The New York City Council Speaker’s office has been accused of allocating millions of dollars to non-existent organisations and hoarding the money for redistribution to other groups favoured by council members.
Christine Quinn, the first woman to hold the post, is expected to run for Mayor of the city next year. She insists all taxpayer’s money was used for legitimate purposes.
However, investigations by the US Attorney’s Office and the city’s Department of Investigation are already underway.
Sources at City Hall claim the practice of allocating funds to non-existent groups has been going on for decades.
The New York Post, which broke the story, reported that phantom organisations such as the Immigration Improvement Project of New York and the Coalition for a Strong Special Education received tens of thousands of dollars of city funding.
In all, $4.7m (£2.4m) of the 2007/8 budget was allocated to 30 fake organisations.
“The money, in effect, became a slush fund for the speaker and was later used at Quinn’s discretion to reward groups that were loyal to her and to fund favoured council members’ pet projects,” reports the Post.
“The scheme gave “the speaker a stash of cash with which to thank or pay off politically important allies or cooperative council members,”" a source told the paper.
In the interview Ms Quinn, who is one of the most prominent and high-flying lesbian politicians in the US, claimed that she knew about the reserve funds but only learned about the bogus organisations listed in the city budget a few months ago.
“I was kind of sick over the fact that there were things listed in the budget that were not accurate and that my instructions to the staff were disregarded,” Quinn told the Post.
The current Mayor of New York Michael Bloomberg’s second term of office comes to an end in 2009 and he is legally barred from seeking a third.
Ms Quinn is a frontrunner for the Democrats.
The city elected Democrat Mayors from 1918 to 1933 and 1946 to 1993, a hegemony broken by Rudi Giuliani.
Mr Bloomberg was elected as a Republican in 2001 but left the party last year.
Ms Quinn, 41, was unanimously elected as New York City Council’s first woman and first openly gay Speaker in January 2006, becoming the second highest-ranking official in the city after the Mayor.
The role of the Speaker is to act as a check and balance to the executive authority of the Mayor.
It is a similar position to the chairman of the London Assembly.
In her 2006 acceptance speech Ms Quinn wept several times, thanking her father and her partner, Kim Catullo who were sitting in the public gallery.
She came to international attention in 2006 for refusing to march in the New York St Patrick’s Day parade because it banned gay groups from participating.
The New York parade is organised by the Ancient Order of Hibernians, an Irish-Catholic fraternal organisation.
They have refused to allow gay and lesbian groups to march in the parade since 1991.
If elected she would be the first woman to be Mayor of New York City and in charge of the largest municipal budget in the US.
The city government employs a quarter of a million people, educates 1.1 million children and spends more than $50bn (£35bn) a year.