LOS ANGELES - Note ratings for many California issuers with remain high grade if they deal conservatively with current budget problems, but the outlook for longer-term credit quality is less certain, Moody's Investors Service said yesterday.

"In most cases, short-term ratings will prove resistant to erosion, in large measure due to the inherent structural strengths of the security, but due also to timely, if painful, management response to reduced resources," Moody's said in a credit report.

But proposed cutbacks in state funding for local governments could cause problems down the road, the rating agency said.

California has proposed "unwinding a large part of the significant role the state has played in county and education finances since the passage of Proposition 13" in 1978, Moody's said. "The short-term result has been a high level of uncertainty; the longer-term result of these changes is likely to be reduced credit quality at the local level."

The Moody's report focuses on how the state's budget problem is creating uncertainty for local governments, particularly as they prepare for the annual sale of tax and revenue anticipation notes.

Moody's said it already has more than 100 pending requests for note ratings from California counties, school districts, and cities, representing almost $3.2 billion of proposed issuance in June alone.

Meanwhile, state legislators are studying Gov. Pete Wilson's proposal to transfer $2.6 billion in property tax revenues from counties, cities, special districts, and redevelopment agencies to offset an equal amount of state school funding. That transfer would help balance the state's budget in fiscal 1994, which begins July 1.

The transfer proposal "creates uncertainty and risks" for local issuers, Moody's said.

But the rating agency said it believes "many issuers will be able to achieve highest-grade [note] ratings, despite the budget risks, if the issuer is able to show strong management and a conservative approach" for the upcoming fiscal year budget.

In addition, Moody's cited certain structural strengths of California Trans - such as early segregation of funds for note repayment - that can enhance security.

Counties face the most problems from the transfer, Moody's said, partly because Wilson's proposal would ask them to absorb almost half of the tax shift.

Counties also "have little operating flexibility, with most of their revenue already dedicated to mandated programs," Moody's said in the report.

However, Moody's said it "will not give weight to potential new sales tax revenues" when it evaluates short-term borrowings.

New sales taxes may face legal challenge and voter opposition, Moody's explained, and even if approved the increases would not help county coffers until late in the fiscal year.

But Moody's said it expects many counties to achieve highest-grade note ratings, based on "realistic and achievable plans to address the property tax transfer."

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