State Investigates Use of Hawaiian Gardens Funds

State auditors are investigating whether Hawaiian Gardens illegally diverted millions of dollars from its redevelopment agency to pay city operating expenses.

An independent audit released earlier this year uncovered evidence of such spending, and city officials have since acknowledged dipping into redevelopment funds over the past two years in an attempt to avoid municipal bankruptcy.

City records show that Hawaiian Gardens has tapped at least $4.2 million in the restricted funds, including more than $2.5 million in the fiscal year that ends June 30.

A spokesman for state Controller Kathleen Connell said state law reserves redevelopment funds for economic incentive projects and forbids their use for general city expenses. Auditors are now focusing on how much restricted money was diverted and where.

“[Hawaiian Gardens officials] might have [spent] more money than they had, and they had to dip into the redevelopment agency fund,” said Mike Monasmith, spokesman for the state controller.

State auditors began scrutinizing Hawaiian Gardens’ finances after learning of the independent audit. The state controller’s spokesman said the state attorney general’s office could be called in to “rectify” city finances if auditors confirm that restricted funds were spent wrongly.

Records show that the city has operated at a deficit since at least 1990, and the City Council has failed to formally adopt an official budget for at least the last three years.

City officials have been dipping into the restricted redevelopment funds since at least August 1994, when then-finance director Marylou Matienzo wrote a letter asking Bank of America to merge the agency’s and the city’s checking accounts, records show. Matienzo no longer works for the city. She could not be reached for comment.

Within a year of combining the checking accounts, $1.6 million of the redevelopment agency’s funds had been used to pay city bills, according to an independent audit by Irvine-based Conrad & Associates. The audit, a routine annual examination of the city books, warned against the practice and said the city might go broke unless officials made cuts and found new revenues.

Still, a majority of the City Council earlier this year approved a 19% pay raise for the city’s new 18-officer police force and a 7% raise for all other city employees.

Mayor Lupe Cabrera said the council is now attempting to separate the city’s and the agency’s funds and has developed a plan to repay the agency.

Hawaiian Gardens’ officials have pledged to balance their books by July 1, the beginning of the next fiscal year.

Last week, the City Council agreed to mortgage the city’s recreation building to cover the $4.2-million debt to the redevelopment agency. The money would be repaid over 30 years under the plan.

Cabrera said the city’s fiscal health is largely contingent on the opening of a card club approved by voters in November. But a lawsuit filed by casino opponents has so far prevented both the club’s opening and the city from receiving tax revenues from the club.

“We would have already had everything addressed if it hadn’t been for the lawsuit,” said Councilman Robert Canada.

Nestled near the border of Los Angeles and Orange counties, Hawaiian Gardens is a hamlet covering about one square mile.

Some say the city’s financial problems were evident long before the casino vote.

Former City Atty. Maurice O’Shea urged city leaders to consider filing bankruptcy last summer and arranged for the council to speak with bankruptcy lawyers in a closed session Aug. 8, he said. Canada, then the mayor, removed the session from the agenda, however, saying later that he felt the conference was unnecessary.

“I felt,” O’Shea said, “that [the city] appeared to be insolvent. I urged them . . . to address this problem.”

Just as they sometimes rejected financial advice, the city’s fiscal managers also have delayed separating redevelopment and general fund checking accounts, insisting instead that a single account has eased accounting.

Former agency attorney Graham Ritchie suggested establishing separate accounts in February, just as auditors from Conrad & Associates had recommended the month before. But according to a letter from then-finance director Karen Nobrega, the separation would have to wait until the city “has successfully negotiated advance payments on card club revenues.”