LOS ANGELES -- Standard & Poor's Corp. yesterday placed lease obligations of the Los Angeles Unified School District on Credit Watch with negative implications, citing financial stress caused primarily by declining state revenues.

"Despite strong financial manangement, revenue compression has resulted in very difficult budget negotiations for the second consecutive year," the agency said in a release.

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

Despite that action, Standard & Poor's yesterday assigned its highest short-term rating, SP-1-plus, to an imminent $450 million tax and revenue anticipation note issue by the district. The agency did not place those notes on CreditWatch, "as any change in the long-term rating is not expected to result in a change in the note rating."

The CreditWatch action also does not affect $240 million of the district's fiscal 1992 notes due Aug. 10.

The district's chief financial officer, Robert Booker, yesterday expressed optimism that Standard & Poor's "concern will go away" once the didtrict produces a balanced budget later this summer and the state's budget picture is clearer.

"The good news is that they have not taken any action" regarding a downgrade, Mr. Booker said, stressing that the areas of concern raised by the rating agency "are not anything we're not on top of."

Standard & Poor's said the district may see its COP ratings lowered if potential state cuts in school funding prove harmful and the district encounters difficulty producing a balanced budget in the new fiscal year beginning July 1.

"The planning budget for fiscal 1993 exposed a funding gap of approximately $400 million, which will take herculean effort on the part of management to address while it maintains the financial integrity of the district," the rating agency said.

Standard & Poor's noted that the district's management already had to renegotiate teachers' salary contracts, reduce programs, increase class size, and eliminate 2,300 positions to close a funding gap of $274 million in fiscal 1992.

The district, with an annual budget exceeding $3 billion, expects to end fiscal 1992 "with a negligible fund balance reserve of $20 million," Standard & Poor's added.

The agency also expressed concern over the state's chronic budget problems and current cash crisis.

"Because roughly 80% of the district's annual general fund revenues come from the state, any slight fluctuation in this revenue stream will be amplified in the district's budget," Standard & Poor's said.

The agency added that further spending cuts by the district may be necessary if the state reduces its school funding commitment, which is based on a formula tied to average daily attendance.

Standard & Poor's said the district has "some maneuverability on the expenditure side" because its debt service carrying costs "are very low at only 1% of budget."

Rating analysts took comfort in that fact because "they're not highly leveraged at all," said Katherine Evans, a director at Standard & Poor's. By contrast, she note that some school districts dedicate much higher percentages of their annual budget to debt service.

Ms. Evans said the CreditWatch action affecting the Los Angeles district does not necessarily mean other schools in California face similar scrutiny.

"It's hard to equate them all," because each district has its own mix of revenues and spending plans, she noted.

Diane Schenkman, an assistant vice president of Moody's said her agency plans to re-evaluate the Los Angeles distric's long-term ratings after the state and district finish work on their new budgets later this summer.

Moody's which rates the district's COP's either A or conditional A, lowered the long-term rating in May 1991 because of continuing budget pressures, Ms. Schenkman said.

She added that the district's finances have "deteriorated in recent years," partly owing to high fixed costs associated with past employee salary increases.

Moody's Investors Service this week assigned its highest rating, MIG-1, to the district's new note issue.

A district finance officer could not be reached for comment yesterday on the Standard & Poor's action.

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