Governor Arnold Schwarzenegger had a message for local government in his press conference after the legislature passed a revised budget that closed a $24 billion gap partly by borrowing city and county property taxes.

“We talked to small mayors, we talked to the mayors of larger cities and we made it very clear that we will do everything we can to make this as painless for them as possible.”

The salve included in the budget bill is language that allows local governments to sell bonds against the state’s promise to repay the $1.9 billion by 2013.

A similar “securitization” occurred in 2005 when the state borrowed a portion of the Vehicle License Fee revenues. A California Statewide Communities Development Authority Joint Powers Authority (JPA) sold the joint bond to ad the repayment to participating cities and counties.

How painless this “securitization” will be this time around depends on a number of factors, including whether rating agencies approve of some of the gimmicks such as moving the final payday of the year one day to count it in the next fiscal year.

Chris McKenzie, executive director of the League of California Cities, which is working with the California State Association of Counties and the state to sell the repayment commitment, warned that the state’s standing in the eyes of Wall Street could have a grave impact on the price of the loan.

Treasurer Bill Lockyer called the budget “a big step forward” but said it was too early to assess the effect of the budget deal on cash borrowing.

Although language in ABX4 15 states that the state will pay all interest and bond issuance costs, it caps that amount at 8 percent.

The plan is pretty straightforward, but this kind of thing is rare and it depends on investors being comfortable with the plan,” McKenzie said. “The biggest unknown is the state of the state’s bond rating.”

In July all three major ratings agencies downgraded the state’s standing because it had not yet come up with a budget. Standard & Poor’s rates California A, the sixth highest of 10 investment levels.

Moody’s cut California’s bond rating two steps to Baa1, three ranks above speculative grade.

After the budget passed at the end of the month, Emily Raimes, Moody’s vice president and senior analyst, was quoted as saying that the plan adopted may stop the state’s credit rating from dropping further, but added that the deficit closure “was achieved through a combination of cuts, raids on local funds, accounting maneuvers, and one-time revenues that leave the state poorly positioned for budgetary balance in future years.”

Fitch Ratings ranked California debt to BBB, or two levels above high-yield, high-risk status. “When the cash-flow numbers are available, we will take a good hard look at it,” Fitch Managing Director Richard Raphael told Bloomburg.

The good news is that it has been made a high priority commitment right behind schools and bond repayment. “If that adds up to $50 million of the state’s budget, then we are the $50 million and first dollar paid.”

That means that even if the state’s finances overall are not considered positive, the odds of repaying this obligation are good.

McKenzie is also looking for clean-up amendments when the legislature returns from recess that will help local governments recoup their losses.

McKenzie would like to see the 8 percent cap taken out and more flexibility in structuring the bond given so the issuers can get the best deaql depending on the bond climate on that day.

Also, one of the left-over clauses from when the state was considering borrowing against an expanded redevelopment district program, makes it sound like the sale could be delayed until next year.

“I don’t think that was the intent,” McKenzie said.

“Quite a few details still need to be filled in,” McKenzie said. “If that is taken care of, it’s feasible that this could be done in four months and theoretically in place before the December 10 property tax distribution.”

That would make the “loan” almost seamless to cities and counties that decide to participate.

Those who don’t need the funds for four years can wait until the state repays and receive up to 6 percent interest.

“It has to work,” McKenzie said. “If it doesn’t then for cities, it will mean cutting police and fire protection because that is the bulk of our budgets.”

JT Long can be reached at