The state Department of Finance has rejected as invalid an $8.1 million debt that Santa Rosa claimed was owed to it by its former redevelopment agency.

The decision, which was received by city officials Friday and was not unexpected, means the city is unlikely to receive those funds as it once expected.

City and county redevelopment agencies were ordered dissolved by Feb. 1 as a part of Gov. Jerry Brown's plan to use the revenues to plug the state budget gap.

Former redevelopment agencies across the state have been learning in recent weeks just how much money the state will let them keep to continue paying existing projects and programs, and how much must be diverted back to underlying taxing entities, such as school districts.

Last month Sonoma County learned that plans to transform a Roseland shopping center into a commercial and residential complex and to complete pedestrian upgrades to Highway 12 north of Sonoma were "unenforceable" obligations.

Three Santa Rosa projects suffered the same fate.

The largest is two loans the city made as seed money to get two redevelopment project areas started. The total value of the unpaid principal balance and future interest payments for the two loans amounts to $7.6 million.

The state deemed the loans invalid because they were made more than two years after the formation of the agency, which was created in the late 1950s.

Also rejected was $406,471 earmarked for the city's economic development programs. That got the thumbs down because it is a funding agreement between the redevelopment agency and the entity that created the agency, the City of Santa Rosa.

State guidelines for the winding down of redevelopment agencies have stated that only debts that are "enforceable," such as required payments to bond holders, will continue receiving funding.

The city's draft budget for next year assumed the loss of these and other funds. The city's economic development program budget is expected to fall 39 percent next year, from $1.8 million to $1.1 million.

"It totally devastated our program. We lost the entire downtown program," said Danielle O'Leary, the city's economic development manager.

The third item is $46,600 the city planned to use to connect a portion of Leddy Avenue to the city sewer system.

Curiously, the state did not reject $1.3 million of bond proceeds for the project, or $181,000 in reserves for the project. It only rejected the $46,600 the city listed coming from redevelopment property tax revenues.

Cheryl Woodward, deputy director of economic development and housing, said the Department of Finance "singled out a single component of this agreement based on the funding source."

Woodward said it remains unclear whether the $8.1 million is the entire amount the state will reject because the letter states that other obligations remained "subject to review and may be denied as future obligations."

You can reach Staff Writer

Kevin McCallum at 521-5207 or