IRS is investigating Bell finances

The Internal Revenue Service has opened an investigation into the handling of bonds and employee compensation packages in the financially struggling city of Bell, according to sources familiar with the ongoing probe.

At least two IRS agents have been assigned to the investigation and have been in and out of Bell’s red-brick city hall since February, one source said. “They’re sifting and combing through everything,” the source said. The sources requested anonymity because they were not authorized to talk about the investigation.

IRS spokeswoman Linda Lowery said she could neither confirm nor deny there was an investigation.

The IRS is at least the eighth agency to probe Bell and the third to examine tens of millions in bonds the city sold. The city, engulfed by scandal after the arrest of eight current and former city leaders on public corruption charges, is now struggling to pay its bond debt and is on the brink of insolvency.

Among the subjects under investigation are workers’ compensation settlements and disability retirements that Bell’s former Chief Administrative Officer Robert Rizzo gave employees, according to a source.

The Times reported in May that Rizzo would wrap severance and sick and vacation time into workers’ comp settlements when some employees retired, especially those Rizzo was trying to force out of city hall. Experts said the practice violated tax codes. Workers’ compensation settlements are tax-free.

After being questioned by The Times, the state retirement system asked Bell to investigate the disability retirement pensions given to at least 10 police officers. Since such pensions are taxed at half the normal rate, they could lead to millions of dollars in extra benefits.

James Spertus, Rizzo’s attorney, said he had not heard about the IRS investigation. “I’ve always been surprised the federal government hasn’t joined the feeding frenzy,” he said.

Bell’s handling of bonds under Rizzo had already attracted the attention of the Securities and Exchange Commission and the state Department of Corporations, which opened investigations last year.

A highly critical report by the state controller’s office last year said Bell’s bond money was “mismanaged” and that “the risk for improper use of bond funds is very high.”

Pedro Carrillo, who, until recently, was Bell’s interim chief administrator, told the council last week that the city’s practice of using bond proceeds to repay principal and interest might be legally questionable.

Some of Bell’s bond money was supposed to be used to fund an elaborate sports complex, expand its civic center and build a new library and a performing arts center. Seven years and $26.5 million later, none of the projects have materialized.

The controller’s office also said that the city, at one juncture, sold $35 million in bonds for no apparent reason, and that a large portion of the money was deposited in a non-interest-bearing city checking account that Rizzo controlled.

The report suggested that Rizzo may have done this because, according to his contract, he wouldn’t get a raise if the city showed a deficit.

Rizzo and Annette Peretz, the city’s former director of community services, received tens of thousands of dollars out of the bond money, apparently for administering the funds.

The SEC subpoenaed documents involving the sale of $9.2 million in pension obligation bonds in 2005, $26.3 million in taxable bond anticipation notes in 2006 and $35 million in general obligation bonds in 2007.

The subpoena also asked for information about the $35-million lease revenue bonds Bell sold in 2007 to buy a piece of federal land and lease it to Burlington Northern Railway.

A Superior Court judge ruled the city failed to conduct environmental reviews, and the deal fell through.

jeff.gottlieb@latimes.com