At its winter meetings next week, the Sacramento-based California Building Industry Association (CBIA) is expected to craft its formal positions on Gov. Jerry Brown’s proposals to close that state’s $25.4 billion budget gap.

One proposal that’s likely to receive attention, says Mike Winn, CBIA’s interim president and CEO, is Brown’s plan to eliminate California’s 400 redevelopment agencies (RDAs) as of July 1, and to take $1.7 billion that RDAs would otherwise divert to developers annually and redirect those funds to counties, cities, and special government agencies for fire protection, water, and other services.

Eliminating RDAs, says Brown, would prevent cuts in the state’s K-12 school system. He also wants to eliminate enterprise zones, which would make another $924 million available to local governments.

California is one of many states grappling to find ways to reduce their ballooning deficits. The Center for Budget and Policy Priorities, in a survey of state fiscal conditions, finds that 44 states and the District of Columbia are projecting budget shortfalls of $102 billion in the upcoming fiscal year and totaling $125 billion in fiscal 2012.

Consequently, governors across the nation are scrambling to slash spending (tax increases, in most cases, are unmentionable), including allocations for previously untouchable sacred cows. “Everything’s on the table,” concedes Rebecca Boykin, a spokesperson for the Illinois Housing Development Authority (IHDA), which serves a state that’s staring at a $15 billion budget deficit.

On Wednesday, IHDA reported that $359.2 million in federal stimulus funding it received in 2010 enabled the state to start construction and rehabilitation on nearly 5,500 affordable rental homes, which created an estimated 4,855 jobs statewide.

Builder’s calls to associations representing governors and state legislatures found that California seems to be alone among other states in targeting redevelopment authorities for outright elimination. Projects already started in that state with RDA-provided financing could be completed under a replacement agency. But if Brown’s proposal were approved, voters would henceforth need to sign off on financing for other projects in the pipeline.

The perception that RDAs are under siege was perpetuated further on Tuesday, when California’s controller, John Chiang, announced that his office was sending auditors to comb through the books of 18 redevelopment agencies across the state.

That probe—which Chiang contends is solely to provide information about how RDAs perform—and Brown’s confidence that eliminating RDAs isn’t political suicide suggest that the protective walls which these agencies have built around themselves might have some cracks. The controversy Brown’s proposal has stirred up also shows how hard it would be for cities and developers to wean themselves off of these dollars.

The Los Angeles Business Journal quotes Bill Witte, a managing partner for Related Cos.’ California division, who says that two of Related’s projects—an affordable housing complex in Pacoima and an $80 million mixed-use development in Little Tokyo—wouldn’t “pencil out” without RDA money. Last month, Los Angeles’ RDA allocated $930 million for hundreds of projects in a preemptive move in case that agency gets dissolved under Brown’s budget. Other towns and cities in the state have been maneuvering to either block the elimination of their RDAs or to shield the money collected from the budget knife.

The California Redevelopment Association (CRA) calls Brown's proposal "more budget smoke and mirrors that will bring little financial gain for the state, but will cause widespread and significant economic pain in communities throughout California. It is another gimmick that will likely result in extensive litigation." The trade group estimates that redevelopment activities contribute $40 billion to California's economy and support more than 304,000 full- and part-time private sector jobs annually.

However, Brown's proposal has supporters who believe what he's calling for is long overdue. Critics of redevelopment agencies point out that a rule which mandates that one-fifth of all RDA funds be used for affordable housing is often ignored without penalties. They also see RDAs as boondoggles that favor big developers without providing much impetus to the state's economic fortunes. Dan Walters, a political columnist for the Sacramento Bee, disparages CRA's employment claims for redevelopment agencies as "propaganda." And the state legislature's budget analyst, Mac Taylor, says he's found "no reliable evidence that redevelopment agencies improve overall economic development in California."

Apparently, many of the state’s residents agree. A new poll that the Public Policy Institute of California released on Wednesday shows that 66% of Californians and 63% of likely voters support phasing out funding for redevelopment agencies and using it for schools and other services.

Randy Shaw, editor of Beyond Chron, San Francisco’s alternative daily newspaper, poses a question that the development community might need to answer at some point, as this debate goes forward in a state that stands precariously on a financial cliff: If defenders of RDAs and enterprise zones seek immunity from budget cuts, “they need to announce where to find the $2.7 billion they want restored,” writes Shaw. “Otherwise, as Brown has repeatedly stated, they are not serious about a budget solution.”

John Caulfield is senior editor for Builder magazine.

Learn more about markets featured in this article: Los Angeles, CA.