The "notice of intent" filed in Sacramento County Superior Court contended the non-binding financing plan approved by the city council last week did not meet requirements for environmental reviews and also constituted "an unlawful gift of public funds to private parties."
The Sacramento Bee said the Coalition for Responsible Arena Development had warned the city previously it would sue unless the financing plan was put up to a public vote.
The City Council approved a so-called term sheet for the plan that includes $258 million in public subsidies for the arena, which carries a $448 million price tag and is aimed at heading off the proposed sale of the Kings to buyers in Seattle.
City Attorney James Sanchez told the Bee the lawsuit was "premature." The required environmental reviews will be conducted before the council takes a binding vote on the financing plan.
The lawsuit comes at a critical time in Sacramento's bid to keep the Kings. Sacramento and Seattle will both make presentations this week to NBA officials in New York who have yet to approve the Seattle sale.