The problems with West Covina’s public contracts were so bad, the controller’s office says, that they constitute criminal behavior in violation of the state’s public contracting laws.

However, the statute of limitations for public contracting violations is limited to one year — making it nearly impossible to prosecute violations.

“It makes no sense that the statute of limitations for violating state and local contracting laws is one year from when the money is spent,” Controller Yee said in a statement to CalWatchdog.com. “I urge the legislature to consider a statutory change if we expect to ferret out fraud and prevent willful abuses of state law and taxpayer dollars.”

West Covina: 72 of 79 control components inadequate

The audit of West Covina covered just two fiscal years, from 2011-13, during which time the city routinely misstated its revenues and expenditures. The controller’s audit division reviewed the internal accounting components based on the guidelines established by the General Accounting Office’s Internal Control Management and Evaluation tool. Ninety-two percent, or 72 of 79 components were deemed inadequate.

The City of West Covina struggled with basic accounting procedures. In fiscal year 2011-12, the city understated its property tax revenue by $14 million, sales tax revenue by $4 million and expenditures by $16 million. The following year, expenditures were off by $9.78 million and property tax revenue understated by $4.2 million.

In addition to misstating the city’s financials, the council and top management charged the city for lavish meals, hotel bills and other expenses with no government purpose. From July 1, 2011, to June 30, 2013, city officials charged more than $32,000 in “questionable” expenses to city credit cards. According to the state controller’s audit, former city councilmembers and city managers charged thousands of dollars for hotel stays in Santa Barbara and weekend getaways in Indian Wells.

Problems occurred under former City Manager Andrew Pasmant

Among the State Controller’s other findings:

• West Covina settled a breach of contract lawsuit for $900,000 after a real estate deal fell through due to the city’s failure to comply with applicable laws and regulations. The city also paid $145,000 in legal fees to the West Covina Improvement Association, which challenged the deal’s legality.
• After winning a discrimination and hostile work environment lawsuit, West Covina waived its right to recover more than a million dollars in costs and legal fees. The State Controller’s review concluded the city failed in its responsibility to protect taxpayer dollars.
• Invoices for $457,015 in legal fees did not detail the work performed or show payment authorization.

In another instance of questionable city spending, the state controller’s audit revealed, “On November 17, 2011, the former City Manager charged to the City issued card $5,300 for a business-magazine advertisement for a private company for which the contact person was the former Community Development Director.” Andrew Pasmant, according to city records, was the city manager at the date in question.

The West Covina city council should have anticipated Pasmant’s penchant for problems. When the city hired him in 2001, it knew about Pasmant’s past problems in the City of South Gate, which needed “a court order to get him out of his office,” according to the Los Angeles Times.

Sweetheart Contract for Athens Services

The former city manager can share the blame with the former members of the city council.

In 2012, the council approved a sweetheart deal for Athens Services to collect the city’s trash and recycling. Athens Services received a contract extension until November 2037 in exchange for a one-time payment of $2 million and annual contributions of $50,000 to the City’s SWAT program, $20,000 to the Summer Concert series, and $30,000 to the Fourth of July celebration.
That agreement with Athens Service  was approved by then-Mayor Mike Touhey and then-Councilmen Steve Herfert and Rob Sotelo. Councilman Fredrick Sykes, who cast the lone dissenting vote, criticized the contract.

“The evergreen clause has been in the driver’s seat in this city forever,” Sykes said of the Athens contract, according to the San Gabriel Valley Tribune. “The City Council doesn’t control the how and the when and the cost. We have no say.”

To its credit, the City of West Covina has embraced much of the audit’s findings and cooperated with the state controller’s office. The current city council was largely elected on a reform slate and took over control after the problems found in the audit.

“The City of West Covina acknowledges that the open bidding requirements established by the municipal code were not always complied with,” the city stated in response to the audit. The city also says that it has adopted “a new and more comprehensive purchasing policy since the time periods evaluated.”

A complete copy of the audit is available at the State Controller’s website.

This week, State Controller Betty T. Yee announced that her office would investigate the financial practices of the 12-square mile municipality, which has come under fire for awarding $326 million in taxpayer-funded contracts to businesses owned by a former mayor and his family.

“Our initial review shows significant discrepancies between the financial transaction reports submitted to my office and the city’s audited financial statements,” Controller Yee said in a press release. “As the state’s chief fiscal officer, I have the duty to bring my office’s expertise to bear to identify potential misuse of taxpayer dollars.”

The audit will begin with a review of local, state and federal programs administered by the city dating back to 2012. Yee’s office alerted city officials that it reserves the right to broaden its investigation at a later date.

$326 million paid to former mayor’s businesses

Earlier this year, an outside, limited-scope audit conducted by KPMG found that, over the past two decades, the city had awarded $326 million in government contracts to former mayor David Perez and his family. The city, which has just 99 registered voters, generates $140 million in annual revenue. Much of the city’s revenue comes from taxes paid by roughly two thousand businesses that have set up shop in Industry to avoid the high taxes and regulatory burdens of surrounding cities. 

According to the San Gabriel Valley Tribune, which first obtained a copy of the KPMG audit, the City of Industry paid one company $133,000 a month for street sweeping and parking lot maintenance — a rate that is six times higher than the city’s current contract. In one case, the company, which is partially owned by the former mayor, billed taxpayers “the equivalent to six street sweepers running for a total of 216 hours in one week.”

In addition to outrageous billing, the audit revealed that the city paid out $7 million arising from a sexual harassment lawsuit and water fine by Zerep Management Corporation, the company owned by the former mayor and his family members.

“This is crony capitalism at its worst,” Douglas Johnson of the Rose Institute of State and Local Government, told the San Gabriel Valley Tribune. “This isn’t why cities exist. They exist to provide service and structure, not for the benefit of one family conglomerate.”

