LOS ANGELES -- Several California counties may be placed on CreditWatch with negative implications if voters defeat a measure Tuesday to extend a half-cent state sales tax increase, Standard & Poor's Corp. said yesterday.
"The failure of Proposition 172 would require many counties to adjust their budgets substantially and would likely result in some rating downgrades," the rating agency said in a release.
Counties bore the brunt this year of a $2.6 billion local property tax shift to schools, a move that helped the state balance its own budget.
State lawmakers and Gov. Pete Wilson agreed to put the permanent sales tax extension on Tuesday's ballot to help soften the blow of the shift for local governments; counties will be the primary beneficiaries if Prop. 172 passes.
Diverting the sales tax revenues to local entities is expected to replace, on average, 73% of the lost property taxes, Standard & Poor's said.
But if Prop. 172 fails, the half-cent tax increase will expire at yearend, and locals will lose an estimated $744 million they had hoped for from January to June, the second half of the current fiscal year.
"One of the most troublesome features of the state's recent tax shifts and the reliance this year upon the ballot box to determine ultimate county funding levels is the continued uncertainty about future revenues," Standard & Poor's said in a report scheduled to appear Monday in CreditWeek Municipal.
"County governments have had to react to each event on a year-to-year basis, and this has reduced their ability to plan for the future," the agency said.
Standard & Poor's expects on Wednesday to release its CreditWatch list of counties if Prop. 172 fails.
"I'm not prepared to say who the counties are" at this point, said Jeffrey Thiemann, a director of Standard & Poor's who helped prepare the report.
Counties on which the agency already has a negative outlook -- such as Alameda, El Dorado, Los Angeles, Monterey, and Riverside -- may be prime candidates for the list. A few counties with a "stable" outlook could make the list as well, depending on their levels of budgetary stress.
Despite facing fiscal pinches for about three years -- driven by a deep recession and state-imposed revenue reductions -- "counties have performed admirably well to date," Standard & Poor's said.
The picture also "is not universally bleak," the agency said, noting that some counties that are less burdened by social service demands will emerge intact regardless of the voting outcome on Prop. 172.
Standard & Poor's cited Placer County as an example of a better-situated locality because of strong property value growth and solid financial management.
Some counties also are hedging their bets on the outcome of the vote.
For example, a few are including a half-cent "back-up" sales tax increase on their ballots. If passed, the local measures would take effect in the event the statewide vote fails.
"Other counties have indicated that they will follow this route if the statewide vote fails, and there appears to be local support for it," Standard & Poor's said.
Counties also have taken divergent approaches to handling uncertainties posed by the sales tax vote specifically, and economic conditions generally, the agency said.
Some, for example, have funded select programs through the end of the year only, and will eliminate them in the latter half of fiscal 1994 if Prop. 172 fails. Other counties have reduced services to a level that can be supported by six months of sales tax revenues.
"A riskier strategy has been to bank on passage of the sales tax extension, with the expectation that the budget would be reopened if Prop. 172 fails," Standard & Poor's said.
San Joaquin and Marin Counties have versions of this plan, the agency said.
San Joaquin's contingency plan calls for cutting criminal justice spending and bringing its own sales tax measure to voters in April if Prop. 172 fails, the agency said. Marin County would implement across-the-board spending reductions.
At recent California Debt Advisory Committee hearings on Prop. 172 and the effect of the property tax shift, some county officials stressed that they will face continuing pressure even if the sales tax measure passes.
Moody's Investors Service also warned earlier this month that mounting fiscal pressures probably will result in rating downgrades for some California counties.
Some ratings "are likely to be lowered" even if Prop. 172 succeeds, Moody's said, partly because of a significant revenue loss.