LOS ANGELES - The Los Angeles Unified School District faces a crucial court hearing this week on its ability to implement cuts in teacher salaries amid escalating market concern over the district's financial situation.

The hearing, scheduled for Wednesday, will determine whether a restraining order is upheld that blocked the district from implementing 9% salary reductions for teachers.

In another development that highlights the importance of Wednesday's hearing, the superintendent of the Los Angeles County Office of Education last week asked to meet with the state superintendent of public instruction "in the very near future to discuss possible options and outcomes" regarding challenges facing the district.

"Because of the magnitude and immediacy of the problem and because all efforts by the district to effect relief in court have thus far failed, we are greatly concerned that the district is heading toward insolvency," Stuart Gothold, the Los Angeles County superintendent, said in a letter to Bill Honig, the state superintendent.

"We feel that if the situation is not remedied, the district will be unable to meet its financial obligations for the remainder of the current fiscal year." Gothold continued.

Gothold's office is considering using a state law that lets county education offices intervene in a school district's affairs in cases of growing financial distress.

That prospect, according to market participants, would complicate the situation by compounding fiscal uncertainty with a layer of management uncertainty.

As a result, the outcome of Wednesday's hearing could have eventual rating implications as well as an important impact on the district's operations.

"We are definitely very much concerned about this," noted Diane Schenkman, an assistant vice president of Moody's Investors Service.

Moody's is meeting with school officials tomorrow as part of a planned review of the district's ratings, and "we'll be asking them some very pointed questions about what their contingency plans are" if the salary cuts are blocked, Schenkman said.

The district imposed the pay cuts to help close a $400 million budget shortfall. The teachers union, United Teachers of Los Angeles, responded by threatening a strike in late October and challenged the salary reduction in court.

In an unexpected development on Nov. 5, Los Angeles County Superior Court Judge Stephen O'Neil granted a temporary restraining order against implementing the pay cut. The order surprised both the union and the district because neither expected the action to succeed.

The judge also ordered the district to issue supplemental checks totaling $19.7 million to reimburse teachers for a payroll period that incorporated the salary cuts. An appeal on that requirement failed because a state appellate court said the district failed to show it would suffer "irreparable harm" from issuing the supplemental checks.

Wednesday's hearing will determine whether the temporary restraining order against the pay cuts remains in place or is overruled in favor of the district.

Gothold, in a separate letter Thursday to Leticia Quezada, board president of the district, reiterated his concern that the district faces insolvency if it must find an additional $19.7 million per pay period to meet its certificated payrolls.

"If this is not the case or if there is any additional action that the district is proposing to take that would enable it to meet its financial Obligations for the remainder of the [1993 fiscal year], we need to be apprised of the situation, "Gothold said, adding that the "urgency of this situation" requires a prompt response.

Last June, Standard & Poor's Corp. placed district lease obligations on CreditWatch with negative implications, citing financial stress caused mainly be state revenues.

The watch affects $217.2 million of the district's certificates of participation, covering various series rated either A-plus or provisional A-plus. Moody's rates the district's COPs either A or conditional A.

Some traders expressed concern Friday over the district's ability to maintain its ratings.

Market participants said they also are increasingly worried over any attempts by other governmental entities to assume a larger role in running the district's affairs.

"I think it's kind of scary," one trader said, especially when the state's largest school district is involved.

Honig and other school officials said last week they believe it is best for the Los Angeles district to solve its problems on a local level, rather than bringing in outside parties.

Standard & Poor's said in an update it is monitoring events closely.

"It's a unique situation," said Katherine Evans, a director at Standard & Poor's, primarily because the judge's restraining order is "a very, very unusual thing to have happened."

A district finance officer was unavailable for comment Friday.

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