Final state audit of Montebello finds huge lack of fiscal controls

The state controller’s fourth and final audit of financially troubled Montebello found the city’s internal controls severely lacking, opening the door to waste and possible malfeasance.

Controller John Chiang said the lapses in Montebello were so severe that he compared them to those in Bell, a city that has become synonymous with mismanagement and allegations of public corruption. The audits didn’t allege criminal wrongdoing in Montebello but did find serious lapses.

“While the roots of Montebello’s problems are different from Bell’s, they both share the common trouble of having little or, at times, no accountability in their spending of public dollars,” Chiang said.

Out of 74 accounting standards that cities should follow, the controller found that Montebello practiced only eight.

In one case the breakdown might have led to “pension spiking,” according to the audit report released Wednesday by Chiang’s office.

In March 2007, Montebello City Council members voted to fire City Administrator Richard Torres, but the city’s Human Resources Department never took him off the payroll, apparently because the agency was never told to stop paying him, the controller’s report said.

He continued to receive his $10,934 monthly salary even after the city finally approved his severance agreement in November 2007. A new City Council majority brought in by a recall election that year voted in January 2008 to rehire Torres with a 49% raise, bringing his salary to nearly $200,000 a year.

The combined effect was to increase his pension by more than $4,000 a month when he retired in 2009, according to the audit report.

The audit report called the matter a case of possible “pension spiking” and said Chiang’s office had asked the California Public Employees’ Retirement System to investigate. The city said in its response that officials were working with CalPERS to reconcile the reporting issues. Pension spiking occurs when an agency deliberately increases public sector employees’ pay in their final years on the job to allow them to collect greater retirement checks.

CalPERS spokeswoman Amy Norris said that in general it would be unusual for an employee to receive a 49% pay boost and that it might be something CalPERS would look into. But she added that she did not know enough about the Montebello case to comment.

Torres said he was stunned by the controller’s allegations. He said his firing was not contested, as the controller’s report suggested, but held up by city officials who lagged in signing his termination agreement, which called for 18 months of severance pay.

Torres said the salary he continued to receive was supposed to be deducted from the severance payment when he eventually got it. He said he ultimately forfeited the full severance due to him when he was rehired.

“I had 18 months’ severance due. I got seven months instead, and I left the rest on the table because I was happy to be rehired,” he said.

Torres also contested the idea that the pay raise was intended to spike his pension. He said a salary survey conducted by the city determined that his previous salary was exceptionally low.

The handling of Torres’ termination was just one of many failures of financial controls in Montebello identified in Chiang’s final audit.

The audit also found that the city mishandled other employees’ retirements. In 2006, Community Development Director Ruben Lopez resigned under pressure and the city agreed to pay him 12 months’ severance, which officials included in calculating his pension. CalPERS rules do not allow severance payments to count toward retirement benefits, and in 2007 state officials told the city to reverse the credits. According to the audit, city officials ignored the instruction until this summer, when auditors from the controller’s office pointed it out.

City officials said the erroneously reported compensation had since been corrected with CalPERS.

Other problems cited included loose control of petty cash, failure to properly report employee bonuses and City Council stipends to the Internal Revenue Service, and “systemic” problems in bookkeeping, including a failure to balance city statements for nearly a year.

Previous audits this fall said the city had mishandled $31 million and spent money intended to improve poor neighborhoods on golf games, travel for city officials and a “business lunch” at Chuck E. Cheese’s (Torres said it was a meeting with a City Council member who had a grandchild). Chiang’s auditors also found that city officials allowed an engineering firm at the center of a federal bribery investigation to award about $2 million in city funds to itself.

City officials had vigorously contested some of the findings of previous audits and accused Chiang of playing politics. But the city largely agreed with the findings of the latest audit and said it was working to correct the issues.

Interim City Administrator Larry Kosmont said current city officials are aware of the long list of problems with the city’s controls, which he ascribed not to corruption but to “a lot of improper and antiquated processes.”

Kosmont said officials were already moving to correct many of the problems, including working with CalPERS to rectify the pension issues, working to revamp the bidding process for engineering contracts, installing a new cash management module and recovering funds that the controller’s previous audit found had been improperly spent.

“The next year will be an important year for Montebello to find its way back,” he said.

abby.sewell@latimes.com

jessica.garrison@latimes.com