City of Bell’s Lessons Unveil Larger Problem with Auditing of Cities

The latest investigation by the Los Angeles Times came out this week, and it should alarm every single resident of California that cares about such things.

In the case of Bell, the city’s outside auditors gave “Bell’s financial record a clean bill of health.”

The LA Times’ review of state and local records, however, found that “the independent audits that public agencies in California are legally required to obtain frequently fail to flag cases of fraud and mismanagement.”

The LA Times’ investigation found that “Many cities that have been troubled by public corruption or mismanagement during the last decade… got clean audits, even in cases in which public officials were later sent to prison.”

Moreover, “There has been a widespread failure by auditors to make sure that cities are properly spending hundreds of millions of dollars in redevelopment money.”

According to the Times, “Each year, approximately 100 of the state’s 391 municipal redevelopment agencies fail to file annual reports as required by law. Auditors are supposed to flag that failure as a major audit violation subject to review by the Attorney General’s office, but auditors catch the problem in fewer than 20% of cases, according to a recent report from the state Senate Office of Oversight and Outcomes.”

One reason for the failure, “Firms that deliver negative audits risk being replaced.”  The Times found that, “Cities pay the auditors, and some officials have responded to negative findings by hiring new auditors. In at least one case, the new auditors gave Victorville a clean rating after the previous auditor found a raft of problems.”

Controller John Chiang wrote in his September report that among the most glaring problems were the complete lack of internal controls and the failure of auditors to properly check to make sure these internal controls are working. 

“We found the City of Bell’s administrative and internal accounting control system to be, in effect, nonexistent, as all financial activities and transactions revolved around one individual — the former Chief Administrative Officer — who apparently had complete control,” Controller Chiang’s report said.

You think this cannot happen in Davis?  Without an independent audit, we may have no way of knowing.

Do people think the city would not mislead or lie to the public about getting a clean bill of fiscal health?  I hope not.  But then again, I would not have surmised that the city would tell the public that something was in the Zipcar contract was not not in the contract at all, but rather a mere artifact after a non-enforceable handshake agreement.

The Zipcar contract was only worth $74,000, but there are tens of millions of dollars at stake in the city’s redevelopment agency.

How much do we know about that?  Not a whole lot.

One big question someone might ask is whether the city is properly utilizing redevelopment money, given the fact that redevelopment is supposed to siphon money from property taxes at a higher rate than would normally be allotted to the city, and to use that money for development projects.

Across the state, redevelopment agencies and monies have become a huge cash cow for developers.

But it is worse than that, because in Davis, huge swaths of South Davis are in the redevelopment zone, even though the area does not fit a technical or even common definition of blight.

In August, the Sacramento Bee ran a story about the City of Glendora and their redevelopment plan that was deemed illegal “because the city had not not proved the existence of urban blight as required by law, upholding a lower court ruling in a lawsuit brought against Glendora by the County of Los Angeles.”

The Bee’s columnist Dan Walters reported at that time that Assemblyman Anthony Adams had used his vote to pass the state budget to get his bill that would amend redevelopment law.  According to Mr. Walters, “The measure allowed Glendora, a city in Adams’ Southern California district, to retain about $2.6 million a year in property taxes from redevelopment that otherwise would go to other local governments and schools in Los Angeles County.”

However, even with the new legislation, the court still ruled that “the city still had to prove the existence of blight, which has specific definitions in law, and “in the absence of blight, the redevelopment plan is invalid.”

Would that put Davis in jeopardy?

Not necessarily, at least according to City Attorney Harriet Steiner, who told the Vanguard in August, “Blight is determined at the time the redevelopment plan is adopted.  At the time the Davis Redevelopment Plan was adopted, the City Council made findings that the project area was blighted.”

“The statutory definition of blight has been changed several time between the adoption of the Davis Redevelopment Plan in the 1980s and the recent Glendora case,” she continued.  “Conditions in the Davis Redevelopment Project Area might or might not constitute blight under current law. However, this does not  matter from a legal perspective, because the blight findings are conclusive once the findings are made at the time the plan is adopted and not challenged in court.”

She continues, “I would also add that, since the purpose of redevelopment is to eliminate blight, once a plan has been adopted and redevelopment projects start to be built,  one would hope that the redevelopment projects would serve as a catalyst to remove blight and to maintain and support the redevelopment of the project area.”

The bigger question is who is policing the people that are supposed to be auditing the cities.? Are we getting an honest assessment in our audits or are there things being misreported?

The LA Times found “that auditors around the state do a poor job of verifying that agencies are following the most basic tenets of redevelopment law.”

Based strictly on that, perhaps Ms. Steiner’s response should not give us the confidence that we should have.

At the most basic level the Times found that over one-quarter of all redevelopment agencies (100 out of 391) failed to file their annual report on time and this is supposed to be considered a “major audit violation,” but only 15 or 20 of the auditors reported this to the controller’s office as required by law.

The extent of the findings by the LA Times should be concern enough that our City Council, in performing due diligence, should at least broach these topics – even if ultimately the answer is that everything has been done above board and properly.

Again, how much faith do we have in the review process?  I want to believe that the City of Davis is beyond reproach here, but I am having trouble accepting its word now.

I have no reason to believe that we have a specific problem, but I am less than willing  simply to take the city’s own word for this at this point, given the blatant dishonesty we saw with the Zipcar contract, something that had far fewer things at stake for the city.

This is about trust, and the Zipcar incident, minor as it may be, is a breach of the public’s trust.  We should now demand a full accounting of all city doings that require audits and make sure that the city receives the clean bill of health that they would claim to have received.

—David M. Greenwald reporting