SANTA ROSA -- A dispute between the state and the city of Santa Rosa over millions of dollars in redevelopment money, part of which the city deems necessary in coming months to kick-start a large Railroad Square transit-oriented project, escalated in the closing days of the year as the city joined a growing number of local governments statewide not in a hurry to comply.

In a letter received Dec. 15, the state Department of Finance gave the city until Dec. 21 to turn over to the Sonoma County Auditor-Controller $6.345 million of affordable-housing funds from the former Santa Rosa Redevelopment Agency or face losing that much in sales- and property-tax allocations and even criminal charges against individuals. The state ordered the funds returned after rejecting the city's plea that it be allowed to keep them for a long-planned senior housing project in Railroad Square.

That funds include $4 million for 93 senior-oriented housing units that would be the first phase of a $200 million-plus redevelopment of the historic cannery and train depot in Railroad Square central district. [See "City makes 11th-hour plea for Railroad Square funds," Nov. 5.]

"The city is still evaluating the letter from the DOF and does not anticipate releasing any funds until that analysis is complete," said City Attorney Caroline Fowler. She declined to comment on how long that analysis would take or what further action the city would take.

Santa Rosa dispute with the Department of Finance over which obligations are enforceable isn't unique, because many local governments and their RDAs had reimbursement or cooperative agreements with third parties, including other state agencies, according to redevelopment law expert Iris Yang, partner in Sacramento-based law firm Best Best & Krieger. She is a special counsel to a number of redevelopment successor agencies, including Santa Rosa's, and is representing the League of California Cities in a lawsuit against the very "claw back" penalty provisions of Assembly Bill 1484 included in Santa Rosa's Dec. 15 letter.

"The bill says that the successor entity is separate from the city or county, but if the successor entity does not make payment, the DOF says it owes a penalty that goes against the city or county," Ms. Yang said. "A number of constitutional provisions, we believe, say you can't do that, because you are shifting how property taxes are allocated, and that violates (Propositions) 1A and 22."

More than two dozen local governments, real estate developers and a bond financier have sued the state in Sacramento courts, and a number of local governments that recently received letters from finance such as Santa Rosa's are considering it, according to Ms. Yang.

About 160 local governments had meet-and-confer sessions in November and early December with Finance to contest determinations on allowed use of former redevelopment agency affordable-housing funds, according to department spokesman H.D. Palmer. Finance hasn't yet had to pursue AB 1484 remedies, he said.

Funds turned over are to be apportioned to local schools based on Proposition 98 proportions. That would benefit state coffers for not having to cover that, Mr. Palmer said.

"I want to make it abundantly clear these remedies are not the first resort," he said. "We've leaned forward, so to speak, to work with successor agencies."

That includes working with successor agencies on payment schedules if the funds can't be turned over all at once. If an agency don't turn over the funds, the law allows Finance to order the state Board of Equalization to offset sales- and use-tax allocations or the local taxing agency to reduce property-tax allocations.

In a Dec. 18 letter, the finance department approved a small fraction of Santa Rosa's October appeal to access $24 million of the former redevelopment funds in the first half of next year, including $5.5 million considered crucial in the next few months  to provide local matching funds for a $11.3 million Proposition 1C grant through the state Housing and Community Development Department (HCD). The money would also allow lead developer The John Stewart Co. to compete for tax credits to fund the project, according to David Gouin, city housing and economic development director.

The finance letters rejected a number of the city's assertions in the past few months that Santa Rosa Redevelopment Agency funds earmarked for the Railroad Square project and others were under "enforceable obligations." That means the money could be spent on redevelopment projects, under state law enacted in 2011 and this summer to close the California budget deficit. In February, more than 400 redevelopment agencies were dissolved statewide, and the Department of Finance wants funds not under such obligations to be turned over to county tax collectors.

The city noted at a finance "meet and confer" meeting Nov. 19 that the matching funds requirement is such an obligation. In October and December letters, Finance rejected that argument, quoting language in RDA-dissolution laws that disqualifies obligations that include an RDA or local government among the parties to such an agreement.

The recent finance letter does say that the city could turn over the required funds then apply to the department to get them back in the next six-month cycle of redevelopment funds allowances, which starts in July. Yet, funding projects and covering debts from existing tax income in the redevelopment area could create cash-flow issues while the city awaits a new decision from Finance, according to Mr. Gouin.