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Bill to avert local bond losses is sent to Schwarzenegger
By John Hill - jhill@sacbee.com
Published 12:00 am PDT Tuesday, March 25, 2008
Story appeared in MAIN NEWS section, Page A3
A bill meant to stanch local government losses in the municipal bond market cleared the Senate Monday, putting it on Gov. Arnold Schwarzenegger's desk.
Senate Bill 344 by Sen. Mike Machado, D-Linden, allows governments and other issuers of municipal bonds to escape volatility in the bond market by buying back their own debt.
Since last month, two little-known municipal bond markets have been in turmoil, a spillover from the meltdown in mortgage-backed securities. Interest rates in the bonds, which are resold at short intervals, have spiked after years of exceptionally low costs.
In California, the bonds are issued by the state treasurer, local governments, hospitals, universities and others.
State Treasurer Bill Lockyer, who sponsored SB 344, estimates that more than $40 billion is outstanding in one type of bond, known as variable-rate demand bonds. Another $28 billion is outstanding in the other type, auction-rate securities.
SB 344 clarifies that when governments and others buy back their own bonds, it does not legally "extinguish" the debt. Without the legislation, the bonds might have lost their tax-exempt status and their insurance, and entities might have been forced to seek reauthorization from voters.
If Schwarzenegger signs the bill, governments and other bond issuers might also choose to convert the bonds into long-term, fixed-rate securities.
"The Legislature is committed to assisting local governments save millions of taxpayer dollars in borrowing costs," Machado said in a prepared statement. "Such savings are critical during tough fiscal budget years like the one we are facing."
Schwarzenegger has not yet taken a position on the bill, spokeswoman Rachel Cameron said.
About the writer:
- Call John Hill, Bee Capitol Bureau, (916) 326-5543.
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