DIXON, Ill.—Many residents of this small Illinois city knew municipal-finance chief Rita A. Crundwell was in the business of raising horses. They didn't suspect they might have been paying for it.

Now the inhabitants of the town best-known as Ronald Reagan's boyhood home are puzzling over how Ms. Crundwell might have, as federal authorities allege, made off with more than $30 million of the town's money—using part of it to pay for a lavish horse farm on the outskirts of town.

On Wednesday, stunned residents crowded City Hall looking for answers from officials, a day after federal agents led Ms. Crundwell away in handcuffs and the U.S. attorney for the Northern District of Illinois made public a complaint alleging that she defrauded Dixon of more than $3.2 million and misappropriated more than $30 million in city funds since 2006. The complaint charged Ms. Crundwell with one count of wire fraud.

Rita Crundwell with one of her horses at a November 2011 competition. American Quarter Horse Journal / Associated Press

Dixon Mayor James Burke read a statement outlining how irregularities were discovered last fall only when a city worker assigned to fill in while Ms. Crundwell was on extended vacation raised questions about the city's bank statements. Mr. Burke then relayed concerns to the Federal Bureau of Investigation.

Mr. Burke told residents the city is putting Ms. Crundwell on unpaid leave and would try to recoup as much money as possible through asset seizures. He also said he didn't believe additional city employees were involved.

"We realize the main question is, how can someone allegedly steal $30 million and get away with it for so long," said Mr. Burke, who declined to take questions because of the investigation.

Ms. Crundwell was released Wednesday from federal custody with restrictions placed on her travel and assets. Her lawyer, Kristin Carpenter, said that the only thing discussed in court was her client's release and that Ms. Crundwell hasn't entered a plea.

The scale of the alleged crime is jarring for a city that had just $4.2 million of operating revenue last year. The funds Ms. Crundwell is accused of misappropriating amount to nearly $2,000 for each of Dixon's roughly 15,700 residents. Relative to the city budget, a comparable crime in a big metropolis like Chicago, less than 100 miles to the east, would involve billions of dollars.

Authorities alleged Ms. Crundwell, who served as Dixon comptroller since the early 1980s, moved money to and from an array of city bank accounts that she controlled, including a development fund and money disbursed to Dixon by the state. But details of where the funds originated remain unclear.

The U.S. attorney's office declined to elaborate, saying the investigation is continuing.

The 58-year-old Ms. Crundwell, whose official annual salary was $80,000, is accused of using city funds to pay for a lifestyle that mixed J.R. Ewing-style glitz with more down-home comforts. Part of the money allegedly went to fund her horse farm, whose gated entry and barns she emblazoned with the initials "R.C." Other funds were allegedly used to purchase a $2.1 million Liberty Coach Motor Home and a $60,000 Chevrolet Silverado pickup truck. The complaint said she used more than $2.5 million to pay for charges on her personal American Express card between January 2007 and March 2012, including more than $339,000 for jewelry.

Residents said Ms. Crundwell started training for the job of comptroller while in high school, and was repeatedly reappointed to the post no matter who was elected mayor. They said she was well-known and well-liked.

Sharon U. Thompson, a real-estate broker, said people assumed Ms. Crundwell earned money from breeding and selling quarter horses, so didn't think twice about her large, meticulously groomed facility. We "can't understand how it could be," Ms. Thompson said.

"This just came out of the blue for everyone," said John R. Thompson, president of the Dixon Area Chamber of Commerce and Industry, who worried the scandal could scare away potential investors in the city.

Write to Mark Peters at mark.peters@dowjones.com

Corrections & Amplifications
Ronald Reagan lived much of his childhood in Dixon, Ill., but was born in nearby Tampico, Ill. An earlier version of this article incorrectly described Dixon as his birthplace.