This week, State Controller Betty T. Yee announced that her office would investigate the financial practices of the 12-square mile municipality, which has come under fire for awarding $326 million in taxpayer-funded contracts to businesses owned by a former mayor and his family.

“Our initial review shows significant discrepancies between the financial transaction reports submitted to my office and the city’s audited financial statements,” Controller Yee said in a press release. “As the state’s chief fiscal officer, I have the duty to bring my office’s expertise to bear to identify potential misuse of taxpayer dollars.”

The audit will begin with a review of local, state and federal programs administered by the city dating back to 2012. Yee’s office alerted city officials that it reserves the right to broaden its investigation at a later date.

$326 million paid to former mayor’s businesses

Earlier this year, an outside, limited-scope audit conducted by KPMG found that, over the past two decades, the city had awarded $326 million in government contracts to former mayor David Perez and his family. The city, which has just 99 registered voters, generates $140 million in annual revenue. Much of the city’s revenue comes from taxes paid by roughly two thousand businesses that have set up shop in Industry to avoid the high taxes and regulatory burdens of surrounding cities. 

According to the San Gabriel Valley Tribune, which first obtained a copy of the KPMG audit, the City of Industry paid one company $133,000 a month for street sweeping and parking lot maintenance — a rate that is six times higher than the city’s current contract. In one case, the company, which is partially owned by the former mayor, billed taxpayers “the equivalent to six street sweepers running for a total of 216 hours in one week.”

In addition to outrageous billing, the audit revealed that the city paid out $7 million arising from a sexual harassment lawsuit and water fine by Zerep Management Corporation, the company owned by the former mayor and his family members.

“This is crony capitalism at its worst,” Douglas Johnson of the Rose Institute of State and Local Government, told the San Gabriel Valley Tribune. “This isn’t why cities exist. They exist to provide service and structure, not for the benefit of one family conglomerate.”

City of Industry’s checkered past

Corruption at the City of Industry has been an open secret for years. In 2009, the Los Angeles Times detailed the by then self-dealing Mayor Perez.

“Everyone who does business in the city of Industry is required to sign up with Mayor David Perez’s company,” read the opening sentence of a 2009 investigation by Los Angeles Times reporter Rich Connell. “For years, a firm partly owned by the mayor has held an exclusive, multimillion-dollar franchise to pick up trash from the warehouses, manufacturing plants and other commercial enterprises packed into this oddly configured, avidly pro-business San Gabriel Valley city.” 

Perez and his family have maintained control over the city, which rarely holds elections and instead hands off City Council seats to one of the 400 residents. The city currently has just 99 registered voters. In previous years, residents have claimed “to live in churches, houses that can’t be found.”

“If this were the old Soviet Union we were talking about – or current-day Russia, for that matter – we would understand that we’re not really dealing with a democracy here,” the local newspaper editorialized in 2012. “It’s an oligarchy, a clique of family and friends with enormous sums of money at stake.”

In 2009, the Los Angeles District Attorney’s Office opened an investigation into claims that elected city officials had filed fraudulent voter registration forms and were residing outside of the city. However, that investigation concluded without charges being filed. 

“I can’t say that we absolutely were sure that all the city officials really lived where they said they lived, but I know we didn’t seek criminal charges,” Dave Demerjian, the then-head of the D.A.’s Public Integrity Division, told the San Gabriel Valley Tribune’s Ben Baeder.

Antonovich, Solis demand answers

This time, the scandal appears to have reached a critical mass of support to finally force the City of Industry to clean up its act. On Tuesday, the Los Angeles County Board of Supervisors, led by Supervisors Hilda Solis and Michael Antonovich, stepped into the fray by demanding a grand jury investigation.

“The recent audit of expenditures by the City of Industry revealed millions of dollars in questionable payments to the former mayor and his family members,” the L.A. County Board of Supervisors stated in its draft motion. “Given the magnitude of the audit findings, a Grand Jury investigation into possible corruption and back-room deals is warranted.”

The Los Angeles County District Attorney’s Office launched an investigation into the matter last Friday, according to the Pasadena Star-News.

The scandal in Industry is only the latest in a long line of Southern California municipal corruption cases. In 2010, the tiny city of Bell was caught paying city employees excessive salaries. Earlier this year, a former employee at the city of Pasadena was arrested as part of a 60-count indictment for embezzling $6 million in taxpayer funds.

(Editor’s Note: The first part in a two-part series on how California’s regulations affect the global economy.)

July 26, 2012

By John Hrabe

Regulations are killing California’s global competitiveness. Or, so you’ve heard from policymakers left, right and center.

“Our environmental regulatory system is obsolete, duplicative and burdensome in many areas, which is hurting our business community’s ability to thrive and compete in a global marketplace,” lamented Assembly Majority Leader Charles Calderon, D-Industry, in an opinion piece at Capitol Weekly.

Republican U.S. Senate candidate Elizabeth Emken repeated the complaint a few weeks later.

“Thanks to over-taxation, over-regulation and over-litigation, American companies are at a distinct competitive disadvantage,” Emken wrote in her policy paper on regulations. “This disproportionate cost on small business causes inefficiencies in the structure of American enterprises, and the relocation of production facilities to less regulated countries, adversely affecting our ability to compete in the global marketplace.”

