ALAMEDA, Calif. — California Gov. Arnold Schwarzenegger vetoed a bill that would have allowed local governments to use bonds to securitize the state’s promise to repay them for the cost of implementing unfunded mandates prior to 2004
Schwarzenegger said the proposed legislation would threaten the credit of other state debt, including revenue anticipation notes and lease-revenue bonds.
The veto came Tuesday, when the Republican governor acted on 20 of the so-called trailer bills enacted in connection with the state budget, which was passed and signed Oct. 8. He signed the other 19 bills.
The mandate bill materialized in print the day before the budget was adopted. It would have created an accelerated payment schedule for the state to repay pre-2004 mandates it imposed on local governments, and allowed the local governments to securitize those payments through a bond issue.
The mandate repayment requirement was created by the voter-approved Proposition 1A of 2004, which is better known for limiting the state’s ability to borrow from local property tax revenues.
The same legislation barred California from imposing unfunded mandates on local governments after 2004, and required it to repay local governments for the costs that they incurred fulfilling them before 2004.
As California law currently stands, the state is not required to make those repayments until 2021.
“SB 866 has the potential to offer significant fiscal relief to counties that otherwise would have to wait until as late as 2021 for reimbursement of mandated services provided in the early 2000s,” Paul McIntosh, the executive director of the California State Association of Counties, wrote in a letter to Schwarzenegger urging him to sign the bill.
According to McIntosh, the bill would have created a program structured similarly to the Proposition 1A securitization of 2009, in which the California Statewide Communities Development Authority sold $1.9 billion of bonds on behalf of local governments to make up for money the state borrowed from local property taxes that year.
The state is on the hook to pay those bonds back in 2012.
McIntosh said that the state owes almost $1 billion in pre-2004 mandate reimbursements, with the large majority of that figure being owed to California’s 58 counties.
According to Schwarzenegger’s veto message, the bill would have prioritized the mandate repayments ahead of the state’s revenue anticipation notes and its lease revenue bonds.
The state is currently preparing to sell up to $10 billion of Rans in the coming weeks to avert an immediate cash crunch and manage its cash-flow requirements through June 2011.
The bill’s provisions “may create concerns for investors, jeopardizing the ability of the state to issue such debt or could significantly increase the state’s cost of borrowing,” Schwarzenegger wrote in the veto message.
“Given the current fiscal situation, I cannot sign this bill, which requires payment on a specified schedule, increases the cost through higher interest payments, and changes the priority order for transactions.”
On Wednesday, Schwarzenegger signed a bill asking voters to approve a stronger rainy-day fund — one of the governor’s key demands in the negotiations leading to passage of the budget earlier this month, 100 days into the fiscal year.
“California’s budgeting process has been in desperate need of reform that limits spending in good years so we can save money for tough economic times,” he said in a statement.
“This rainy-day fund is a historic reform that will end the drastic swings in state revenue that punish California’s most vulnerable citizens,” Schwarzenegger added.
