LOS ANGELES--Mounting fiscal pressures probably will result in credit rating downgrades for some California counties, says a report by Moody's Investors Service.

"Two key credit rating criteria, [the] economy and financial operations, have suffered unabated declines since 1990," Moody's said in the five-page credit report.

The impact of the deterioration "has been dramatic" for California counties, the report says. in response, Moody's says it is reviewing the debt -- totaling about $6.7 billion -- of all 41 California counties rated by the agency.

Although strong management and favorable financial characteristics will help many counties maintain existing grades, "some level of rating deterioration will inevitably follow the significant and long-lasting negative economic events experienced in California counties in recent years," the report concludes.

The observations by Moody's echo similar concerns expressed recently by other municipal analysts about county credits in California.

Large urban counties with high service demands and rural counties with limited economies face the greatest challenge in maintaining credit quality, Moody's said.

The agency over the last year has already lowered certain ratings on Los Angeles, San Diego, and San Francisco counties.

More county ratings "are likely to be lowered" even if Proposition 172, which would extend a temporary half-cent sales tax increase, succeeds at the polls next month, Moody's says.

Lawmakers devised the proposition with Gov. Pete Wilson's backing to help offset the state's shift this fiscal year of $2.6 billion in property taxes from local governments to schools. The shift allowed the state to reduce its school funding by the same amount.

Counties will absorb about $2 billion of the shift, but the sales tax extension only partly offsets their losses because the tax would raise about $1.37 billion in fiscal 1994, Moody's says.

"Counties will have suffered a significant loss of revenues overall" even if Proposition 172 passes, Moody's said, and "the credit consequences could be even more significant" if the measure fails.

Counties with realistic contingency plans will be better positioned to deal with further revenue losses, Moody's said.

From a broader perspective. "the loss of property taxes is particularly significant because they are historically the most discretionary source of revenues and represent the primary funding source for public protection. one of the largest programs for which counties are responsible," the report says.

Substituting sales tax revenues--which tend to be more volatile--for property taxes also more highly exposes counties to economic fluctuations, the report says.

Dispite all the pressure, strong administration has played a prominent role in maintaining counties' credit quality, Moody's said. Debt burdens also are generally low because of conservative borrowing policies.

In fact, California's county credit ratings remain favorable relative to assessments of counties elsewhere in the U.S.

Excluding credit-enhanced debt, Moody's says 48% of California's county general obligation and lease issues are rated A1 or better, compared with 40% for all U.S. counties.

Although Los Angeles County's numerous lease obligations help skew the percentages, "they are impressive given the relatively large number of lease financings in California. which are inherently weaker than general obligation offerings," Moody's said

But the agency said the downward trend of California's county ratings is now much more pronounced than elsewhere in the nation.

Counties with diverse economies--typically, on the periphery of urban areas--may stand the best chance of protecting their ratings because they have more balanced sources of revenues and less demanding public protection, health, and welfare needs, Moody's said.

Generally, however, "the current operating structure of counties presents a hurdle to the improvement of credit quality" due to minimal revenue-raising ability and little discretion over mandated expenditures, the agency said.

The counties' financial health "will not significantly change" without basic structural changes through state legislation, the report says.

Restructuring of the local and state fiscal relationship is expected to be a hot topic in Sacramento next year.

Administrators in many counties deserve commendation for making tough adjustments, "but at some point there is only so much you can do" without fundamental restructuring, Kevork Khrimian, a Moody's analyst and one of the report's authors. said yesterday.

Counties essentially have "a lot more on their plates than they have money to deal with," so they either need more resources or freedom to provide less in terms of services Khrimian said.

Besides the state tax shift, Moody's said that a deep recession and a restructuring of California's economy has slowed local revenues.

Even if the economy improves significantly. county officials should be cautious about immediately dedicating revenues to salary increases or hirings in order to avoid reducing future operating flexibility, Moody's says.

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