SOUTH LAKE TAHOE, Calif. — The South Lake Tahoe City Council has decided to take a wait and see approach when it comes to the future of the South Tahoe Redevelopment Agency.

But with several deadlines approaching, the council will need to act quickly on several decisions that will effect the city's budget for decades to come.

Gov. Jerry Brown has sought to eliminate California's 400 redevelopment agencies as part of his budget proposal, saying scarce funds should be spent on core services.

Last month, state legislators passed two bills requiring local jurisdictions to dissolve their redevelopment agency or pay a share of the $1.7 billion in tax revenue used by the agencies back to the local governments and schools.

On Aug. 2, the City Council told staff to move forward with an ordinance that would allow the South Tahoe Redevelopment Agency to remain in accordance with one of the bills.

The ordinance will need final approval from the city by Oct. 1 in order to meet a state-mandated deadline.

But the council direction does not necessarily amount to a reprieve for the redevelopment agency.

The exact ramifications of dissolving or continuing the agency are far from certain and the council's move to continue allows the city to “keep options open,” said city spokeswoman Nancy Kerry.

A pending lawsuit could also invalidate the bills passed by legislators last month.

The California Redevelopment Association, the League of California Cities and two San Francisco Bay area cities sued the state to block the changes.

They have asked the California Supreme Court to rule on whether to halt the changes in the bills by Aug. 15.

Options comes at a cost

How the court will rule is unknown, but both continuing the South Tahoe Redevelopment Agency and dissolving the agency come with significant consequences.

“You're being put in a very tough position,” Don Fraser, a redevelopment consultant to the city, told the council Aug. 2.

Councilwoman Claire Fortier described the position as being “between a rock and a hard place.”

If council votes to continue with the agency, the city would be subject to payments required by the bills, dubbed “extortion” by several jurisdictions around the state.

The city would be required to pay the state about $1.8 million by January and about $425,000 each year afterward to continue with the agency, according to staff estimates.

“The question becomes, if we want to continue the (redevelopment agency), how do we pay for it,” City Finance Director Christine Vuletich told the council.

With the city already facing several million dollars in budget shortfalls, City Manager Tony O'Rourke warned the council against incurring any additional liabilities, saying core services could be “gutted.”

But, if the council dissolves the redevelopment agency, South Lake Tahoe will face uncertainty that concerned several council members.

If the redevelopment agency is eliminated, a successor agency composed of the city, El Dorado County and several other South Shore special districts would be tasked with closing out the affairs of the redevelopment agency and settling about $109 million in agency debt.

Property owned by the redevelopment agency, including the lot at the southwest corner of Ski Run Boulevard and Lake Tahoe Boulevard, as well as the development rights owned by the agency would be sold as part of the agency's elimination.

Because of a commitment to payoff redevelopment debt with hotel taxes from Project Area No. 1 near stateline, Mayor Hal Cole said he was concerned the taxes could be seen as a redevelopment asset and disposed of by the successor agency.

The prospect of the successor agency having control over about $4 million in city hotel tax was “very scary,” Cole said.

Not all of the hotel tax from the project area is dedicated to bond service and discussions with bond attorneys has indicated the scenario is unlikely, Kerry said.

Still, with so much gray area surrounding the future of redevelopment, its impossible for anyone to give a definitive answer regarding the consequences of dissolving the agency, Kerry said.

Projects in jeopardy without redevelopment

Dissolution of the redevelopment agency would put several South Shore projects in doubt, according to Aug. 2 testimony.

Fraser questioned how the city would be able to get the stalled condominium and convention center project at Stateline restarted again without redevelopment funding.

Shellan Rodriguez, a project manager for Pacific West Communities, said a $15.5 million affordable housing at the corner of Pioneer Trail and Ski Run Boulevard is in jeopardy if the redevelopment agency goes away.

Pacific West has invested four years and about $1 million on the project, which was approved by the Tahoe Regional Planning Agency in December 2009, Rodriguez said.

The city must continue with the agency prior to a Sept. 26 deadline in order for the developer to use about $1.6 million in state loans necessary for The Aspens project, Rodriguez said.

If the state loans cannot be secured, the project is “pretty much dead,” Rodriguez said.

A proposal to build an affordable, Scandinavian-style nature spa at the southwest corner of Ski Run Boulevard and Lake Tahoe Boulevard would also be scuttled if the redevelopment agency is dissolved, according to Kalia Knutson, who owns the company behind the proposal, Luka Holdings, with her husband.

The project fits with the Lake Tahoe Basin Prosperity Plan, would bolster tourism and provide much needed jobs to the area, Knutson said.

The council is expected to further discuss the future of redevelopment, as well as its 2011-2012 budget, at its Aug. 23 meeting. The decisions made by the council will effect the city's budget for the next 30 years, Kerry said.

“These are very big decisions, probably much bigger decisions than people realize,” Kerry said.

-The Associated Press contributed to this report