SACRAMENTO — Gov. Arnold Schwarzenegger on Tuesday won the right to raid local redevelopment funds to help close California's budget deficit, but the court ruling provides only a ray of good news in an otherwise bleak fiscal outlook.
Local leaders said the ruling is an unfair cash grab that will devastate local efforts to stimulate the economy, and an appeal was announced soon after the decision.
Sacramento County Superior Court Judge Lloyd Connelly ruled that the state can transfer more than $2 billion from local redevelopment funds to school operations. Local governments objected to diverting the money, which generally is used to promote public works projects and rehabilitate downtowns.
"We dodged a bullet," said Schwarzenegger's spokesman, Aaron McLear. "This would have added $2 billion to our deficit."
During budget negotiations last year, Schwarzenegger and lawmakers agreed to use the money from redevelopment funds for schools in those districts as a way to make up for declining general fund revenue.
Local governments argued that shifting that money was unconstitutional and would prevent redevelopment agencies from moving ahead on projects that create jobs at a time of high unemployment. California's unemployment rate is at 12.6 percent.
Oakland loses $41 million this year under the ruling. Pittsburg loses $17.5 million, Richmond loses $10.1 million, Concord loses $6.2 million and San Pablo loses $5.9 million.
The money was taken as part of last year's budget negotiations, so cities must pay promptly. Concord had already written its check to the state. Richmond officials said last year they would not have the money and would likely face sanctions.
Concord will be completely out of the redevelopment business and, unless the city makes more cuts to staff or programs, its redevelopment agency will be insolvent in about five years under the debt it already has taken on, said Community Development Director Jim Forsberg.
In Oakland the ruling means less money for housing needs and, over the long-term, uncertainty in planning renewal projects, said Oakland City Councilmember Jean Quan, who is the city's representative to the League of California Cities.
"It would mean we'll have less for affordable housing and we'll have to be much more cautious when we're investing in new areas, because we're not going to be able to predict how much the state may or may not take from us," said Quan, who also heads the council committee that oversees city budgetary matters. "It would really limit our flexibility."
Quan said the ruling makes it more important that voters in November pass the Local Taxpayer, Public Safety and Transportation Protection Act of 2010, a measure aimed at stopping state raids on local revenue that includes a provision to apply it retroactively.
"If we pass it, we get our $41 million back," Quan said.
In his decision, Connelly wrote that the state could use the money to help support schools located within redevelopment agency boundaries because it served a public purpose.
The California Redevelopment Association, the leading plaintiff in the case, said Tuesday it would appeal the ruling.
"We strongly disagree with Judge Connelly's ruling, which effectively says the Legislature has unlimited discretion to redirect local redevelopment funds to any purpose it wishes," said John Shirey, executive director of the association, in a written statement. "The Legislature needs to deal with its budget problems by making hard decisions using its own limited resources — not by taking away local government funds."
Connelly last year rejected a similar 2008 plan by Gov. Arnold Schwarzenegger and lawmakers because it could have led to a redevelopment agency's funds being spent outside that agency's community. State leaders fashioned their new version of the plan in a way intended to pass legal muster.
Had Connelly approved the local governments' request for an injunction, it would have created an even bigger problem for Schwarzenegger as he prepares to release his revised budget later this month. California is projecting a deficit of roughly $20 billion in the fiscal year that starts in July.
State income tax collections took an unexpected drop last month after four months of steady improvement.
The controller's office reported personal income taxes in April were down about $3 billion, or 30 percent, from administration projections. April is a critical month because it's when most Californians pay their taxes.
The Sacramento Bee and staff writers Paul Burgarino, Kelly Rayburn, Katherine Tam, Rick Radin and Paul Thissen contributed to this story.