Lawndale to Keep Tighter Rein on City Purse Strings

Lawndale City Council members, still reeling from the discovery last month that the city lost more than $1.6 million in a speculative securities deal, have tightened controls over the treasurer’s office and adopted a formal investment policy.

Several city officials, meanwhile, predict that the planned $3.3-million civic center expansion project will be put on hold until the city’s financial condition is clearer. The city has already accepted construction bids for the project, which would nearly double the size of the civic center.

The council, meeting in a special session Monday, also ordered the city’s staff to determine if the city’s funds can be managed by a bank on an interim basis until a new treasurer is appointed. The move elicited a sarcastic response from City Manager Paul Philips, who has been acting treasurer since Treasurer Ray Wood, who made the bad investment, was fired in October.

Bank Gets Fee, Profit

Philips suggested that a bank could charge a fee to manage the funds and make additional profit by lending them.

“What you’re saying is, we turn our money over to a bank to have them put it into their own (certificates of deposit). We pay them to do that?” Philips asked.

“That’s right,” snapped Mayor Sarann Kruse.

City officials spent about two hours in closed session after the council meeting to discuss legal or other action to recoup the lost funds. On Tuesday, City Atty. David Aleshire said the city wants to “talk to the people we feel are potentially liable for our losses and see if we can work something out with them.”

Aleshire said he was referring to the two brokerage firms, E. F. Hutton & Co. and First Investment Securities Inc., which handled the investment.

Lawndale officials said the losses occurred after Wood, a part-time treasurer, invested in U. S. Treasury bonds bought on margin. The cities of San Marino and Palmdale, who also employed Wood, reported that they lost an estimated total of $6 million in such investments.

In a margin account, an investor puts down only a fraction of the price of a security, hoping the market will rise. If the market falls more than the amount invested, the entire investment can be lost unless the investor puts in additional funds.

Checks and Balances

In an effort to tighten control over the treasurer and keep better track of the city’s investments, council members approved Monday an ordinance that transfers the duties of finance director from the city manager to the assistant city manager.

The ordinance is designed to improve the checks and balances within the treasurer’s office by, in effect, having one more person review the monthly treasurer’s reports. Before, the treasurer was supposed to submit his reports to the city manager, who then reported to council members. Now, the treasurer’s reports will first go to the assistant city manager and then to the city manager before the council reviews it.

The ordinance becomes law in 30 days.

The formal investment policy approved Monday is similar to policies in other South Bay cities. It mandates that the city’s treasurer and finance director invest only in passbook savings accounts, certificates of deposit, U. S. government securities and the Local Agency Investment Fund, which is managed by the state treasurer’s office. Any other type of investment would require council approval.

State law requires a municipal treasurer to submit an investment policy to the city council. However, Lawndale officials said they have no record that such a policy was ever submitted to the council by Wood.

Declines Comment

Wood has declined to comment on the investments he made for the three cities, other than to express regret for the losses.

Lawndale officials said no city services will be cut as a result of the loss, which represented about half of the city’s general fund reserves. But because Lawndale will lose about $150,000 annually in interest income, the city’s staff recommended Monday that two new positions slated to be filled this year--one in leisure services and the other in administration--be left vacant. The staff also proposed miscellaneous cuts in such areas as maintenance and employee travel.

Assistant City Manager Paula Cone said Tuesday that Lawndale could pay off the civic center expansion bonds even without the lost funds, but Councilman Terry Birdsall said he doubted the city could proceed.

“I think we are going to have to put it on hold for a good while because of the funding problem and the loss of the money,” Birdsall said in an interview. “We must recover that money before we do anything else. It is just a bad issue now to push forward because some people have some real doubts about what is going on in the city.”

The council will decide whether to delay the project and will discuss the recommended staffing cuts at its Nov. 19 meeting.