* Atwater faces $3.3 million budget gap
* City officials mull compensation concessions, rate hikes
* S&P lowers Atwater's wastewater revenue bonds four notches
By Jim Christie
SAN FRANCISCO, Sept 24 (Reuters) - Furloughs and a hiring freeze will not plug Atwater, California's budget gap and it must move more aggressively to avoid becoming the fourth city in the state to file for bankruptcy this year, according to its mayor.
Other options for tackling the $3.3 million budget gap faced by the Central Valley city of about 28,000 residents include selling property and asking employees for pension-plan concessions, Mayor Joan Faul said on Monday.
"You can say a little prayer and hope everyone works together on this," Faul told Reuters, adding that she was hopeful the city could approve further austerity measures.
Like other cities in inland parts of the most populous U.S. state, Atwater has fallen on hard times after its housing market imploded and sent property tax revenue into a spiral.
In June, the housing crash helped push Stockton, located about 62 miles (100 km) to the northwest of Atwater, to become California's first city to file for bankruptcy in 2012. The Central Valley city of 300,000 sought Chapter 9 protection from its creditors after 90 days of inconclusive med i ation.
According to a report by city staff presented to Atwater's city council, the local median home price has dropped about 40 percent to $139,000 since 2007 and the city's property tax revenue has dropped by 27 percent since then.
The local jobs market has also been hammered in recent years: Atwater's current unemployment rate is approximately 21 percent, the report said.
Atwater's economy is "pretty bleak" and starving the city of so much revenue its leaders must consider a drastic overhaul of the services, said Jim Price, vice president of operations at Gemini Flight Support at Atwater's Castle Airport.
"Police and fire, you keep them - and everything else is going to have to be privatized," Price said. "I just don't know how they can do it any other way."
Atwater's officials are just beginning to consider their options, Faul said, noting the city must consider raising 20-year-old rates for water services and 10-year-old rates for garbage services while clamping down on costs.
Union representative Nancy Vinson said she expects the city will seek concessions from its roughly 30 non-safety employees, who gave up 10 percent of pay last year through furloughs.
"They could ask for a wage reduction, they could ask for a different contribution to the retirement system, they could ask for a higher health benefit contribution," Vinson said. "We have not been unwilling to talk to them."
Atwater must also seek concessions from its roughly 50 safety and management-level employees, Vinson said, adding she is concerned city officials are moving too fast on a plan for declaring a fiscal emergency.
The city council last Wednesday began discussing a fiscal emergency. The council will again take up the matter on Oct. 3 while city staff compile solutions to Atwater's deficit.
California requires local governments to try to enter talks with their creditors to avert bankruptcy filings. Municipalities may, however, declare fiscal emergencies to circumvent the law and file for bankruptcy.
The city council of San Bernardino, California in July authorized a bankruptcy filing after declaring a fiscal emergency. The city of 210,000 residents 65 miles (104 km) east of Los Angeles, filed for bankruptcy on Aug. 1.
Municipal debt market analysts are concerned more cities with troubled finances in California could use fiscal emergency declarations as a way to fast-track Chapter 9 filings to attempt to shed financial obligations.
Standard & Poor's Ratings Services lowered on Friday its underlying rating on the Atwater Public Financing Authority's wastewater revenue bonds by four notches to 'BBB-minus' from 'A' and put the rating on CreditWatch with negative implications.
"The rating action reflects our view that financial distress in the city's general fund, water fund, and sanitation fund has negatively affected the credit quality of the wastewater enterprise through the drawdown of the city's pooled cash reserves," S&P credit analyst Scott Sagen said in a note.
The CreditWatch action is based on Atwater's consideration of declaring a fiscal emergency as a potential step toward a bankruptcy filing, Sagen added.