The court announced it will decide by mid-January whether the state can eliminate about 400 redevelopment agencies throughout California unless they agree to give up a portion of their property tax revenue.

The court action prevents the state from moving ahead on its plan until the case is resolved. If the justices side with redevelopment agencies, it would spell more budget headaches for the state because the Legislature and Gov. Jerry Brown are relying on the plan to help save the state $1.7 billion in the current fiscal year.

“We’re confident the state Supreme Court will ultimately strike down this unconstitutional legislation that ignores the voters’ will and that will destroy local economies,” Chris McKenzie, executive director of the League of California Cities, said in a statement.

The justices are likely to hear arguments after the Oct. 7 deadline for the last legal briefs.

H.D. Palmer, a spokesman for the Brown administration, said the order should not affect the state budget because the first voluntary payment is not due from redevelopment agencies until Jan. 15.

“We’re very pleased with the terms of the Supreme Court’s order. We specifically asked that the case be put on fast-track. We will now have the issue resolved definitively on or before that date,” Palmer said.

The state argues that because redevelopment agencies were created by an act of legislation, they can be dissolved by another act of legislation.

Although the court issued a stay, justices did allow the state to prohibit redevelopment agencies from taking on new debt or taking on new projects.

The governor has criticized the agencies for draining tax money away from schools and public safety at a time when revenues are running thin. Under the budget plan for the current fiscal year, redevelopment agencies are required to make additional payments that help fill the state deficit this year. After that, the agencies would have to contribute $400 million annually to schools and local governments.

Brown and fellow Democratic lawmakers are counting on a win to prevent having to make deeper spending cuts to schools and social services.

“I am confident the court will conclude the legislation is constitutional and prevent the state from having to enact $1.7 billion in new and additional budget cuts,” said Senate President pro Tem Darrell Steinberg, a Democrat from Sacramento.

California began the year with a projected $26.6 billion shortfall, forcing Democrats to adopt a budget without Republican support by relying on a combination of spending cuts, fee hikes and what may turn out to be overly optimistic revenue assumptions.

The current state spending plan already projects a $3.1 billion shortfall for the fiscal year that will begin July 1, 2012.

Redevelopment supporters point to Proposition 22, a ballot initiative passed last fall that prohibits the state from further raids on transportation, redevelopment or local government money.

They defend redevelopment agencies as one of the few vehicles promoting construction and jobs at a time when California is still reeling from the effects of the recession.

The lawsuit was filed by the League of California Cities and the California Redevelopment Association.

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By Judy Lin