Report Concludes Funds Mismanaged by City : Finances: Council votes unanimously to rectify past procedural errors in accounting made by administrators.

Sierra Madre officials kept sloppy books and mismanaged funds but did not break the law, auditors and the city attorney reported to the City Council on Tuesday.

The audit and city attorney’s report came in the wake of the resignation last month of former City Administrator James E. McRea. Though the audit and legal opinion did not mention McRea, they were prompted by allegations by a group of residents that he mismanaged city funds. McRea has denied any wrongdoing.

On the advice of City Atty. Charles Martin, the council voted unanimously to fix at their next meeting any past procedural errors made by city administrators, including approving a $1-million redevelopment agency loan to the city for the second time.

Although the City Council authorized the loan Sept. 22, 1992, the council members were not in session as the redevelopment agency board, as required by state law. The redevelopment agency is a legally separate entity that oversees improvements in the center of town and is composed of council members.

Martin read a 15-page legal opinion during Tuesday’s council meeting after presenting it in closed session to council members.

Martin said bookkeeping and procedural errors did not result in loss of city or redevelopment agency funds, and no public officials enriched themselves.

But to avoid any litigation, he said, the council should “ratify the procedural missteps.”

Robert Eichel, of the Pasadena accounting firm Edwards, Eichel & Beranek, told the council that city officials made bookkeeping errors and failed to separate the accounts of the redevelopment agency and the city.

Eichel, whose firm conducts the city’s yearly audits, said that between 1988 and 1992 the city used up its reserves because expenditures exceeded revenues by $1.7 million.

To avoid a deficit in the future, he said, Sierra Madre residents will have to pay more for services. “The city can’t operate in a situation where its revenues are lower than its expenditures,” he said.

He said most of the reserves could have been spared had the city spent $800,000 in gas tax revenue on street maintenance and improvement projects, and spread the payments on a $285,000 lawsuit settlement over a number of years.

Eichel said the $1-million loan made by the redevelopment agency to the city last September was unnecessary because the agency already owed the city $1.1 million from June, 1992, for projects, debt service and administration.

City officials mingled the cash accounts of the redevelopment agency and city, and did not attribute the administrative costs of water and sewer projects to the right accounts, he said.

Eichel said the city lost $25,000 annually by providing more Dial-A-Ride services than paid for by the state.

Water fees had not been increased over the last five years even though more than $2.5 million in water system improvements had been made, he said.

Martin said it was not improper for the redevelopment agency to pay for fire trucks and audio equipment because the courts have not decided otherwise. Citizens had complained that the money should have been spent to bring new business to the city.

Steven. A. Broiles, one of the residents who called for the review of the city’s finances, said he believes the audit and city attorney’s report downplayed widespread financial problems.

“They are doing an awful lot of fixing up for something where there was no problem,” he said.

Mayor Clem L. Bartolai recommended that two committees be formed, one to review city bookkeeping and another to seek new revenue sources because the city is spending more than it is taking in.

“It’s my heartfelt desire that the healing process begin,” he said.