ALAMEDA, Calif. — Officials in Modoc County, Calif., scrambled to avoid insolvency last week after years of lax accounting put the government in a $12.5 million financial hole.

Some form of state bailout appeared to be the last hope for the rural county’s government to avoid a Chapter 9 bankruptcy filing.

There were extensive discussions toward that end last week and more are expected this week, Tom Dresslar, spokesman for California Treasurer Bill Lockyer, said Friday.

“We have chopped through some legal thickets and we’re now proceeding to try and develop a short-term and long-term financial relief plan that gets Modoc County through its fiscal straits without hitting bankruptcy,” Dresslar said. “There’s absolutely no guarantee of success, but the odds are better today than they were earlier in the week.”

For Modoc, $12.5 million is a lot of money. Located in the far northeastern corner of the state, the county has about 9,700 residents. Only two of California’s 58 counties have fewer residents.

Modoc’s fiscal problems first came to light in 2009, after the controller’s office learned that funds earmarked for school purposes had been “borrowed” to keep the money-losing county hospital afloat.

That led to further review by the controller’s office, which found that the county had illegally shifted at least $12.5 million to the hospital from a variety of earmarked funds over several years, and also found major flaws with audited financial statements.

“That audited statement, prepared for the county by an outside accounting firm, failed to meet professional standards, lacked evidence, and failed to support the auditor’s conclusions regarding Modoc County’s finances,” Hallye Jordan, spokeswoman for Lockyer, said in an e-mail Friday.

Modoc was ordered to repay the funds, but lacked the means to do so. Its officials spent the ensuing months trying to arrange a bond or note financing that would allow the county to clear the debts.

But Modoc finds itself unable to access the bond markets until it has up-to-date audited financial reports, its elected auditor, Darcy Locken, told the Board of Supervisors in a recorded meeting July 13.

Even when the audits are done, the county is not in a position to obtain an investment-grade rating, because of it history of financial mismanagement, she said.

“Even if we have the audits done, Fitch has advised us it will not give us a long-term rating at this time that will allow us to do the financing at an affordable rate,” Locken said.

Lacking market access, county officials turned to the state government for help this month, asking the state’s Pooled Money Investment Board to purchase a $12.5 million tax and revenue anticipation note.

“We’ve exhausted pretty much all our options. Were asking the state please, please help,” county administrative officer Rich Rudometkin told his Board of Supervisors July 19.

The pooled money board, chaired by Lockyer, discussed the request as an information-only item Wednesday. But extensive discussions continued behind the scenes, Dresslar said.

“Any financial relief plan needs to adequately assure that the state is going to get its money back,” he said Friday. “The legal issues have been worked through to a point where we are comfortable that potential at least exists.”

Earlier this month, the California Health Facilities Financing Authority, chaired by Lockyer, approved a $750,000 loan to Modoc’s county hospital under the state’s HELP II loan program for small and rural health care facilities.

Modoc County reported having no long-term bond debt in its annual report to the state controller’s office for fiscal 2008, the most recent available.

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