California questions $31 million in spending by Montebello

State auditors found Montebello improperly handled $31 million, including instances in which officials used funds meant to improve blighted neighborhoods on fancy dinners in Las Vegas, golf, embroidered polo shirts and other “frivolous” items.

The two audits, released Thursday, mark more bad news for the city of 65,000 east of downtown Los Angeles. Montebello is seeking a private loan to avoid running out of cash this fall and is the subject of an FBI investigation into allegations that it misused federal housing money.

Officials from the state controller’s office spent months reviewing Montebello’s books dating back to 2005 and said they were troubled to learn that the city regularly used money designed for specific purposes to balance its budget — in apparent violation of the law.

“At the expense of local job development, street repair, and schools, Montebello has made it a habit to tap legally-restricted funds to cover its budget and cash shortfalls,” said Controller John Chiang in a statement. “It appears that the City moved money wherever it wanted, whenever it wanted, regardless of the law or the intended purpose of those taxpayer dollars.”

The controller called on the city to reimburse its redevelopment agency nearly $3.6 million for “ineligible expenditures,” including $3.4 million in transfers to the general fund for “administrative costs” as well as golf games and travel for city officials. Among the charges questioned was a “business lunch” at Chuck E. Cheese’s.

If the city has to repay the money, its financial picture could worsen. The audit comes when the city is already low on cash and has been called on to repay the federal government for misspent housing funds.

But city officials said they have no intention of repaying the money and said they disagreed with many of the auditors’ findings.

“There’s nothing to pay back. We don’t owe it,” said new interim City Manager Larry Kosmont, who argued that the administrative costs the city charged to its redevelopment agency were well in line with those of other cities in California.

Councilman Frank Gomez said the city had made major strides in recent months in cleaning up City Hall and worried that the audit would hurt the city’s prospects of getting a desperately needed loan.

“Airing old dirty laundry has put the city in a precarious position,” Gomez said.

But state Sen. Ron Calderon (D-Montebello) took a harsher line, releasing a statement that said, “The taxpayers’ trust has been violated in the most egregious way.”

For much of 2011, Montebello has been reeling from a variety of financial problems. Officials began the year with the discovery of two “off the books” bank accounts that contained city funds that officials had lost track of.

Then federal officials launched an investigation into a deal involving $1.3 million in housing funds that went to a developer for a project that was never built but that city officials recorded as completed in a federal database.

It also became evident that the city’s general fund was in a deep hole.

One interim city manager quit in April after warning that the city could go bankrupt, a prospect that Kosmont strongly denies.

Chiang’s audits, the first two of four planned reports, looked at the city’s redevelopment agency and gas tax fund.

Auditors found problems large and small, including $12 million the city owed its housing fund, $20,767 on conferences and golf registration fees for city officials, $788 to send a city manager to a dinner in Las Vegas in May 2009, and $600 in petty cash reimbursements that the same city manager took in July and September 2009 for lunches.

Chiang also noted that city officials “have a history of authorizing forgivable loans to individuals who are political contributors,” although it did not identify any illegalities in those loans.

The city has, over the years, given more than $20 million to companies controlled by developer Hank Attina, who is a close friend of City Atty. Arnold Glasman and others. (Attina has in the past said there is nothing improper about his relationships with city officials.)

City officials accused Chiang of playing politics on that, writing that he should not have included it because it pushes “the State Controller’s review into the political realm which is not appropriate or proper.”

Chiang’s auditors were unmoved.

They wrote tart responses to many of the city’s complaints.

In one case, when city officials claimed that part of a lunch bill at Chuck E. Cheese’s for the city manager was properly billed to the redevelopment agency, auditors wrote: “The SCO finds it hard to believe that the City Administrator met with an official from another city at a pizza parlor known to be child friendly to discuss Montebello City Council or Redevelopment Agency agenda items.”

City officials did persuade the controller to drop one finding: that the redevelopment agency had inappropriately paid $1,300 for Dodger tickets for city employees.

The city said those tickets had been charged to the city’s general fund.

Chiang conceded the point, but said the city may have acted inappropriately in using general fund money for Dodger tickets.

jessica.garrison@latimes.com

abby.sewell@latimes.com