The Sacramento-based California Redevelopment Association is preparing to sue the state over a "devastating" $2.05 billion in redevelopment funds that state leaders want to be redirected to schools.

On Friday, the California State Legislature passed a budget that includes a provision ordering city and county redevelopment agencies to transfer $1.7 billion in property tax revenues in fiscal year 2009/10 and $350 million in 2010/11, said state Legislative Analyst Mac Taylor. The budget was crafted to close a $24 billion to $26 billion hole in the state's finances.

The order would siphon at least $20 million away from the Sacramento Housing and Redevelopment Agency, a joint powers authority that manages community redevelopment and affordable housing for the city and county. The money is set aside for investments in housing, infrastructure and other redevelopment.

Major redevelopment projects such as The Railyards, Township 9, Curtis Park Village -- as well as smaller projects -- could lose funding under the plan, sources said.

"I don't think it's an exaggeration to say this is devastating," said California Redevelopment Association (CRA) Executive Director John Shirey. "Most agencies will be shutting down for the year. They will not be taking on any new projects."

However, the provision won't become legally binding until 90 days after Gov. Arnold Schwarzenegger signs the budget into law, which is expected Tuesday. The budget was passed by a simple majority, rather than a two-thirds majority required to approve tax increases. Vetoes are still possible in the meantime.

CRA has submitted a formal request that the order be vetoed. But Shirey said he doesn't expect the governor to veto the provision after Schwarzenegger made a similar proposal last year.

Last fall, CRA successfully sued the state to stop it from taking $700 million in redevelopment funds. Taking those funds was found to be unconstitutional. The California Constitution outlines that property tax increment must be used by redevelopment agencies to finance redevelopment projects.

Under the budget plan, the city of Sacramento is expected to lose $16.9 million and the county $2.8 million, totaling $19.7 million for both, according to the CRA, which broke down the figures to estimate what each redevelopment agency's responsibility would be.

Sacramento County officials estimate the county would lose $17 million in low- and moderate-income housing funds, plus $8 million in investment funds.

Some major local projects could lose Proposition 1C funding if redevelopment money is redirected, said city spokeswoman Wendy Klock-Johnson. In 2006, voters passed Prop. 1C to help finance infrastructure for infill redevelopment that contains affordable housing.

Last month, the city won $55.8 million in Prop. 1C funds from the California Department of Housing and Community Development. That money was earmarked for four projects: the Railyards, Township 9, Curtis Park Village and Capitol Lofts.

However, Sacramento must provide matching funds to get the Prop. 1C grant money. The city was using its redevelopment funds as the matching funds, she said.

If the state takes city redevelopment funds, the city may not have the money to provide matching funds. So projects could lose the Prop. 1C grant money funding, Klock-Johnson said.

The state’s move to take redevelopment funds from Sacramento “jeopardizes our ability to stay in that [Prop. 1C] program,” she said.

In addition, the local economy would be hurt by the loss of jobs. Based on the number of construction sector jobs lost in California last year, CRA believes the entire state would lose 164,000 jobs the first year and 34,000 the second year if redevelopment agencies lose these funds. The Sacramento region has been hit especially hard by the loss of such jobs.

"It's as if the Legislature had set out to pass legislation to slow down California's economy," Shirey said. "If they had done that, this is the bill they would have come up with."

The budget provision orders the money to be sent to schools in redevelopment areas because the funding must be linked to redevelopment, Taylor said.

CRA legal advisers don't believe that link can withstand the legal challenge they expect to file within 45 to 60 says, Shirey said.

"The people who told the Legislature last year it was legal to take redevelopment money, which was later found to be unconstitutional, are the same people saying it is legal this time," Shirey said.

The Sacramento Housing and Redevelopment Agency could not be reached for comment.

Staff reporter Kathleen Haley contributed to this report.

Suzanne Hurt is a staff reporter for The Sacramento Press. She can be reached at 916-804-2856 or suzanne@sacramentopress.com.