El Segundo ignores millions in potential taxes from Chevron, records show

For months, it’s been the only story in town: Can a few part-time politicians in El Segundo force the city’s oldest employer and one of the nation’s top oil producers to pay higher taxes on its 951-acre refinery.

While Chevron and the city try to strike a deal, documents obtained by The Times show that in the mid-1990s, El Segundo ignored a preliminary audit showing Chevron owed as much as $9.5 million in back utility taxes and then ordered auditors to stop work.

City officials later reached an agreement with the oil producer that resulted in El Segundo receiving no money at all. At the same time, the city capped Chevron’s future natural gas taxes at $150,000 a year plus inflation — a fraction of what auditors said the city should be receiving.

The abrupt cancellation of the audit led a lawyer for the auditors to write a letter to El Segundo, saying the firm “has never encountered resistance from its client cities regarding the collection of such substantial and much needed tax revenues.”

Leland Dolley, El Segundo’s city attorney at the time, said he thought the city had a solid case if it had taken the oil company to court. “I didn’t think it was a good settlement,” he said in a recent interview. “It was a devastating thing for the city because it was a pretty good chunk of income for the budget.”

Carl Jacobson, who signed the agreement as mayor in 1994 and remains on the City Council, declined to comment. “The documents speak for themselves,” he said.

The unfinished audit and subsequent agreement again raise questions about the influence Chevron wields in El Segundo, the city where the oil company built its second refinery in the state 100 years ago.

The utility tax agreement contrasts sharply with the one between Chevron and the Bay Area city of Richmond, where the oil company also has a refinery.

After a city audit in 2008 found that the oil company had underpaid its utility tax by as much as $50 million over a two-year period, Chevron agreed to a $28-million settlement, said Bill Lindsay, Richmond’s city manager. The utility tax cap was set at $14 million.

“It’s ironic because up here, Chevron keeps saying, ‘We never have this kind of trouble with El Segundo,’” he said.

Like many cities, El Segundo has suffered during the economic downturn. In recent years, 50 employees have lost their jobs, salaries were cut by 12% on average and the library was forced to shorten its hours.

The documents, obtained by The Times through the state Public Records Act, do not say what led El Segundo to look into Chevron’s utility tax payments. Much of the dispute was over how to calculate the natural gas tax, with Chevron disagreeing over the method auditors used, saying the company was being taxed twice.

“That kind of double taxation is an issue of concern,” said Rod Spackman, Chevron’s manager of policy, government and public affairs for the L.A. Basin. “That’s why the city and Chevron came to that agreement.”

According to the documents, auditors from Municipal Resource Consultants determined that Chevron had underpaid its utility taxes by $7 million to $11 million in late 1991 and early 1992. In July 1992, El Segundo told the auditors to suspend work.

Their job was never completed, although a letter to the city said auditors needed just four more hours to finish.

The five-page preliminary audit found that over a three-year period, Chevron had underpaid its taxes on natural gas by $4.2 million, electricity by $3.268 million and telephone by $79,300, not including interest and penalties.

The report said the city might be owed taxes going further back and estimated Chevron’s liability could be “$9.5 million or more.”

Don Maynor, a lawyer who worked on the Chevron case, said he couldn’t recall another instance in which he was pulled off an audit. “I assume they valued their relationship with Chevron and wanted to do it by themselves,” Maynor said. “If they want to negotiate a bad deal, that’s their business.”

Chevron and El Segundo settled the utility tax dispute in early 1994, with the oil producer agreeing to pay the city $800,000, although $600,000 was effectively given back to the company as a credit toward its business license fees.

The remaining $200,000 went to pay the auditing firm, leaving the city with nothing.

In addition, the city agreed to cap Chevron’s gas users tax at $150,000 a year plus inflation. The audit said it should be paying $2 million a year.

Maynor sent Dolley, the city attorney, a scathing letter in September 1993, accusing the city of “stonewalling” and not returning phone calls and letters for more than a year. “… MRC has reached the inescapable conclusion that the City is not dealing with the Chevron matter or MRC in good faith,” he wrote.

“…City staff’s sole response to MRC’s numerous requests for specific information on the Chevron matter is ‘the City Council won’t allow the staff to talk to MRC, and MRC is not allowed to speak with the City Council.’ ”

Doug Willmore, El Segundo’s former city manager, said he found the 1994 agreement troubling.

“At best, it’s one of those sweetheart deals for Chevron to do whatever they want,” Willmore said. “At worst, it’s much worse than that.”

Willmore was fired last month after openly pushing for increasing the acreage tax Chevron pays on its refinery. He said that for decades Chevron had been underpaying the tax by millions.

Although a majority of the five-member council thought the acreage tax should be increased, they could not get the fourth vote necessary to place a measure on the April ballot.

The former city manager said he thought his recent discovery of the utility tax documents led to his firing. “I bring forward these agreements where I believe there are some things wrong and that aren’t legal, and 13 days later I’m fired,” he said.

The council fired Willmore without explanation after less than 10 months on the job without giving him an explanation.

In a claim he filed against the city this week, Willmore called the 1994 agreement “an unlawful settlement and illegal gift of public funds which is criminal.” He said that the $150,000-a-year cap is illegal because voters didn’t ratify it as the required by law.

jeff.gottlieb@latimes.com