Vernon to Pay Price For Independence?

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The old adage, “Be careful what you wish for,” might apply to Vernon’s business community.

After companies there successfully battled to keep the industrial city southeast of downtown Los Angeles from being taken over by Los Angeles County, they now acknowledge there will be a big price to pay. The question is just how much.

Recent revelations of bad debts at Vernon’s utility and a city agreement to pay off neighboring communities for years of pollution have dampened any celebrations. That’s because companies in Vernon – a town with only about 100 residents but more than 1,800 businesses – will likely have to pick up the tab in the form of higher utility bills and other city assessments that businesses didn’t know about until recently.

The big question is whether those costs will be so high as to negate what made Vernon so attractive in the first place; it was known as a rare industrial haven in the county with low taxes and utility rates. If costs go way up, the city may lose its status as a refuge for businesses.

But for now, at least, most are glad to take the deal.

“We all viewed becoming … governed by the county as a death sentence,” said Juliet Goff, president of Kal Plastics, a plastic form molding company in Vernon. “While I’m concerned about potential increased costs and the accompanying uncertainty, it’s still way, way better than the alternative.”

Just how high will those costs climb? It was revealed recently that Vernon and its energy utility have racked up about $500 million in debt in the last several years, mostly from bonds issued to pay for long-term natural gas contracts.

Some of the cost may be refinanced or renegotiated, but a big part will be passed on to the 1,800 businesses. Whatever does get passed on will come on top of electric power rate hikes totaling about 40 percent over the next six years planned to cover debts. Taken together these hikes could reach $277,000 per business.

Meanwhile, the Vernon City Council just two weeks ago approved the creation of a community benefit fund designed to compensate neighboring communities for pollution and traffic impacts created in Vernon. It’s likely that Vernon businesses will pay the lion’s share of those costs, but the size of the fund hasn’t been discussed.

And then there’s the $5 million cost of the nine-month campaign to defeat the legislation to dissolve the city by Assembly Speaker John Perez, D-Los Angeles. Most of that tab, too, will be picked up by businesses. That alone works out to $2,800 a business.

“The fight against disincorporation is over and a major victory has been achieved, but it came at a cost,” said Marisa Olguin, chief executive of the Vernon Chamber of Commerce. “Companies must now understand that a price is going to have to be paid.”

But Vernon business leaders are convinced that the costs will still be less than they would’ve faced if the city had been disbanded. The two-bill package would have made Vernon a community service district governed by the county.

Stopped Perez

Kal Plastics’ Goff said she still can’t believe that the business community prevailed and stopped the Perez bills.

“When we started, we were told that we could not defeat the speaker of the Assembly, that we didn’t have a chance,” she said.

But the business community and its hastily assembled lobbying team focused on the threat of job losses if Vernon were dissolved. They targeted a handful of state senators, especially L.A. Democrats Kevin DeLeon, whose district includes Vernon, and Ron Calderon, whose district covers an area nearby.

“We presented Calderon data that showed 11,000 of his constituents worked in Vernon and told him that if the disincorporation bill passed, many of those people would be forced out of their jobs,” said Olguin, chief executive of the Vernon chamber.

The key was getting DeLeon, who had initially co-sponsored the Perez legislation, to switch sides. The chamber arranged three tours for DeLeon to meet Vernon businesses.

DeLeon ultimately opposed the Perez bills, but his support came with a price: Vernon had to agree to create housing to increase its residential population and set up a community benefit fund. Two weeks ago, the City Council agreed to do so. Just days later, on Aug. 29, the Perez bills were defeated in the state Senate, garnering just 13 votes in favor.

“We are very pleased with the outcome of the Senate vote,” said Lisette Gavina Lopez, who represents F. Gavina & Sons Inc. custom coffee roasters. “Sens. Kevin de Leon and Ron Calderon stood up for the workers, businesses and residents of Vernon to save the city from being wiped off the map.”

Rate hikes

Now, Vernon businesses are focused on shaping city policies, especially with regard to utility rates and reform. Several business leaders are members of a special committee set up earlier this year to deal with the utility’s debts.

Vernon is known for its low utility rates. In 2010, the Business Journal compared what companies paid for electricity in Vernon and what they would pay the Los Angeles Department of Water & Power or Southern California Edison. One company that paid $30,000 per month to Vernon’s utility would have paid $40,000 to the DWP and $46,000 to Edison.

With the committee’s input, the utility in June raised electricity rates 8 percent for this year, 8 percent for next year and 5 percent in subsequent years through 2017.

The 40 percent rate hike would bring Vernon’s utility rates above DWP and near Edison’s. However, the two other utilities are planning rate hikes, too, and Vernon would still be competitive, although by not as much.

But since then, more extensive debts have come to light, mostly involving long-term purchases of natural gas made two years ago. Last week, the Los Angeles Times reported the Internal Revenue Service had opened an investigation into the bond sale used to finance those purchases. Whatever the outcome, additional utility rate hikes are likely.

But business leaders believe when all is done Vernon’s power rates will still be 20 percent to 30 percent less than the DWP’s and Edison’s, based on the fact that the other utilities also plan rate hikes.

Just as important, Vernon business leaders say, is preservation of the city’s fire and police services, with their quick emergency response times and thorough knowledge of local industrial facilities.

Tough sell?

Looking ahead, the chamber’s Olguin said one of the keys to keeping utility rates in check and lessening the impact of the community benefit assessment will be the city’s ability to attract more businesses.

“More businesses means more ratepayers, which means we won’t have to raise rates as much on the businesses already here,” she said.

But convincing businesses to set up shop in Vernon will be tough, experts say. Because of the high-profile fight over dissolving the city, Vernon now has a national reputation for corruption among former administrators.

“Vernon was the bastion of politicians behaving badly before the disincorporation effort began,” said Jessica Levinson, professor at Loyola Law School in Los Angeles. “The city has taken some steps to change this, but they haven’t eradicated that reputation.”

Levinson said that with the corruption and higher business costs, Texas may still be able to market itself as an attractive alternative.

Larger manufacturers especially may shy away from Vernon, according to Larry Kosmont, an L.A.-based economic development consultant.

“Large utility users will be especially concerned about the power rates and the IRS audit definitely does cast a pall,” Kosmont said.

But Vernon is still cost-competitive for small and midsize companies.

“Vernon has to market itself as a small, responsive city that is high on service levels and low on costs,” he said. “If they can do that, they may be able to counteract the cascade of negatives that have been pinned to Vernon as part of its fight for survival.”

In the meantime, business owners in Vernon say the recent fight to keep the city intact has had an unintended benefit: After decades of basically ignoring their government, businesses are much more engaged in shaping city policies.

“This threat awoke the Vernon business community,” Goff said. “We will stay on the watch now.”

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