(Reuters) - Montebello, California, a city of about 60,000 in the eastern part of Los Angeles County, is mis-using public assets and funds, the state said on Wednesday.
Local governments in California have come under close scrutiny over the past year, since the town of Bell was discovered to have overpaid its city officials.
"As a result of the significant control deficiencies, the potential for waste, fraud, and abuse of public resources is extremely high," Jeffrey Brownfield, chief of California's audits division, wrote in a letter to the Montebello's mayor attached to a report on the city's finances.
In April, the state controller found that the city, along with its redevelopment agency, was not submitting complete annual financial reports.
But a recent review went one step further, finding there was "no accountability in their spending of public dollars," State Controller John Chiang said in a statement.
Particularly, the state found there was "possible pension spiking, payroll errors, a loose petty cash drawer and systemic problems."
It also uncovered differences between bank statements and general ledger amounts, unreconciled outstanding checks, retention bonuses and stipends that were never reported to federal tax authorities, as well as 10-year-old secret bank accounts.
The city may have to pay back nearly $1.3 million in misused federal Housing and Urban Development funding.
A businessman sued Montebello earlier this year, saying it illegally borrowed up to $19 million from the redevelopment agency. At the same time, city employees began uncovering off-the-book bank accounts and officials projected a $2 million deficit in its $45 million general fund budget, according to the Los Angeles Times.
The state review found that the city administrator was placed on administrative leave and received a monthly salary of $10,934 in 2007. Even though the person reached a settlement with the city, Montebello continued to treat him as a full-time employee until the city council rehired him in 2008 with a 49 percent salary increase.
The controller posited that the mammoth raise could have been intended to artificially plump up the administrator's pension payments and said there would be further investigation into possible "pension spiking."
Last month, Montebello said it had undertaken a five-year financial recovery plan that would honor all debt and that its current budget is balanced.
In its audit, the state said it is working with Montebello to resolve the problems it had uncovered.
(Reporting By Lisa Lambert; Editing by Dan Grebler)