Virginia's Department of Environmental Quality was embroiled in turmoil last month after the Allen administration announced a reorganization that included the layoffs of 30 senior officials, including all major division directors.

Later, the agency's number two official quit after a state audit showed he authorized $7,845 in payments, in violation of state policy, to a department official who quit amid controversy earlier this year.

Meanwhile, the EPA has decided to withhold more than $1 million in grants to the department because it fears the recent turmoil will further delay already overdue reports about the state's permit program.

A reorganization was unveiled June 2 that resulted in layoff notices going to 30 senior officials and the creation of 35 new positions. The dismissed employees, which include the department's top layer of career staff, will be allowed to compete for the new positions.

DEQ Director Thomas Hopkins said the action stemmed from a directive by the General Assembly that called for eliminating eight positions in the department, and from recommendations by a highly critical report from the legislature's Joint Legislative Audit and Review Commission.

"The General Assembly has presented DEQ with a challenge, and an opportunity," Hopkins said in announcing the reorganization. "This restructuring will be done in accordance with the legislature's will, and in a manner that will enhance the DEQ's ability to serve Virginia's citizens and fulfill its mission to protect the environment." He said the reorganization would streamlinethe department's central office and improve enforcement in its six regional offices.

But the action was criticized by both JLARC and lawmakers, who said the reorganization went beyond anything they had envisioned. Philip Leone, director of JLARC, said the commission had specifically recommended keeping several of the workers laid off in the overhaul. "This does not come close to implementing the recommendations we made," he said.

A JLARC staff member said lateral transfers would have accomplished the same restructuring goal without the disruption and anxiety of layoffs.

The DEQ director has authority under state law to reorganize the agency without General Assembly approval. But the changes clearly disturbed legislators.

Del. Jay W. DeBoer, D-Petersburg, told reporters "there's no rhyme or reason for this type of reorganization this late in the administration." Gov. George Allen's four-year term ends in January, and the Virginia Constitution prohibits him from seeking a second consecutive term.

A letter signed by business, environmental and local government leaders to Allen said "this massive restructuring is unwarranted and poorly timed, and will seriously hamper the DEQ's ability both to work with the regulated community and to protect Virginia's environment.

"Coming on the heels of several reorganizations that have occurred in the brief time since the department was created in 1993, it will exacerbate existing morale problems, disrupt vital programs and undermine the DEQ's effectiveness and responsiveness," stated the letter, which was signed by the Virginia Chamber of Commerce, the Chesapeake Bay Foundation, the Virginia Municipal League, the Virginia Manufacturers Association and others.

In a reply, the governor's office said the reorganization was needed to comply with the General Assembly's attempt to "micromanage" the department.

"When you have the business community, the local governments and the environmental community all saying that it is bad for business, it's bad for the environment and it's bad government, you know there is a problem," said Roy Hoagland, an attorney with the Chesapeake Bay Foundation.

As a result of the reorganization, the EPA decided to continue withholding grant money from the state. After holding up a $1.8 million grant for eight months, the agency was on the verge of giving $1.1 million of it to Virginia until the reorganization was announced, EPA officials said.

The EPA had been withholding the money because of problems the state has had in sending it pollution reports from factories and sewage-treatment systems which show how much pollution they release into rivers.

"With the recent firings of key staff ... we are no longer assured that you will be able to meet your recently promised schedule for continued data improvements," EPA Regional Administrator Michael McCabe said in a letter to Hopkins.

The DEQ was further shook when T. March Bell, its chief deputy director, resigned after a state auditor reported that he told a subordinate to keep track of his own overtime, a violation of state policy. The report by Walter J. Kucharski, the state auditor of public accounts, said Bell and former DEQ director Peter Schmidt had told former DEQ policy director Michael McKenna to keep up with his own overtime rather than get it preapproved and documented.

McKenna resigned in January after a dirty-tricks memo he wrote was made public. The memo suggested a campaign of media leaks to discredit the JLARC, which had issued a report criticizing DEQ practices.

In March, the DEQ paid McKenna $7,845 for 261 hours of compensatory time he claimed he earned in 1996.

Kucharski said the DEQ had no internal documents supporting McKenna's claim. The only record was a list of dates and hours worked that McKenna compiled and faxed to the DEQ.

- The Associated Press contributed to this report.