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Chiang Seeks Control

SAN FRANCISCO — California’s controller is pushing new legislation that would strengthen state oversight over local government finances and audits.

John Chiang has sponsored two bills that would put independent auditors under his office’s watch and stiffen fines for local governments that take too long to file financial reports.

The proposed legislation comes in the wake of revelations of gross financial mismanagement in the Southern California city of Bell and accusations of “rubber-stamp” audits.

Assembly Bill 229, now in committee, would allow the controller’s office to create new guidelines for independent audits, similar to those used for the state’s school districts.

The bill would require local governments, including special districts, to submit all audits to the controller to ensure they comply with the new rules. The controller would also perform a review of independent auditors and publish a list of acceptable auditors.

Local governments would also have to rotate auditors every six years.

Some say auditors are simply going through the motions.

“It has become routine for some auditors,” said Bud Byrnes, chief executive at Encino-based RH Investment Corp., a broker-dealer specializing in California municipal bonds. “Auditing has pretty much become a checklist and fill-in-the-box.”

Assemblyman Ricardo Lara, D-Bell Gardens, cited Bell’s lack of proper checks and balances. The city’s auditor, Mayer Hoffman McCann, gave a “clean bill of health” year after year despite  “record salaries, illegal taxes, and arbitrary fees.” 

“Clearly, the current statutory approach to protect taxpayers from waste, fraud and abusive practices by local governments is not working,” Lara said in a description of the bill, which he introduced.

Bell, located in Los Angeles County, was thrust into the spotlight in the summer by press reports it was paying  city manager Robert Rizzo about $800,000 a year.

The fallout since then has included civil and criminal charges against Rizzo, four City Council members, and other members of Bell’s management team. They are accused of misappropriating millions of dollars from the city, which has a population of about 40,000.

Since the scandal broke, the city has been struggling to align its finances as it faces a deficit of up to $4.5 million. Bell has seven outstanding bond issues totaling $136 million of debt.

Mayer Hoffman said in a statement that its audit of the city was conducted in line with generally accepted government auditing standards. “We stand by our work in the city of Bell and in over 100 cities and municipal entities nationwide,” it said. The firm had audited the city since 2006.

Mayer Hoffman did not responded to requests for comment.

The city of Benicia and the Orange Country Transportation Authority recently declined to renew contracts with the the auditor, apparently because of the fallout surrounding Bell.

The firm more recently was hired as auditor for another financially troubled California city, Victorville, which is facing Securities and Exchange Commission and grand jury investigations into its use of bond proceeds.

Mayer Hoffman took over as auditor in 2009 after another firm declined to certify Victorville’s financial statement. It declared the city potentially insolvent in its latest audit. Officials said the audit mischaracterized the city’s finances.

Audits and auditors are only part of the problem in California.

Fiscal trouble stemming from ill-fated redevelopment real-estate ventures in Hercules only came to light after an interim city manger raised red flags. The embattled city then brought in an independent financial adviser, Municipal Resources Group, to try and get a grip on the problems.

Hercules’ audited financial report for fiscal 2010, which ended June 30, still has yet to be released. Such lags are typical for many local governments.

Mike Oliver, managing consultant with MRG in Danville, said auditors sometimes are afraid to be too critical of city management.

“It is very hard because some of the auditors are mom-and-pop shops and they are not big firms, and so continuing to feed the elephant is important for them, and it can be difficult,” he said.

The MRG report found that Hercules’ general fund is facing a $6 million shortfall out of an $18 million budget for fiscal 2012, while $5 million in unfunded debt obligations linked to the fund are coming due this year.

It also found that the city’s redevelopment agency is basically insolvent and will be unable to make $1.4 million in debt service payments without help from the general fund. The city has more than $130 million of bonds outstanding.

Hercules’ auditor for the last several years has been Moss, Levy & Hartzheim of Beverly Hills.

The second bill, Assembly Bill 276, which is also in committee, attempts to tackle the problem of delayed financial reporting by local governments and agencies. It would raise the fines for local governments that fail to file their annual financial reports with the state controller in a timely manner. It would require the controller to audit an agency that fails to report for three consecutive years and also would require joint-powers agencies to file financial reports with the state controller.

In some instances, according to the Chiang’s office, some local governments have not filed in more than three years.

The bill would raise the penalties on agencies based on their revenues and would double fines on those that fail to report to the controller for two consecutive years and triple them for three years, triggering an audit.

As it stands, local governments are fined $5,000 when they file their financial statements late or fail to file. The controller’s office estimates it doles out $251,000 in fines each year.

“Since the fines are low, these non-filers find it easier to pay the fine than go through the trouble of complying with the law,” Assemblyman Luis Alejo, D-Watsonville, said in a summary of AB 276. “Absent stricter penalties, there is nothing that compels these agencies to file their report.”

The report said that there is also a lack of oversight over joint-powers agencies, which function as conduit issuers for revenue bonds, including “billions of tax-exempt financing to the private sector.”

Mark Stockwell, a board member of the National Federation of Municipal Analysts and director of municipal research at PNC Capital Advisors in Philadelphia, said the federation is behind the California controller’s effort, as the laws would improve transparency.

“We support anything that will provide granularity and transparency in the market,” Stockwell said. “If there are steps that can be taken so all investors get better information, I think we would welcome that.”

A study by the NFMA released last fall found that more than 90% of municipal analysts surveyed believe they are more likely to hear about material events pertaining to local government finances from the news media than from continuing disclosure notices that are supposed to be posted in a timely fashion by issuers.

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