LOS ANGELES -- Confusion surrounding a California bill that protected bond issues sold by special districts from recent property tax transfers points to the need for further cleanup legislation, according to bond lawyers and issuers.

The market participants say uncertainly still exists over the extent to which all debt obligations -- including lease financings -- are protected under existing or proposed legislation.

A proposed technical corrections bill, AB 3027, was drafted in response to a recent state budget-balancing provision that transfers $375 million in property taxes to schools from special districts. More than 5,000 special districts, including water and sanitation, operate in California.

The corrections bill, now pending before the governor, would expand provisions in earlier legislation that exempts special districts' property tax revenues from the transfer when they are pledged to debt service. It also includes corrections to other budget-related local government legislation.

But some issuers say that AB 3027, by using the term "debt instruments," still does not make it clear whether both general obligation and certificate of participation issues are protected. Others say the bill fails to protect debt service for debt issues sold in fiscal 1993.

"Right now, it's a mess," said John Fraser, executive director of the Association of California Water Agencies. "We need another cleanup bill."

In an Oct. 9 letter, Sen. Marian Bergeson, R-Newport Beach, attempted to clarify the legislation's intent and pledged to introduce another cleanup bill when the Legislature reconvenes in early December.

She said the correction bill's current language referring to "debt instruments issued by a special district" should be clarified to include both bonds and certificate of participation issues.

She also noted that AB 3027 inadvertently failed to address bond issues and similar debt issuances made in the 1991-92 fiscal year if loan payments had not been made in the 1991-92" fiscal year. As a result, she said she intends in the new bill to "include in the debt service exclusion those projects which were in the pipeline before July 1, 1992."

Peter M. Detwiler, principal consultant to the Senate Committee on Local Government, said a cleanup bill could be forthcoming.

"If the investment and local government community demonstrate that there is a problem, yes, we will clean it up," he said.

Several bond attorneys and a rating analyst have said the current bill is unclear and vague.

"I think there are still some things that merit clarification, such as what [qualifies as] debt instruments," said Stephen A. Spitz, a partner with Orrick, Herrington & Sutcliffe.

Spitz said this was an important issue for special districts because it is unclear whether or not budget cuts affect their ability to pay debt service, although he stressed it is unlikely there would be defaults.

"From a bond standpoint, this doesn't mean the sky is falling," said Spitz. "But that doesn't mean it's not a serious matter for special districts."

On Friday, Moody's Investors Service released a report saying that it would not take immediate action on debt ratings because of the impact of the state budget cutback on special districts' property tax revenues.

The budget legislation requires the districts to transfer an amount equal to 35% of the property taxes each reported receiving in fiscal 1992. The transfer cannot exceed 10% of the total revenues reported in fiscal 1990.

Eric Friedland, the analyst who prepared the report, said this 10% limit will offer some protection to special district bondholders.

Friedland said new cleanup legislation, if it is "specific," would be helpful from a credit quality review standpoint.

"The more specific they are in the legislation, the less we have to worry about doing a sensitivity analysis," he said.

Special districts in California vary in their ability to respond to the budget cutbacks. Some can raise user fees and take other steps to adjust to the revenue loss, while others have less flexibility. Fire protection and hospital districts are exempted from the property tax transfer.

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