LOS ANGELES -- A California school district entangled in the financial debacle affecting Executive Life Insurance Co. recently obtained the highest rating possible for a new note deal and also retained its general obligation bond rating.

While acknowledging the problems faced by the Temecula Valley Unified School District, Moody's Investors Service concluded that the district's overall financial operations provide enough cushion to protect investors.

Accordingly, Moody's assigned a MIG-1 rating to the district's $3.6 million tax and revenue anticipation note issue planned that was priced last week by Security Pacific National Bank. Moody's last week also confirmed its A rating on the district's $29.6 million of general obligation bonds outstanding.

The Temecula Valley Unified School District cautioned in May that a $27.46 million 1989 special tax financing faces a potential default because the bulk of proceeds from the issue are invested in guaranteed investment contracts with Executive Life.

The California Insurance Commission, conservator of the failed life insurance company, has taken the stance that municipal GICs should receive lower claims priority than life insurance policyholders. Lawyers representing the Temecula district have cautioned that it might not receive the release of moneys needed to make an interest payment on Sept. 1, 1991, on the bonds, issued for Community Facilities District No. 89-3.

Moody's said in an analysis of the situation that "the presence of a municipality lending its name to a financing vehicle which may subsequently default on its debt obligations raises concerns about the 'indirect' effects on the municipality's operations."

It was clear that the concern over the potential default "could have had a negative effect" on the district's ratings, said Ronald L. Junker, the Moody's analyst who prepared the report.

But Moody's also found enough offsetting factors to justify its rating stance.

Bond counsel, for example, assured the agency that the special tax bonds -- commonly known as Mello-Roos debt -- are not general obligations of the district or payable from general fund revenues, Mr. Junker said. District officials also have said they will not use operating monies to make up any special tax shortfalls, he added.

These assurances reduced concerns regarding the district's operations during the life of the notes, which will mature on July 9, 1992, Mr. Junker said.

But the Moody's report cautions that over the longer term, "potential impacts on credit strength may result from increased litigation and settlement costs, reduced access to capital markets, loss of public and political sentiment, and finally questions about the prudence of management."

Moody's said, however, that "comfort is derived from management's statement that even in a worse-case scenario, liability expenses would be met thorugh developer fees and, therefore, have no impact on operations."

Mr. Junker said that concern over potential reduced access to capital markets for debt issuance also is mitigated by revised enrollment forecasts that indicate the district will not need to construct facilities as fast as originally planned.

The Temecula district, located about 55 miles north of San Diego, still expects a doubling of enrollment over the next 10 years to 16,220 students. But current capacity accommodates 13,000 students "and management does not anticipate a need to issue additional [long-term] debt until 1991," Mr. Junker said.

Developer fees and the district's $32 million of voter-authorized but unissued GO bonds are expected to meet most of its financing needs this decade.

"The lack of a need to seek additional debt authorization in the near-term is particularly significant given the potential for reduced voter support of district activities" because of the problems with the Mello-Roos deal, Mr. Junker continued in his analysis.

In an interview last week, Mr. Junker said the Temecula district's potential default raised analytical challenges because of the possible indirect effects on financial operations. There "certainly could have been a rating revision" without the offsetting positive factors, Mr. Junker said, adding that other entities in similar circumstances may not have fared as well.

Standard & Poor's Corp. does not rate the district's notes.

Last week's note issuance was the district's first borrowing for cash-flow purposes. Prior general fund shortfalls were addressed through interfund borrowings and operating loans from Riverside County.

Richard A. Clark, a managing director of Security Pacific, said, "We don't think" the Executive Life problem affected marketing of the notes. They were priced Tuesday to yield 4.8%, with a 5.25% coupon. The official statement included language describing the situation with the special tax bonds.

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