Vernon, California, voters this month ended the industrial city's practice of using a utility fund to close deficits.
Voters approved Measure R on April 10 in a 31-16 vote, with 61% of Vernon’s 87 registered voters casting ballots. Moody’s Investors Service called passage of the measure a credit positive for the utility in a report on Monday.
Though the city five miles south of downtown Los Angeles has a population of 211, the 1,700 businesses located there employ 55,000.
Cash transfers from the utility historically accounted for about 25% of total inflows to the city’s account; without the payments, the city would have a substantial deficit each year, wrote Gayle Podurgiel, a Moody’s analyst.
The city projects the 6% tax on industrial utilities' consumption will add about $12 million annually to its general fund until it expires in 10 years.
Over the past five years, payments to the city from the electric utility have averaged $13.4 million a year, or about seven percent of the utility's operational revenue, Moody’s analysts wrote.
“The tax is credit positive for Vernon Electric Enterprise’s electric revenue bonds, because the tax revenue is earmarked to replace money currently supplied by the electric utility,” Podurgiel wrote. “Additionally, this legislation is further evidence of the city's multi-year reform initiative to strengthen its governance practices.”
A measure that would have placed the 6% tax increase on residential users as well as industrial and commercial users failed last year. The new tax on electricity, gas, telecommunications, and water utility services excludes residential customers.
The measure increases the utility user tax from 1% to 6% to equal or exceed the existing operating transfer from the utility to the general fund. The change means the city government side should be able to sustain itself without transfers from utility enterprise operations, according to the ballot measure.
Moody’s cited weak financial metrics and the general fund’s reliance on the transfer in downgrading the utility’s bonds from Baa1 to Baa3 and giving them a negative outlook on Oct. 18, 2016.
In that report, Moody’s analysts estimated that 27% of the general fund budget came from the transfer and that the city would have a large deficit without it.
S&P Global revised its outlook to negative in December, while affirming its A-minus rating.
The electric utility had $368 million of debt outstanding as of June 30, 2017, and serves 1,916 customers, according to audited financial statements posted Jan. 4 on the Municipal Securities Rulemaking Board’s EMMA website.