Redevelopment has taken a serious beating over the last several years, but it appears the knockout punch may be accidental.

In June, the Legislature enacted two measures, AB X1 26 and AB X1 27, as part of a solution to the state’s gaping budget deficit. The first measure eliminates redevelopment in California. The second measure creates a way to reinstate redevelopment agencies by agreeing to make “voluntary” payments to school districts and local governments.

There is now a lawsuit in the state Supreme Court over whether AB X1 26 and AB X1 27 violate Proposition 22, an initiative passed by state voters last year to stop diversions of local dollars to the state government. The cities and redevelopment agencies are arguing to overturn the new laws. The state is advocating to uphold them.

There is, however, a third possible outcome. The Supreme Court could uphold the first law (eliminating redevelopment) and strike down the second. This potential “split decision” would inevitably end redevelopment, without any backup plan to compensate cities for such a dramatic loss.

In the last eight months, the Legislature considered several measures to essentially replace redevelopment, if and when it was eliminated, with new financing mechanisms. But those measures failed to get enacted. AB X1 27 (the “resurrection law”) was hurried through as a last-ditch effort to retain some vehicle for local governments to invest in public works.

Bundled together, the two laws effectively form a policy of shrinking redevelopment radically, but allowing it to go on in a smaller version. To continue existing, for example, the Sacramento Housing and Redevelopment Agency is preparing to make a $21.9 million payment, which is roughly 40 percent of its total tax-increment funding. These cuts are painful but, in theory, SHRA will survive and persevere. Throughout the state, hundreds of agencies are preparing their own voluntary payments and adjusting to a new reality of scarcer resources.

But that safety net might be taken down. Stripped of the reinstatement law, the Legislature’s last budget deal could potentially end redevelopment permanently.

That outcome would create a howling vacuum in local government funding for infrastructure and affordable housing. Redevelopment agencies currently invest about $5 billion annually in revitalization efforts that include street and road improvements, intercity rail, utility hookups for new development projects, cleanup of toxic sites, and clearing debris and other unsafe conditions from inner cities. Redevelopment also contributes $1 billion annually to affordable housing, California’s largest non-federal source of housing funds.

Redevelopment wasn’t always such a large part of local government finance. In 1965, there were only 46 redevelopment agencies in California, and only 32 projects had actually been initiated. Project areas were typically small – usually 10 to 100 acres. But since that time, redevelopment has grown significantly to compensate for the sharp limits Proposition 13 placed on property taxes, and to pick up the slack for state infrastructure funding that fell far behind population growth and urban housing needs.

Today’s project areas regularly cover thousands of acres; there are a few spanning more than 20,000 acres each. Little by little, tax-increment financing has become an indispensible part of local government finance. It is only through a fluke of legislative and litigious maneuvering that this mechanism may become a casualty of the state’s budget crises.

State and local officials have debated the merits of redevelopment for many years. While redevelopment agencies vitally support public infrastructure, they also provide subsidies and other benefits to private development, which often inflames the controversy of whether taxpayer dollars should go to support private developers. And in February, the Legislative Analyst’s Office questioned whether these types of subsidies are even effective at combating blight.

But even those lawmakers who supported ending redevelopment also supported measures to fill its shoes in financing infrastructure. SB 214 and AB 485 would have enabled local governments to create similar, albeit more modest, tax-increment financing mechanisms to pay for public works. However, both measures failed to get enacted.

The Legislature did pass a measure, SB X1 8, that protects redevelopment funds that are generated specifically for housing. The bill states that if a redevelopment agency is eliminated, its existing balance of low- and moderate-income housing funds is retained and affordability covenants with existing housing projects are retained. However, it is not clear whether the Governor will sign the bill into law, or how the law would be affected if the court did overturn the redevelopment “resurrection law.”

The Supreme Court is expected to decide the redevelopment case in mid-January. If redevelopment is accidentally eliminated, the fiscal gap it leaves should prompt a statewide conversation about how, going forward, government ought to fund local public works.

Josh Rosa is a Sacramento Housing and Redevelopment Commissioner