ALAMEDA, Calif. — A bill to limit the ability of California local governments to file for bankruptcy expired Tuesday in the last-minute frenzy that marked the end of the regular 2010 session for the state’s stalemated Legislature.

Gov. Arnold Schwarzenegger now has hundreds of bills awaiting action on his desk before the end of September — including one that would permit issuers to securitize federal subsidy payments they receive for Build America Bonds. His second and final term ends in January.

California lawmakers argued and maneuvered all the way to their midnight deadline. The clock ran out on several pieces of legislation, including AB 155, the bankruptcy bill, which never went up for a final Senate vote.

The bill was inspired by the 2008 bankruptcy of Vallejo and would have required local governments to go through either a state audit or a California Debt and Investment Advisory Commission hearing before filing for Chapter 9.

Public employee unions backed the bill. Advocates for local governments, such as the League of California Cities, opposed it.

The Assembly and Senate worked their bill files Tuesday until midnight, after both houses spent several mornings and afternoons debating the budget and holding votes that predictably failed.

The majority Democrats and minority Republicans remain unable to agree on a spending plan, leaving the budget in limbo. It must pass each chamber with a two-thirds majority vote that demands a degree of bipartisanship.

Lawmakers will have to return to Sacramento if there is a budget deal. Schwarzenegger said there has been more behind-the-scenes progress than most observers realize.

“We will be getting together again,” he said Wednesday.

Earlier in August, lawmakers sent the Republican governor AB 2080, which would permit local governments to securitize their BAB subsidy payments.

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

The bill passed on party-line votes, with the majority Democrats in favor. It allows the federal subsidy to be monetized by selling the subsidy in a securitization transaction, according to a report prepared by legislative staff.

The BAB program gives municipal issuers the ability to choose between issuing tax-exempt bonds or issuing taxable bonds and receiving a direct federal subsidy to defray 35% of the issuer’s interest cost.

The California bill would allow issuers to sell their subsidy stream for up-front cash in a bond transaction, leaving the issuer to pay the full taxable interest rate for the life of its bonds.

“By potentially making hundreds of millions of dollars in additional capital immediately available to local governments, AB 2080 advances the fundamental purpose of the BAB program and gives California local governments another tool to use in confronting severe capital shortages,” supporters argued in the staff report.

It said opponents worry the bill “could cause cities to take on more unnecessary debt at a time” of volatile financial ­markets.

Opponents are also concerned about the fate of the federal BAB program, which expires Dec. 31.

“No other states authorize BAB issuers to securitize their federal subsidy payments,” said the staff report, noting that it is not clear Congress will extend the BAB program another year.

If the program is extended, Congress will probably change the terms, including lowering subsidy payments, according to the report. It noted that public finance professionals disagree on whether federal law allows BAB issuers to transfer the rights to federal BAB subsidies.

Other public finance bills that cleared the Legislature include: AB 1873, which authorizes the state treasurer, the California Public Employees Retirement System Board, and the State Compensation Insurance Fund to purchase bonds issued by local property assessed clean energy programs; and A B 2437, which allows the California Industrial Development Financing Advisory Commission to make loans or lines of credit available to companies to acquire, construct, or rehabilitate facilities and equipment.

Lawmakers approved a package of legislation designed to crack down on the scandalously high salaries revealed this fall in the city of Bell. However, one bill in that package — which would limit the authority of charter cities to issue redevelopment bonds if they pay overly high salaries to their city councils — did not make it to a final vote.

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