California and Los Angeles County prosecutors are joining forces to investigate the enormous salaries earned by officials in Bell.
The district attorney's office says it will look into possible criminal activity while California's attorney general will handle a civil probe.
The city of 40,000, one of the poorest in the county, has been in an uproar since residents learned their city manager earned nearly $800,000 and other leaders were also getting huge paychecks. The city manager and two other officials have resigned.
Meanwhile, the city's bonds were downgraded to junk status Tuesday by Standard & Poor's, which could make it costlier to float bonds.
The move followed reports that Bell can't meet a deadline to pay off a $35 million bond debt for a failed land deal.