City officials say that two major Highway 101 traffic projects already underway now have the funding to be completed, despite a growing likelihood that the city will never see millions of dollars in redevelopment funds meant to help pay for the projects.

Petaluma has been fighting to keep these funds — $8.7 million — for the East Washington Street and Old Redwood Highway interchange projects for more than a year, since redevelopment agencies were dissolved. The city is also trying to retain an additional $7.5 million set aside for the Rainier Avenue crosstown connector project.

Historically, redevelopment agencies oversaw the disbursement of a portion of city tax revenue that, instead of being paid to the state, was set aside for local infrastructure, housing and maintenance projects. In 2011, the state dissolved these agencies in an effort to direct more money to its budget and required cities to pay the state funds they had not used or that were not earmarked for projects already under contract.

Petaluma officials contend that contracts had been signed and work had begun on both the East Washington Street and Old Redwood Highway interchanges before the Department of Finance dissolved redevelopment agencies, committing the associated redevelopment funds to Petaluma. But because the city had written the contracts directly with Caltrans, rather than through the redevelopment agency, the state said it did not consider the funds committed. The Department of Finance demanded that the city hand over $8.7 million it was holding for the two transportation projects.

To compel Petaluma to do so, the Department of Finance refused to release more than $32 million of city bond money issued for Petaluma prior to January 1, 2011, which Petaluma had been planning to use for the interchanges and other major projects. Petaluma filed a lawsuit in November contesting the state's findings that the two interchange projects were not already under contract and has been awaiting outcome the before paying its Department of Finance bill in the hopes that it would win the rights to the money.

That lawsuit — filed against the Department of Finance in Sacramento Superior Court — was denied in May by a state judge. The City Council has two months to decide whether to appeal the decision.

The city is also currently waiting for a decision on another lawsuit it filed against the Department of Finance for the $7.5 million related to the Rainier Avenue crosstown connector project.

So, forced to choose between keeping the $8.7 million or having access to $32 million in bonds, the City Council on May 20 decided to pay the $8.7 million to the state, with the assurance from the Department of Finance that should they win their lawsuit, the state will return the payment.

City Manager John Brown said the city has already found alternative funding mechanisms for the East Washington and Old Redwood Highway projects through a combination of the bond money and traffic impact fees. The council voted to increase traffic impact fees in 2012 in response to the loss of redevelopment funds.

"The downside is we don't have the $8.7 million, but on the other hand we do have the ability to use our bond money for these, and other, projects." said Brown. "It would have been far superior to use the money from redevelopment and the bonds to pay for these projects, rather than to raise traffic impact fees, but at least we can move forward."

As retaining redevelopment funds seems less and less likely for Petaluma, the city is finding it increasingly difficult to fund major affordable housing and transportation projects. While many of these projects could be funded by issuing a special tax, such a measure requires 67 percent voter approval and is often unattainable — even if the proposal is popular among voters.

An example of how difficult such measures are to pass is Petaluma's Measure X, a special tax placed on the November, 2012 ballot by Petaluma Friends of Recreation. It was meant to fund parks and recreation maintenance in town.

Though the $52-per year parcel tax received 61.1 percent of the vote and obviously had the majority of the public's support, it failed to reach the 2/3 threshold required to pass.

Because other infrastructure tax measures across the state are encountering similar hurdles, Petaluma's State Senator Lois Wolk has proposed a bill to allow cities to create special districts to fund infrastructure projects with a majority vote of the agency proposing it, such as a city council.

"It's really important that communities are able to build and publicly finance infrastructure that's important to them," said Wolk. "This would provide that missing local government finance mechanism."

Senate Bill 33 is scheduled to go before the state governance committee on June 12.

(Contact Janelle Wetzstein at janelle.wetzstein@arguscourier.com)