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Compton on brink of bankruptcy

The city is the latest to fall victim to questionable financial practices. It could run out of money by the end of the summer.

July 18, 2012|By Abby Sewell and Jessica Garrison, Los Angeles Times
  • Daivon Smith practices his cycling tricks at Compton Civic Center. City officials say they could run out of cash by the end of the summer, with $3 million in the bank and $5 million in debt.
Daivon Smith practices his cycling tricks at Compton Civic Center. City… (Barbara Davidson, Los Angeles…)

Compton this week became the latest city in California to find itself on the brink of bankruptcy, and as with others in crisis, much of the blame lies with questionable financial practices.

City officials announced that Compton could run out of money by summer's end, with $3 million in the bank and more than $5 million in bills due.

A longer-term problem is a $43-million deficit that the city amassed after years of improperly using money from water, sewer and retirement funds to balance its general fund. Compton will have to pay the money back at a time when it has no reserves and has been frantically cutting costs.

The situation is similar in other beleaguered cities, including San Bernardino, which voted last week to authorize a bankruptcy filing. Many of those cities relied on restricted funds to balance their books, obscuring their financial troubles.

The state of these cities underscores the complexity of the fiscal crisis roiling California municipalities this year, with Stockton and Mammoth Lakes already in Chapter 9 bankruptcy. While ballooning public pensions and falling property tax revenues have hit many cities hard, bad accounting practices and improper use of funds have also taken a toll.

In many cases cities resorted to these measures because they could not balance their books or raise revenues but were loath to make cuts.

A recent grand jury report found that the High Desert city of Victorville used a series of disparate, possibly illegal measures to stave off insolvency. Those included dipping into sanitation funds to help keep the city's treasury afloat, loaning water agency funds to bail out the city's electric utility and siphoning $2 million in airport bond funds to buy land for a city library.

The inter-agency borrowing was so questionable — with $69 million sloshing around City Hall as of June 2011 — that the Securities and Exchange Commission launched an investigation, which is ongoing.

In Montebello, state auditors last year said they were troubled to learn that the city regularly used money designed for specific purposes to balance its budget — in apparent violation of the law.

"It appears that the City moved money wherever it wanted, whenever it wanted, regardless of the law or the intended purpose of those taxpayer dollars," Controller John Chiang said in a statement.

Montebello officials said they are not close to bankruptcy but acknowledged that accounting problems were serious. "We borrowed money from all over the place, from all sorts of restricted funds. Every type of restricted fund, we have borrowed from it at some point to balance the budget," said Councilwoman Christina Cortez.

San Bernardino officials said budget reports had not been reconciled with audited financial statements, further muddying the city's financial picture. City Atty. James Penman made the controversial statement last week that budget documents had been "falsified" for 13 of the last 16 years, although other city officials said the reporting issues appeared to be the result of sloppiness, not fraud.

An annual audit of San Bernardino's finances in 2010 found that the redevelopment agency had improperly billed the U.S. Department of Housing and Urban Development, seeking reimbursements for expenses the city had yet to pay for. The city "deliberately" did so because of "cash flow concerns,'' the audit found.

Beyond accounting practices, many of these cities have been beset by ugly politics and heavy turnover among city administrators.

At the same time, many cities in California also saw holes blown in their budgets by the state last year when it eliminated redevelopment agencies. Redevelopment in Compton, for example, contributed about $5 million a year to the general fund.

"Losing redevelopment was like the bank calling you and saying, 'We're not renewing your credit line.' That's the kiss of death," said Larry Kosmont, a consultant who advises a number of California cities.

In Compton, the current crisis literally stems in part from inability to get a line of credit.

Officials slashed the city's workforce last year and sought the line of credit to help deal with cash flow problems in the short term. But that effort ended after Mayor Eric Perrodin sent a letter to the state controller's office in December alleging that fraud might have led to the city's financial problems and calling for a forensic audit.

The controller's office has not launched such a probe. But late last month, Mayer Hoffman McCann — the firm hired by Compton to perform the regular annual audit of its finances — told the city it could not finish the audit because it had been unable to get more information from Perrodin about the fraud allegations.

Rating agency Standard & Poor's put the city's lease revenue bonds on credit watch, threatening to withdraw the city's bond rating if it can't present a completed audit report within 90 days.

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