By Emery P. Dalesio, Associated Press

RALEIGH, N.C. (AP) — North Carolina's prized public universities could be the biggest losers as state leaders defend a new law limiting the rights of LGBT people.

The 17-university system, which includes the University of North Carolina at Chapel Hill and North Carolina State University as well several historically black colleges, risks losing more than $1.4 billion in federal funds if the Republicans who run the Legislature don't reverse the law. The U.S. Justice Department requested an answer by the end of business on Monday.

That deadline was set in letters this week to University of North Carolina leaders, Gov. Pat McCrory and the state's public safety agency, warning that the law violates civil rights protections against sex discrimination in education and employment.

If the DOJ follows through on its enforcement threat, tens of thousands of students also could lose around $800 million in federally backed loans that cannot be borrowed to attend institutions that violate Title IX of the federal Civil Rights Act, UNC spokeswoman Joni Worthington said Thursday.

"It's a very big stick," said Katharine Bartlett, the former law school dean at nearby Duke University. "The federal government is giving funds under certain conditions."

State legislative leaders vowed to resist what they describe as Washington's bullying, but it remains to be seen how far they'll go to defend a position compromised by a federal appellate ruling in Virginia last month.

The North Carolina law requires transgender people to use bathrooms and locker rooms conforming with their birth certificates, rather than their gender identity, and leaves LGBT people out of a statewide anti-discrimination code that also bars local governments from providing additional protections.

UNC President Margaret Spellings is two months into her new job, having succeeded Tom Ross, who was pushed out last year after the university system's governing board was overhauled by the state's ascendant Republican leaders. They have been eager to revamp a system that many consider the state's leading bastion of liberal thinkers.

Now, the former Education Secretary to President George W. Bush has found her leadership tested as she steers the UNC system between the conservatives who just appointed her and the federal agency she once led.

Spellings was criticized by LGBT student groups for not doing more to lobby against the law before it was approved in a daylong special session in March. She declared that while the UNC system is obligated to follow the law, campuses need not make any significant changes to comply with it. The law lacks any enforcement mechanism, and the schools will not venture to impose one on their own, she said.

She also said she hoped legislators would change the law, and in yet another statement, she acknowledged that UNC students, faculty and staff are "hurt, angry and even afraid" as a result of the law.

She said the UNC administration's "factual guidance on the requirements of the law has been misinterpreted by many as an endorsement. ... Nothing could be further from the truth."

"This law is sending a chill throughout the University of North Carolina," she continued, harming recruitment and retention, prompting alumni to take back donations, and major conferences to be delayed, canceled or moved out of state.

None of these statements prevented the Justice Department from declaring that UNC remains in violation of federal law — a determination that she said she takes seriously.

It seems unlikely that state and federal authorities will allow the impasse to continue to the point where UNC actually loses this money. While the Education Department has in the past withheld federal funds due to a Title IX violation, in the past decade the agency has reached settlements instead, spokeswoman Dorie Nolt said in an email.

"It's not really in anybody's interest that North Carolina loses," Bartlett said. "Who loses from that? All the children and young adults involved in the education system of North Carolina. A lot of people get hurt."

The DOJ letters cited the appellate ruling protecting a Virginia high school student's right to use bathrooms aligned with his new gender identity, which also applies to North Carolina and other states in the Fourth Circuit.

A similar case in suburban Chicago was settled after the Education Department threatened the loss of millions in federal funding, but a group of parents in that district, in Palatine, Illinois, sued Wednesday to challenge the Obama administration's interpretation of Title IX to include gender identity.

This interpretation is "just beginning to be tested in court," said John Dinan, who teaches about state-federal relations at Wake Forest University.

The conservative legal group that filed the Illinois lawsuit says the Obama administration's position is flawed.

"Title IX is very clear in its plain language that schools can maintain restrooms and locker rooms based on biological sex because this is the only logical way to protect the rights of all students," said Kelly Fiedorek, a lawyer with Alliance Defending Freedom. What the federal agencies are "trying to say is that sex should be interpreted to include gender identity, which is very fluid."

To Learn More:

Big Corporations Face Off with Republican State Lawmakers over Discriminatory LGBT Bills (by Kathleen Foody, Associated Press)

Most Contentious Governor’s Race in Nation Expected in North Carolina as Battle over LGBT Law Heats Up (by Gary D. Robertson and Jonathan Drew, Associated Press)

Business Backlash to North Carolina Law Barring Local LGBT Anti-Discrimination Laws (by Emery P. Dalesio and Gary D. Robertson, Associated Press)