Compton finds itself in full financial meltdown

Compton’s finances are in such disarray that the city amassed $369,000 in late fees over the last year because it could not pay its policing contract with the Los Angeles County Sheriff’s Department on time.

The city has already laid off about 15% of its workforce, and city leaders warn that more cuts may be on the way. City Hall has slashed spending, even canceling the city’s popular gospel concert.

But most disconcerting is the city’s looming deficit of $39 million, a sum that represents about 80% of its annual general fund budget. Standard & Poor this summer lowered the rating of some of Compton’s bonds to just above junk status. City officials said they’re hoping for a short-term loan or line of credit to get through the year and vowed not to file for bankruptcy.

As city leaders work frantically to turn the city’s finances around, many residents are questioning how things got so bad so fast.

Just a few years ago, the national media were writing about the renaissance of Compton, where new businesses including Target and Home Depot were moving in and crime rates were plummeting.

But those boom times quickly went bust. Compton’s new city manager, Lamont Ewell, said that years of poor decisions — coupled with the economic downturn — drained $22 million in surplus reserves and left the city with crushing debts.

Year after year, as revenues fell short, Compton kept spending more. Between 2007 and 2011, the city hired 110 new employees. Expenditures kept rising, including project cost overruns, unexpected litigation, increases in salaries and benefits, and payouts of unused sick and vacation time to employees who had quit or were fired.

While cities in California have been hit hard by the recession, Compton is in a small class of cities that have ended up in critical condition. The cuts come at a bad time, with unemployment in the working-class community already at 20%.

For some, talk of a turnaround comes too late.

Johnnie Davis, 64, is one of the dozens of city workers who lost their jobs over the summer. He got notice that he would be laid off from his job as a City Hall night custodian as he was recovering from surgery for prostate cancer. Davis and his wife now have no health insurance, and he has had to postpone follow-up doctor’s appointments because of a lack of funds.

Like many city employees, Davis said he had no idea the city was headed for a crash until the spring, when rumors of layoffs began to circulate.

“In my mind and everyone else’s mind, the city was solid, and then this came out of nowhere,” he said.

In reality, the descent happened gradually over five years, when officials went through the city’s once-healthy reserves and then began raiding other funds, including those for water, sewer and retirement, to pay the bills.

In the summer of 2007, Compton had $22 million in reserve, more than many of its neighbors. Its spending and revenue for the previous year matched up. A new shopping center was preparing to open and other developments were in the works.

“There were a lot of things coming online that, as a resident and an official, made me feel very optimistic,” said Barbara Kilroy, who was city manager from 2004 to mid-2007. (She was one of three Compton city managers fired in the last five years. The most recent, Willie Norfleet, who was also the former city controller, got the ax in September.).

Over the next five years, the bubble deflated. Every year, the city spent more than it took in by more than $10 million.

Compton saw its tax revenue plateau as the recession hit — better than some cities that have seen revenues sharply drop. But the city made overly optimistic projections each year, Ewell wrote in a report to the City Council in which he deconstructed some of the city’s financial malaise.

Ewell said it was partly poor record-keeping and lack of internal controls that allowed the deficit to balloon. Outdated software, a breakdown in communication between departments and a lack of policies to prevent administrators from spending reserve funds without council approval contributed to the snowballing problem.

Other officials and observers cited strife on the council and the rapid turnover in management staff as destabilizing factors that allowed the fiscal situation to fester. Staffers who were aware of the problems may have kept quiet out of fear of upsetting city leaders, said Michael Hill, a longtime resident who sits on the city’s Planning Commission.

“In any political environment, there’s a certain fear factor that if you’re the squeaky wheel … you’ll end up being shown the door,” he said.

By 2009, officials were using money from the water, sewer, retirement and other funds to paper over the shortfalls when the general fund ran short on cash for day-to-day operations. In its report for 2009, the city’s independent audit firm chastised officials for the practice and for violating a city policy requiring council approval for budget changes.

Over the last five years, the general fund used at least $16 million from other reserves without City Council approval and without a repayment plan, Ewell said. It is legal for the general fund to borrow from other funds, but the city is required to pay the money back with interest.

Even as Compton’s financial situation crumbled, the city continued to pursue a costly plan to reopen its Police Department, which had been disbanded years before as a cost-saving measure. The city spent more than $1 million on equipment for the new department, only to kill the idea when officials realized that it was cost-prohibitive.

Members of the politically divided City Council called the revelations of the extent of the city’s deficit “eye-opening” but insisted that they will unite to help the city pull through. They have little choice. Gov. Jerry Brown signed legislation last month that will make it much more difficult for cities to declare bankruptcy.

“We gotta find a common ground, and where the common ground is, is dealing with this budget situation,” Mayor Eric Perrodin said, although there was little common ground at recent meetings, which devolved into shouting matches between the mayor and council members.

The task now facing city officials includes figuring out the size of the budget gap and then finding ways to plug it. Compton will need to make more cuts, restructure departments and look for concessions from the city’s unions to avoid eliminating services or laying off more workers, Ewell said.

In the meantime, city residents and employees are left wondering what comes next. But many are hopeful for a return to better times.

“Truth is a tough pill for most, but I think in this community, we have people that have come through much worse,” said Hill, the planning commissioner.

abby.sewell@latimes.com