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Judge Rules California Can Raid Local Funds To Balance State Budget

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SACRAMENTO, Calif. — Gov. Arnold Schwarzenegger on Tuesday won the right to raid local redevelopment funds to help close California's budget deficit, but the court ruling provides only a ray of good news in an otherwise bleak fiscal outlook.

Sacramento County Superior Court Judge Lloyd Connelly ruled that the state can take more than $2 billion from local redevelopment funds and transfer the money to school operations. Local governments objected to diverting the money, which generally is used to promote public works projects and rehabilitate downtowns.

"We dodged a bullet," said Schwarzenegger's spokesman, Aaron McLear. "This would have added $2 billion to our deficit."

During budget negotiations last year, Schwarzenegger and lawmakers agreed to use the money from redevelopment funds for schools in those districts as a way to make up for declining general fund revenue.

Local governments argued that shifting that money was unconstitutional and would prevent redevelopment agencies from moving ahead on projects that create jobs at time of high unemployment. California's unemployment rate is at 12.6 percent.

In his decision, Connelly wrote that the state could use the money to help support schools located within redevelopment agency boundaries because it served a public purpose.

The California Redevelopment Association, the leading plaintiff in the case, was deciding whether to appeal.

"We strongly disagree with Judge Connelly's ruling, which effectively says the Legislature has unlimited discretion to redirect local redevelopment funds to any purpose it wishes," said John Shirey, executive director of the association, in a written statement. "The Legislature needs to deal with its budget problems by making hard decisions using its own limited resources – not by taking away local government funds."

Had Connelly approved the local governments' request for an injunction, it would have created an even bigger problem for Schwarzenegger as he prepares to release his revised budget later this month. California is projecting a deficit of roughly $20 billion in the fiscal year that starts in July.

State income tax collections took an unexpected drop last month after four months of steady improvement. The controller's office reported personal income taxes in April were down about $3 billion, or 30 percent, from administration projections. April is a critical month because it's when most Californians pay their taxes.

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