Bloomberg News

California City Returns to Market After 3 Convicted of Crimes

January 09, 2012

Jan. 6 (Bloomberg) -- Vernon, California, the Los Angeles suburb where two city managers and a mayor were convicted of malfeasance in the past 25 months, triggering a series of audits and investigations, is returning to the bond market.

The city, which is home to 1,200 businesses employing 50,000 people yet has a population of 112, will offer $74.3 million of securities backed by revenues from its municipal utility, according to a prospectus. The bonds, to be sold as soon as Jan. 10, will be used to finance upgrades to Vernon’s electric grid and pay interest and principal on a 2009 issue.

The 5-square-mile (13-square-kilometer) community, which fought off efforts by state lawmakers to dissolve it last year because of alleged corruption, is one of at least three California cities set up specifically as manufacturing hubs more than 100 years ago.

“Operating results are on the low side, relative to other utilities,” said Kevork Khrimian, an analyst for Moody’s Investors Service, which lowered its rating on the city’s $476 million in electric enterprise bonds to Baa1, the third-lowest investment level, from A3 on Dec. 6.

The downgrade reflected the city’s “stagnant” power demand, high debt burden and obligation to purchase natural gas under a long-term contract, according to a Moody’s report.

Tax-exempt electric revenue bonds Vernon issued three years ago and maturing in 2021 traded yesterday at a price that yielded the investor an average of 4.52 percent, or about 50 percent higher than a Bloomberg index of 10-year power bonds.

Mayor Convicted

Leonis Malburg, Vernon’s mayor for 50 years, was convicted in December 2009 of charges including voter fraud for falsely claiming residence in the city. Last May, former City Manager Bruce Malkenhorst pleaded guilty to taking $60,000 in city money for personal expenses, the Los Angeles County District Attorney said in a statement at the time. Donal O’Callaghan, another former city manager, pleaded guilty in July to conflict-of- interest charges, according to a statement from the district attorney’s office.

Anthony Murray, an attorney for Malburg, and Mark Werksman, who represented 0’Callaghan, declined to comment. Jeffrey Wittenberg, a lawyer for Malkenhorst, said he couldn’t immediately respond.

California Assembly Speaker John Perez, a Democrat from Los Angeles, pressed for legislation last year that would have disincorporated the city due to its history of public corruption. Vernon’s City Council passed reforms that included adjusting public employee salaries to match comparable municipalities and appointing an independent ethics adviser. Local union and business leaders lobbied against disincorporation, saying it would cause businesses to flee, and the state Senate in August rejected Perez’s proposal.

‘Stronger City’

“Despite what anyone inside or outside of the City of Vernon might say, the changes enacted over the past 12 months to implement a series of municipal reforms have made Vernon a stronger city and more unified community,” City Administrator Mark Whitworth said in a Dec. 23 statement.

Whitworth, who also serves as Vernon’s fire chief, has worked for the city’s fire department for 22 years.

The Internal Revenue Service completed an examination of $419 million of Vernon’s electric revenue bonds issued in 2009 with no change to the position that the interest received on those bonds is tax-exempt, according to a statement and copy of the IRS letter released by the city Dec. 22.

Vernon is still the subject of at least two audits and investigations, according to the offering statement. The California Public Employees’ Retirement System is auditing the city’s member enrollment and compensation to see if it’s in compliance with state law. The state Bureau of Audits is examining the Light and Power department’s operational structure and compensation.

--Editors: Pete Young, Jeffrey Taylor

To contact the reporter on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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