Tax and revenue anticipation note attraction looks to be on the wane.

State budget uncertainties and a recent change in the federal tax code are crimping tax and revenue anticipation note (TRAN) financings.

TRANs are short-term public debt offerings that tide over local government entities until tax revenues are available. They were created to avert potential cash flow problems and have been popular with issuers that range from school districts to municipal and state government agencies.

The County of Los Angeles alone issued $1.85 billion worth of TRANs last year, said Jan Takata, a finance analyst with the county treasurers office.

According to the California Debt Advisory Commission, entities around the state completed more than $9.8 billion TRANs in the July 1993/June 1994 fiscal year. More than a third were issued in July.

California limits these issues to 85 percent of uncollected revenues. And because these are tax-exempt issues, the federal government has added its own set of limitations on the spending and size of an issue's proceeds.

"The old federal tax rules said you could take the (issuer's projected) deficit and automatically add on a reasonable working capital reserve," said tax attorney Chas Cardall, a partner at the San Francisco law firm of Orrick Herrington & Sutcliffe.

That reserve, he noted, used to be 10 percent of the prior fiscal year's expenditures. Now it's 5 percent, he said, and it's no longer automatic.

The reduction is part of an ongoing federal campaign to cut back on arbitrage profit opportunities that stem from parking the proceeds of low interest rate, tax-exempt issues in investments with higher interest rates.

As a result of the tightening, and especially following enactment of the Tax Reform Act of 1986, the City of Los Angeles decided TRANs were not worth doing any more. Its last TRANs (an issue of $140 million) was completed during fiscal 1985/1986.

But L.A.'s assessment was very much in the minority, according to a report from New York-based credit rating agency Standard & Poor's. In fact, it noted California issuers led the nation in taking advantage of a temporarily liberalized stance that the IRS took in 1992 regarding the size and spending of TRAN proceeds.

Now that the IRS has limited the opportunity for arbitrage profits, Cardall expects the dollar volume of TRANs to drop by about a third.

Diane Brosen, who rates TRANs issues for S&P, also predicts a fall-off. She said, "For the major California counties, we have seen thus far a decline in the size of TRANs issuance of about 20-30 percent."

Mark Fisler, managing director of investment bank Piper Jaffray Inc.'s Torrance office, said, "On average, a TRAN issuer will be issuing 20-25 percent less than it did last year."

County financial analyst Takata acknowledged that L.A. County was one of the players on the sidelines. Although the county Board of Supervisors has authorized TRANs of up to $1.85 billion, Takata said no amount has been signed off to date.