SAN FRANCISCO -- Although California bonds may retain long-term attractiveness, the prolonged state budget battle and fiscal problems have eroded investors' confidence in the state, market participants said Friday at a California public finance conference.

A new University of California at Los Angeles study and other economic data released last week show the state's economy continuing to deteriorate as it undergoes major structural changes.

Noting that California's general obligation bonds are now trading at a discount compared to other bonds of the same caliber, market participants said at The Bond Buyer-sponsored conference that this year's budget, fiscal, and political crises have contributed to a "confidence crisis."

The state credit is a "fallen angel," said Peter B. Coffin, senior vice president of Massachusetts Financial Services.

"Currently, the credibility of management in Sacramento is somewhat tarnished,," Mr. Coffin said of the state capital. "There is a crisis of confidence among Wall Street investors.

Mr. Coffin also said investors are concerned that this year's budget crisis may be revisited next year.

"As an investor, we don't want to see this repeated next year," Mr. Coffin said, adding that investors may either avoid owning bonds during this period or wait on the sidelines before buying bonds.

Aaron S. Gurwitz, vice president of fixed income research at Goldman, Sachs & Co., said California local and state bonds are not as scarce as they once were because of rising volume. As a result, he noted, yield spreads have narrowed between California bond issues as a group versus the national market.

In addition, Mr. Gurwitz observed a growing differentiation for credits within California. For example, general governmental issuers such as counties are being harmed more than strong revenue bond issuers such as the Los Angeles Department of Water and Power, he said.

Indeed, he noted that the strongest revenue bond issuers are even viewed as a "safe haven."

But in general terms, the lowest bond yields in 20 years present a boon for California bond issuers, Mr. Gurwitz commented, even if they have lost some of their luster.

State Treasurer Kathleen Brown told conference attendees on Thursday that California, along with the worlds, is engaged in a "fundamental economic restructuring." She predicted more economic troubles for California as the state shifts from a manufacturing economy to an economy based on high technology and other service areas.

"I have the sense our state may not have bottomed out yet," she said.

Jack Kyser, chief economist for the Economic Development Corporation of Los Angeles, cautioned Friday in a speech that "the recovery process in the state is going to be very, very slow."

In an overview of the state, Mr. Kyser listed a lengthy confluence of forces harming California's economy. In some areas, such as defense and aerospace industries, the state "is losing high-paying jobs permanently," Mr. Kyser said. He added that "this hemorrhaging is still continuing," with Los Angeles and Orange County absorbing a majority of job losses.

Mr. Kyser said "we can put the wheels back on," partly by stressing to state leaders in Sacramento that they must create a favorable business climate. In the meantime, however, he acknowledged that state and local governments "face very, very serious problems" until a meaningful turnaround occurs.

Ms. Brown said the costs of recent raising downgrades for the state will be $190 million to $200 million in added interest on $10 billion of authorized but unissued GOs. However, she said , "The costs to me go beyond dollars and cents. There are costs that come when you breach trust with the people that you do business with."

Ms. Brown and others at the conference also expressed concern about the state's budget assumptions, noting that an imbalance of as much as $2 billion may be looming next spring.

The treasurer said the budget impacts on local issuers will be tracked by a series of public hearings to be held in the next two months by the California Debt Advisory Commission. This year's budget reduced funds for cities counties, redevelopment, and special districts by $1.4 billion. "This represents a seismic shift in the fiscal relationship between local governments and the state," said Ms. Brown in a separate statement.

The treasurer said she is gearing up for what she called her "new fall product line," the state's $5 billion revenue anticipation note sale. A mix of variable-rate and fixed-rate securities, the issue is expected to be marketed in late September.

"I will have a little bit of everything," said Ms. Brown. She said the state will sell $1.3 billion of general obligation bonds this October, and the issue will be "almost entirely for schools."

In a session Thursday examining redevelopment trends, a proponent of city restoration efforts characterized the industry as being at a crossroads.

William Carlson, executive director of the California Redevelopment Association, noted that the recently adopted state budget imposes constraints on redevelopment agencies and lessens their financial cushions.

The state action, which shifts $200 million of property-tax increment revenues from redevelopment agencies to an education fund in fiscal 1993, "is a one-time hit," Mr. Carlson conceded.

But he cautioned that redevelopment is at a crossroads because the question remains, "what happens next year?," if the state faces another budget pinch.

State Senator Marian Bergeson, R-Newport Beach, agreed that local cuts were "very painful." But she said redevelopment officials "should be comfortable with what finally came out" because other proposed legislation would have imposed more restrictions, including a moratorium on the adoption or amendment of redevelopment plans.

Redevelopment is not necessarily a "cash cow," the senator said, but she cautioned municipal market participants not to "let the cow stray too far out of the proper pasture."

Mayor Dan Young of Santa Ana agreed on the need for "responsible redevelopment practices," and he urged market professionals "to protect redevelopment" by shunning practices that harm the tool.

However, Mr. Young also strongly defended redevelopment as one of the only tools available for rehabilitating cities.

According, Mr. Young said, the "state can't ruin" redevelopment, adding that the state must live up to its funding responsibilities rather than creating a situation that makes redevelopment agencies enemies of other local governments such as school districts.

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