Vernon, the Los Angeles-area city nearly disincorporated by the California Legislature in September, has received two divergent ratings on its $471 million of outstanding electric revenue bonds and a $73 million electric revenue bond issue planned for Wednesday.
Standard & Poor’s affirmed the A-minus on the city’s electric revenue debt on Nov. 23 with a stable outlook. But Moody’s Investors Service downgraded Vernon Electric Enterprise on Dec. 6 to Baa1 from A based mainly on declining revenues, while also giving it a stable outlook.
“This downgrade is due to financial operations, which just deteriorated independently of the other issues,” said Moody’s Kevork Khrimian.
Bond proceeds from the $38.7 million first series will fund routine capital improvements, while the $33.5 million second series will restructure bonds issued in 2009 to improve cash flow, according to the S&P report.
Moody’s downgrade reflects weaker-than-expected operating results for 2011 and analysts’ expectation that similar results are likely to persist at least through 2014.
The utility’s power demand is stagnant and has fallen significantly short of projections, the report noted.
In 2009, Vernon’s electric system had projected 2011 operating revenues of $162 million and net revenues of nearly $78 million, but actual revenues for 2011 are $76 million, the report said.
The defeat and aftermath of AB 46, which would have disincorporated the city, had minimal affect on the rating, according to Khrimian.
The bill was defeated in September after Sen. Kevin De Leon, D-Los Angeles, raised concerns that dissolving the city could result in job losses. Simultaneously, De Leon recommended a series of reforms to improve oversight and transparency that were approved by voters in two separate ballot efforts held in November.
Over the past several years, state lawmakers and local politicians have complained that a small group of Vernon officials determined who could live in the houses in the sparsely populated city of 112 and ran the city without feedback from the voters. The 5.2-square-mile municipality is home to 1,800 businesses.
Among the measures approved by voters was a requirement that officials fill vacancies on the City Council through a special election rather than by appointment. Other voter-approved changes to the city charter included requiring competitive bidding on contracts, retaining an independent reform monitor for four more years, and maintaining a housing commission.
Over the past two years, three of Vernon’s former senior officials have been convicted of crimes relating to city activities — the mayor for voter fraud and conspiracy, the city administrator for misappropriation of funds, and the director of light and power on a felony conflict of interest charge related to the hiring of his wife as a contractor. None are currently employed by the city, and salaries have been adjusted to levels comparable to other California cities.
Standard & Poor’s analysts said that those events and the subsequent reforms “do not have a material impact on the credit quality of Vernon’s electric system.”
Rory Burnett, the city’s finance director, said Moody’s downgrade was not a surprise, considering the economy and the state of politics in the city over the past two years. He found it hard to believe that the turmoil in city politics — and the threat of disincorporation — had no impact on the ratings.
“Moody’s upgraded us a level two years ago, so they just took it back,” Burnett said. “There was no change in the S&P rating and that report was glowing.”
The positive attributes that Standard & Poor’s highlighted included the city’s willingness to raise electric rates, and that its current rates of 12% to 55% are below those of competing municipalities.