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Spotlight on Bell 8 Trials as Reformers Work to Fix Damage

FEB 7, 2013 4:37pm ET
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LOS ANGELES — More than two years after Bell gained national notoriety for corruption that left the working-class southeastern Los Angeles city on the brink of bankruptcy, reform leaders are still working to repair the damage done to city finances.

Trials have begun for former city leaders accused of corruption, who include a former city manager, assistant city manager, and six City Council members.

While the spotlight is on the trials of the so-called Bell Eight, the four council members and mayor that voters picked to turn Bell around are still struggling to rebuild city finances that were decimated by the people now on trial.

The multi-million dollar theft prosecutors claim Robert Rizzo, the city’s former manager, perpetuated on the city not only resulted in a drawdown on city finances, but left city services in a shambles.

Rizzo’s salary rose to nearly $800,000, while his assistant Angela Spaccia, brought home nearly $400,000 and the six part-time City Council members were raking in $100,000 a year. The reform mayor and four city councilmembers elected in March 2011, who sometimes attend three special meetings a week in efforts to right the city, earn $8,076 annually.

While city prosecutors are working to gain residents some measure of justice in the courts, the leaders elected or hired to fill seats vacated by their allegedly corrupt predecessors are finding the process of repairing the city’s financial woes slow going.

It took until the end of December 2012 for auditors to complete a comprehensive annual financial report for fiscal 2009-2010. The city still lacks CAFRs for fiscal 2011 and 2012.

“The city was three years behind on audits,” said Bell city manager Doug Willmore, who was hired in May 2012. “We can’t do a CAFR unless the audits are done.”

When the fiscal 2010 audit was complete, auditors found that the numbers were off by $1 million, which may seem large for a city of 35,000 with a $12 million general fund budget, but considering the extent of the malfeasance was deemed minor by Willmore.

Instead of beginning fiscal 2012-13 with a fund balance of $1.2 million, the city has $200,000.

“The positive news is that all the bank statements are reconciled and up to date,” Willmore said. “The transactional environment is up to date and when money is deposited, it is in the correct account.”

The hope is that within a few months the city will be able to complete audited financial reports for fiscal years 2011 and 2012.

Despite continued problems, including an anticipated budget for legal expenses of $1.5 million annually for the next several years, Willmore said Bell is in no immediate danger of filing bankruptcy, through potential pitfalls remain.

“We aren’t insolvent,” Willmore said. “We think we have a pathway to long term financial stability.”

To put the city’s legal expenses in perspective, Bell city attorney David Aleshire said in a report that he has represented Lawndale since 1978 and has not seen that number of lawsuits Bell currently is dealing with during the entire 34 years he has worked for that city. Most cities pay $500,000 annually for legal expenses, Aleshire said.

It wasn’t easy for a city involved in 50 lawsuits, mediations and appeals — including those against former auditors, bond counsel and financial advisors — to even find someone who was willing to audit the city’s budget.

After Los Angeles-based MGO certified public accountants took on the job, they were determined to make sure “all the “i’s” were dotted and the “t’s” were crossed, Willmore said.

Willmore said he is really looking forward to starting work on the fiscal 2013 budget not only because it will be open and transparent, but because they will have better assumptions to work with.

“When I got here, and when Arne Croce, [the interim city manager Willmore replaced in May], got here, it wasn’t a functioning finance office,” Willmore said. “We didn’t have basic things done and didn’t know what the cash position was and what the fund balance was.”

The reformers brought in to restore the city found that the harm wrought on the city went way beyond theft.

“Records were misplaced, disorganized or missing,” Willmore said. “A lot of general ledger entries were off or wrong. We have been reconstructing the accounts from scratch.”

In addition to a complete lack of general accounting standards, many of the financial records were seized by prosecutors. The auditors had to get copies of the documents from the district attorney’s office in order to perform their jobs.

When city department leader positions became vacant, the position would remain unfilled.

Trying to rebuild, Bell hired a finance director, community director and economic development director in the final months of 2012.

“We came into a city that needed to be rebuilt from the ground up and that has been our focus over the past two years,” said Bell Mayor Ali Saleh.

The irony is that to some degree the city is in better financial shape than others, according to Willmore, because Bell is saving $3 million annually by not paying the salaries of the former city leaders now on trial.

While Los Angeles and San Diego are trying to find ways to repair streets and sidewalks, during the review of city finances Willmore discovered a sum of $2 million in unspent state money for street repairs that is now being used to repair streets.

Both Saleh and Willmore said it would take something cataclysmic for the city to contemplate bankruptcy, but roughly $142 million in outstanding bond debt and the Bell’s long list of lawsuits would seem to indicate that many fissures remain in the city’s financial structure.

While city attorneys are trying to recapture funds they say were stolen by the characters forced out of the city’s government, those same people are suing Bell claiming such things as wrongful termination.

If prosectuors are unable to convict the former city leaders, Bell could be on the hook for a minimum of $5 million to pay for their legal expenses, according to Willmore.

Among the many lawsuits is one filed by Dexia to recoup a $35 million privately placed bond the city secured with the Franco-Belgian bank.

Dexia filed a lawsuit against Bell on Oct. 14, 2011 to recover the money, none of which has been repaid.

The bonds were secured by a lease revenue from certain properties and the lease was invalidated in a lawsuit defended by then-city attorney Best Best & Krieger LLP.

The city is also engaged in a malpractice lawsuit against Best Best & Krieger that argues the law firm failed to disclose that the lawsuit had been filed before the bonds were issued, according to Aleshire’s report to the city.

Richard Egger, BB&K’s general counsel, said Bell’s management team was corrupt, and did not seek legal advice from the firm on the compensation issues and many other issues. “It is our belief that the firm has been added to the Bell lawsuits in question - as a matter of course - in an attempt to recoup losses suffered at the hands of public officials who are facing trial on corruption charges.”

Bell’s attorneys have asked the judge for a summary judgment in the Dexia case scheduled for trial in March.

In court documents, Bell’s attorneys are claiming that they were wrongly advised by bond counsel Nixon Peabody, who they are also suing, to secure the private placement.

Bell’s attorneys are arguing that they should never have been advised to make the private placement, because the state constitution dictates a city can’t issue bonds in an amount higher than its general fund.

Despite the bevy of lawsuits, city officials remain optimistic that Bell will work its way through.

“We expect to get some recovery from some of the people who did the city wrong —  not only the Bell Eight, but some service firms we allege did malpractice,” Willmore said.

The city has already recovered $1.2 million, he said. It was also able to defease $18 million worth of debt in a tender offering completed in August.

“The key will be that we do not get adverse rulings on the lawsuits,” Willmore said.

If the city receives an adverse ruling on the Dexia lawsuit, it could throw the city into bankruptcy, he said.

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