AD Quality Auto 360p 720p 1080p Top articles1/5READ MOREBlues bury Kings early with four first-period goals The Associated Press, seeking to account for how things went so wrong in Gardena, found a trail of no-bid contracts and other special deals, government doublespeak and warnings unheeded that show how vulnerable any town can be to unchecked officials who gamble with the public’s money and trust. A few people did well as the insurance venture bled cash, according to the AP’s investigation, which was based in part on documents obtained through open-records requests. There were the consultants and financial specialists who earned millions and the former city manager who spent lavishly on four-star hotels and travel. How could this happen in Gardena, whose name evokes its simpler past as a center for berry growing? Home to 60,000, it’s ethnically diverse, blue collar and six square miles small – a place where lunch lines get long at Giuliano’s deli, kids splash in the municipal pool and homeowners expect potholes to be fixed. Now, however, there is scant money to repair streets and sewer lines. The municipal pool is part of the public property backing bonds that bankrolled the insurance venture. Some officials doubt that the pool – or parkland, or the police station – will be handed over to creditors. The financial outlook is bleak. In a city with a tight budget, the possible higher interest payments to banks are “not likely to be sustainable,” according to Standard & Poor’s, the Wall Street rating service. And a recent survey of the credit strength of California cities already placed Gardena alone at the bottom. GARDENA – At the edge of insolvency, this Los Angeles suburb has a surplus of just one thing: frustration. Banks could slap Gardena this week with hefty penalties for failure to pay $25.6 million in debt. Most of the long-overdue bill, equal to more than three-fourths of the annual municipal budget, dates to a decision a dozen years ago that many see as reckless: Despite repeated warnings of the financial risk, local officials pushed their city into the insurance business. The unprecedented for-profit company they founded, Municipal Mutual Insurance Co., is now under state supervision. To stay afloat, city officials have considered declaring bankruptcy, raising taxes or even closing a city department. Block by block, Gardena is suffering. Gift-shop owner Carol Luna sees a city in decline and is thinking of moving away. City officials “spend their money foolishly,” she said. “You can only beat your head on the wall for so long.” It’s unclear whether the banks – Japanese-owned Sumitomo Trust & Banking Co., which holds most of the debt, and Union Bank of California – will go to court to attempt to extract the higher payments, which a city official said could cost an extra $1 million a year. Sumitomo holds the debt connected with the insurance company, $19.6 million. Union Bank is owed nearly $6 million for the failed home-loan program. Officials at both banks declined comment; negotiations with the city are continuing. Across the nation, municipal entities have defaulted in recent years on bonds issued to support other atypical ventures, such as golf courses and marinas, according to a study by Fitch Ratings. And neighboring Orange County suffered default after losses in a high-risk investment pool. But Gardena officials became convinced that a homegrown insurance company could provide coverage for Gardena while earning millions of dollars through policies sold to other cities. The business the city founded in 1993 was supposed to turn government investments into profit – but people connected with Municipal Mutual describe it as the little company that couldn’t. Weeks before Gardena was scheduled to borrow $15 million on the bond market, a financing team led by Prudential Securities walked out on the deal. The problem: The city didn’t have any commitments – beyond Gardena itself – to buy the insurance it wanted to sell. If it didn’t sell policies, the company couldn’t repay the bonds. It was “clearly a risky program and it caused (Prudential) not to want to proceed,” said David N. Lund, a former Prudential director who worked on the financing. Yet Prudential’s findings were not detailed in City Council minutes, which described Prudential’s sudden exit simply as a “business decision.” A second underwriter, Sutro & Co., and a San Francisco law firm also dropped the deal. 160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set! read more