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California

Pete Peterson
The Hong Kong of Los Angeles County?
What a politically corrupt city might teach California
17 July 2011

For decades, most Angelenos have known that something was not quite right in Vernon. A 5.2-square-mile city situated in the southern shadows of downtown Los Angeles, a scant few miles from the now infamous Southland cities of Bell and Maywood, Vernon is a company town—or, rather, a companies town. At last count, 1,800 businesses had operations in Vernon, employing over 55,000 people in mostly blue-collar jobs. Yet the city has just 97 residents. A larger, more engaged populace might possibly have prevented Vernon’s public officials from committing a shocking amount of malfeasance recently. The city manager, Bruce Malkenhorst, pleaded guilty in May to illegal use of public funds after investigators for the L.A. County district attorney found that he’d received more than $60,000 in city funds for personal use and was drawing the state’s highest pension (over $500,000 per year). Malkenhorst’s plea followed the 2009 conviction of Vernon’s mayor, Leonis Malburg, for voter fraud. Donal O’Callaghan, the city’s top administrator until mid-2010, was indicted in October for illegally putting his wife’s company on the city payroll. And the city council recently voted to continue receiving salaries of around $70,000 per member per year—nearly the highest in the state.

Vernon’s disturbing resemblance to Bell has provoked bipartisan ire from the state capital. Led by California’s Democratic Assembly speaker, John Pérez—whose district includes Vernon—a number of Assembly Democrats and Republicans have proposed stripping Vernon of its incorporation. If passed, Pérez’s bills, AB 46 and AB 781, would dissolve the municipality, including its city council, and turn it into a Community Services District (CSD) under the jurisdiction of Los Angeles County. Led by representatives of the County Board of Supervisors and local business owners, the CSD would oversee public services—including police and firefighters—as well as the Vernon electric district, which provides local industries with cheap power.

Pleading the good-government case, Pérez and his allies argue that a town with only a few dozen voters and a long history of municipal corruption can no longer be entrusted with governing responsibilities. Not lost in the ongoing machinations over Vernon’s fate, however, is the prospective revenue windfall for whatever government gets to take Vernon over. “So why is Vernon the target of so much passion for change?” asks the left-leaning Los Angeles Times in a recent editorial opposing the disincorporation plan of AB 46. “Possibly wrath over the misdeeds in town, but the city’s business leaders and officials point, with some justification, to Vernon’s nearly $300-million-a-year tax base, which has been eyed hungrily by several surrounding municipalities.”

A recent study by former state finance director Mike Genest concluded that disincorporation would result in a 20 percent to 40 percent increase in overall costs (composed of utility rate increases, taxes, and insurance) to Vernon’s manufacturing base. For small- to medium-size industrial businesses operating on tight margins, such costs would be unsustainable. The study projected that if the original legislative plan (AB 46) were to go forward, over 11,000 jobs would be killed, resulting in $1.5 billion in lost revenues and $42 million annually in vanished local and state tax revenues. Such predictions have led an improbable coalition of Vernon’s business and union leaders to fight disincorporation. “Disincorporation can’t be on the table, period,” Ed Rendon, a Teamsters public-relations official, told the Los Angeles Times recently. In a press release, the leader of Vernon’s chamber of commerce, Marisa Olguin, argued: “No matter how Speaker Pérez tries to sugar coat it, AB 46 and AB 781 will result in the loss of jobs, cause business taxes, property taxes, insurance rates and electrical rates to increase and result in higher crime throughout the region and less environmental overview.”

Behind legislative resistance to the disincorporation measures is the unstated fact that many lawmakers—Democrats and Republicans—would like to save Vernon’s industries from assuming the tax and regulatory burdens that thousands of other businesses face outside this tiny, commerce-friendly haven. Fact is, California is losing its manufacturing base at a steady clip, leaving thousands of people jobless, in large measure because of state regulation and taxation. Yet the same legislators who approve laws such as AB 32, which would impose even greater regulatory burdens on businesses in the name of combating climate change, cannot make the link between California’s persistently high unemployment rate and the policies they favor.

The right way forward might come in a modified Community Services District plan. The body could be led, not by the county, but by a board made up of residents and business and union officials. Ralph Shaffer, professor emeritus at Cal Poly–Pomona, argues that such a body is more likely to pass constitutional muster than Pérez’s current scheme. “The Speaker’s aides plead that it may be unconstitutional to allow non-residents to elect a governing board,” Schaffer wrote at Fox & Hounds Daily. “That’s true in an incorporated city, but Vernon won’t be a city. As a CSD, it can elect its board any way the legislature deems appropriate. And nothing is more appropriate than election by owners and workers.”

If the legislature could pass a plan along the lines of a special Community Services District, it would set a useful precedent for creating similar districts throughout the state—perhaps one per county or region, placed strategically. We might approximate the Chinese program of “One country, two systems,” which permitted the capitalist expansion of Hong Kong and Macau underneath a socialist umbrella. In the Chinese framework, these two entities were given a unique “Special Administrative Region” designation, permitting them to continue with free trade, keep taxes low, and retain legal systems that defend property rights. California might similarly create “Special Industrial Regions” along the lines of what Shaffer proposes, governed by boards of residents, workers, and owners with more commerce-friendly tax and energy policies. That might be a way to keep more “gold”—and industry—in the Golden State.

Pete Peterson is executive director of the Davenport Institute for Public Engagement and Civic Leadership at Pepperdine’s School of Public Policy.

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