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State finance officials have rejected as invalid nearly $35 million that Santa Rosa's former redevelopment agency claimed it was legally committed to spend on a variety of local projects.

The decision was another blow to the city's nearly two-year effort to prevent the state from redistributing the property tax revenue that had long allowed the agency to build infrastructure and promote economic development.

The department did authorize the city to spend about $1.6 million during the first half of next year to make payments on debts it deemed valid, such as payments to existing bond holders, and some administrative costs.

"It's discouraging to see our state Legislature choosing not to recognize these contractual obligations for local community projects that if completed, lead to increased property and sales tax revenue on which public services and schools rely," said Dave Gouin, the city's director of economic development and housing.

State officials, however, contend that binding contracts, as defined by state law, did not exist when the measure went into effect.

More than 400 redevelopment agencies statewide were dissolved Feb. 1 as part of an effort by Gov. Jerry Brown and the state Legislature to divert their tax revenues and related assets to help plug the state budget gap.

Many of the agreements that the agency views as "contractual obligations" are with City of Santa Rosa, deals that were signed in an attempt to ensure tax dollars continued flowing to those projects, even if they remained years off. But the state law that dissolved redevelopment agencies noted such agreements would not be honored, though subsequent legislation created a path for some to be recognized.

While not a surprise, the decision was disappointing because city officials believed they had been clearing all the hoops necessary to preserve some of the money, particularly $5.6 million in bond proceeds and $7.6 million in loans the city had made to the agency.

But the state finance officials made no mention of these efforts in their rejection letter, Gouin said.

"That doesn't give us confidence," he said. The city plans to appeal the decision with the state Department of Finance.

One project that City Hall was particularly disappointed to see rejected was the $5.5 million in funding for a Railroad Square apartment complex near the future SMART rail station.

That money was going to be used to leverage an additional $11.3 million in state grant funds aimed at promoting in-fill and transit-oriented development, said developer John Stewart.

If the city's seed money is lost, the grant will be lost and "the site will lie fallow for the next five years. It's crazy," Stewart said.

Stewart had planned to renovate the former cannery on Third Street west of the rail line with a Club One Fitness Center on the first two floors and 68 low-cost senior rental apartments on the third, fourth and fifth floors.

But the fitness center backed out last year, and the latest plan is for 93 affordable senior units, he said. The plan still could succeed if the Department of Finance reverses its decision on the $5.5 million, he said.

"I think this is an example of inverse economic development," Stewart said.

Other local projects would have funding evaporate under the department's decision. These include a new sewer line for B Street to handle higher density downtown housing, Stony Point Road improvements, a section of the multi-use SMART path, graffiti removal and city-wide economic development programs. Some projects will stall while others will need funding from other sources, putting further pressure on city budgets, Gouin said.

Santa Rosa isn't the only local agency getting bad news from the state.

The Sonoma County Community Development Commission has also seen funding for its two largest projects rejected.

The commission had earmarked $6.6 million toward the construction of a mixed-use neighborhood center on the site of the former Albertson's site in Roseland and $9.5 million to install sidewalks along Highway 12 in the Springs area of the Sonoma Valley.

Those funds did not qualify as "enforceable obligations," in state department of finance parlance, according to John Haig, redevelopment manager.

A decision on the county's appeal is expected next week.

Working with the state Department of Finance officials has proven challenging in part because projects in question were to be funded from a variety of sources. The Highway 12 sidewalk project, for example, was to be paid for with a mix of bond proceeds, cash and future tax revenues, but the fate of each individual funding piece hasn't been clear, Haig said.

"Different analysts are giving different answers," he said.

(You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com. OnTwitter @citybeater)