Vernon’s financial problems sour business leaders on the city

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Vernon has long been a nirvana for business: Easy access to freeways and rail lines. Low taxes. Cheap, abundant supplies of electricity.

Manufacturers, chemical factories and even a giant slaughterhouse thrived in Vernon’s friendly confines for much of the past century, free of the protests about noise, exhaust and odors that bedeviled neighboring communities. Largely free, too, of the hordes of pesky residents that can make it so difficult for industry in California towns.

But these days, the party seems to be ending.

Hit by the recession and a series of ill-fated investments that have cost the city millions, Vernon has moved to raise taxes and has jacked up its electricity rates by about 40% in recent years, bringing them much closer to what utilities across the region charge.

Vernon’s biggest businesses, including Farmer John, Gavina Coffee and Owens Illinois, have in recent weeks slammed the city and issued dire warnings. Some business leaders are threatening to move their operations out of the city because they say the costs of doing business there have become too high. Others have called on city leaders to consider declaring bankruptcy to get out of Vernon’s bad investments.

Just a year ago, many of these same businesses were rising to Vernon’s defense when the state Legislature considered disincorporating the city of just 100 residents after a series of public corruption scandals. Back then, the companies argued that disincorportion would ruin the local economy and that Vernon City Hall — while tainted —was good for business.

Now, business leaders say they feel betrayed.

“John Pérez has to be laughing,” said Doug Rawson, chief executive at a local printing company, referring to the Assembly speaker who sought to dissolve Vernon last year. “In retrospect, I think he was right. I think the city is poorly run.... I think we made a big mistake.”

Peter Corselli, manager at a large Vernon cold storage business, traveled to Sacramento last year, lobbied legislators and even appeared in a television advertisement promoting Vernon as “a place where business works.”

“It’s a very ugly feeling,” Corselli said in an interview. “I feel like I was suckered. I feel like I wasted my time…. At the rate they’re going with these increases, this is just not a sustainable city.”

The outcome of the dispute could reverberate well beyond Vernon’s borders.

The 1,800 businesses there employ 50,000 people and generate about $1 billion in taxable sales annually, according to a report commissioned by the city. Vernon also accounted for 15.3% of Los Angeles County’s food industry employment, 10.7% of its apparel-related jobs and 5.5% of furniture employment, the report said.

Some of the businesses threatening to reduce operations in Vernon said they might do more of their work out of state. Farmer John, for example, has suggested it could move some of its production to the Midwest.

Vernon officials reject the idea of bankruptcy but say they have no choice but to seek more revenue. In addition to rate increases, the city has placed a utility user tax on the November ballot to help balance the budget. Officials said the once-sizable reserve that the city for years tapped to keep rates low is largely depleted.

“I know it’s painful,” said Michael Ybarra, a newly elected member of Vernon’s council. “But we need to work on it, and in the short term I don’t know if we have much of a choice.”

John Van de Kamp, a former California attorney general who works as Vernon’s ethics advisor, told businesspeople at a council meeting earlier this month that the city’s finances needed to be “brought into balance” and that all sides needed to consider what sacrifices they were willing to make.

“The question I think everyone here has to face … is what kind of city do you want to have? What kind of services do you want to provide and how are you going to pay for them?” he said.

While all cities have been hit hard by the economic slump, Vernon’s problems have been compounded by a series of investments made through its Light & Power Department.

Businesses are particularly angry at a $431-million hedge on a long-term supply of natural gas that Vernon purchased several years ago. Under the deal, the city locked in the bulk of its purchases at $7.50 per unit. But prices have fallen significantly since then, creating huge losses for the city. Last year, the price of natural gas fluctuated around $4 per unit.

Now, it sits at just over $2.50. A top Vernon official estimated that the city is losing $25 million to $30 million a year on the agreement.

Over the last decade Vernon also became heavily involved in the municipal bond market, issuing more than $1 billion in bonds to pursue new projects and refinance existing debts.

But the derivative instruments used by the city to try to lower its interest expenses backfired during the credit crisis, and the recession drove down revenue in its general fund. The Times reported last summer that Vernon had lost more than $130 million in net assets over six years. L.A. County auditors who reviewed Vernon’s books after that article appeared found that the city’s general fund had consistently operated at deficits of $20 million to $25 million.

During the same period, Vernon increased its spending on employee compensation. Between 2006 and 2010, four officials took home annual pay of more than $750,000, including Eric T. Fresch, who made as much as $1.6 million in 2008.

Those same four officials oversaw Vernon’s natural gas hedge, which it entered in 2006. Experts said the investment, which was hailed by a trade publication as the “deal of the year” at the time, was unusual for the length of time it covered. The impacts of the hedge and Vernon’s other investments are expected to be addressed in a state audit of the city’s finances scheduled for release later this week.

Business leaders say the losses on the deal have driven up the cost of power, and they have questioned the city’s decision to enter it in the first place.

“Who in the world would do this?” said Ebrahim Simhaee, president of Crown Poly, a large plastic manufacturer in Vernon, at a recent city meeting. Simhaee and others want the city to look at having Vernon’s power department declare bankruptcy to get out of the deal.

Carlos Fandino, the head of the department, called the hedge “a bad decision at the time, if you’re Monday morning quarterbacking.” He said that he’s trying to renegotiate the agreement but that bankruptcy is not an option.