From Bad to Worse: IRS Takes a Look at Vernon's Finances

The last few weeks have been tough for Assembly Speaker John Perez's effort to destroy the Los Angeles County city of Vernon. With the revelation that the embattled town had run up hundreds of millions in debt as a result of foolish energy speculation, many of AB 46's biggest supporters, including the County's Board of Supervisors and state Senator Kevin de Leon, have backed away from the measure. It seems they've realized that wiping out thousands of jobs and incurring the wrath of organized labor aren't acceptable costs if the county will be taking on sizable debts in addition to tax revenues. And the deal may be about to get even worse for LA County, with news that the IRS is auditing Vernon's 2009 issuance of $419 million in tax-exempt bonds.

The 2009 issue goes back to the city's fateful decision to purchase a 15-year supply of natural gas back in 2006. When the market price fell far below the fixed rate Vernon had agreed to, and the derivatives trades it was banking on fell apart in 2008, the city chose to issue the new debt as a way to pay down the remaining debt on the 2006 purchase. Effectively, it was like refinancing a loan (in this case, a $431 million loan). While they haven't offered specifics to the press, the IRS believes the 2009 issue may violate restrictions on tax-exempt debt. Tax-exempt bonds are typically issued for things like major construction projects and infrastructure development. While Vernon is confident that it hasn't violated any laws, they could be in big trouble if they're wrong. If the IRS determines that paying down prior debt isn't a "qualified purpose" under the tax code, the city could be forced to pay millions in back taxes to the federal government.