SAN FRANCISCO - The California Redevelopment Association has filed a lawsuit challenging a $350 million shift from redevelopment agencies to the state government.

The $350 million shift was a budget-balancing provision in the budget the California Legislature adopted in September.

But the fund shift, with no repayment provisions, violates the state's constitution, said John Shirey, executive director of the CRA, which filed the suit Thursday in Sacramento Superior Court along with the Moreno Valley Redevelopment Agency.

The $350 million transfer is what is known in California budget argot as an "ERAF shift," because it directs the agencies to send money to "education revenue augmentation funds" for public education in their respective counties. It has no real effect on public education, because it simply reduces the state's general fund obligation for schools by $350 million.

The lawsuit argues that the transfer of redevelopment funds violates state constitutional language that authorized the creation of redevelopment agencies.

"We think the language is pretty clean and pretty straightforward in terms of what the money can be used for," Shirey said.

The suit also argues that taking redevelopment funds unconstitutionally impairs bond contracts.

"When agencies issue bonds, they in their covenants pledge future revenues for repayment of those debts, those bond payments," Shirey said. "If the state can willy-nilly arbitrarily take money any year it feels like it, then it is in effect jeopardizing repayment of bonds and other debt obligations."

Furthermore, Shirey said, there's no reason to believe the shift won't happen again and again, which could make it harder to sell redevelopment debt to investors.

"If they take money this year, they will take money the year after and the year after, because we see no prospect that the state will deal with the core of its structural deficit problem," he said. "We know with reasonable certainty the bond market will penalize agencies by saying in effect this seems to be a precursor to making it permanent."

This year's $350 million shift should not have any impact on outstanding redevelopment debt, according to Jim Cervantes, managing director at Stone & Youngberg LLC, a major underwriter of California redevelopment debt.

"But it will erode coverage and it will erode future financing flexibility," he said.

Redevelopment agencies are required to make the ERAF payments by May 10. If an agency's debt service obligations prevent it from making a full payment of the ERAF funds at that time, it does not have to, but it would then be subject to prohibitions against new debt issuance and strict spending limits. The agencies could also ask their sponsoring governments - most of which are facing their own budget crunches - to make up the difference.

The CRA is hoping for a court decision by May 10, Shirey said, but the timeline is impossible to predict and any decision is likely to be appealed by the loser.

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