Audit Sparks Demand for $3 Million : Government: A community group charges that county officials improperly spent the funds in an effort to build sewer system.

Members of a Malibu community group have demanded that Los Angeles County reimburse homeowners in the new city more than $3 million that they say was improperly spent in the county’s long effort to force construction of a Malibu sewer system.

County officials quickly rejected the demand and insisted that all of the $9.3 million spent so far on the project was legitimate.

The Malibu Township Council’s demand for reimbursement was triggered by a review of county financial records by certified public accountant Arnold E. Bernstein made at the community group’s request. The council released the results last week.

Bernstein concluded that $3 million of the $9.3 million in spending by the county was improperly used for such purposes as trying to block Malibu’s incorporation as a city, defending the county against lawsuits aimed at stopping the $43-million sewer project and paying for a public relations campaign to promote the project.

The county’s sewer expenses were paid from proceeds of a 1989 bond issue that followed the establishment of a sewer assessment district covering much of the eastern section of Malibu. About 2,000 homes in the district have been assessed $13,000 each to pay for the bonds; most homeowners are paying the bill over 20 years as part of their property taxes.

“We believe that, under the bond documents, some of the expenditures are questionable, if not actually illegal,” said John B. Murdock, attorney for the community group.

County officials disputed the conclusions.

“This is an incomplete audit from which they’ve drawn erroneous conclusions,” said Harry Stone, deputy director of the county Department of Public Works. “This is a big project--the financial records are complex and detailed. If you don’t do a full audit, then you could draw wrong conclusions.”

And in a letter to representatives of the township counsel May 29, County Counsel DeWitt Clinton said, “All county expenditures to date in connection with the Malibu sewer project have been proper and no reimbursement is necessary.”

Bernstein acknowledged that his firm was not able to study all the project costs. That was because county records “were missing or . . . simply disorganized,” he said.

The review was further hampered, Bernstein said, because he could not find “one person who seemed to have overall control for financial record-keeping of the sewer project and who assures that costs charged to the project are, in fact, directly related to the project.”

Galvanized by their opposition to the county’s sewer proposal, Malibu residents started an incorporation drive in November, 1987, and in June, 1990, voted overwhelmingly in favor of cityhood. But the county, through a series of legal maneuvers, managed to delay incorporation for nine months as it attempted--unsuccessfully--to start building the sewer.

Late last month, the county offered to abandon all plans for the project, but under terms that members of the Malibu City Council indicated were probably unacceptable. Further negotiations are expected.

The community group presented Bernstein’s findings to the City Council last week and urged the council to make use of the information as it attempts to reach an overall sewer settlement with the county. If no reimbursement results, township council members said they would consider reviving a 1989 lawsuit against the county.

According to Bernstein’s review, payouts not directly related to the $43-million sewer include an indeterminate amount paid for parts of the so-called Montgomery plan, an $85-million sewer project approved by the Board of Supervisors but never built. Another $1.1 million went to upgrade the Malibu Mesa treatment plant, which serves Pepperdine University and the nearby Malibu Country Estates subdivision through a separate sewer district. A check for $50,000 went to the law firm of O’Melveny & Myers for work on a 1986 bond issue for which Malibu homeowners were billed through a separate tax district.

Stone and Clinton defended the commingling of funds among the various assessment districts as proper because the environmental reports and engineering plans from the earlier sewer projects were incorporated into the $43-million plan.

Bernstein disagreed. “Costs incurred by the county in anticipation or investigation of an improvement should not be charged to another project simply because it has a similar description or has the funds.”

A spokesman for the Municipal Securities Rulemaking Board in Washington said the transfers among the assessment districts might be legitimate, “but only if this was spelled out in the bond documents or in the legislation authorizing the county to issue bonds.”

Murdock called for a continuing audit of sewer expenditures, predicting that closer scrutiny of the books would ultimately force the county to refund all $9.3 million to Malibu homeowners.

Malibu City Council members Jeff Kramer and Carolyn Van Horn endorsed the call for a continuing audit, with Kramer declaring the $3-million reimbursement demand “morally correct.”

“I’ve believed for a long time the county was improperly using sewer funds on things like the defeat of cityhood,” he said.

Whether bond proceeds should have been used to defeat Malibu’s incorporation was addressed first by Clinton in his eight-page letter to the township council. Both Clinton and Assistant County Counsel Bill Pellman cited state law to defend the $277,000 paid to the law firm of Jones, Day, Reavis & Pogue to assist the county in delaying cityhood.

“The incorporation drive had the principal effect of delaying construction of the Malibu sewers,” said Pellman, “so the county counsel’s office concluded that those legal fees were allowable as an incidental expense under California law.”

Malibu Township Council representative Leon Cooper argued that if cityhood was a threat to the completion of the sewer, that fact should have been declared as a risk in the bond documents under Securities and Exchange Commission regulations.

“Bonds are issued with legal documents laying out the risks to the bondholder and the specific purposes for which the money is to be used,” Cooper said. “If the county uses it for other purposes, then it has committed fraud.”

The township council’s audit was released exactly a week after the Board of Supervisors voted to abandon the $43-million sewer project if the new city of Malibu agreed to put in its own waste-water project within three years.

As part of the deal, the city would also assume all liability for the termination of the county plan, including lawsuits that could be brought by bondholders.

A spokesman for Supervisor Ed Edelman, who brought last week’s proposal to the board, said there was “no connection whatever” between the audit findings and the board resolution. Edelman, whose district includes Malibu, is out of town until Thursday and could not be reached for comment.

Pellman too insisted that the timing was “purely coincidental, even though Kagon and Cooper sent the Bernstein findings to county officials in March. Edelman promised the two men a response by May 30, “But we still haven’t heard from him directly,” said Cooper.