The California Department of Finance on Friday denied more than $34 million in former redevelopment agency funds to the city of Petaluma, most of it allocated for transportation projects like the Rainier crosstown connector and Old Redwood Highway interchange at Highway 101. The decision throws into jeopardy several multi-million dollar projects the city is under contract to complete.

The news stunned city officials who said this week it's unknown how the projects, including the new East Washington/Highway 101 interchange currently under construction, will be paid for if the state prevails in preventing the city from using redevelopment monies previously earmarked for such projects.

"We at the city whole heartedly disagree with the Department of Finance's conclusions and intend to dispute their findings on many legal grounds," according to Ingrid Alverde, Petaluma's economic development manager charged with winding down the city's former redevelopment agency. "We plan to do everything we can to preserve the funds allocated to these important projects … many of which support the state's highway system and create jobs."

In February of 2011, Petaluma council members unanimously approved a $41.5 million spending package in an attempt to keep the money from being taken by the state under Gov. Jerry Brown's plan to eliminate redevelopment agencies.

The deal committed the now defunct agency's funds to several specific transportation improvement projects, including $7.5 million for the Rainier cross-town connector and $15.4 million for a new interchange at Highway 101 and Old Redwood Highway, as part of a five-year capital improvement plan that also included about $6 million for affordable housing programs with local non-profit groups like COTS.

But the state claims that contracts for most of the projects were not in place prior to a June 28, 2011 deadline set by the state legislature when it voted to dissolve all of the state's redevelopment agencies last year. At the time, Brown vowed that no redevelopment projects already in the works would be affected.

Over $6 million the city had allocated for affordable housing — including Petaluma's COTS organization, rental assistance programs, transitional housing programs, rehabilitation and fair housing programs — has also been denied by the Department of Finance.

"It is our understanding that these are obligations of the city … and therefore do not qualify as enforceable obligations," said California Department of Finance Program Budget Manager Mark Hill in a letter to the city.

On April 25, the Petaluma Oversight Board — a task force designed to guide the city through the process of meeting financial obligations previously run by the city's redevelopment agency — met and was reminded by Alverde that several of Petaluma's capital projects had already been approved and were in the process of development.

"The East Washington project is well underway, and the Old Redwood Highway interchange is in the design phase," said Alverde. "A third project contemplates the design and construction of a cross town connection and (Highway) 101 interchange at Rainier Avenue. The last major project is the final phase of a pedestrian trail along the Petaluma River … previous phases completed a flood wall and a portion of the path stretching from Lakeville Avenue to D street," Alverde told the Oversight Board.

Prior to receiving the state's denial notification, Alverde said the city was prepared to proceed with these projects since they were contractually obligated to continue. Now, it's unclear how the city will proceed.

"There is no precedent for this," said Alverde. "The law is often vague and unclear about how this works."

Petaluma City Councilman Mike Healy, who chairs the oversight board, agreed with Alverde, noting that Petaluma's attorneys were talking with city attorneys across the state to evaluate their options in challenging the state's action.

Healy said that the $1.8 million earmarked for the East Washington interchange had already been spent on property acquisition, so he doubted the state could take that. He said he was less optimistic about protecting monies earmarked for the Old Redwood Highway interchange or the Rainier connector.

"These issues will probably have to be resolved in court," he said.

(Contact E.A. Barrera at argus@arguscourier.com.)