Found my own answer! I spent a couple of hours looking into this problem before posting so don't laugh that I found the answer within 15 minutes of posting this question. Okay, maybe laugh a little. ;o)
What I had done was customized the ".k-event" style locally within the .cshtml file. So of course it was going to get confused.
background: url("textures/highlight.png") repeat-x scroll 0 -257px #38B9FF;
so I added some relative path corrections and it started working. Btw, I tried using tilde in an absolute path but apparently that is not a good thing to do in a style.
background: url("../../Content/textures/highlight.png") repeat-x scroll 0 -257px #38B9FF;