“California has a daunting task to regain its competitiveness,” complained Loren Kaye, president of the California Foundation for Commerce and Education, in a blog post entitled, “Job Killing Bills Hobble California in Global Competition.” The piece continued, “It can’t be a leader in the global economy if it interferes in the global marketplace.”

While there’s some truth to the cliché, it’s not the whole story. Increasingly, it’s the regulations themselves that are being exported globally.

That makes the story of California’s over-regulation even more troubling. Unelected bureaucrats on obscure boards in Sacramento are establishing regulations for the world—in many cases based on weak or contradictory scientific data that is selectively edited by special interest groups.

“The regulatory field has a lemming-like attitude, often reflecting biases,” Dr. F. Peter Guengerich, the interim chairman of the biochemistry department at Vanderbilt University School of Medicine, told CalWatchDog.com.

Prop. 65: Hazardous Substance Warning Label

To understand the increasingly global nature of California’s regulations, consider the case of a chemical compound that you’ve likely never heard of and probably can’t pronounce, 4-methylimidazole or 4-MEI. It’s a common byproduct of the cooking process and gives sodas their caramel color.

In March 2009, regulators at the Office of Environmental Health Hazard Assessment, a department of California’s Environmental Protection Agency, began the process of adding the chemical to a list of potentially harmful substances. Products that contain chemicals on the list must carry warning labels about their potentially harmful effects. Voters created the process with passage of Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of 1986.

“Prop. 65 is primarily a right to know law that provides information about exposure to listed chemicals that the public can use to make informed choices,” explained Sam Delson, deputy director of the Office of Environmental Health Hazard Assessment.“The addition of 4-MEI to the Prop. 65 list does not ban it from use in California or anywhere else.”

Of course, who wants to buy something that warns of death on its packaging?

4-MEI Does “Not Represent a Risk”

A substance can be added to the Prop. 65 warning list through one of four ways, including if it has been flagged by any “authoritative body” chosen by an unelected state committee. Some legislators say that this process deserves greater scrutiny.

“As Vice-Chair of the committee of Toxics and Environmental Safety, I have had a front row seat to the show which is legislating the use of chemicals in products that are sold and made in California,” said Assemblyman Jeff Miller, R-Corona. “Over time, what sticks with me, is that we have to be very careful about the decisions we make in California regarding banning or placing chemicals on a list of ‘chemicals of concern.’”

California’s regulators weren’t so careful with 4-MEI. The state began the review process after only one study of mice and rats showed an increased risk of cancer.

“According to California’s regulators, a level of more than 16 micrograms per day would pose a significant risk,” Time cautioned last year. “Meaning it could result in at least one excess case of cancer per 100,000 exposed people.”

The study’s findings weren’t as scary as they sound.

“Basically my advice would be just to relax … I did some simple math. … If you look at the study in terms of what the mice got, in terms of causing any effect, a human being would have to drink more than 1,000 sodas a day,” Dr. Guengerich told ABC News back in 2011, when the chemical first garnered headlines.

Dr. Guengerich’s view is backed up by health and safety agencies from all over the world. The European Food Safety Authority conducted a comprehensive review of the scientific evidence and concluded that 4-MEI is not a health concern. The same goes for Health Canada, the country’s federal health agency. It ruled that 4-MEI does “not represent a risk” to consumers.

Even the original study, which prompted the 4-MEI scare, showed a reduction of tumors in the group of female rats that received the highest dosage of 4-MEI. A 2011 study published in Food Chem Toxicol, an international food chemical toxicology journal, reinforced that finding. “4-MEI itself may possess an ability to prevent tumor formation,” Dr. F. Jay Murray wrote.

Safe Harbor Standard Raised by 81 percent Without Any New Research

Nevertheless, some consumers might prefer a “better safe than sorry standard” when it comes to potentially hazardous products. For this very reason, Prop. 65 required the state to adopt a “safe harbor standard,” or an acceptable exposure level for each chemical. The safe harbor standard for 4-MEI was originally set at 16 micrograms per day. Then, state regulators changed their minds.

The experts were only off by 81 percent. In October 2011, 32 months after the regulatory process began, California increased the safe harbor standard from 16 to 29 micrograms. State regulators confirm that the increase wasn’t based on any new research.

“The change was based not on new research but on adoption of an updated method for calculating human cancer potency based on animal studies,” Delson, the OEHHA’s spokesman, said. “So the effect of setting the NSRL for 4-MEI at 29 micrograms per day instead of 16 was to create a larger “safe harbor” and exempt a larger number of products from Prop. 65 warning requirements.”

That means the decision to label 4-MEI as a potentially hazardous chemical wasn’t based on objective scientific data. Or rather, the science itself isn’t as precise as the public is made to believe.

So, what does 4-MEI have to do with the rest of the world? For that, we return to Dr. Guengerich’s evaluation of the regulatory field’s “lemming-like attitude, often reflecting biases.” There’s a movement afoot to ban 4-MEI in Kenya. The reason: the chemical “has been restricted in the US state of California.”

Coming soon: Part Two: How California’s regulation are sold to other countries.