State auditors noting an unusual absence of “key” Vernon leadership during their meetings with the city, said there was instead a “strong presence” by Latham & Watkins, the city’s legal consultants.
State Auditor Elaine Howle, who has served in the California State Auditor’s office for nearly 30 years, said it was “striking” that their meetings with Vernon were “run by Latham and Watkins, not necessarily… by city officials.”
In her experience, consultants in other cities take a backseat to top administrative and elected officials. But in Vernon, attorneys served as the representatives, right down to signing the city’s response to the audit’s findings, Howle said during a public hearing last week in Sacramento.
Howle’s report released on June 28 after a ten-month review painted a particularly grim financial picture of Vernon. Auditors said the city has been living with a structural deficit for at least two decades, had gotten itself into debt over a natural gas deal that went sour, and is now forced to raise its electricity rates because of its poor financial decisions.
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City council members or city administrators usually sign the city’s response to their audits, Howle said. In Vernon’s response, Latham & Watkins attorney David Schindler lashed back, accusing Howle and her team of auditors of “misrepresenting the facts” and displaying a “lack of objectivity.”
During the audit, Latham & Watkins attorneys were responsible for “responding to some of the concerns, or listening, having my staff step out of the room, bringing my staff back in and then responding on behalf of the city,” Howle said.
According to the state auditor’s report, Latham & Watkins’ contract with the city dates back to 2003. The city paid the firm a total of $22 million for its services in the last five years, with fees jumping from around half a million a year to more than $4 million a year starting in 2007 and 2008. One auditor said the firm appeared to serve a “general advisory role” in the city.
As auditors were being steered toward consultants, Vernon’s high-ranking officials themselves appeared to Howle to be unqualified for their jobs. At last Thursday’s hearing, she openly questioned the Vernon finance director’s “ability to understand the complexity of the fiscal situation in the city,” suggesting that he be replaced, along with City Administrator Mark Whitworth, who is also Vernon’s fire chief.
Vernon spokesperson Fred MacFarlane pointed out the decision to replace the finance director or the city administrator would be up to the city council. “I think the city feels that the city council is well within its authority to choose the best, capable person,” he said, but defended the current administrator, saying that he has “conducted himself in fine fashion.”
He also said Finance Director Rory Burnett has “performed ably for the city and will continue to do so as long as the city council believes he’s the right person to handle those responsibilities.”
But even as the city points to the city council’s decision-making powers, auditors last week described Vernon’s elected officials as being ill-prepared to make decisions. They found that budget documents given to the city council hid two decades of general fund deficits, while the risks and benefits of financial investments were never properly explained to them.
From 2004 until 2012, the city issued eight bonds, totaling $1.3 billion, but the council got “little to no information that summarized or explained the fiscal impact and potential risks associated with the bonds,” causing auditors to wonder “who is in charge.”
Most of the over $500 million that remains to be paid back is for bonds taken out to pay for a 15-year supply of natural gas, which the city almost immediately lost money on when the value of gas dipped. The city also seems to have no real use for the supply, since it had sold the Malburg Generating Station, a power plant that the natural gas was supposed to fuel, say auditors.
The losses from the deal also had an impact on the city’s utility company, which has moved to raise rates in the past month, much to the chagrin of the Vernon business community.
Spurred by the possible threat of higher utility bills and taxes proposed by the city, members of the business community, for years preferring to stay out of city politics, have joined city commissions and packed city council meetings in the last year in search of more information on the bonds and the budget that auditors now allege were never properly presented to city officials.
Vernon Chamber of Commerce president, Marisa Olguin, released a statement Wednesday saying that the chamber’s mission is to keep Vernon “economically viable.” They agreed with the state auditor’s recommendations, calling it a “positive roadmap” for future reform. “We feel a stronger demonstration of transparency and a more public/private partnership with the business community is needed in this process,” she said.
During last week’s hearing, legislators again questioned whether Vernon could truly be reformed, to which one of the auditors, Donna Neville said, “It’s never going to be a real city like you imagine with a significant population. One of the things we think could help is engaging the business community more fully… it’s an industrial city and the kinds of services it offers supports industrial activities.”