LOS ANGELESS -- California's local governments are responding to $1.3 billion of state budget cuts by raising fees and reducing services and future capital projects, according to a Standard & Poor's Corp. report expected for release today.

The cuts in aid for counties, cities, special districts, and redevelopment agencies represent "the most profound shift in state-local financial relations since the enactment of Proposition 13," the property tax-cutting measure voters approved in 1978, the rating agency said in a Credit Week Municipal report.

While Standard & Poor's did not mention the possible ratings impact of the budget reductions, it said that without continued state support, local governments "will have to raise revenues themselves or cut services and programs."

Richard Larkin, a Standard & Poor's managing director, said the rating agency will look at ratings on "a case-by-case basis."

Counties took the hardest hit, for a cost of $525 million, although the budget gave them increased flexibility to reduce social programs and services. Los Angeles County has already identified $250 million in cuts that will be made to health and welfare prorams.

The rating agency noted cities took the second hardest hit and said they have more options than counties to raise revenues through fees and taxes, although voters might not welcome them.

One city resorting to politically unpopular fee increases is Oakland, which plans to replace about $3.7 million in lost revenues with increases in the real estate transfer and utility consumption taxes.

The cuts affect special ditricts the least, the report says, because most can increase rates, mainly for water and sewers. Redevelopment agencies could look to cities to backstop their $200 million of cuts.

The rating agency predicted that the budget reductions "may reduce the willingness and ability" of cities and counties to sell general fund-supported lease obligations because no specific revenue stream is targeted for debt service.

Instead, the agency said the budget restructuring may encourage the use of general obligation debt, because property taxes can be raised to support such issues.

Next year is not likely to be any better for California.

The rating agency predicts state support for local agencies may continue to decline, "bringing about the reduced levels that could have resulted from the passage of Proposition 13, but were avoided due to the state's willingness and ability to support local government."

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