INDIANAPOLIS | The city of Gary is more than $4 million overdrawn and the effect of Indiana's property tax caps "raises substantial doubt about the city's ability to continue as a going concern," according to a new state audit.

At the same time, auditors found Gary paid hundreds of thousands of dollars in questionable food, travel and personal expenses for city officials in 2008, even as those officials begged the state to allow the city to impose higher property taxes.

Riverboat gambling revenue is keeping the city afloat, with more than $12 million in state gaming taxes going to pay the city's day-to-day expenses last year. Even so, the city still owes more than $2.5 million in employee health care bills and has fallen behind on many of its other bills, according to the 157-page audit report prepared by the State Board of Accounts.

Property tax caps have significantly reduced Gary's revenue and the city will need to drastically cut its budget as a result, auditors said.

In May, the state gave the city more time before the full effect of tax caps kicks in. Gary is allowed to charge one-third higher property tax rates than the rest of the state.

"If the city had been required to immediately comply with this tax legislation, they would have needed to reduce their 2009 budget by over $30 million and their 2010 budget by an additional $6 million," auditors wrote.

Compounding Gary's problem is Lake County's slow reassessment of properties after tax caps were put on, auditors said. The delay has meant tax bills go out late, money comes in late and cities have to borrow until the money comes in. Gary has paid nearly $2 million extra in interest because of the delay.

But Gary Mayor Rudy Clay said he remains optimistic about his city's future.

"I believe that for the city of Gary there's light at the end of the tunnel," Clay said. He said an improving economy, federal stimulus money and state aid will improve Gary's situation.

The city laid off 100 employees in June to partially reduce this year's estimated $7 million deficit. A fiscal monitor has been hired to recommend future budget cuts.

But you can't necessarily tell that Gary's broke by the behavior of city officials, the audit suggests.

Auditors said Clay used his city-issued American Express card to pay for a personal vacation, travel for his wife and repairs to his city-purchased Hummer. Clay later reimbursed the city for some of his personal expenses when they were discovered by auditors.

"We paid it back after an honest mistake was made by one of the office workers," Clay said.

Clay said his credit card number is often used to pay for department expenses incurred by other city workers.

Auditors also found City Clerk Suzette Raggs took an office employee to Ponderosa, Kenny's Ribs, Cracker Barrel and Bennigan's restaurants for lunch at least once a month on the city's dime.

Gary spent $90,565 to renovate City Hall bathrooms as well as $278,390 on "promotion" last year. "Promotion" includes buying food and drinks for a skybox at Gary SouthShore RailCats baseball games, paying $15,000 for a videotape of demolition projects and purchasing more than $1,000 in flowers for employees, according to the report.

Through April of this year, the city also has spent at least $11,828.50 for City Council members to attend conferences in Washington, D.C., and Indianapolis, auditors said.

Among the audit's findings

State auditors questioned the legitimacy and necessity of many things the city of Gary paid for in 2008, including:

-- $90,565 in renovations to City Hall bathrooms

-- $10,720 in car washes for police, fire, recycling, city court and council vehicles

-- $2,895.62 to send two sanitary district employees to a three-day conference on how to set up airport kiosk businesses

-- $278,390 on "promotion," which includes buying food and drinks for a skybox at various Gary SouthShore RailCats baseball games, paying $15,000 for a videotape of demolition projects and purchasing more than $1,000 in flowers for employees.

-- $484.74 for City Council Member Kyle Allen Sr. to stay in a hotel while attending a Democratic Party political event in Chicago

-- City Council travel to South Bend; Rapid City, S.D.; Atlanta; Indianapolis twice; Welches, Ore.; and Orlando, Fla.

-- Monthly lunches between City Clerk Suzette Raggs and her deputy at Ponderosa, Kenny's Ribs, Cracker Barrel and Bennigan's restaurants.

-- Meals for the mayor at Gamba's in Merrillville, Beach Cafe in Gary and Leona's in Calumet City

-- Repairs to the mayor's Hummer performed by an outside vendor, despite the city having a vehicle maintenance department

Auditors pointed out that a complete list of expenses cannot be determined because Mayor Rudy Clay does not submit itemized receipts for his city-issued American Express card.