From K Street to the downtown railyard, urban renewal projects in Sacramento and elsewhere have relied heavily on public redevelopment funds.

Until now, perhaps.

Gov. Jerry Brown signed legislation Wednesday that blows a $1.7 billion hole in cities and counties' redevelopment programs. It eliminates the state's 400 redevelopment agencies, although it creates a mechanism allowing them to survive with less money.

Redevelopment agencies are preparing a lawsuit, calling the legislation an unconstitutional cash grab that conflicts directly with a recent state ballot initiative.

They said lawmakers have crippled an industry that's helped the construction sector through bleak times.

"Redevelopment was probably the only thing that most communities had going through the recession," said John Shirey, who leads the California Redevelopment Association.

But legislators said redevelopment won't die. Although agencies will surrender $1.7 billion in the new fiscal year, they'll lose just $400 million a year in future years, out of an annual budget of $5.5 billion.

"Anybody who's saying this wipes out redevelopment, this ends redevelopment, it's not true," said Senate President Pro Tem Darrell Steinberg, D-Sacramento.

In Sacramento, redevelopment money has been used in many notable projects. It revived Old Sacramento in the 1960s and the crime-plagued Franklin Villa housing complex in 2006. The lofts at 16th and J streets, whose tenants include Brown and his wife, Anne Gust Brown, were renovated with redevelopment funds.

Yet redevelopment had become a tempting target as lawmakers sought to tame budget deficits. The Legislature took nearly $2 billion from redevelopment in 2009.

Critics said the system gets abused. State Controller John Chiang recently scolded Palm Desert for allocating $16 million in redevelopment money to improve a luxury golf course deemed "blighted."

Now local officials fret that scores of legitimate projects in the pipeline could falter.

The revival of Sacramento's downtown railyard has been counting on redevelopment money. The same goes for the old PG&E power plant on Jiboom Street, which is supposed to become a science museum, said Leslie Fritzsche, the city's downtown development director.

"If you look around downtown Sacramento today, you will see that virtually all major construction activity going on is happening at projects assisted with redevelopment funds," said La Shelle Dozier, head of the Sacramento Housing and Redevelopment Agency, in a written statement.

The new law jeopardizes such projects as the Township 9 housing complex and the planned face-lift of K Street's dilapidated 800 block, she said.

Projects that have already been funded are probably not in peril, Fritzsche said. That includes the renewal of the 700 block of K Street, which just got approved, and the infrastructure work in progress at the railyard.

Backers of some fledgling projects, like the proposed downtown sports arena, have sidestepped redevelopment funding, knowing that Brown had been trying to kill the agencies since he took office in January.

"It was clear that it was something we couldn't count on," said Chris Lehane, a member of Mayor Kevin Johnson's arena task force.

Brown signed two bills, ABX1 26 and 27, that take aim at redevelopment's complex funding mechanism.

Redevelopment agencies issue bonds to fund projects in blighted areas. As projects come to life, property values rise. But instead of generating gobs of new tax revenue for schools and municipalities, the agencies keep most of the money to repay their bonds.

Because of funding mandates, the state must "backfill" that lost revenue by sending money to schools. That adds to the state's deficit.

By eliminating the agencies in the new budget, lawmakers expect to save $1.7 billion.

The legislation lets redevelopment agencies survive – as long as they pay the schools and municipalities a significant chunk of the tax money they've been using to repay their bonds.

Some agencies couldn't afford the payments and would fold, Shirey said. He said the new law violates Proposition 22, a 2010 ballot initiative that says the Legislature can't take money from redevelopment agencies to balance the budget.

The lawsuit is "ready to go," he said.

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Call The Bee's Dale Kasler, (916) 321-1066. Torey Van Oot of The Bee's Capitol Bureau contributed to this report.

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