Gov. Arnold Schwarzenegger Wednesday afternoon signed a bill designed to help bond issuers avoid higher interest rates on government-issued bonds hit by the fallout from turmoil in capital markets and the bond insurance industry.

The measure, introduced by Sen. Michael Machado, D-Linden, at the request of Treasurer Bill Lockyer, clarifies that California law permits issuers to buy up their outstanding debt and hold it for a period without legally extinguishing the bond debt. It is anticipated that the law will be a particular help to issuers with outstanding variable-rate debt that has been resetting at high interest rates due to concerns about underlying bond insurance.

The state clarification provides assurance that buy-backs will not create problems related to the bonds’ tax-exempt status, the potential need to obtain reauthorization to resell the bonds, and contractual terms requiring payment of termination fees, among other issues, according to Lockyer’s office.

“This measure will protect taxpayers from further financial harm by helping governmental entities buy back these bonds and resell them when market conditions are more favorable,” Lockyer said in a statement.

The state measure was signed into law a day after the U.S. Treasury Department issued a notice saying governmental issuers can purchase their own auction-rate bonds on a temporary basis without running afoul of any tax laws or extinguishing the debt.

As an urgency measure, the state bill took effect immediately.

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