Compton bankruptcy possible but not a certainty, top official says

Compton's incoming city manager said the city is in serious financial trouble but that bankruptcy is not a foregone conclusion.

Harold Duffey, the newly hired city manager, said that before discussing bankruptcy, the city needs to deal with allegations of fraud that led the city's independent audit firm to refuse to sign off on last year's financial statements and puts the rating of some of the city's bonds in serious jeopardy.

"I'm certain that the city will be able to meet its financial obligations at least until September," he said. "...The city is not to the point where they should be having a conversation about bankruptcy -- that's a dirty word that the city should not be using at this time."

At Tuesday night's council meeting, City Treasurer Douglas Sanders told council members that they would need to start thinking about bankruptcy as an option because of the city's cash flow issues.

The city currently has about $3 million available to pay general fund expenses and $5 million in bills coming due, while the general fund will need to make a $1.1 million water-bond payment Aug. 1, he said.

"We are in some very critical issues, so by August 1, y'all need to decide what's going to happen -- make the bond payments, default on them, or go into bankruptcy," he told the council. 

Sanders said in a telephone interview with The Times on Wednesday that he is confident the city will make its bond payment, but that he wanted to force city officials to confront the seriousness of the situation.

The city's general fund has accrued a deficit of $43 million over the past several years, largely by dipping into restricted funds to pay the bills, and city officials project an additional $10-million deficit in the coming fiscal year.

Unlike many other cities, Duffey and Sanders said, Compton's issue is not pension obligations -- those are funded by a parcel tax passed in 1947. But the city's overall expenses rose as its revenues flagged over the past several years, and it has struggled with cash flow issues that have put it behind on paying the bills. Last year, the city paid half a million dollars in late fees on its contract with the Los Angeles County Sheriff's Department, Duffey said.

City officials had sought a line of credit to help deal with the short-term cash flow problems, but that effort ended after Mayor Eric Perrodin sent a letter to the state controller's office in December alleging fraud might have led to the city's financial issues and calling for a forensic audit.

The controller's office has not launched an audit, but the allegation of fraud delayed the routine annual audit of the city's financial statements by the independent firm and shut down efforts to secure a line of credit. Late last month, the audit firm, Mayer Hoffman McCann, said it could not complete the audit because they had been unable to get more information from Perrodin about the fraud allegations, and quit.

Following the auditors' actions, Standard & Poor's put the city's lease revenue bonds on credit watch, threatening to withdraw the city's bond rating if it can't present a completed audit report within 90 days.

Sanders said the line of credit was a crucial step to help the city pay the bills while it gets on the road to financial recovery. The city has slashed costs, including cutting its workforce by 15% last summer.

"You’ve been borrowing from other departments and other funds to the tune of $43 million -- that was your line of credit," Sanders said.

Duffey said one of his first priorities is to get clarification about the mayor's accusations and convince either Mayer Hoffman McCann or a different one to complete the city's annual audit.

“Whatever it is the mayor has concerns about, needs to be detailed out,” he said. “The city really needs to have closure on this issue -- closure that there is fraud or closure that it couldn’t be substantiated.”

Perrodin could not be immediately reached for comment.

Mayer Hoffman McCann is set to present its audit findings to the council next Tuesday.

The Times will hold a Google+ chat on the issue at 2 p.m. We invite you to join in on the conversation by posting comments below or onto The Times’ Facebook and Google Plus pages or on Twitter using the #asklatimes hashtag.

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-- Abby Sewell

Photo: Eleven-year-old, Daivon Smith, practices his cycling tricks in the MLK Memorial at the Compton Civic Center, where the incoming city manager said the city is in serious financial trouble but that bankruptcy is not a foregone conclusion. Credit: Barbara Davidson/The Los Angeles Times