LOS ANGELES - A California county that broached the possibility of bankruptcy three years ago expects week with an improved story and an A rating thanks to a state-authorized credit enhancement program.

Butte County continues to face funding pressures common to many California localities, but "our financial condition has improved significantly" compared with a few years ago, said Richard Puelicher, the county's treasurer, on Monday.

Local governments still face a measure of uncertainty, Puelicher said, citing a stubborn recession that dampened revenues and caused the state to dip into local property tax revenues over the last two years.

In general, however, Butte County's fortunes "seem to have stabilized," Puelicher said.

The county plans this week to sell a $5.7 million certificate of participation issue to fund construction of a justice facility, including courtrooms. Stone & Youngberg is underwriting the deal, with a pricing tentatively planned for today.

Butte County became a poster child of sorts for troubled counties in the late 1980s, culminating with the threat of a potential bankruptcy filing in the summer of 1990.

Fiscal pressures began building a few years earlier, fueled by a combination of dramatic increases in unfunded state mandates and an unusually low share of the locally collected property tax.

After budget slashing failed to stem the fiscal deterioration, Butte County officials considered a bankruptcy filing as a possible response.

But the county determined that "a bankruptcy action was not legally sustainable, and in any event would offer no financial benefits," the preliminary official statement for this week's sale says.

"County elected officials have abandoned any consideration of a future bankruptcy filing," the prospectus says.

Some viewed the past bankruptcy threat partly as political brinksmanship to get the state's attention. But the threat brought attention of another kind as well as newspapers nationwide used the tiny county's plight to illustrate pressures facing other similarly situated localities.

Such negative publicity has a downside because it leaves a long-lasting impression in the minds of investors, Puelicher acknowledged. But he also hopes the county can avoid much of an interest rate premium, if any, by stressing its financial rebound.

Part of the stabilization effort can be traced to 1991, when Butte County enacted a utility users tax.

Annual proceeds from the tax total about $4.5 million and can be used for any county purpose.

The utility tax makes a "material difference" for the county whose overall annual revenues total about $50 million, and provides "a wonderful revenue in that it's reasonably predictable," Puelicher said. "From our perspective, it's gold."

Butte County has also joined other California localities in absorbing the state's recent local property tax shifts. The state shifted the taxes from local governments to school purposes to help balance its own budget.

Butte County lost almost $10 million on an annualized basis from the shift. But the net loss is closer to $1 million, thanks largely to statewide voter approval of Proposition 172 last month. The proposition permanently extends a half-cent sales tax increase and provides $7.5 million for Butte County to help offset the effects of the tax shift.

The county does not expect the $1 million net loss "to have a material, adverse impact on its ability to balance its local budget or to pay lease payments," the prospectus says.

Extension of the half-cent sales tax increase "was critically important" for Butte County, Puelicher said, adding that he would have recommended against going forward with the justice facilities project if the measure had failed.

Butte County also derived a one-time benefit of about $2 million this fiscal year by switching to the so-called Teeter plan, an alternative method of property tax distribution. That gain is provided by a state law, passed last summer, that provides a partial offset against the property tax shift for counties that switched to the Teeter plan by Oct. 15, 1993.

The county intends to cover lease costs for the justice facility from its annual collection of penalty assessments on fines levied by county courts. Those penalties already have raised $1.2 million for a courthouse construction fund that is being applied to the project's cost.

If those funds are insufficient to cover debt service, the county also has pledged to budget and appropriate payments from its general fund.

Finally, Butte County's COPs are enrolled in the state's three-year-old Credit Plus program, which provides credit enhancement for cities and counties by intercepting their vehicle license fee revenues in case they fail to make debt payments.

Credit Plus boosts the deal's rating above what the county could have obtained on its own, which might have been BBB or lower, Puelicher said. In addition, he said, the enhancement should help overcome any lingering investor doubts stemming from the county's highly publicized financial troubles.

To qualify for the intercept program, a locality's annual receipts over the last five years must cover maximum debt service two and a half times.

"The county's minimum annual license fee collection over the past five years was $5.8 million in fiscal 1989, covering maximum debt service by 11.5 times," Standard & Poor's Corp. said in a release. That paved the way for the A rating, though the assessment is "provisional" based on project completion.

Construction is scheduled to be completed by September 1995. Lease payments will be capitalized through February 1996 to provide a cushion for investors against any delays.

Standard & Poor's termed Butte County's outlook "stable," saying "the county has performed adequately amid state revenue shifts."

The county also is taking other steps to pare expenses by reducing the work week to four days and cutting employee salaries by 5%, according to Standard & Poor's, which is the only agency rating the COPs.

Butte County also helped establish a market presence by issuing $15 million of tax and revenue anticipation notes earlier this year through a pooled deal, Puelicher said. The COPs deal represents another important step in reinforcing the county's creditworthiness as a borrower, he observed.

During the county's more difficult times, Puelicher always said that the issuer intended to make all of its debt payments.

The county's largest chunk of current long-term loans is with the state, which in fiscal 1990 and 1991 provided $5.7 million to cover certain forestry and fire services. The state restructured that obligation into longer-term debt to help relieve the county's financial pressure at the time.

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