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.