Looks like a partial basement. I assume the stemwall is a few inches above grade. I'm also assuming AK is short for Arkansas.

When the insulation is removed, air seal as much as possible with handheld single component foam (Great Stuff etc.) and caulking.

Fit in at least 3/4" thick XPS (extruded polystyrene) behind the 2x4 framing, at least for the below-grade portion of the wall. Then you can use XPS or more economical EPS (expanded polystyrene) or fibrous insulation for the balance. Keep it as tight to the wall as possible. A neat trick is to jam shims between the framing and the foam boards. Just buy a bundle of cedar shakes. No poly vapour barrier. Latex paint on the drywall is sufficient. In a mixed humid climate, you want the walls to dry in either direction.

Here are the insulation levels adopted in Arkansas as noted in the US Department of Energy publication "Impacts of 2009 IECC for Residential Buildings at the State Level, September 2009"

Thank you Worthy,
Sorry AK is for Alaska I am near Anchorage. The space from the stud wall to the block wall is only 1/2". The basement is a partial basement as the ground slopes. There are electrical outlets in these 2x4 walls infront of the block wall. The above grade walls are 2"x 6" and have fiberglass bats and behind the bats against the sheathing is some sort of housewrap. What is the best way to tackle this? Can we use 3" or 4" XPS on the below grade walls between the studs and use can foam between them to fill the gap behind the stud?
Thanks
Kelli