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The state is watching these 6 cities closely for financial fraud

The state is watching these 6 cities closely for financial fraud
The city of Maywood was the target of a state audit program aimed at preventing cities from ending up like the city of Bell, where a corruption scandal in 2010 led to the conviction of seven city officials. (Los Angeles Times / Brian van der Brug)

The city of Maywood was low on cash and struggling to pay its $15-million debt. With its future looking bleak, state auditors decided to step in.

In January, the state started auditing the 1.2 square-mile town, finding that its "flawed governance and fiscal mismanagement" had prevented Maywood from recovering -- and made it susceptible to corruption.

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In many ways, the struggling city in southeast Los Angeles County had its neighbor, Bell, to thank for the scrutiny. A city that Maywood had once counted on to bail it out of earlier financial troubles, Bell had become wrapped up in a major corruption scandal in 2010.

The Bell fiasco led the state to take a proactive look at local governments, from cities to municipal agencies, like it had not done before. Last year, the California state auditor launched a new program to crack down on fraud, waste and mismanagement — with six cities, including Maywood, identified as being vulnerable.

"It's very important to get a jump on financial stress indicators before they become severe," said Kinney Poynter, executive director of the National Assn. of State Auditors, Comptrollers and Treasurers. "You don't want situations like you had in Bell, where there was extremely large salaries or large cases of fraud because it destroys the confidence in government."

The corruption scandal in Bell, which led to the conviction of seven city officials, had sweeping implications for governments in California. Scrutiny by state agencies increased for some cities, and legislators created bills to pump up accountability and transparency, and to curtail political malfeasance. It inspired a 2011 bill aimed at preventing a similar scandal.

The Assembly bill — AB187 — was signed into law that year, leading to the creation of the "high-risk local government audit program" and expanded the auditor's powers to investigate local agencies heading down the wrong fiscal path.

The state auditor already had an existing program to identify agencies at high risk of fraud or waste, but that law was limited to state functions. The auditor could investigate local agencies only if directed to do so by an audit committee.

"We wanted to give proper authority to the auditor to review these local governments and ensure that the Bell situation would not happened again," said state Sen. Ricardo Lara (D-Bell Gardens), who had pushed for the measure. "Now we have a third-party entity that can look at and prevent other local governments from falling into corruption."

Lara said corruption and mismanagement not only undermines the public's trust but that of state and federal agencies that might balk at providing resources to cities with serious problems.

"At the end of the day, it's our constituents and communities that suffer," he said.

The cities being monitored by state auditors are Chico, Richmond, Ridgecrest, Monrovia, Hemet and Maywood.

Margarita Fernandez, spokeswoman for the state auditor, said the cities were identified after auditors looked over public records such as budgets and previous audits.

She said auditors looked for "key financial indicators" such as a city's ability to respond to financial emergencies, pay short-term debts and meet its pension obligations. They also looked at their revenue growth and projected fiscal outlook.

Most of the six cities were ranked poorly in some or all of the categories. But it was Maywood and Hemet that required audits after they failed to address issues raised by the state auditor.

Lara said he wasn't surprised when the state auditor came to the committee to ask that Maywood be audited, given its relationship with the city of Bell before it spiraled into scandal. The senator said he encouraged the auditor, Elaine Howell, to move forward with an audit of Maywood.

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Six years ago, Maywood was on the edge of bankruptcy and had lost its insurance coverage, forcing it to disband its Police Department and lay off its entire City Hall staff.

Maywood contracted policing services with the Los Angeles County Sheriff's Department and hired Bell to help manage some of the town's city functions. The relationship came to a sudden halt when Bell became entangled in a scandal revolving around over-the-top salaries for council members and city administrators.

Though the brunt of criminal and other attention fell on Bell, auditors said Maywood never really bounced back from the problems that had led it to seek its neighbor's help. The audit said Maywood's leaders made a series of questionable decisions that worsened the situation.

Reuben Martinez, acting city administrator for Maywood, said he welcomed the scrutiny and agreed with several of the state's findings.

Martinez said that the city has been working to create a plan to pay off its massive debt, as well as to increase Maywood's revenue.

"I see it as we're getting the help we need and it's important," Martinez said of the audit.

"There's this concept that cities run on their own, but it's not true," he said. "If you're not watching and paying attention to it, it will get away from you."

For more Southern California news, follow @latvives on Twitter.

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