Cities across California are scrambling this week to decide how to respond to the dissolution of the state's redevelopment agencies following a State Supreme Court decision issued late last month. The case was the result of a legal challenge brought forward by the California Redevelopment Association, the League of California Cities and a number of other parties.

The suit charged that two bills passed by the state legislature and signed into law by Gov. Jerry Brown as part of an agreement to close the 2011 budget gap were unconstitutional. The first law, Assembly Bill 1X 26 prohibited the state's redevelopment agencies from engaging in new business and ordered their dissolution, while the second, Assembly Bill 1X 27, would have allowed the agencies to continue to operate so long as the cities and counties that created them paid into a fund for schools and special districts. The plaintiffs in the suit argued that the laws violated Proposition 22, which limited the ability of the state to require payments from redevelopment agencies to benefit the state, and hence were unconstitutional.

The court upheld the first law and struck down the second, thereby giving the green light for the dissolution of the agencies but providing no system which would allow them to continue to operate. Many cities and counties are poised to name themselves the successor to their local redevelopment agency, while others appear unable to take on the cost of doing so.

On Tuesday, San Diego's City Council unanimously voted to name the city the successor to its redevelopment agency in order to ensure that it would maintain control of the former agency's ongoing projects and the process of unwinding its assets. The likely result will be the creation of a new city department to handle redevelopment issues. “Some of the projects will take years,” said San Diego Chief Operating Officer Jay Goldstone. “But, again, we need to determine which of the projects will survive and which ones will not and then staff accordingly,” he continued, adding that the city's general fund would likely not be significantly affected as the law abolishing the agencies allocated enough money to aid the process of dissolution.

Things appear rather different in Los Angeles. City Administrative Officer Miguel Santana and Chief Legislative Analyst Gerry Miller advised the City Council yesterday that it simply could not afford the cost of absorbing its redevelopment agency. Santana and Miller estimated the cost at around $109 million dollars, including nearly 200 employees. The city has already initiated negotiations to lay off the agency's personnel. If the city chooses not to become the successor to its redevelopment agency, the county could do so. If the county were to pass, responsibility for the unwinding of the agency would pass to an oversight committee appointed by the governor. The situation has created a vast amount of uncertainty among officials and developers alike, to say the least. “Everything is in chaos right now,” said Los Angeles Councilwoman Jan Perry.

California's redevelopment agency system was created following World War II. By last year, the tax increment financing method at the heart of the redevelopment agency system ensured that billions of dollars in tax revenue were funneled back into development projects, thus diverting funds that would have otherwise gone to schools and social services.