Isn't the point of these contests to see what people can CREATE with available tools? AI art tools are a NEW kind of tool, and using them well still takes SKILL and vision. Without specific rules against it, entering AI art seems fair to me.
My local library had the same issue with their photography contest last spring. Several submissions clearly came from AI image generators, all those perfectly polished surreal landscapes. The handmade photos just couldn't compete on that glossy level. It absolutely makes sense to create a separate category, otherwise it feels like comparing apples to oranges.
Remember that cooking contest where someone submitted a store-bought pie? They got disqualified for not making it from scratch, even though they picked a nice one and arranged it on a plate. That's the same weird feeling I get with undisclosed AI art in a regular art contest.