The city of Bakersfield was sent some good news over the holiday break: the state Department of Finance has dramatically reduced the amount of money the city must come up with on its own to repay a $17 million debt tied to the Rabobank Arena.

Now the city will only have to pay $5 million of that tab out of its general fund.

Bakersfield city administrators had been arguing with state auditors that the city should keep getting property tax funds to repay the debt, but the state disagreed. That meant Bakersfield was facing the prospect of paying off the $17 million from its general fund over the next 10 years, at $1.7 million a year.

The general fund pays for basic city services, such as police and firefighters.

But in a letter dated Dec. 21 and received by the city Wednesday, state auditors said they now will allow Bakersfield to keep getting property tax money to pay $12 million of that $17 million debt, substantially reducing the hit to the city.

Redevelopment agencies, including Bakersfield's, were funded through a portion of property tax revenue before the state legislature ended redevelopment in late 2011. Since then, the Department of Finance has been combing through lists of debts the redevelopment agencies had on their books to build projects. They have to validate each debt in order for the successors to the agencies -- in Bakersfield's case, the city itself -- to keep getting property tax money to pay off the debts.

The state is still challenging some of the city's other redevelopment debt, including $3.6 million in loans between Bakersfield and its former redevelopment agency. But Bakersfield City Manager Alan Tandy said Wednesday he was "very pleased" at the state's decision on the arena debt.

"That, for us, was the single biggest issue of all, so winning over two-thirds of it is significant," he said.

The state reversed its stance after the city provided more documentation about the debt, specifically information showing that the city and former redevelopment agency renewed a repayment agreement in 2006, said Bakersfield Finance Director Nelson Smith.

"We have proven to (the state Department of Finance) from our documentation that it is a valid and enforceable obligation," Smith said. "It was very responsive of them to be so quick."

The Rabobank Arena is a redevelopment project dating back to 1997. The city issued bonds for the arena's construction. The redevelopment agency, which was a separate entity from the city, agreed to repay the city for that money to the extent it could, using property tax proceeds it received.

Initially, the agreement was that the redevelopment agency would repay $12 million to the city, or $1.2 million a year. That was increased to $1.7 million a year in 2010 because the property value of the downtown redevelopment area had increased, so the redevelopment agency could repay more of the debt.

The state has approved debt repayment based on the initial amount, $12 million. As to whether the city will push the state to allow the full $17 million amount, Tandy said, "It leaves the general fund $12 million better off than we were yesterday. So at this point in time, that part of it, we'd be accepting of that."

At a high point last year, the state challenged $28 million of debts and other funding related to redevelopment for Bakersfield. They revised that down to $25 million on Dec. 18. The latest revision, on Dec. 21, brings the total down substantially, to $13 million that they are challenging.

Tandy said the city will attempt to change the state's decision on blocking the $3.6 million in loans between the city and the former redevelopment agency.

Another $4.2 million of the $13 million the state is still challenging isn't debt, but property tax money that the city would keep getting if the state wasn't blocking it. That money is marked for two housing projects: low-income housing on 20th Street and low-income housing in the Mill Creek development on S Street.

Cities now are banned from starting new projects, but Bakersfield administrators have said the city is obligated to finish those two projects.