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Vernon's Debt Vexes L.A. County

LOS ANGELES — A high-profile bill in the California Legislature would disband the city of Vernon, handing the industrial hub and its 50,000 jobs to Los Angeles County. But county officials are increasingly uneasy about Vernon and its $511 million of bond debt.

California State Assembly Speaker John Perez, D-Los Angeles, introduced legislation this year to disincorporate Vernon, which has been marred by allegations of corruption. That effort faces increasing opposition as the clock runs out on this year's legislative session.

Members of the Los Angeles County Board of Supervisors expressed opposition Tuesday to the two Vernon bills, after reviewing a six-page report they requested from county staffers that indicates that the county could be liable for Vernon's estimated half-billion dollars in debt obligations and its harder-to-quantify derivatives exposure.

County supervisors ultimately postponed a vote, instead going into closed session to discuss the impact Assembly Bill 781 could have on county coffers if the legislation passes.

When Perez initially proposed legislation in late 2010 to disincorporate the beleaguered city through AB 46, county supervisors were initially supportive.

It was the second piece of legislation, AB 781, introduced a few months ago to implement a disincorporation, that has drawn doubt from county supervisors, worried that their general fund would become the backstop for Vernon's obligations.

"We can barely keep up with the other unfunded mandates that the state and federal governments have already imposed on us," said County Supervisor Zev Yaroslavsky. "We don't need another one."

AB 46 sailed through the Assembly, but the bill has found slower going in the Senate. AB 781, which would create a community services district in place of Vernon's city government, was introduced in response to an outcry from the 1,800 business owners located in Vernon, according to John Vigna, Perez's press secretary.

"The speaker has been speaking with senators and has been able to curry additional support for the bill," said Vigna, adding that Perez remained optimistic he could usher the bill through before the session ends Sept. 9. "We don't view the legislation as an unfunded mandate. We view it as cleaning up corruption."

State lawmakers have been working with county representatives in Sacramento to make sure that county officials would have the tools they need to govern the district, Vigna said.

Vigna contends there is no need to rush because Vernon is not currently on the verge of collapse, but considering how overleveraged its bond debt is, if it continues on its current path it could collapse.

Because the county governs unincorporated areas, it would end up dealing with Vernon's fiscal problems if a crash occurred, Vigna said.

Perez now also faces opposition from the bill's former co-author. Sen. Kevin de Leon, head of the Senate's Democratic caucus, withdrew his support for the bill on Tuesday, saying he would help Vernon retain its city status if officials agreed to significant reforms, according to an AP report.

The county supervisors said they agree that reform needs to come to the small. largely industrial city, which has seen its reputation marred by the convictions of three former top officials on charges of misusing public funds.

Complaints by Perez' constituents in cities surrounding Vernon about air pollution from the city's power plant brought to light last year the illegal practices that city leaders have been engaging in for decades, Vigna said.

Allegations include rampant cronyism, the illegal use of public funds, voter fraud, and bloated salaries and pensions, he said.

Vernon, the smallest city in California by population, has only 96 residents, virtually all of whom live in heavily subsidized, city-owned housing, and are either employed by the city or connected to city officials, Vigna said.

Current state law requires that a city have at least 150 residents to incorporate. If Vernon sought to incorporate as a new city today, it would not have enough residents to meet the state's requirements.

The entire housing stock is controlled by the City Council and the city has not held contested elections for the council in more than 25 years, according to Vigna.

If AB 64 and AB 781 are not approved by Sept. 9, the legislation could carry over into next year's session.

That is exactly what the county supervisors said they would like to see happen.

"This should be a two-year bill," said Los Angeles County Supervisor Michael Antonovich. "I don't think this has been well-thought-out enough."

The county staffers' report only amplified the county supervisors' concerns about taking on Vernon's debt. Staffers compiled the report following a request last week from supervisors.

If legislation passed, county supervisors would become the acting board of directors for the community services district, and also would be responsible for the city's redevelopment agency.

The treasurer and tax collector identified four outstanding long-term debt obligations and at least two interest rate swaps, said Glen Byers, the county's assistant treasurer and tax collector.

"We have been able to determine that $510 million in bonds are outstanding and $66 million in CRA [community redevelopment agency] bonds are outstanding," Byers said. Vernon's power utility has $444 million in electric system revenue bonds outstanding.

The redevelopment debt is complicated by the ongoing legal battle over redevelopment statewide, the report noted. Redevelopment interests have challenged recently adopted legislation dissolving RDAs that don't make a payment to the state.

Vernon's share is $4.9 million. If the city's redevelopment agency is dissolved, a successor agency — which county officials have interpreted to be them — would be responsible for the outstanding bond debt.

Los Angeles County officials, who have struggled like other municipalities to maintain a balanced budget, said they do not want fiscal responsibility for a city that has an operating deficit of $33.4 million for 2009-10.

The woebegone city also has a negative unreserved fund balance of nearly $11 million.

According to the report, Vernon expenditures have exceeded revenues by amounts ranging from $20.6 million to $3.4 million over the past five years. The deficits were managed by using fund balance reserves, selling real estate assets, and transfers from other funds.

"Vernon has significant amounts of long-term debt and has entered into contractual commitments known as interest- rate swaps," the report states. "In addition, natural gas has been advance-purchased and an estimated $311 million of Enterprise Fund Assets consist of prepaid natural gas."

County staffers added that there are long-term risks associated with the utility operations that will require access to Vernon's records and evaluation by someone more knowledgeable about interest rate swaps.

Staffers compiled the report by accessing online audited financial statements for the past five years.

In the time allotted, county staffers said they were unable to meet with Vernon officials.

Staffers warned the county supervisors that even if more time had been available to do a more detailed report, Vernon officials would probably be as unreceptive to opening their books to county review as they were when state officials made the request under California's open document regulations.

"We have to know every detail about what the county is going to be liable for. I have been told that the Assembly speaker can't get a response from the city of Vernon to his request for information under the public records act," said Yaroslavsky, the county supervisor. "The press has had just as bad of luck. If they can't get answers to these questions, then how can we?"



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