emphasizing class-size reduction and programs to help English Language Learners, a vice president of the union, Michael Mulgrew, said.

A schools spokeswoman, Debra Wexler, said the education department will hold public hearings — but the hearings will not dictate how principals spend the funds; only principals can make that decision, she said. What the community can do at hearings is contribute ideas for guidelines the department will send to principals suggesting ways to spend the Contracts for Excellence money.

“The best-qualified people to determine how schools spend Contract for Excellence funds are not bureaucrats or advocates, but the leaders of the schools,” Ms. Wexler said.

A parent leader with the Coalition for Educational Justice, Pat Boone, said getting a voice in how guidelines are written is not enough.

“Guidelines are not a plan,” Ms. Boone said.