LOS ANGELES -- Despite the financial constraints facing many California counties, Moody's Investors Service this week said the credit outlook is "relatively stable" and confirmed virtually all its county ratings in the state.

"Prudent management, rapid economic expansion, and modest debt levels compensate considerably for California counties' lack of financial flexibility," Moody's said in an overview of its comparative analysis of general obligation bonds and lease obligations.

The lengthy report, which comes out today, produced only two rating changes out of 44 California counties carrying Moody's ratings.

Moody's reinstated and lowered to B from Baa the rating on a Butte County certificate of participation issue, dated April 4, 1988, that was sold through the California Counties Lease Financing Authority. The agency said it downgraded the $1.9 million issue "due to the county's severe financial difficulties."

Moody's suspended the rating in September 1989 after Butte County cautioned it might file for bankruptcy protectoin. A state aid offer averted a filing last year, but county officials say they will need state assistance again this year to balance their budget.

By contrast, Moody's said the strengthening and diversification of Napa County's economic base prompted an upgrade to A1 from A for the rating of the Napa County Public Improvement Corp. certificates of participation for its correctional facilities project, dated June 1, 1987. Moody's also upgraded the corporation's judicial facilities project certificates, dated Jan. 1, 1990, to conditional A1 from conditional A.

California counties have more than $6.2 billion of debt outstanding, according to Moody's, and county operations have drawn more attention recently because of mounting financial pressures and the publicity over Butte County's plight.

Moody's noted, for example, that county costs associated with state-mandated services have escalated while revenue-raising options remain limited. California counties are limited by Proposition 13, which restricts property tax increases.

But Moody's said "the prospect for enhanced financial flexibility is favorable," especially because Gov. Pete Wilson has appeared to recognize county problems in his budget proposals. Gov. Wilson supported new laws that transfer administrative and fiscal responsibility for various health and welfare programs to the counties along with revenue sources to fund them, Moody's noted.

"If the new revenue sources cover program costs and keep pace with expenditure growth, counties would have substantially more control over programs and their financial flexibility would be enhanced," Moody's said.

The agency also noted that the governor has proposed lowering the threshold for approval of local GO bonds for jails, parks, and schools to a simple majority from the current two-thirds level. Approval of such a plan may help to reduce counties' reliance on more expensive lease obligations.

Moody's also said "sophisticated county management has helped offset" some of the financial pressures. "Administration is generally a positive credit consideration for California counties," the agency said, adding that "counties recognize their lack of financial flexibility and have developed ways to deal with their limitations."

Overall, Moody's noted that California counties' ratings compare favorably to national county ratings. About 58% of California county GO and lease obligation debt is rated A1 or higher, while only 44% of all U.S. counties fall within these rating categories. These figures exclude credit-enhanced debt.

Moody's noted, however, that California's proportion of higher ratings reflected a large number of leases outstanding from a few highly rated issuers, such as Los Angeles County.

The agency noted that California counties are less likely to be rated in the highest rating categories of Aa and above than are counties elsewhere in the United States, primarily because California counties rely on lease obligations -- which offer less security than GOs -- as a dominant borrowing vehicle.

Separately, Moody's said it plans this week to release a special report on counties nationwide in conjunction with the National Association of Counties conference being held next week in Salt Lake City.

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