LA Mayor Hopeful Kevin James Details SEC Complaint Against the City of Los Angeles Exposing Municipal Fraud

LA Mayor Candidate Kevin James and former Los Angeles County District Attorney Steve Cooley.
Randy Economy Photo

UPDATED AT 8:14 PM PST

By Brian Hews

Los Angeles- This afternoon, former federal prosecutor and mayoral candidate Kevin James announced on the John and Ken Show on KFI that he officially filed a 42-page complaint with the United States Securities and Exchange Commission-Municipal Securities and Fraud Division (SEC) against the City of Los Angeles last October.

According to the complaint, in attempt to cover up the extent of the city’s financial problems city officials moved hundred of millions of dollars from restricted funds into the general fund to pay for unaffordable union salary raises and pension benefits.

Los Cerritos Community Newspaper was the first news agency to obtain the filing.  James will be appearing on Friday night in a televised forum on KCAL9 in Los Angeles that is being hosted by Political Reporter Dave Bryan.

“The raiding of the special revenue funds by the City Council, under the guidance of the City Controller, may be in direct violation of federal and state regulations,” said James.

“The City of San Bernardino is currently under federal investigation for the same thing; depleting restricted accounts for the purpose of hiding fiscal mismanagement. If the SEC continues with an investigation into the City of Los Angeles then the City officials will be held accountable by not just the taxpayer, but by this federal regulatory agency.”

James also issued the following statement to LCCN about the filing and the situation in greater detail:

“It has been proven throughout California that in order to create an illusion of fiscal solvency and financial stability, city government officials have consistently and improperly moved millions of taxpayer dollars from various restricted funds into their general funds. These actions are meant to hide the true fiscal mismanagement of city accounts by those very same officials. These accounting games have recently resulted in federal investigations – most notably in cities that were forced to seek bankruptcy protection,” James said.

“In an apparent attempt to cover up the complete extent of the city’s financial problems, Los Angeles officials have concocted elaborate schemes to: (1) move hundreds of millions of dollars of taxpayer money from restricted and special revenue accounts into unrestricted accounts including the city’s general fund; (2) postpone significant liabilities, and (3) create the false impression for the financial markets, rating agencies and the public, that the city’s finances are in order. The primary tools used by L.A. officials include (1) the abuse of the common law doctrine “escheat” to transfer millions in restricted funds into the city’s reserve fund, (2) the transfer of funds through improper ordinance manipulation, postponing over $100 million in personnel costs until years in the future, and (3) the transfer of over 1,000 city employees from the general fund budget to proprietary department budgets while the city was undergoing layoffs,” James said.

“Former Los Angeles Mayor Richard Riordan and former First Deputy Mayor Austin Beutner, have called out current city officials for “play[ing] accounting games”, (Riordan, Wall Street Journal, May 5, 2010) for using “Enron”-like tactics and for committing “fraud” (Beutner, Los Angeles Times, January 3, 2012).”

“Because an investigation into these unlawfaul actions is urgent, in October 2012, I submitted a complaint to the Securities and Exchange Commission’s Enforcement Division – Municipal Securities and Public Pensions Unit.”

“My complaint focused on five primary actions by city officials. First, the transfer of $29 million from a restricted fund used for fire hydrant installation and water main replacement into the city’s reserve fund. This action intended to create a temporary and imaginary balance in the reserve fund for the bond rating agencies (the City Council President confirmed that the money would be used to pay city salaries and raises rather than used for an emergency). Evidence of city officials’ intent to mislead the bond rating agencies into believing that Los Angeles maintained a healthy reserve fund balance exists in written communications from the Mayor to the Council President stating that “with rating agency downgrades looming” the Mayor made an “urgent request to strengthen the Reserve Fund by infusing it with Council controlled special fund cash balances.” Video evidence shows that in order to avoid an embarrassing reprimand the multi-million dollar transfer was made by the Council and that after a better grade was received by the rating agency the money would be used to pay city salaries and raises. The funds would not be left in the reserve fund for use in case of a natural disaster or emergency matter.”

“Second, the transfer of over $119 million from a parking revenue fund intended to relieve parking and traffic pressures into the general fund to pay city salaries and raises. Third, the postponement of over $100 million in personnel costs including police overtime and unused sick time until the current Mayor leaves office to which the Times stated “even some of Villaraigosa’s allies are questioning whether the public has been misled about the health of the city’s finances.”

“Fourth, the transfer of over 1,000 general fund employees to the Department of Water and Power (which is a proprietary department with a separate budget) even though there is no evidence the DWP needed over 1,000 new employees. Fifth, the creation of an early retirement incentive program represented as savings to the city when it was later revealed that the program cost the city hundreds of millions of dollars.”

“On August 30, 2012, the Los Angeles Times reported that San Bernardino made the decision to “raid restricted funds to pay its employees.” The Times stated that “borrow[ing] from funds not intended for day-to-day expenses, [is] a practice that has drawn federal scrutiny of the city’s books. In October 2012, the Times reported that the SEC had opened a probe into San Bernardino’s accounting practices and city officials had “acknowledged that the general fund had borrowed repeatedly from restricted funds and eventually failed to pay back the debt.”

“L.A.’s accounting practices are questionable at best. There are simply too many similarities between L.A.’s practices and the conduct of officials in other cities that have already come under federal scrutiny. For these reasons, and because the financial future of Los Angeles is at risk, I am calling on the SEC’s Enforcement Division to take action on the complaint I filed in October 2012.”

Below are “supporting documents” submitted to Los Cerritos Community Newspaper by the Kevin James for Mayor Campaign late Friday afternoon.

EMAIL EXCHANGE FROM FIRE CAPT. ON FIRE HYDRANT FUND

Additional Backup Documents on the Restricted Funds Raiding Process:
Here is a link to the memo authored by Greuel on how to “raid” these funds and which funds to “raid”.
Here is a link to the Declaration of a Fiscal Emergency enabling the City Council to “raid” restricted funds
Here is a video of Councilman Garcetti during a Council meeting leading the effort to “raid” the Fire Hydrant Repair Fund 

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