The state budget signed by Gov. Schwarzenegger in late September shifts $350 million from redevelopment agencies to schools, and it provides no funding at all for transit projects contained in the State Transportation Improvement Program. Still, the sentiment among many local government officials was that the budget could have been far worse.

State budget negotiations and the ultimate adoption of a revenue and spending plan for the 2008-09 fiscal year dominated most of September – a month typically devoted to bill signings and vetoes by the governor. Instead, Schwarzenegger stuck to his promise and avoided action on non-budget bills until after he signed the budget on September 23.

On the budget, the administration proposed shifting the greater of $225 million or 5% of redevelopment agency tax increment revenues annually for three years from the agencies to school districts – a proposal that the California Redevelopment Agency (CRA) said could be a step toward a permanent funding shift. With that proposal gaining traction in August and early September, legislative Republicans proposed taking all unallocated money in redevelopment agency low- and moderate-income housing set-aside funds, or about $350 million. Affordable housing advocates immediately went on the defensive, and the housing fund shift appeared to be a nonstarter with both Democrats and Schwarzenegger.

During final budget negotiations, Schwarzenegger backed away from the three-year shift. In 2004, local government organizations endorsed Schwarzenegger's Propositions 1A and 42 – fiscal reform and transportation funding measures. In exchange for those endorsements, the governor promised not to raid local funding sources in the future. The League of California Cities and other organizations called the governor on his vow, and in a speech at the League of California Cities conference during late September, the governor took credit for protecting local revenues.

In his speech, the governor did not mention the shift away from redevelopment agencies. According to analyses by the CRA and the Senate Local Government Committee, local agencies must pay their share of the $350 million total to school and community college districts by May 10, 2009.  This is equal to 7.7% of tax increment revenue. If an agency has committed all or a portion of its share to debt service, the underlying city or county may make the payment. If the agency or its underlying city or county do not make the payment, the agency must cease all activities except for debt retirement. If no other money is available, an agency may borrow up to half of its current year contributions to its low/mod housing fund to make the payment; the housing fund must be reimbursed within 10 years.

One question concerns use of bond proceeds to make the payments. "If payments are made using tax-exempt bond proceeds, unless the payment could qualify as a long-term capital borrowing or a de minimus amount, agencies run the risk of jeopardizing the tax-exempt status of the bonds," the CRA advised its members. "However, it may be permissible to use taxable bond proceeds."

The CRA argues that the revenue shift is unconstitutional, and the CRA board is considering a lawsuit.

A budget trailer bill, AB 1389, also requires redevelopment agencies to make up missed or unreported pass-through obligations to school and community colleges districts from the last five years. There is a sharp dispute about the amount involved but it could be as much as $100 million (see CP&DR In Brief, June 2008).

On the transportation front, the California Transit Association dubbed the budget "abysmal." The budget contains $306 million for the state transit assistance program, down nearly $200 million from 2007-08 and down $250 million from legislator's recommendation in July. The budget also shifts nearly $1.5 billion away from the public transportation account to cover general fund expenses. The diversion from the public transportation account since 2000 is now more than $4 billion, according to the association. The budget contains no money for any transit capital improvements listed in the State Transportation Improvement Program.

Aside from budget activity, the governor did sign a collection of bills to address the home foreclosure problems in California. Most of the legislation concerns private market activities, but two bills may be of interest to local government officials and planners.

Senate Bill 1065 (Correa) authorizes cities and counties to use revenue bonds to refinance mortgages on owner-occupied homes for households earning up to 150% of median income. Assembly Bill 929 (Sharon Runner) raises the total debt that the California Housing Finance Agency (CalFHA) may carry by $2 billion. The agency issues bonds to finance low- and moderate-income housing.