The struggling city of Montebello was hit with another significant setback Wednesday as federal housing officials suspended funding to the city and demanded that it repay a total of $5 million in grants.
The news added more financial pressure to a city already facing possible insolvency later this year as well as investigations by state and local agencies into allegations of misspent money and falsified records.
In a memo to City Council members Wednesday afternoon, departing city administrator Peter Cosentini said a meeting with Department of Housing and Urban Development officials had reduced him to tears.
The report from HUD "was so bad that I was shocked, and embarrassed and openly crying in front of my staff and a room full of people I did not know," he wrote. "I have not experienced anything so bad in all my 27 years of City service."
He also said that some of the city's past handling of HUD funds "may border on criminal." He did not elaborate further in the memo and could not be reached for comment. HUD cited 31 violations by the city of various rules but did not provide specifics. Officials said a full report would be forthcoming.
Councilwoman Christina Cortez said it appeared that the city had little documentation for how it spent federal money.
HUD officials told the city Wednesday that it will be required to pay back an additional $2.7 million on top of about $2.2 million the federal agency previously demanded back. HUD is also freezing Montebello's access to HOME funds, which are used to build affordable housing.
City spokesman Kevin McClure, who is also the police chief, said some of the $2.7 million was money the city had awarded to Rehab Financial, a Huntington Beach-based company that handled finances for cities' rehabilitation programs and whose former president recently pleaded guilty to federal embezzlement charges.
McClure also said the staff member who administered that money for the city was recently fired.
In a letter to the city, William Vasquez, director of HUD's Office of Community Planning and Development, wrote that the freezing of funds was "intended to prevent the continuation of the city's pattern of expending HOME funds for ineligible activities and costs."
HUD began its investigations into Montebello's use of federal housing dollars after the city awarded $1.3 million to a developer to build affordable housing units in a mixed-use development. The city allocated the funds without required written agreements and recorded the project as completed in a federal database even though no construction had begun, according to an audit report issued last July by HUD's Office of Inspector General.
The housing agency demanded that Montebello pay back the $1.3 million and later asked it to reimburse an additional $898,000 relating to the same project, city officials said.
Danny Ku, the developer on the project, could not be reached for comment.
HUD may have to get in line to try to collect from Montebello. The city's general fund has a $1.6-million deficit this year, on top of $16.8 million that the general fund owes the city redevelopment agency as part of a highly unusual loan the council authorized last fall.
Cosentini warned earlier this spring that the city could be out of cash by the fall — and unable to pay its staff or other bills — if it does not get a loan.
A new management team is also trying to sort out a number of recently discovered financial irregularities, including at least two "off the books" city accounts and possible falsification of reports. Records of transfers into and out of one of the accounts led the city administrator to question whether developer Hank Attina was twice paid the $1 million the city had agreed to give him more than a decade ago for a restaurant project. Attina said he did not receive double payment.
At its Wednesday night meeting, the City Council voted to subpoena bank records for a Chase account to which funds were transferred from one of the off-the-books accounts.
Michael Takahashi, vice president of Attina's company, told the council that Attina had been paid only once. He called the city administrator's suggestion that the developer might have been overpaid "reckless and irresponsible."
Mayor Art Barajas and Councilman Frank Gomez said the news of the HUD funds is one more in a barrage of revelations of fiscal mismanagement they have faced since they were elected in November 2009. Four out of five council members have joined the council in the last two years.
"I'm just really frustrated and angry," Barajas said. "We're trying to do everything possible to clean this up, and what's been going on for years is ridiculous."