SAN FRANCISCO - Proposals from both the governor and the Legislature to close California's budget deficit include stripping the share of state fuel-tax revenue that currently goes to local governments.

Local government officials say the proposal would illegally strip those governments of one of their main tools for street maintenance.

For four communities that together issued more than $100 million of bonds backed by those state fuel-tax apportionments, the proposals could strip the bonds of the source of their debt service.

Lawmakers and the governor have been debating the details of how to close a $24 billion budget gap that has emerged since February, when lawmakers thought they had closed the state's budget deficit with a $40 billion package of cuts, taxes, and borrowing.

The Democratic majority in the Legislature, in its budget package, has avoided some of the cuts Republican Gov. Arnold Schwarzenegger proposed.

But both public proposals call for suspending about $1 billion in fuel tax apportionments to local governments in fiscal 2010, using the money instead to fund state general fund debt service on transportation bonds. The Democratic proposal called for a two-year shift; Schwarzenegger's was ongoing.

The budget debate is occurring in an accelerated time frame, with Treasurer Bill Lockyer and Controller John Chiang both warning that the state needs an honestly balanced budget by the end of June to prepare for a cash-flow borrowing needed to keep the state from running out of cash before the end of July.

Budget votes could come as early as today, according to a spokesperson for the Senate Democrats, though details of budget legislation were not public earlier yesterday.

Local governments use the gas tax apportionments to finance street maintenance. Four governments around the state issued long-term bonds backed by those payments in 2007 and 2008, to get more out of their dollars by financing larger-scale street projects.

The deals were all underwritten by De La Rosa & Co., and the first such transaction, $27.7 million of Oxnard gas-tax revenue certificates of participation in 2007, was honored as The Bond Buyer's 2008 regional deal of the year for the Far West.

The deal was structured to back the bonds with a pledge of future state gas-tax revenue disbursements without recourse to the city's general fund.

Subsequently, similar bonds were issued by the city of Santa Ana, for $68 million, and a pooled $14.7 million California Statewide Communities Development Authority transaction for the cities of Coachella and Indio.

Oxnard's financial services director, Michael More, said that given the fluid situation in Sacramento, it was hard to draw any firm conclusions about what would happen.

"I think we're just going to wait and see," he said. "We will be watching the situation for sure." The bonds include a year's debt service reserve, he said.

The League of California Cities and other local government trade organizations have been lobbying against the proposal, and the group commissioned a legal opinion from Nielsen, Merksamer, Parrinello, Mueller & Naylor LLP, which concluded that the state was prohibited from shifting gas tax money from local governments through the language of two voter-approved constitutional amendments in 1974 and 1998.

Only borrowing, for a maximum of three years, is permitted, according to the firm's analysis.

"The league has shared the legal opinion with the legislative leadership, the Budget Conference Committee, and the governor," it said in a statement.

"Like the League of Cities and other people in the industry, we're examining the implications of a range of state [budget] actions," De La Rosa president Edward J. De La Rosa said yesterday. "Until there's a clear plan from Sacramento, we're not prepared to issue an opinion about the various proposals being considered."

All the gas tax COP deals carry underlying A-minus ratings from Standard & Poor's. The agency downgraded Santa Ana and Oxnard in April 2008 after the state deferred payment of that year's gas tax apportionment for five months in response to budget pressure.

The Oxnard bonds were insured by XL Capital Assurance, which has since been renamed Syncora Guarantee Inc. In April, Standard & Poor's assigned Syncora a rating of R, meaning it is under regulatory supervision because of its financial condition.

The other two gas-tax COP deals were insured by MBIA Insurance Corp., which has since morphed its public finance business into the National Public Finance Guarantee Corp., to which Standard & Poor's assigns an A rating and developing outlook.

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