In what City Attorney Eric Danly called a "disheartening blow for the city," a state judge recently ruled against Petaluma in its lawsuit against California's Department of Finance over $7.5 million in redevelopment funds meant to help pay for the Rainier cross-town connector.

Petaluma has been fighting to keep about $13 million set aside for the East Washington and Old Redwood Highway freeway interchange projects and an additional $7.5 million for the Rainier Avenue cross-town connector project for more than a year, since local redevelopment agencies were dissolved in late 2011. The city lost its first lawsuit for $13 million in May and filed a notice of intent to appeal that case soon after. Last week, Petaluma learned it had also lost its second case — the one for the $7.5 million that would have gone toward Rainier.

"Obviously, we're disappointed and frustrated by the results," said Danly. "We all knew the state was trying to get back some tax dollars until it could balance its budget, but what these rulings have done is essentially take money away from cities at the expense of their local programs — like police, fire, parks and housing."

Danly said the City Council has two months to decide whether it wants to appeal the second case.

Prior to their dissolution, redevelopment agencies disbursed a portion of property tax revenue that, instead of being paid directly to the state, was given back to cities for local housing and infrastructure projects. But in 2011, the state ended these agencies in an effort to direct more money to its own budget. The Department of Finance required cities to pay the state any funds they had not used or that had not been set aside for projects already under contract.

Petaluma, like many other cities, had already drawn up contracts for several major infrastructure projects, including the East Washington Street and Old Redwood Highway interchanges, and the Rainier Avenue cross-town connector. But the state contends that Petaluma did not properly secure its contracts through its redevelopment agency and is therefore not entitled to money it had set aside for the work in question.

Danly and many other city attorneys across the state have argued that the work contracts written by cities for redevelopment are valid and that Petaluma should be entitled to keep the more than $20 million in redevelopment funds it had planned to use on the three projects. But the Department of Finance disagreed, forcing the city to fight for the money in court.

Petaluma has since found ways to pay for the East Washington and Old Redwood Highway interchange projects without redevelopment funds, by using a combination of city bond money and traffic impact fees, which the city voted to increase in 2012 in part because of the loss of redevelopment. Construction on the East Washington Street interchange reached a significant milestone when the new northbound onramp opened last month, while work on the Old Redwood Highway interchange continues. But the Rainier cross-town connector project remains largely unfunded.

Recently, the County of Sonoma won a similar redevelopment lawsuit against the state Department of Finance, giving the city a glimmer of hope that they might win their case seeking funds for Rainier. But despite the precedent, Petaluma lost the case. Danly said that the city might still be able to use the county case in future appeals.