Oakland Mayor Jean Quan makes a point during her State of the City address, Wednesday, Feb. 27, 2013 at City Hall in Oakland, Calif. (D. Ross
Oakland Mayor Jean Quan makes a point during her State of the City address, Wednesday, Feb. 27, 2013 at City Hall in Oakland, Calif. (D. Ross Cameron/Staff)

OAKLAND -- Oakland's multimillion-dollar accounting "gimmick" that helped balance its books two years ago appears to have been rejected by state regulators, a move that would severely cut into the city's rainy day reserve.

Faced with a $58 million deficit in 2011, Oakland sold several properties -- most notably the shuttered Henry J. Kaiser Convention Center -- to its redevelopment agency.

The transactions essentially moved more than $30 million from the redevelopment agency into city coffers shortly before Gov. Jerry Brown eliminated the state redevelopment program and used agency assets to help close the state's deficit.

There had been doubts from the start whether Oakland's move would be allowed to stand. At Tuesday's budget meeting, Mayor Jean Quan told council members that the state was disallowing the transactions.

"We just got the word from the auditor this week that they're clawing back most of the money," Quan said.

Jacob Roper, a spokesman for the California State Controller's Office, said that the department's audit of Oakland is ongoing and that none of the findings will be official until it is completed.

The city stashed most of the proceeds from the property sales in its reserves, which in turn soared to a record $84 million last year. Oakland is required to keep a roughly $30 million reserve, which amounts to 7.5 percent of its $400 million operating budget.

But the reserves have been dwindling this year as the city began a host of new police initiatives.

Quan told council members she thought the state would take back "pretty much everything" leaving the city with only its $30 million base reserve.

It is still unclear if Oakland's reserves might dip even lower, either from state take-aways or increased city spending. The police department is forecast to overspend its overtime budget by $8.9 million this fiscal year, according to a recent city report.

The redevelopment news underscored a grim beginning to Oakland's budget season. Quan, who will release her proposed two-year budget later this month, warned council members that cuts were likely.

"You can set (maintaining staffing levels) as a goal," she said, "but I don't think you have the money to do it."

Oakland has already faced the wrath of state officials over its handling of redevelopment's demise.

Earlier this year, the Department of Finance ruled that the city was ineligible to receive $9.5 million in redevelopment funds that was to pay for staffers working on affordable housing developments.

Redevelopment agencies were created to help local governments fight blight. The program allowed the agencies to receive a higher share of property taxes to pay for economic development projects, which in Oakland included the Fox Theater renovation. But it also proved costly to the state, which was left having to backfill tax revenue that otherwise would have gone to school districts.

Quan told council members that most of the funds taken back by the state will go to an agency that is winding down Oakland's redevelopment projects. The agency would split the funds among entities that collect local property tax with Oakland receiving between 29 percent and 39 percent, city officials said.

Contact Matthew Artz at 510-208-6435.