California Seizure of $1.7 Billion in Redevelopment Funds Blocked by Court

California’s plan to use $1.7 billion from redevelopment agencies for the state budget was put on hold by the California Supreme Court.

The San Francisco-based court said yesterday that two laws that divert the funds can’t be enforced except for provisions that preclude redevelopment agencies from incurring new debt, transferring assets and entering new contracts, according to an e-mailed statement from the court. A final decision on the laws will be made before Jan. 15, when the funds diversion was scheduled to begin, the court said in an order.

“It’s a very positive sign that the court accepted the case and recognized a very serious constitutional question that needs to be resolved,” Chris McKenzie, executive director of the League of California Cities, said in a telephone interview. “Agencies no longer have to decide whether they will shut down or pay a ransom to the state.”

The league, along with the cities of San Jose and Union City and the California Redevelopment sued California Controller John Chiang and the California Department of Finance July 18 to overturn the two laws. The cities and the associations allege the statutes violate a ballot initiative approved by voters last year that prevents the state from seizing revenue dedicated to local government.

Affordable Housing Projects

The decision affects road, sewer, lighting and affordable housing projects across the state administered by 400 redevelopment agencies, McKenzie said.

Yesterday’s ruling temporarily halts the move by Governor Jerry Brown to divert $1.7 billion from redevelopment agencies to balance California’s 2011-12 budget. The Brown administration had counted on the money to avoid deeper cuts to education.

California’s $86 billion spending plan took another hit earlier this week when Chiang said July revenue had fallen more than 10 percent short of projections.

H.D. Palmer, spokesman for the California Department of Finance, said yesterday’s ruling isn’t an omen of how the court will ultimately rule. He said in a phone interview the issue will be resolved before Jan. 15, when the redevelopment agencies are due to turn over their first installment of $850 million to the state.

‘We’re Confident’

“We’re confident that the state is on solid legal footing in this case,” he said. “Redevelopment agencies were created by an act of the Legislature and they can be dissolved by an act of the Legislature.”

The money from redevelopment agencies was earmarked for K- 12 public schools and community colleges, Palmer said.

Jacob Roper, a spokesman for Chiang, didn’t immediately return a voice-mail message seeking comment on the court’s order.

The high court yesterday ordered the state to explain why the seizure of redevelopment funds shouldn’t be blocked.

“We’re glad the court took the case and we’re glad it issued the stay,” said Steve Mayer, an attorney for the plaintiffs.

California lawmakers approved a budget in June that kept alive 400 redevelopment agencies while requiring them to turn over $1.7 billion.

The case is California Redevelopment Association v. Matosantos, S194861, California Supreme Court (San Francisco).

To contact the reporters on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net; James Nash in Sacramento at Jnash24@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Mark Tannenbaum at mtannen@bloomberg.net.

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