City of Industry’s checkered past

Corruption at the City of Industry has been an open secret for years. In 2009, the Los Angeles Times detailed the by then self-dealing Mayor Perez.

“Everyone who does business in the city of Industry is required to sign up with Mayor David Perez’s company,” read the opening sentence of a 2009 investigation by Los Angeles Times reporter Rich Connell. “For years, a firm partly owned by the mayor has held an exclusive, multimillion-dollar franchise to pick up trash from the warehouses, manufacturing plants and other commercial enterprises packed into this oddly configured, avidly pro-business San Gabriel Valley city.” 

Perez and his family have maintained control over the city, which rarely holds elections and instead hands off City Council seats to one of the 400 residents. The city currently has just 99 registered voters. In previous years, residents have claimed “to live in churches, houses that can’t be found.”

“If this were the old Soviet Union we were talking about – or current-day Russia, for that matter – we would understand that we’re not really dealing with a democracy here,” the local newspaper editorialized in 2012. “It’s an oligarchy, a clique of family and friends with enormous sums of money at stake.”

In 2009, the Los Angeles District Attorney’s Office opened an investigation into claims that elected city officials had filed fraudulent voter registration forms and were residing outside of the city. However, that investigation concluded without charges being filed. 

“I can’t say that we absolutely were sure that all the city officials really lived where they said they lived, but I know we didn’t seek criminal charges,” Dave Demerjian, the then-head of the D.A.’s Public Integrity Division, told the San Gabriel Valley Tribune’s Ben Baeder.

Antonovich, Solis demand answers

This time, the scandal appears to have reached a critical mass of support to finally force the City of Industry to clean up its act. On Tuesday, the Los Angeles County Board of Supervisors, led by Supervisors Hilda Solis and Michael Antonovich, stepped into the fray by demanding a grand jury investigation.

“The recent audit of expenditures by the City of Industry revealed millions of dollars in questionable payments to the former mayor and his family members,” the L.A. County Board of Supervisors stated in its draft motion. “Given the magnitude of the audit findings, a Grand Jury investigation into possible corruption and back-room deals is warranted.”

The Los Angeles County District Attorney’s Office launched an investigation into the matter last Friday, according to the Pasadena Star-News.

The scandal in Industry is only the latest in a long line of Southern California municipal corruption cases. In 2010, the tiny city of Bell was caught paying city employees excessive salaries. Earlier this year, a former employee at the city of Pasadena was arrested as part of a 60-count indictment for embezzling $6 million in taxpayer funds.

Other highlights from the new audit of Cal Fire by the Office of State Audits and Evaluations of the Department of Finance:

* Cal Fire “did not have specific statutory authority to establish the Fund and did not request or obtain Finance authorization to establish this account outside” the Centralized Treasury system.

* Of the $3.66 million collected in the slush fund, “$2.4 million was expended.”

* Cal Fire’s “decentralized process for the Civil Cost Recovery Program increases the risk of lost or stolen goods.”

* Established state procurement and inventory processes were not followed”; and neither the California District Attorneys Association nor Cal Fire claims “ownership of $1.7 million of equipment and software items purchased with the fund.”

Slush funds are becoming a trend in state government. The Cal Fire audit was published a little more than a year after the discovery of the $54 million State Parks hidden fund last year. In that scandal, the State Parks Department claimed budget cutbacks justified increases in park entrance fees and monetary help from volunteer groups.

Uncovering the dirt

Cal Fire has the authority under the California Health and Safety Code to recover costs for fighting fires and providing rescue or emergency medical services — despite the fees and taxes, and the new fire tax California residents already pay. This money was supposed to be deposited in the state’s general fund.

“Cal Fire Director Ken Pimlott told The Bee he never knew the $3.66 million fund was cloaked from state leaders and the Department of Finance,” the Sacramento Bee reported in January. “Cal Fire froze the account last year and scheduled it for dissolution in February at the request of the prosecutors’ group.”

When news of fund first were reported, Pimlott claimed media coverage was “incomplete and sensational, and over time, truth would prevail,” the Los Angeles Times reported in January. He even went out on a limb and said those who attacked the fund would have their motives exposed.

The new state audit contradicts his earlier statements.

Pimlott now claims that Cal Fire officials believed they had the authority to set up the fund account. But according to the Times story, documents from 2008 show Cal Fire officials were aware of problems with the fund and were concerned that, if the fund were discovered, the Department of Finance would demand that Cal Fire place the money with the state treasury.

When the Department of Finance auditor asked for the legal reasoning for establishing the off-the-books fund, Cal Fire officials referred the question to the office of Attorney General Kamala Harris. However, the Attorney General’s office legally represents Cal Fire.

The Audit

The Department of Finance audit also condemned Cal Fire’s failure to even track the settlement monies. According to the audit, managers of the Cal Fire program did not even know how many settlement cases were involved, nor did they know how much money the agency received from the settlements. Auditors concluded that there was a heightened “risk of money being either lost, stolen or both.”

“A California fire account hidden from state lawmakers paid for $22,000 in metal detectors, $30,000 in GPS units — and $33,000 for a conference at a Pismo Beach resort, according to a spreadsheet released Tuesday showing expenses dating back to 2011,” the Bee reported.

The $3.6 million dollars in the Cal Fire fund was spent as follows:

* $766,000 for training;

* Nearly $374,000 to the District Attorneys Association in management fees;

* $1.7 million on equipment for which, as noted above, no inventory was kept.

Sen. Ted Gaines, R-Rocklin, called for an investigation last January into the state officials behind the slush fund account, but his request fell on deaf ears.