California cities such as Los Angeles and Fremont are rushing to commit tax money to new buildings, street repairs and additional blight-removal projects, ahead of Gov. Jerry Brown's drive to spend the funds on other state priorities.

The California governor's move, which would dismantle local redevelopment agencies to free up money for schools, municipalities and other local entities, is an early test of his strategy to dig the nation's most populous state out of a $25.4 billion budget hole.

Mr. Brown's plan, included in his proposed budget this month, comes as cash-strapped officials from Wisconsin to Ohio have pushed for overhauls of economic-development programs whose effectiveness is unproven.

State law lets cities and counties create redevelopment agencies as a funding mechanism to cure blight through public improvements that lure private investment, generate jobs and boost tax revenue. When a city designates an area for redevelopment, the local agency sells bonds to finance projects. The agency then uses any resulting increase in local property-tax revenue, which in other cases would go to schools and local governments, to pay off the bond debt and fund other community improvements; schools and municipalities receive a smaller share of the increase.

The agencies have recently received increasing sums of property-tax revenue, and the state has used its coffers to make sure schools have enough funding.

Mr. Brown's plan for the fiscal year ending June 30, 2012, would shift about $1.7 billion from redevelopment to the state's low-income health-insurance program and to trial courts. Later, the money would be shared by local governments and schools.

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