SACRAMENTO, Calif. - The California Supreme Court will hear a high-stakes case that will decide whether Gov. Jerry Brown and state lawmakers have the right to eliminate redevelopment agencies used for local construction projects or if they are overreaching and wrongly taking money from local governments.  
At stake is a chunk of tax revenue that lawmakers want to divert from the agencies to schools and other local programs that have suffered budget cuts due to the impact of the recession on state finances.
 
The state's high court will hear arguments Thursday about whether the state has authority to dissolve the agencies and set out new requirements for cities that want to maintain their agencies.
 
The lawsuit questions whether the state has authority to eliminate about 400 redevelopment agencies that have become an important source of revenue for local governments trying to revitalize and improve communities.
 
The state is counting on $1.7 billion from the agencies in this year's budget and $400 million a year thereafter.
"If the courts go one particular way, then we need to figure out how to fill that hole - and that's a mighty big hole," said Assemblyman Bob Blumenfield, D-Los Angeles, chair of the Assembly Budget Committee.

Cities and the statewide redevelopment association filed the lawsuit in July, shortly after the budget was passed and signed by Brown. The governor and supporters of the law said the redevelopment agencies have become little more than slush funds for private developers, and they want the tax money generated by new developments to be diverted from the agencies to local schools, law enforcement agencies and other services.
 
Proponents of redevelopment say Brown and the Legislature ignored the will of voters by passing legislation that sidesteps Proposition 22, a ballot initiative passed in November 2010 with 61 percent of the vote. It prohibited the state from raiding transportation, redevelopment and other types of local government funding.
The proponents noted that the court was willing to issue a stay until the matter could be settled before a Jan. 15 deadline.
 
"What's at stake for the cities is 300,000 private-sector jobs a year, funding for public infrastructure projects, the cleanup of brownfields and the revitalization of blighted, urban areas," said Chris McKenzie, executive director of the League of California Cities. "If cities don't have redevelopment to accomplish these goals, there's no other tool as nearly as powerful."
 
The Brown administration, however, counters that Proposition 22 only blocked the state from shifting and transferring money from redevelopment agencies.
 
"The state constitutional provisions that limit the Legislature's powers over RDAs do not prevent a legislative repeal of the RDA program," state lawyers wrote in a court brief. "RDAs are creatures of statutes - and their existence is not guaranteed in the state Constitution - so the Legislature was free to dissolve them."
 
California began the year with a projected $26.6 billion shortfall and closed the gap with spending cuts, fee hikes and what may turn out to be overly optimistic revenue estimates. The state budget called for 70 state parks to close next year, raising tuition at state colleges and universities, and cutting funding to schools and libraries.
 
A legislative memo has estimated the shortfall for the new fiscal year starting in July 2012 to be between $5 billion and $8 billion, and possibly more if revenue estimates don't materialize.
 
In June, lawmakers passed the legislation to dissolve redevelopment agencies and establish a voluntary program for cities and counties interested in continuing the agencies. The budget was passed on a majority vote by Democrats, who were unable to coax Republicans to support fee increases and closing tax loopholes.
 
Brown, a Democrat, criticized redevelopment agencies for draining tax money from schools and public safety at a time when the state faces immediate and long-term fiscal problems. Blumenfield said he and other lawmakers sought a compromise on redevelopment - a plan that was ultimately passed by the Legislature and signed by the governor.
 
The new framework called for eliminating existing agencies and allowing them to re-form if they met new conditions, such as taking on greater responsibility in funding schools.
 
"It's recognition of the fact that we're in dire, dire budget times," said Blumenfield, adding the agencies are long overdue for reform.
 
After World War II, the state Legislature passed legislation allowing cities to combat blight by creating special districts for redevelopment. Growth in property taxes in those areas could then be used to finance redevelopment projects, known as "tax-increment" financing. The agencies also had the power to acquire property by eminent domain and sell, lease or develop the land.
 
Audits have revealed some agencies have misused the funds, a portion of which is intended to be used for low-income housing.
 
Redevelopment critics noted the city of Palm Desert spent $16.7 million in redevelopment funds to upgrade a luxury golf course, the San Francisco Bay area city of Hercules used affordable housing money to hire a lobbyist, and Montebello spent $31 million on - among other things - fancy dinners in Las Vegas, golf and embroidered polo shirts.
 
The definition of blight also has been questioned. For example, the city of Coronado near San Diego was declared blighted and became one redevelopment zone that included multimillion dollar, oceanfront homes.
 
Under ABX1-26 and ABX1-27 approved by the Legislature, the state sought to eliminate redevelopment agencies by Oct. 1. It allowed local governments to launch new agencies if they agreed to pay a greater share of property taxes to local governments and schools, replacing money the state now pays.
 
In accepting the lawsuit, the state Supreme Court halted the law until the case could be resolved. State finance officials say the lawsuit should not affect the state budget because the first voluntary payment is not due from redevelopment agencies until Jan. 15.
 
Local government officials say it does not make sense for the state to eliminate redevelopment agencies, which they say contribute $2 billion a year in economic activity.

"By killing funding for redevelopment projects, they're killing the jobs that create the very tax revenue the state needs to fund education and other vital services," said McKenzie, the League of California Cities executive. "It's a colossal mistake to shoot yourself in the foot on that scale."