SAN FRANCISCO — California's redevelopment agencies may be closer to death's door than previously thought after a state Supreme Court hearing on Thursday.

The court is hearing a challenge to a pair of laws the Legislature passed this year — one eliminates redevelopment agencies, and the second allows them to come back to life if they make payments to help balance the state budget. During a tense hearing, the justices appeared to give consideration to a split decision; allowing the law that eliminates the agencies to stand, while finding unconstitutional the law that allows them to survive by paying the state.

If that is the outcome, the plaintiffs in the case said bondholders could be seriously affected.

"We have already seen ratings on bonds decline since the passage of this legislation. You better believe that the folks that hold those bonds are going to be very concerned about the repayment of those debts to them being impaired," Chris McKenzie, executive director of the League of California Cities, a plaintiff in the case, said on the courthouse steps. "There could be other lawsuits that raise that issue."

According to the state's reading of the law, if the agencies are shut down, the money to pay debts would be put in a special fund and bondholders would get paid.

"Five billion dollars right off the top is the amount that is deducted to cover debt service and honor the preexisting obligations," said H.D. Palmer, a spokesman for the state Department of Finance.

The state's 400 RDAs have $20 billion of tax-allocation bonds outstanding. The two bills, passed as part of the state budget, effectively give redevelopment agencies the choice of either paying an estimated $1.7 billion to the state this fiscal year and $400 million a year thereafter to help balance its books, or to shut down.

The California Redevelopment Association and the League of California Cities, along with San Jose and Union City, filed the lawsuit in July to block the laws, saying they violate the state constitution.. The defendants named in the suit included California finance director Ana Matosantos and Controller John Chiang.

Throughout the hearing, the justices peppered the lawyers with questions, including ones about the severability of the two laws if one is shot down but not the other.

Santa Clara County's lawyer, James Williams, argued for keeping the one law and axing the other, something he said lawmakers intended. He said that RDAs have had an "extraordinary" negative impact on the county because they take away needed tax revenue.

In response, the lawyer for the plaintiffs, Steven Mayer, said the Legislature did not intend a complete shutdown of redevelopment.

"The reality is that most of the cities and counties will make the payments if they can because the alternative is so draconian," he said.

The main thrust of the argument by the redevelopment agency advocates centered around Proposition 22, a ballot measure passed in 2010, that prohibits state government from taking or interfering with revenue dedicated to local governments.

The unintended consequence of that measure, backed by redevelopment supporters, could be the agencies' elimination because the high court may use Proposition 22 to find the budget payments are unconstitutional, while accepting the state's argument that redevelopment agencies are a creation of the Legislature, which retained the power to eliminate them.

The court, which has expedited the case and has granted a stay on most parts of the new laws, expects to reach a decision by Jan. 15.

Even if both laws are upheld, rating agencies have already warned that redevelopment agencies with tenuous backing for their bonds could find themselves in trouble.

Standard & Poor's said in a report at the end of October that put 16 agencies on credit watch negative that many of these bonds will come under more financial strain because they will likely lose the ability to use funds outside of pledged revenues and reserves to cover shortfalls.

Many experts agree that lawmakers will iron out the kinks in the new laws if the court upholds them. Gov. Jerry Brown vetoed an attempt by the Legislature to clean up the laws, saying he wanted to hear from the Supreme Court first.

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