Local governments may have to prove if cash is being used.
A New Jersey appeals court will consider whether the state can take control of money set aside for towns to use to fund affordable housing projects.
Under a 2008 law, the state can use the money if local governments do not commit the funds.
Gov. Chris Christie is planning to use $200 million of the money in the current state budget.
The state League of Municipalities objects, saying the state never defined what it means to commit the cash.
Lawyers are scheduled to argue the case before an appeals court in Newark on Friday.