The state assembly
tried to send some relief to local governments reeling from higher
interest costs Monday with
approval of a bill that allows cities, counties and other bond issuers to buy back their own bonds. The Assembly approved
Senate Bill 344 by Senator Mike Machado, a Democrat from Linden, on a vote of
67 to 1. The bill affects Amador
County and will now go to the Senate. Markets for two types of municipal bonds
have been hit with turmoil in recent
weeks as a side effect of the
meltdown in subprime mortgages. The bonds are sold at short intervals, from weekly to monthly,
to investors looking for short-term returns.
But when the companies that insure the bonds were shaken by losses
in mortgage-based securities, the municipal market was also rattled, leading to
higher interest rates. Senate
Bill 344 makes it clear that local entities, including governments, hospitals, utilities
and universities – can shelter themselves from the interest rate volatility by
buying back their own bonds without “extinguishing” the debt. The
agencies can then resell the bonds if the market is down, or switch to more traditional
forms of debt. Without
that clarification, bond issuers have lost their bond insurance or been forced
to go back to voters to reauthorize the debt.
The bonds could have been
stripped of their tax exempt status. Treasurer Bill Lockyer, who sponsored the legislation, said that
taxpayer’s don’t create the financial turmoil, “Yet they are the ones who pay
the price.” In the local area, public agencies have been scrambling to
get out of the “auction rate” and “variable rate demand” markets as interest
rates have spiked. Officials say that for years, the little-known markets
allowed them to borrow at unusually low interest rates.