This coastal city of 13,500 -- which adopted the state's first and only Proposition 13-style property tax limitation less than a year ago -- went into default last week, clouding its ability to meet city payrolls and sending tremors of concern throughout the state.

Saco ended the year with a deficit of more than $1 million and found it couldn't pay off a $2.1 million tax anticipation loan from Casco Bank of Portland, one of the state's largest banks.

The city borrowed the $2.1 million from Casco last January, but when it came up short of cash at the end of the year, it couldn't convince any New England banks to loan it enough money to pay off its debts.

This city 20 miles south of Portland has been in financial straits since the middle of last year, when voters approved a $3 million limit on municipal spending.

The tax limitation made the already cautious banks hesitant to buy any of the city's notes, which hampered the city's ability to sell a $540,000 sewer bond, which would have paid off a project that was completed last year but never fully paid for.

The inability to sell the bond notes compounded the city's financial problems, leaving it with a year-end deficit of more than $1 million. It is the first city in New England to go into default.

Late last week, a Bangor Superior Court judge ordered a freeze on all of the city's cash assets, leaving it with no money to pay its bills or meet its payrolls.

"I really believe we'll recover from this," observed city administrator Curtis W. Tripp. "Our attorney is meeting with the city's creditors, and I'm confident that a solution will be reached soon."

But city employes, many of whose paychecks bounced last week after the city's $1.6 million bank account was frozen, weren't quite so optimistic.

"Everyone's jumpy and irritable," said city clerk Joan Lamontagne, "no one knows what's going to happen."

"We haven't gotten paid," she added last week, "and who knows whether anyone will be paid next week?"

Maine state treasurer Jerrold J. Speers observed that Saco's default "is a matter of very great concern to us," adding that "potential investors tend not to differentiate between one Maine town and another."

The police, fire and public works dipartment unions held emergency meetings last Thursday to discuss the financial crisis. All of them agreed to whithhold any job action until tomorrow, when the next payroll is due to be met.

"We're proceeding right now in good faith," said David Corbett, president of the police department's union, "We realize some of our checks have already bounced, but we're waiting to see whether the money will be there next week."

Robert Paradis, president of the local fire department union, observed that "fire fighters are going to work, there's no question about that. But we're anxious to see whether this will be resolved before next week's payroll." w

The city went into default on New Year's Eve, when the First National Bank of Boston -- the city's financial adviser -- withdrew its offer to help bail the city out of the crisis that has brought Saco close to financial paralysis in recent weeks.

The Boston bank withdrew its offer after Saco Mayor J. Haley Booth refused to sign about $2 million in tax anticipation and bond notes for 1980 -- a move that would have helped keep the city from going into default.

"I refused to sign those notes because the city would have overdrawn its checking account by $16,000," Booth said. "I was asked to do something that I felt was morally wrong and illegal."

The First National Bank of Boston had offered to provide "market access" for the city's $1.5 million 1980 tax anticipation notes and a $540,000 sewer construction bond.

But when Booth refused to sign the papers that would have cleared the way for selling the notes, the Boston bank pulled out.

"I don't know what the hell that man was thinking of," observed one city hall worker. "Didn't he know what he was doing to the city?"

After the city went to default, Merill Trust Co. of Bangor -- the agents for the city's bondholders -- filed suit in Penobscot Superior Court seeking an attachment on the city's $1.6 million in cash assets.

Superior Court Justice Edward Stern granted the bank's motion, effectively freezing all of the city's operating cash.

Meanwhile, the school department decided to close schools today and tomorrow. "I have no choice but to recommend that the schools be shut down," School Superintendent Howard Cushman said late last week. "I'm not going to as that the teachers work without pay."