Petaluma filed suit against the state Department of Finance this week in an effort to retain millions of dollars in redevelopment funds the city had earmarked for two major road projects, including the East Washington Street-Highway 101 interchange that has been under construction for months.

The state abolished redevelopment agencies throughout the state last year and has staked a claim to the local tax receipts to supplement the state budget.

Former redevelopment agencies have been arguing with the state's Department of Finance since then over which planned projects constitute "enforceable obligations." Funding for those the state deems not under contract is taken by the state.

In Petaluma, the state has denied about $15 million in funds the city directed toward two Highway 101 interchange projects: East Washington Street and Old Redwood Highway.

It also has rejected another $7.5 million Petaluma earmarked for the Rainier Avenue crosstown connector project. A second lawsuit may be forthcoming on that issue, Councilman Mike Healy said.

The state has repeatedly rejected Petaluma's arguments that its signed funding agreements with Caltrans and the Sonoma County Transportation Authority, which administers local transportation tax money, constitute legal contracts.

In its suit, Petaluma argues that the state has used "flawed and arbitrary rationale" to review the agreements.

At the core of the dispute, the suit says, is whether the city, acting as the "successor agency" to wind down redevelopment activities, should be compelled to renege on financial commitments made by the former redevelopment agency.

No hearing date has been set. The suit was filed in Sacramento Superior Court.

You can reach Staff Writer Lori A. Carter at 762-7297 or