LOS ANGELES — Officials in Bell, Calif. say they are close to an agreement with Dexia that could eliminate $39 million in debt the city owed on defaulted bonds.

The city council is expected to consider that agreement Wednesday evening, along with overdue city audit reports.

But that upbeat news was overshadowed last week when State Controller John Chiang issued a report saying improvements to the city’s fiscal controls do not go far enough.

Bell made headlines in 2010 for corruption involving misuse of city funds that extended not only to the city’s former manager, but also to the mayor and city council.

“They have made progress – there is just a lot more to do,” said Jacob Roper, a spokesman for Chiang’s office.

The report took Bell officials, who have been working furiously to right the city, by surprise.

“The scope of the report isn’t clearly defined and the work is limited,” said Bell City Manager Doug Willmore, who was hired a year ago to replace interim City Manager Arne Croce.

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.

Several city council members were prosecuted recently on related charges, but the cases against Rizzo and assistant city manager Angela Spaccia are still in the pre-trial phase.

The most significant point made in the controller’s report was that city leaders have failed to establish internal controls that would prevent future misuse of funds, Roper said.

“It wasn’t our intention to beat up on the city,” Roper said. “I think the controller went out of his way to give credit to the city, because they had the toughest starting point of any city in the state.”

The review -- a follow-up to a series of audits conducted by the controller’s office in 2010 -- focused on Bell’s internal controls, concern with the management of state and federal funds, its dissolved redevelopment agency and use of gas tax proceeds.

The new review identified nearly three dozen material weaknesses in the city’s financial operations, and noted serious concern with the city’s immediate fiscal condition and cash balances, according to a release from the controller’s office.

“The City of Bell has made some progress since it ejected a corrupt city management two years ago,” Chiang said in a prepared statement. “But many of the same fiscal management and internal control lapses that allowed Bell to fail its citizens in the past remain unaddressed today.”

The review serves as a blueprint to preventing the return of unlawful taxation, abusive spending and backroom deal-making, Chiang said.

Willmore said he would agree with parts of the report merely because the city hasn’t reached the point where they are able to enact some of the internal controls they hope to have in place by early 2014.

“By the end of this calendar year, I think you will see that our finance office will be in the top 20% of best practices,” Willmore said. “It’s not here now. As I said to the controller: Do we spend time on new processes or on completing the independent audits? We chose to do the audits.”

He took issue with the fact the report didn’t consider the work city officials have done to deal with issues that could put the city in a state of fiscal emergency.

“Three of the most important things were not addressed: No. 1, we needed to catch up on our audits,” Willmore said. “We got that done.”

The City Council will vote Wednesday on the final two audits , bringing the city current on that process, he said.

The city also has been able to work out an agreement with Dexia over $39 million it owes in principal and interest on bonds that went into default. Those bonds represent the largest fiscal issue for the city, because if the city couldn’t reach an agreement with Dexia that debt could put the city in a fiscal emergency situation, he said.

The city found a developer willing to pay $29 million for the property the bonds were issued to buy – and reached an agreement with Dexia to accept a lower amount. Willmore said part of what helped was recovery in the commercial real estate market, because Dexia wouldn’t have accepted the amount they would have been able to sell the property for prior to now, he said.

The city had five developers bid on the property in a competitive process.

“We expect to have it on [Wednesday’s] agenda – to approve the short-sale process that is part of the agreement with Dexia,” Willmore said last week.

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