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Audit hammers bankrupt California city's financial management

SAN FRANCISCO (Reuters) - Many of Stockton, California's fiscal problems can be traced to poor decision-making, weak accounting and fiscal mismanagement, state controller John Chiang said on Monday.

If left unaddressed, the problems will continue to "invite wasteful spending," Chiang's office said in a report released on Monday.

An audit by his office found that Stockton officials should have been aware of how the cost of retiree healthcare and labor contracts would place a long-term strain on the city's finances.

Stockton filed for bankruptcy last year after its city council concluded it could not accept further public safety cuts. With nearly 300,000 residents, Stockton was the biggest U.S. city to have filed for bankruptcy until Detroit filed last month. Stockton's case is testing whether bondholders and bond insurers will be forced to swallow losses while the city leaves pensions for its workers and retirees intact.

The California controller's audit also found that as early as 2006, officials should have been aware that a decline in home-building permits was a potential signal that Stockton's housing boom was coming to an end and would pare city revenue.

Stockton issued $125 million in pension obligation bonds in 2007 along with other long-term debt as its housing market was on its way to a vicious slide that hammered the city's budget.

Stockton was also not very good about its bookkeeping, according to the report, released by Chiang's office as the city prepares to file its plan to adjust its debt in U.S. Bankruptcy Court next month.

Stockton's city council in June adopted a $159.5 million general fund budget for the fiscal year that began on July 1. The spending plan is balanced by eliminating $12.6 million in payments to creditors along with $9.9 million in subsidies for retired city employees' healthcare.

Bond insurers Assured Guaranty and National Public Finance Guarantee have led the court challenge to Stockton's bankruptcy and have tried to block the city's plan to force losses onto bondholders while continuing to pay into the state pension fund.

Stockton officials, notably City Manager Bob Deis, last year conceded the city's bankruptcy was the result of its finances being in disarray, too much spending and too much debt.

Hired by Stockton in 2010, Deis has helped spearhead $90 million in spending cuts, including cuts to police in one of California's most dangerous cities.

To help Stockton exit from bankruptcy, city unions have offered concessions and the city council has placed a measure to hike the city sales tax on the November ballot to raise revenue.

Deis in a letter last month to the controller's office said its audit of Stockton "'bayonets the wounded' after the battle has been fought to repair a distressed city."

Deis told Reuters on Monday the audit report failed to shed new light on Stockton's problems, adding he would release before he retires in November a review of internal controls to help the city avoid its past mistakes. "It'll be a step-by-step road map," he said.

(Reporting by Jim Christie; editing by Matthew Lewis)

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