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Complex financial deals and energy projects cost Vernon millions

In the last six years, the tiny industrial city has amassed nearly half a billion dollars of debt and lost more than $130 million through aggressive investments and energy projects that one expert called 'too risky.'

August 13, 2011|By Sam Allen and Hector Becerra, Los Angeles Times
  • The small industrial city of Vernon has lost more than $130 million in net assets in the last six years, according to a financial analysis commissioned by The Times
The small industrial city of Vernon has lost more than $130 million in net… (Robert Gauthier, Los Angeles…)

The city of Vernon has amassed nearly half a billion dollars of debt and suffered major losses over the last six years in an aggressive pursuit of investments through its electric utility, according to a Times analysis of the city's financial records.

Even as the city's losses mounted, Vernon's leaders continued to push for more complex and grandiose projects. Officials bought a 15-year supply of natural gas at a fixed rate expecting prices would rise, only to see them fall precipitously. They also spent heavily on plans for a massive power station project that was later abandoned.

Despite this financial crisis, the city steadily increased spending on salaries, pensions and fees to attorneys and consultants, according to audited financial reports.

Reimbursement records show that top administrators traveled first-class across the country and to Europe, stayed in luxury hotels and saw their pay skyrocket — with one official making over $1 million a year.

In the face of the city's financial struggles, officials sought to educate themselves more about the energy industry. Eric T. Fresch, the city administrator at the time, purchased $4,000 worth of books with such titles as "Trading Natural Gas: A Nontechnical Guide" and "Lights Out: The Electricity Crisis, the Global Economy, and What It Means to You."

Vernon's leaders have traditionally painted a rosy picture of the city's finances. But when asked for specifics this year, city officials declined several requests to answer detailed questions about the city's financial history.

"Have we had our ups and downs? Absolutely," City Administrator Mark Whitworth said in a brief interview. "But we've navigated the most difficult waters. We're doing a good job."

To better understand the city's financial situation, The Times hired an accounting firm to review Vernon's annual financial reports dating to 2001.

Raman Sain, a principal at Holthouse, Carlin & Van Trigt, the largest accounting firm in Southern California, said the reports outline a steady decline in the city's finances since 2005 due to swelling debt, dwindling revenues and increased spending on salaries, benefits and legal fees.

The firm found that Vernon lost more than $130 million in "net assets" in the last six years. Sain said net assets are an important measure of a city's financial health because they compare the city's cash, property and other assets against its debts. Vernon's own auditor also described net assets as a "useful indicator" of the city's finances.

"It's not good," Sain said. "The net assets of the city are declining significantly, and the trend is so steep."

John Naimo, Los Angeles County's assistant auditor-controller who also examined Vernon's audited records on behalf of The Times, said: "Overall, it's a deteriorating picture."

To balance its budget and cover surging interest expenses, the industrial city has been forced to sharply raise electricity rates, which have traditionally been much lower than in surrounding cities.

The financial problems are challenging Vernon's reputation as a business-friendly hot spot at a time when it faces the threat of disincorporation by the state Legislature after a series of public corruption scandals.

Kevork Khrimian, a Moody's Investors Service analyst who covers Vernon's bonds, said the city's current A3 rating is significantly lower than that of many other public entities in California.

To meet its debt service — estimated at $56 million a year for the next decade — the Vernon Light & Power Department would have to continue to raise rates or find ways of cutting costs, he said.

While there is little chance Vernon will default on its debts, Khrimian said the city has received a relatively low bond rating due to the complexity of its business ventures and the inherent risks involved.

"There's just a lot going on, they buy gas, they sell gas, they invest in properties….Those things can go wrong, it's an exposure," he said. "The average utility system just keeps it simpler."

Unusual arrangements

Vernon, located near the heart of a key shipping corridor south of downtown L.A., is a 5.2-square-mile city that has long catered to heavy manufacturers, food processors and cold storage companies. There are only about 30 homes and 100 residents within its borders but 1,800 businesses that employ an estimated 55,000 workers.

With an annual budget of about $300 million — dwarfing that of surrounding communities — the city has been an economic powerhouse.

Vernon's unique makeup has given it an advantage in its power business, experts said. The high, steady power consumption of the city's industrial users has helped it offer lower rates compared to other utilities, which must also provide energy to residential customers whose use fluctuates during the day.

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