Fiscal mess fuels crisis in Montebello

Millions in Montebello city funds have been mismanaged or drained from off-the-books accounts, leaving officials scrambling for explanations and prompting fears about the city’s solvency.

Fiscal troubles abound in the city of about 65,000 in southeastern Los Angeles County: Federal officials say Montebello misused $1.3 million in federal housing money and want it back; a city official discovered $5 million in debt a few weeks ago; and the city has been sued by a businessman who alleges it illegally borrowed up to $19 million from its redevelopment agency last fall.

The matter of the unofficial bank accounts came to a head this week, when officials disclosed that about $900,000 from an off-the-books Union Bank investment account could not be immediately accounted for. There’s now $5,000 left in the account, which came to light when an employee in the Montebello finance department discovered a bank statement and alerted the city finance director.

That follows the discovery a few weeks ago of a second off-the-books account at Banco Popular containing $240,000, which showed withdrawals in 2004 and a deposit in 2007. City officials said they learned of the account after Banco Popular contacted the city because there had been no recent activity.

Neither of those institutions is the city’s official banker, and it is highly unusual for cities to maintain bank accounts that are not reflected in municipal financial records. It was not immediately clear Friday whether such accounts were illegal.

Officials in Montebello, which has a $45-million general fund budget and a projected $2-million deficit, say they don’t know why the accounts were created, why they weren’t on the city’s books or who received the money that appears to have been transferred out over the years.

Interim City Manager Peter Cosentini, who was hired less than six months ago, said officials were “vigorously pursuing” answers. He noted that just because the accounts were set up in an unusual manner doesn’t mean the money was used inappropriately.

“We will get to the bottom of it and find out what occurred here,” he said.

It is unclear whether the city’s troubles — which one councilwoman and one union leader think could lead to bankruptcy — are a result of mismanagement or corruption or a combination of the two.

“This is crazy, this is just entirely crazy,” said Councilwoman Christina Cortez, summing up both Montebello’s financial state and her attempt to get city staff to explain it to her. She complained that when she has asked officials for information, they has stonewalled her, handing her Excel spreadsheets instead of actual financial statements.

Cortez, who gained office in a recall election last year and has been raising a ruckus about the city’s financial dealings ever since, said she has asked the state controller’s office to send auditors to “come in here and open the books and try to figure out what we can’t.”

“I truly believe this is the tip of the iceberg,” she said. “There could be more accounts. We will never know.”

The controller’s office is reviewing the issue and seeking more information, a spokesman said Friday.

Like many cities in southeastern L.A. County, Montebello has been racked for years by political instability and allegations of corruption. A total of three council members were recalled in bitter campaigns in 2007 and 2010.

The district attorney has two active inquiries into Montebello activities. One is a 2010 bribery allegation against former Councilwoman Rosie Vasquez, and the other is a 2009 allegation of election violations involving a developer.

As for the latest imbroglio over off-the-books accounts, David Demerjian, the head of the D.A.’s Public Integrity Division, said, “I don’t have a complaint yet, but I’m expecting one.”

A new council majority took office after a 2009 election and a 2010 recall of two council members. They immediately began dealing with a severe budget crisis, as well as waves of questionable financial dealings.

In July, the inspector general of the U.S. Department of Housing and Urban Development issued a scathing audit, finding that the city had improperly drawn the $1.3 million in federal affordable housing funds. Then, the auditors found, the city recorded the project as finished in a federal database even though construction had not yet begun — and still has not. The money went to a developer.

HUD now wants its money back, saying in a statement that “we’ll continue to look very closely at how the city manages its taxpayer-funded affordable housing programs.”

Also in July, staff members alerted the council that they had “discovered that in order to meet city operational needs … staff was transferring funds from the [redevelopment agency] to support the needs of the city’s general fund.” The report to the council said that neither the council nor the city attorney had approved the transfers. State law generally requires redevelopment and general fund monies to be kept in separate accounts.

The council ultimately approved borrowing up to $19 million from the redevelopment agency. Interim City Manager Peter Cosentini said the money will be paid back this year, but he acknowledged that the city may have to seek a loan from somewhere else to do it.

“The city is on the edge of bankruptcy,” said Craig Barker, head of the Montebello firefighters union. “They are trying to borrow money and they can’t.”

Councilman Frank Gomez, who was elected in 2009, said that he doesn’t see bankruptcy as imminent but that “there are structural changes that need to be made in the way Montebello does business for it to remain solvent long term.”

As for the city’s past stewardship, he said: “Nothing surprises me here in Montebello.... My feeling is anybody who has been on the Montebello City Council over the past few decades should be ashamed.”

One thing that would surprise him, he said, was if there were no more financial surprises.

Longtime Councilman Bill Molinari said that in the case of the newly discovered accounts, there is no indication of anything other than human error. “There was no impropriety here,” he said.

Cosentini said officials are trying to obtain the most basic financial data on the accounts, such as who all the signatories are and what the account histories are.

Both accounts share at least one signatory: former City Manager Richard Torres, who retired in November 2009. Cosentini said that he doesn’t know if the city has a policy on who can be a signatory on a city account but that the common practice has been for the treasurer, not the city manager, to do it.

In an interview, Torres said he believes he knew of the Banco Popular account, which he thought had been related to a redevelopment project.

“I believe it is related to the Whittier Boulevard redevelopment project, but I cannot say with certainty,” Torres said, adding that he had not seen the paperwork.

He said he was unaware of any account with Union Bank. “I cannot explain it,” he said. “Is it my signature on the card? Is that what they are saying? I would like to see that signature card.... I am at a loss for what it might be.”

“I am sure there is a simple explanation for all of this,” Torres said.

jessica.garrison@latimes.com

richard.winton@latimes.com