The National Association of Counties, embarrassed by disclosures of a $2 million, 25 percent cost overrun on its new eight-story headquarters on Capitol Hill, has laid off a quarter of its staff, watched its longtime director resign and is scrambling for a bank loan to pay off its debts.

"People feel very badly about what's happened," said Stephanie Drea, a spokeswoman for the group, which represents 2,200 counties nationwide. "As a growing organization, they had planned on having their own headquarters for a long time. This was the culmination of that dream."

Drea acknowledged that lavish furnishings and decorations and spacious offices have added to the cost overruns. She said the group's cash-flow problems grew worse when two unidentified employes made "unauthorized decisions" to dip into day-to-day operating funds to pay construction costs. The association is seeking a loan from a Washington bank to cover the deficit.

Bernard F. Hillenbrand stepped down last week after 25 years as the group's executive director, saying he had to assume responsibility for the financial shortfall, which amounts to a third of the group's $6 million budget.

"When something goes bad in an organization, the director is responsible, regardless of whether he knew about it," Hillenbrand said. "We got bad information. But I'm honor bound not to comment further. They're in delicate negotiations for a loan and I don't want to upset that."

In his resignation letter, Hillenbrand said that "while I acted in good faith . . . we have all been deceived and lied to by a trusted employe as to the state of these finances."

Drea said that two staff members, whom she would not identify, have been dismissed because of their role in approving the cost overruns.

The association, which often lobbies against federal budget cuts, has given its own RIF notices to 21 professional and clerical staffers. The group, which gets its funding from member dues and public and private grants, also has cut travel, printing and other operating expenses by $237,000. The 68 remaining staff members plan to squeeze into two floors instead of three at the new building at 440 First St. NW so they can rent out the rest of the space.

"What will come out of this will be a smaller but much stronger organization than before," said association President William J. Murphy, who is executive of Rensselaer County, N.Y. "It will help us to focus on what our purposes are. We're doing what each of our member counties are having to do at home -- tighten our belts."