AUSTIN, Tex. -- Wall Street analysts yesterday lauded efforts to closely watch debt levels, but they cautioned state officials to tailor debt limits to their unique revenue and budget structures.

Analysts from the three major rating agencies told the first-ever gathering of the State Debt Management Network, an outgrowth of the National Association of State Treasurers, that many states are trying to limit debt use to 5% of annual general fund expenditures at a time when some investors are skittish about government finance.

"There's a lot of nervousness in the market today," said Claire Cohen, executive managing director at Fitch Investors Service. "Tailor [debt limits] to your needs as an issuer. If it's right, that will be recognized."

She and other senior analysts advised about 125 officials at the conference here to study the state's needs and then devise a debt limit customized for its particular revenue and budget structures.

"Because states operate so differently, it's important to recognize what you are trying to do before you start this process," said Treasurer Mary Landrieu of Louisiana, the meeting's chairwoman.

But panelists and state officials differed over whether such debt measures should be a matter of statutory law or of policy. "It seems to me that you could get into trouble by setting your debt limit too low," said Tom Pollard, executive director of the Texas Bond Review Board.

Texas lawmakers this spring adopted a first-ever limit on tax-supported debt that is equal to 5% of the general fund annually. The measure is a matter of law and would require new legislative action to change.

Ms. Cohen said that whether a debt limit is law or simply policy, it should be flexible.

However, Richard Larkin, managing director at Standard & Poor's Corp., said that while other analysts did not favor statutory debt limits, he did. "It gives you a little more clout," he said.

While many states are just now starting debt management plans, Maryland, which is rated triple-A by all three agencies, has implemented one since 1978. The effect has been to curtail the use of long-term debt by the state.

Joan Shirrefs, a special assistant to the Maryland treasurer, said state officials started the oversight process because of financial concerns and the perceived risk that the state could lose its top rating.

Analysts from all three agencies lauded states for focusing more on debt policy, but said that when deciding whether to sell bonds they should consider more than just paying for debt service.

George Leung, managing director for state ratings at Moody's Investors Service, said governments need to consider the long-term operating costs of projects they may be building, such as prisons. "The biggest cost is going to be in operations," he said in an interview.

He and others agreed that the recession and shrinking assistance from the federal government have spawned concerns by states over how and when to use debt rather than pay-as-you-go financing.

"The financial strains facing states today make determining capacity and what is affordable critical," Mr. Leung said.

Ms. Cohen agreed. "The pressure point really is on operations right now," she said. "Your [debt] capacity can really shrink rapidly if you have stagnant income growth."

Already, states are feeling the pinch of the current slowdown in the economy. But as states use short-term borrowings to solve cash-flow problems, Mr. Larkin warned they face the prospects of having one-year notes affect debt calculations by Standard & Poor's.

Since 1983, the agency has been the only one to include short-term debt in its calculations. He noted that, for many states, a note sale is its single largest deal and often becomes a perpetual need.

"It never really gets retired," said Mr. Larkin, a member of the Anthony Commission. "It just gets recycled."

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