Redevelopment agencies would permanently lose $400 million in annual tax increment revenues under a proposal from the Legislative Analyst's Office. That's about 9% of annual tax increment that would be shifted to schools in order to reduce the state's education funding obligation.

The proposal is contained in a report on the state budget situation that new Legislative Analyst Mac Taylor released on Tuesday. The shift of money from redevelopment agencies to schools is listed as a "budget option" – and it's only one of several that should get the attention of anyone who cares about land use in California. Among other Legislative Analyst's Office (LAO) recommendations (and the size of the budget impact for 2008-09 and 2009-10 combined):

• Temporarily redirect tribal payments for transportation loans to the general fund ($163.7 million)

• Shift the cost of Resource Agency department regulatory programs to regulated entities ($66.7 million)

• Charge property owners for one-half the cost of California Department of Forestry and Fire Protection wildland fire protection costs ($239 million)

Add to these recommendations, measures that are already contained the Gov. Schwarzenegger's revised budget proposal:

• Eliminate state funding to transit agencies ($536 million)

• Eliminate state Williamson Act subventions ($70 million)

The LAO paints an incredibly grim picture of state finances. The nonpartisan analyst says the state needs $27.8 billion in "budget solutions" by June 30, 2010. Without corrective actions, the state faces annual budget deficits of about $22 billion through the 2013-14 fiscal year. The LAO speaks highly of the governor's special legislative session proposal because it contains realistic numbers, no borrowing, solutions that last longer than one year, and it balances revenue increases and spending cuts. Still, because the governor's proposed sales tax hike of 1.5% and borrowing from future lottery revenues would run only through the 2010-11 fiscal year, the state faces a shortfall of $9 billion to $11 billion in future years, according to the LAO. Thus the need for even more adjustments.

In some ways, the recommended shift of redevelopment funding is old news. The LAO advocated for a permanent shift of tax increment away from redevelopment agencies earlier this year. But at that time, the recommendation was for a $200 million shift.

"This is not really surprising," California Redevelopment Association (CRA) Executive Director John Shirey said of the latest LAO recommendation.

Even if the redevelopment shift is politically acceptable – and it might be, compared with the deep cuts proposed for education, health care, social services and prisons – it might not be legal. The CRA intends to file a lawsuit later this month in Sacramento County Superior Court challenging the one-time, $350 million shift from redevelopment agencies to schools contained in the current budget (see CP&DR Capitol Update, October 2008). The CRA argues the budget maneuver is illegal under Proposition 1A from 2004, a statewide ballot measure that authorized a swap of state and local revenues, and which purported to block future state raids of local revenues.

Several weeks back, the CRA asked redevelopment agencies if they would like to become plaintiffs in the lawsuit. "We got a lot of volunteers," Shirey said, "but we only want one or two. Otherwise, it makes for a lot more work in a lawsuit."

Shirey declined to name the likely plaintiff agencies, but he said they will probably be agencies that are forced to cancel needed projects because of the revenue shift.

Schwarzenegger has called for lawmakers to convene a special session to address the budget before a new Legislature is seated in early December. For good reason, Schwarzenegger hopes that lawmakers, especially the approximately 30 members not returning in December, will be willing to make the hard budget decisions that they have been avoiding.

Two months ago, I said that the state budget and SB 375 contained conflicting priorities. If adopted, the LAO's recommendations would only deepen that conflict.

– Paul Shigley