LOS ANGELES -- Citing continuing program losses, Standard & Poor's Corp. has downgraded $3.15 billion of outstanding bonds issued by the California Department of Veterans Affairs.

The drop to A-plus from AA, announced yesterday, affects $2.7 billion in general obligation bonds and $450 million in home purchase revenue bonds.

In connection with the downgrading, Standard & Poor' s removed the veterans department from CreditWatch, and the outlook for its bonds is now stable.

The downgrade reflects a $21 million operating loss contained in a recently released internal audit, as well as last year's $45.5 million loss, Standard & Poor's said.

Department officials said yesterday they disagreed with the downgrade, but that they were not shocked by it because of the two-year loss figures.

"We're obviously a little disappointed," said Tom Maddock, chief deputy director. "We think our program is very strong, and we see support for that in the stable outlook S&P has assigned."

The state agency was created in 1921 to help veterans buy homes, and today it has more than 50,000 mortgage loans outstanding. Purchase contracts are the collateral for all loans -- a major plus in the eyes of credit agencies.

"We had hoped that would be enough to sustain our rating," Maddock said.

A Standard & Poor's analyst said it was the collateral that kept the department's grade from falling to the A-rating assigned to other California GO bonds.

Last July, each of the three major credit rating agencies lowered California's rating on the same day. But the veterans department was not affected.

"We've kept them a notch above the state based on the strength of the collateral," said Pamela Berkowitz, a director with Standard & Poor's San Francisco office.

The department's recent financial strains are attributed to negative arbitrage, along with other losses from life, disability, and fire insurance programs, according to a Standard & Poor's report released yesterday.

Revenues were also reduced this summer when the department lowered the interest rate charged to mortgage holders from 8% to 7.75%. At the time, officials said the move was necessary because of California's declining real estate market.

The interest rate change was temporary and will be re-evaluated within two years.

The department issues new bonds frequently, and, although there are no concrete plans, officials expect to go to market within a year or two.

Responding to Standard & Poor's downgrade yesterday, Moody's Investors Service continned its Aa rating and Fitch Investor's Service confirmed its A rating on the home purchase revenue bonds.

"We' re not contemplating a review of the vets program as of this moment, but they'll come up for a scheduled annual review next March," said Vincent Barberio, a Fitch senior director.

Standard & Poor's downgrade may have been foreshadowed by a state assemblyman's criticism of the veterans department earlier this year.

Assemblyman Tom Connolly, chairman of the veterans affairs subcommittee, warned that the department was in danger of falling to meet debt service payments on the $3.5 billion.

Connolly drafted a bill requLring the state treasurer to study the department' s finances and reslmcture the debt if necessary.

Coy. Pete Wilson signed a revised version of the bill requiring the department to submit its annual audit to the legislature.

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