Petaluma is preparing a protest letter to the state in defense of $34 million, mostly in highway construction projects, that the state disqualified for funding with former redevelopment money.

The most crucial at-risk plans include two highway interchange projects: at East Washington Street, which is under construction, and at Old Redwood Highway, which is ready to go out for bid.

The $28 million budget for the East Washington-101 project includes $4 million of redevelopment funding, which the city approved in 2005. Of that, $1.8 million has already been spent on land acquisition.

The $41.5 million Old Redwood Highway interchange project was to include $15 million in redevelopment funds, $11.3 million of which was rejected by the state Department of Finance. That project was identified as a redevelopment priority in 2003.

After the state dissolved municipal redevelopment agencies — as a part of Gov. Jerry Brown's plan to use the revenues to plug the state budget gap — each locality submitted a list of what it said were contractually obligated projects, essentially those for which redevelopment funds had been specifically earmarked.

The state Department of Finance is in the process of analyzing each local government's list and approving or denying projects, based on whether they are considered "enforceable obligations." Money not allowed for the projects will 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 denied. Santa Rosa learned this month that $8.1 million for three projects was denied.

In Petaluma's case, the state denied $34.3 million of the $41.5 million it considered to be enforceable obligations.

That includes the two highway projects, $7.5 million the city earmarked for the Rainier Avenue cross-town connector project, $6 million for undefined future economic development, $6 million for affordable housing programs and administration, $1.4 million for the next phase of the Petaluma River bike trail and $1 million toward a loan involving work at the city's marina.

Mayor David Glass has sought the help of state Sen. Lois Wolk, D-Davis, who encouraged local leaders last week to fight for their projects, particularly ones that were approved locally before the state moved to eliminate redevelopment agencies.

"I do not believe the city of Petaluma could stop construction on this project at this point and we have no other funding source identified to honor our contractual obligations," Glass said of the in-progress East Washington construction.

Councilman Mike Healy, chairman of the oversight board charged with winding down the former redevelopment agency's functions, also defended the planned $7.5 million funding for Rainier. That project doesn't have a clear funding source, but is in the city's general plan.

"With East Washington, I think we would desperately try to find another funding source because it can't just be stopped," he said. "For Old Redwood, I think there's a risk of that just not happening."

Glass said the city might sue the state if it continues to deny the eligibility of what the described as "already earmarked funds."

Petaluma Finance Director Bill Mushallo said the city may ask the county to hold disputed funds in a trust fund pending a final resolution.