The state controller took the rare step of launching an audit of the struggling city of Montebello, saying there is evidence the city produced false financial reports dating back several years.
The action — the first time officials have launched a full city audit since examining wrongdoing in Bell last year — marks an ominous turn for Montebello, which is in danger of running out of money to pay its bills later this year.
The working-class city east of downtown Los Angeles has been mired in budget problems and allegations of mismanagement and missing money for months. The city also has been the subject of state and federal investigations.
Last week, the city manager brought in to clean up the mess abruptly resigned. Peter Cosentini had warned council members that former city officials for years had used accounting tricks to hide the true nature of the city's financial picture, making it seem as though the city had more money than it actually did. Cosentini said he stepped down because he and the council could not agree on a way to deal with the budget crisis.
Montebello officials discovered more than $1 million had moved through two off-the-book bank accounts. That prompted a probe by Los Angeles County prosecutors that is still ongoing. Last month, Montebello officials said they had partially solved the mystery, claiming that some of the money went to a local developer as part of a complex loan to build a restaurant in the city.
In a letter to Montebello announcing the audit Thursday, Controller John Chiang said the city was out of compliance with state laws because it had not submitted annual audits and financial reports to the state, or had not submitted them on time.
Chiang also cited comments made by several city officials to The Times and other media outlets that financial reports might be inaccurate and included false information.
"I have concluded that there is reason to believe that the Annual Report of Financial Transactions … are false, incomplete or incorrect," Chiang wrote.
This is only the third time the controller has moved into a city to audit the books since 2000. In the case of Bell, the controller found that the city had illegally levied millions of dollars in taxes. The other city was South Gate, where a top city official was sentenced to federal prison on corruption charges in 2006.
The Montebello audit is part of a larger effort by the controller to monitor public salaries and spending in the wake of the Bell scandal, which resulted in criminal charges against eight former city officials.
Montebello Councilwoman Christina Cortez, a critic of the city's past financial dealings, said she welcomed the audit.
"It's unfortunate that nobody in the city understood the severity and seriousness of all the illegal activities that have been going on," she said. "I'm glad we are finally getting a third party to investigate."
The city of 65,000 has been stuck in a destabilizing cycle of infighting for the better part of the last five years. Three Montebello council members have been recalled in two elections since 2007, and there have been other threatened recalls. As a result, the balance of power in Montebello has shifted several times.
The district attorney has two active inquiries into Montebello activities, including a 2010 bribery allegation against former Councilwoman Rosie Vasquez. The other involves a 2009 allegation of election violations involving a developer.
Last year, the inspector general of the U.S. Department of Housing and Urban Development issued a blistering audit, finding that Montebello improperly drew $1.3 million in federal affordable housing funds.
Then the city recorded the project as finished in a federal database even though construction has not yet begun, according to the audit. HUD has demanded the money back.
Montebello also took the unusual step of borrowing millions from its redevelopment agency to balance its books.
In launching the audit, Chiang said Montebello and its redevelopment agency have been "delinquent" in providing reports as far back as 10 years ago.
"These delays in compliance have raised concerns about the reliability and accuracy of the information in the reports," Chiang wrote to the city, adding that the audit is expected to begin within the next two weeks.
Steven Erie, a political science professor at UC San Diego who has written about L.A. politics, said the controller's decision to launch an audit suggests there are major problems in Montebello.
"The question is, how much of this is negligence on the part of government workers, and how much is an attempt to cook the books because money is passing hands," he said. "Whenever there's a lot of money to be made, and people think the risk of being caught is very low, you're going to find rules being bent."
Just a few weeks ago, officials said the budget was in such dire straits that the city might have trouble making payroll or paying its debts in the near future unless "immediate corrective action" was taken. The size of the city's budget deficit is hard to come by, but it appears to total at least $26 million.
Councilman Frank Gomez said he hopes the audit will help the city "get to the bottom of this."