The plan offers the City Council a series of options, such as slashing compensation for employees up to 20% and laying off other city workers. The plan also calls for eliminating the city's supplemental retirement plan and some contributions to the state pension plan for future employees.

"The city has reached a financial crossroad," the agenda report reads. "While the recommendations set forth in this report require difficult decisions to be made, without these actions, the City will likely be force into insolvency."

The action plan is based on the recent findings by the State Controller's Office and the Los Angeles County Auditor-Controller's Office. A recent county review of Bell's finances showed that the city faces a deficit of $2.16 million unless drastic cuts are made. But according to calculations by city administrators, that deficit could grow up to $5 million by the end of June if the council does not take action.

City leaders in Bell will meet Thursday night to consider approving an action plan that would include deep cuts to salaries and benefits, elimination of the city's supplemental retirement plan and the possible disbanding of its police department, all as a means of avoiding bankruptcy.

[Corrected at 10 a.m.: A previous version of this post said that the city would consider eliminating city-matched contributions to employee pensions. Employees currently do not make any contributions to their pensions. The city pays both the "employee" and "employer" contributions. Under the new proposal, the city would only cover the "employer" contribution.]

But one of the most difficult decisions city officials said they will have to make Thursday is the possible disbanding of its 83-year-old police department. The department currently operates at a cost of approximately $8.47 million annually, which is $2 million more than the city's expenditures for other operations, according to city officials.

The police department, whose contract with the city is under negotiations, is comprised of 45 full-time sworn and non-sworn employees, according to city administrators.

By contracting with the Los Angeles County Sheriff's Department, the city would save nearly $4 million and could potentially "eliminate the City's entire deficit without having to make further cuts in any other department," the report says.

The report also emphasized, however, that disbanding the police department is only one of several options that will be considered.

Bell, a city of roughly 40,000 people with a general fund of $13.5 million, is in this financial predicament in part because it had been rapidly increasing compensation and salaries of top city officials, accounting for a large portion of the budget.

Until they were force to resigned, former Chief Administrator Officer Robert Rizzo was in line to receive more than $1.5 million, with $846,000 for Assistant City Manager Angela Spaccia and $770,000 for Police Chief Randy Adams. All but one member of the council made close to $100,000 annually for their part-time jobs.

Other officials also received high salaries; both Lourdes Garcia, the city's director of administrative services, and Eric Eggena, the director of general services, were each paid more than $400,000 annually. Eggena has since been fired and Garcia agreed to a 61% pay cut. A third official was also laid off.

In addition, state auditors found that the city had to refund more than $5 million in illegal taxes levied during the previous administration's reign and now faces hefty legal bills because of the scandal. The city has racked up hundreds of thousands of dollars in legal fees from City Atty. Jamie Casso and his law firm since they were hired last summer.

The small town has also taken a financial punch from the poor economy.

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-- Ruben Vives