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New York State lost out on $700 million in federal Race to the Top money today, placing second to last and beating only the District of Columbia among the 16 finalists. Only two states, Delaware and Tennessee, won in the initial phase of competition for the coveted federal grants.

New York was not widely expected to be a first-round winner; even its advance to the final round of competition caught many observers by surprise. Today’s announcement will send state education officials back to the drafting table to refine their plan — and will likely re-ignite a legislative battle over the state’s teacher evaluation laws and cap on charter schools — before the June 1 deadline for the next round of competition.

In the 500-point scoring rubric federal officials used to judge applications, New York lost the greatest share of points on the sections of its application dealing with statewide data systems, teacher evaluations and charter schools.

“This is like going to the doctor and getting your bloodwork back,” Board of Regents Chancellor Merryl Tisch said.”They told us our cholesterol is high and we need to fix it.”

“We’re going to need the legislation now, obviously, to help us,” Tisch added.

In January, state officials asked the legislature to lift the cap on charter schools, but lawmakers froze, in large part because of opposition from the state teachers union. Union leaders have refused to endorse a charter cap lift without significant changes to how the schools are opened and run that charter supporters say would kill the schools.

In a change from the first round, states applying in Round 2 will be required to submit budgets that fall within the ranges suggested in the competition’s original guidelines. This change will force New York to revise its budget downward by more than $100 million. In the first round, the state applied for $810 million in grant funds, though the Race to the Top guidelines suggested states of its size are eligible for, at a maximum, $700 million.

New York City Schools Chancellor Joel Klein signaled today that the city would lobby even more aggressively for a charter cap lift and for changes to state law that would mandate the use of student data in teacher evaluations and make it easier to fire teachers who do not fare well in those evaluations.

“Support for initiatives like these helped Tennessee and Delaware win today and is the only way New York State will succeed in the next round of the competition,” he said.

The selection of two relatively small states in the first round means the U.S. Department of Education will only spend $600 million to fund its initial grants, leaving $3.4 billion to be doled out in the second phase of competition. Duncan said today that he expected 10 to 15 states to be named winners in the second round.

In a conference call with reporters today, Duncan said that first round finalists do not necessarily have an edge for the second phase. “It’s a new competition,” he said.

Here are the final score sheets for New York’s application, along with comments from five anonymous federal reviewers. Score sheets from all of the states who applied are available on the USDOE website here.