Governor issues cities lifeline for bond rates

As cities and counties across the state face cuts in state funding, the governor has signed a bill that could help them save money by ducking the high interest rates on bonds.

After the collapse of the subprime mortgage market, there have been concerns that the mortgage-backed security market is causing investors — those who buy the bonds — to request higher interest rates if they are going to invest, according to a state Senate Banking, Finance and Insurance Committee analysis of the bill.

“These higher-than-expected interest rates are causing some of these issuers significant financial distress,” according to committee analysis.

Gov. Arnold Schwarzenegger signed legislation this week that allows state and local governments to buy back some or all of the outstanding bonds without erasing the bond debt. Before this bill, doing this would have required the government agenecy to have the voters reauthorize the bonds.

San Francisco public finance officials said they were “ecstatic” over the new law because it could save The City millions in high interest rates as they ride out the destabilization of the municipal bond market.

Nadia Sesay, Director of Public Finance for The City, said the new law provided a tool for San Francisco to save money as bond rates on two bonds, Moscone West and Laguna Honda

Hospital, totaling $268 million, spiked recently to 7 percent when market rate is currently around 2.33 percent.

“Having this bill gives us a tool to deal with some of the changes we’re dealing with in the municipal bond market,” Sesay said.

If The City does buy back any bonds, it could wait until interest rates have stabilized, saving millions, Sesay said.

San Mateo County is not likely to buy back its bonds because it is in the process of obtaining its own rating, said Jim Saco, County Budget Director. By having its own rating, the county would not need to be insured, he said.

“I think it’s a good bill. It’s just probably not going to help us,” Saco said.

While the new law applies to all bonds, it was meant specifically for problems related to auction-rate securities and variable rate demand notes. Sen. Michael Machado, D-Linden, introduced the bill, which was also sponsored by state Treasurer Bill Lockyer.

dsmith@examiner.com

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