Schwarzenegger Vetoes BAB Bill

Describing it as bad policy, Gov. Arnold Schwarzenegger Wednesday vetoed a bill that would have authorized California governments to raise upfront cash by securitizing the future subsidy streams for Build America Bonds they have issued.

The BAB program allows municipal issuers to receive a direct 35% federal subsidy for the taxable interest rate on bonds that would ordinarily be eligible for tax-exempt interest.

Assemblyman Ed Hernandez, D-West Covina, introduced AB 2080 at the behest of the California Public Securities Association, the state’s trade group for municipal broker-dealers.

“This bill, authorizing securitization of Build America Bonds federal interest-subsidy payments, may provide a mechanism to borrow very expensively to avoid needed budget adjustments for just one year, at high costs to future budgets,” Schwarzenegger said in his veto message. “Alternatively this could be a substitute for general obligation bonds for large projects, avoiding the required two-thirds voter approval. In either case, this is not good fiscal policy.”

The governor had until Thursday to address the flood of bills approved at the end of this year’s legislative session.

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