LOS ANGELES - Municipal market participants say the budget California has put together establishes a tough new tone for public finance in the state.

The 1980s are over, and with them the glory days when a burgeoning economy helped drive governmental revenues higher. From a public finance standpoint, this means local governments can expect to find the state's hand in their pockets.

"The measures undertaken to balance the current state budget signal an increased vulnerability of local governments to the state government's financial conditions." Moody's Investors Service said in an initial assessment of the budget passed Wednesday.

"The state has shown a new willingness to change the rules by which certain local revenues are allocated, such as their application of locally collected redevelopment funds towards school funding, the release of port revenues for general city purposes, and the redirection of mobile home and trailer-coach license fees to the state general fund." Moody's said in its assessment.

The philosophy underlying that change could represent a turning point for public finance, with both positive and negative implications.

"I think this is the beginning of a trend," said Steven Zimmermann, a managing director at Standard & Poor's Corp. in San Francisco.

In the 1980s, he said, responsibilities for many governmental services in California, such as school funding, tended to move upstream from local governments to the state.

But, Mr. Zimmermann said, "what goes up must come down."

By redirecting $1.3 billion to school and community college districts from property tax funding for counties, cities, redevelopment agencies, and special districts, the state is sending a message that local governments must decide what services they want and how they will finance them.

"This downloading of services, in my mind, will continue," barring a miraculous revival of the economy, Mr. Zimmermann said.

In the near term, market participants will obviously focus on the credit implications for issuers of these changes. "Following three fiscal years of recession-driven local budget reductions, this latest round of cuts in state funding to local government can only further strain local financial operations." Moody's noted.

But from a longer-term perspective, some market participants stressed that California governments might benefit from scrutinizing their operations.

Steven Krupa, a portfolio manager for Nuveen Advisory Corp., noted yesterday that "California was faced with a lot of tough decisions and [it] met them head on."

The consequences may be unpleasant for some local governments, he said, but he added there may be long-term benefits for the state.

In particular, the state could emerge stronger, much as Massachusetts and Connecticut rebounded from financial difficulties, Mr. Krupa said.

The problems for California issuers did not develop overnight and will require time to remedy. Mr. Zimmermann said lying behind much of the current troubles is Proposition 13, the 1978 landmark voter initiative that cut and capped property taxes in the state.

"It's coming home to roost," Mr. Zimmermann said. "People should understand what Proposition 13 means," especially now that the state lacks funds to cushion the long-lasting effects of the tax-limitation measure.

By sharply limiting taxes on people who still require services, California governments are leaving "sizable amounts of money on the table" in the form of potential revenues, he noted. At the same time, they are still up against massive expenditure pressures, he added.

Continuing state shrinkage is setting the stage for more local taxation," or sharp service cutbacks, Mr. Zimmermann said.

State legislators, as a concession to this dilemma, broke a long-standing dispute in recent days when they agreed to let state voters decide in 1994 whether to let citizens approve local school general obligation bond measures with a simple majority, rather than the two-thirds vote required now.

Such a change could empower local agencies to better meet capital outlay pressures. However, the prospects for passing the constitutional amendment are by no means certain, largely because the anti-tax movement in California is still powerful.

Thomas J. Elzey, general manager of the San Francisco Public Utilities Commission, warned yesterday that the amendment is not a cure-all for local agencies even when they have access to capital-improvement funds.

Budgetary pressures that force consistent cuts in operating expenditures "create a conflicting situation" because certain capital improvements are useless if governments cannot afford the staffing or equipment for them, he noted.

For now, municipal market participants clearly have their work cut out for them in determining the effects of the state budget on various issuers.

Rating agency officials are digging into the state budget and likely will make a determination on their current state ratings when California sells its revenue anticipation notes later this month.

Due to the complexity of the $40.8 billion general fund spending plan, analysts need time to study "what the budget does answer and doesn't answer," said Claire G. Cohen, executive vice president of Fitch Investors Service.

The cumulative effect of the recession on local governments and the potential for further cuts means "increased surveillance of many credits in the state on a case-by-case basis," Moody's said. The specific results "will depend on the particular facts of the credit, including its previous planning for such reductions and its flexibility for either decreasing expenditures or raising additional revenues."

The state's 58 counties appear headed for the most intense scrutiny, in part because they lack the revenue-raising flexibility of other local governments, market participants said.

Certain types of securities also may get extra attention, analysts said.

For example, certificates of participation and other forms of lease financing will merit attention because they usually rely on the strength of an issuer's general fund for security, analysts noted.

In the future, there could be "more of a reticence to issue" lease-related securities because they must compete against other funding needs for a piece of a smaller general fund pie, Mr. Zimmermann said.

Local officials also may be leery about encumbering their general fund with new obligations when "they don't know what's coming next year" in terms of revenue, he added.

Some market participants, while noting that public finance officials face adjustments, stressed that they remain positive about many California credits. Not all local agencies will feel the sting from the state's difficulties, they noted, adding that in some cases the credits a sound investment.

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