San Diego's redevelopment agencies face a loss of around $70 million this year and $16.5 million annually because of the budget past last week, according to local press reports.
The cuts represent about 40% of property tax increment collected by city's redevelopment agencies this year that pay for 17 projects, according to the San Diego Union Tribune.
Last week, California Gov. Jerry Brown signed two bills tied to the budget that would eliminate redevelopment agencies unless they make payments to the state, sparking a legal battle.
Lawmakers approved two budget trailer bills that either eliminate or drastically curtail the agencies by seizing $1.7 billion from some 400 agencies.
The California Redevelopment Association and the League of California Cities are expected to ask the state Supreme Court to rule on the constitutionality of the new laws.
If San Diego sues the state and loses, according to the legislation, it will be unable to sell bonds and its redevelopment will be hindered in other ways, the paper said.
The agencies, usually operated by city and county governments, collect property-tax increment financing to back bonds that fund economic development in blighted areas.
Redevelopment agencies have come under fire because the incremental tax revenue they collect is lost to the local agencies that would have received the revenue if the RDAs didn't exist.
Some critics also feel the agencies sometimes fund development that has little to do with improving rundown areas.
Redevelopment's share of total statewide property taxes has grown sixfold, to 12% from 2% of total statewide property taxes, according to a report this year from the state Legislative Analyst's Office.
The report found that RDAs receive more than $5 billion of tax increment revenue annually.