SAN FRANCISCO — Compton, Calif., is facing serious cash-flow problems that could force the city to declare bankruptcy, according to its elected treasurer.

The city has been unable to secure a line of credit from banks because its independent auditor would not sign off on its fiscal 2011 financial report due to a statement by the mayor in December of “possible fraud, waste, and-or abuse of city monies.”

Compton Treasurer Douglas Sanders said during a tense City Council meeting Tuesday night that the city is facing a more than $2 million cash-flow gap as it approaches Aug. 1 when it must make bond payments.

“You are going to have to make a decision in the next 10 to 12 days whether you’re gonna pay these bonds, chew up all of your cash,” Sanders told the council, or else “have a serious talk about bankruptcy.” 

He said the city needs to make a $4.5 million payment on bonds issued by its now shuttered redevelopment agency and a $1.1 million payment on water bonds. He said Compton has less than $3 million in the bank.

“We are screwed pretty much,” Sanders said during the meeting. He said he had been warning the council about the impending cash crunch.

Controller Stephen Ajobiewe said as it stands the city only has enough money to make payroll until September.

Compton is facing a projected $10.1 million deficit out of a total budget of $161 million for fiscal 2013, and has $275 million of outstanding bonds, according to Ajobiewe.

Fiscal pressures on Compton increased last week when Standard & Poor’s placed the city’s BB rating and underlying rating on its lease revenue bonds on watch for a possible downgrade.

The rating agency said the negative CreditWatch listing came after the city’s auditor, Mayer Hoffman McCann PC, refused to give an opinion on the city’s 2011 comprehensive annual financial report.

“The independent auditor wrote that due to allegations of waste, fraud and abuse of public moneys, as well as a lack of city responses to the auditors’ inquiries, that the scope of their work did not enable them to express an opinion,” Standard & Poor’s said in the report released last Friday.

Mayor Eric Perrodin had sent a letter to California Controller John Chiang in December requesting he conduct an audit of the city and suggested its multimillion dollar deficit was caused by “possible fraud, waste, and-or abuse of city monies.”

Sanders also suggested that potentially illegal financial missteps had been made by past city controllers.

The controller’s office has said it is unlikely it would audit the city.

Compton officials have 90 days to produce an audited report for Standard & Poor’s before it takes the possible action of withdrawing or suspending its rating on the city.

Ajobiewe said during the meeting that he reached out to other firms about doing another audit, but he received no bids and was told by one firm that it would be unlikely anyone would agree to the work, given the situation.

The controller said if the city loses its credit rating it could trigger a default.

Mayer Hoffman, the city’s auditor for the last three years, said in its opinion of Compton’s most recent audited statement for fiscal 2010 that there was “substantial doubt about the city’s ability to continue as a going concern.”

This is not the auditor’s first experience with questionable financial statements.

Last month, the California Board of Accountancy fined Mayer Hoffman McCann $300,000 plus investigation costs and placed it on two years of probation for its audits of scandal-plagued Bell, Calif.

That previously obscure city in Los Angeles County was thrust into the spotlight in the summer by press reports it was paying its city administrator at the time, 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 the city’s management team.

They are accused of misappropriating millions of dollars from the city of 40,000.

Compton has gone through several city managers over the last few years.

Compton paid its city manager more than $458,000 in 2010 — the most of any other city in California by almost $100,000, according to a database created by the Sacramento Bee from salary information produced by the state controller’s office.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.