LOS ANGELES -- California's lingering recession -- and the resulting impact on state finances -- is a continuing concern for municipal market participants as the state prepares to take bids tomorrow on $441 million of general obligation bonds.

California may face a budget gap of $3 billion in the current fiscal year, primarily because key economic indicators suggest the state's recovery may be delayed or weakened, Kevin Scott, executive director of the nonpartisan Commission on State Finance, told a caucus of Assembly members last week.

Falling interest rates may spur improvement, but a continuation of the current economic trends "could have significant negative implications for the budget outlook for both this year" and the new fiscal year that starts July 1, 1992, Mr. Scott said in a recent letter to Assembly Speaker Willie Brown, D-San Francisco.

A stagnant economy could harm California's budget and also pose added risk to the state's bond sales because uncertainty over its creditworthiness makes it more difficult for investors and underwriters to assess the bonds' future direction.

State leaders averted a potential downgrade last July by reaching agreement on various tax increases and spending cuts to close a $14.3 billion budget gap spanning fiscal 1991 and the current fiscal year.

It now appears, however, that state officials may have to make additional adjustments this year unless the economic picture improves. A potential funding gap of $3 billion would be offset partly by a $1.2 billion reserve built into the state budget.

Rating agency officials scrutinized state finances earlier this year after the $14.3 billion deficit developed. But all three agencies -- Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service Inc. -- maintained their tripe-A assessments on California GOs.

In a report issued this month, Sanford C. Bernstein & Co. stirred discussion anew by saying that California GO bonds merit a double-A rating, primarily because recent demographic and population changes are undermining the state's creditworthiness.

Joseph Rosenblum, a nine-year veteran of Moody's and currently director of municipal research at Bernstein, wrote the report.

Mr. Rosenblum said in an interview yesterday that "the projections for a deficit are not at all surprising" given current economic conditions.

A deficit of sizable magnitude this year will be "much more difficult to address," if only because state officials already had to make huge adjustments to close the last gap, Mr. Rosenblum said.

A rating agency official said yesterday that her firm will give state leaders time to address the situation before making any new rating judgments.

"We were very impressed with the way California responded" to the last financial crunch, said Amy Doppelt, a vice president of Fitch. "You didn't have a Massachusetts situation, a Connecticut situation," where state leaders failed to respond in a timely manner, she added.

"We're obviously concerned about the economic results," Ms. Doppelt continued. But while California has a lot of needs, "it also has a lot of resources" with which to respond.

Mr. Rosenblum said his report stressed that "the [state's] credit is weakening," but he also noted that California is still a high quality credit.

A major uncertainty for investors is whether California GOs will underperform the rest of the market if negative economic news from the state begins to surface in coming months.

Underwriters also face a challenge this week in pricing the new issue.

"You look at the last significant high grades that have sold, Maryland and Missouri, they've had a very difficult time" with unsold balances, said the head of a major Wall Street trading desk. The official predicted that a 6.40% rate on 20-year California GOs this week might be too low, while a 6.50% could be too high.

Tomorrow's proposed sale encompasses $404 million of various purpose GO bonds, maturing as serials from 1992 to 2001, and $37 million of housing and homeless GO bonds due as serials from 1992 to 2001. The housing and homeless bonds are subject to the federal alternative minimum tax.

California's fiscal 1992 budget projects general fund expenditures of $43.4 billion and special fund expenditures of $10.6 billion.

An October bulletin from the California Department of Finance revealed that cash receipts from July to September were about $344 million less than projected.

An October revision of historical employment data by the state's Employment Development Department also showed that California experienced a net loss of almost 380,000 jobs between June 1990 and March 1991 -- a development termed "startling" by Mr. Scott. A preliminary estimate last spring put the net job loss at 35,000.

But Mr. Scott also said it is "important to remember" that California revises its jobs data in a more timely manner than elsewhere in the country, a fact that should help state officials react sooner to problems than otherwise might be the case.

State leaders already have discussed the possibility of meeting in a special session to study budget-related issues. The Legislature is in recess until January, and Gov. Pete Wilson has not endorsed holding a special session.

It appears possible that this winter could present yet another test for state leaders in how they address potentially deepening economic problems. Rating agency officials have said previously that California must act promptly to address further budget problems.

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