Governor Jerry Brown says the decision returns more than $1 billion in ongoing funding to the state budget. But local leaders fear it could hurt their communities.
There are more than 400 redevelopment agencies throughout California.
They are in charge of partnering with private developers and bringing construction projects to areas that are in need of revitalization.
The state wants the $1.8 billion that go toward redevelopment agencies back in the budget.
Thursday, the state's highest court said yes, the state can abolish the agencies. But it can't force them to share their money in order to stay in business.
From the energy of downtown to the revitalization of Hollywood, the two are touted as proof positive that redevelopment agencies can have a huge impact on their communities.
But critics argue that the millions the agencies collect could be better spent solving the state's budget crisis.
To that end, lawmakers passed legislation this year that would allow the state to abolish the agencies.
Redevelopment agencies sued the state, but Thursday the California Supreme Court upheld the law, saying the state has the right to dissolve the agencies when the legislature deems it necessary.
"It was not a good decision for the city of Los Angeles, or for cities around the state," said Los Angeles Mayor Antonio Villaraigosa.
Villaraigosa says the Community Redevelopment Agency in Los Angeles is a proven economic development tool that has created more than 18,000 jobs.
"Eliminating the redevelopment agencies is not the way to go, and we're going to continue to work hard to do everything we can to make sure that our legislative representatives understand that," said Villaraigosa.
Gov. Brown pushed hard for the abolishment of the agencies.
In a statement, he said: "Today's ruling by the California Supreme Court validates a key component of the state budget and guarantees more than a billion dollars of ongoing funding for schools and public safety."
The state supreme court ruled against a separate law that would've allowed the agencies to continue operating so long as they shared their revenue with the state. The court said that requirement was unconstitutional.
In light of Thursday's rulings, the agencies will be phased out when their contracted projects are completed. But more legal challenges are possible as the individual agencies are still reviewing Thursday's rulings.