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SEC Probes Troubled Calif. City

SEP 17, 2010 6:46pm ET
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ALAMEDA, Calif. — The Securities and Exchange Commission is investigating bonds issued by Victorville, Calif., and its enterprises, a city official has confirmed.

“At this point we are ­complying with any records request that they’re asking for, and that’s the phase we’re in with them,” said city spokeswoman Yvonne ­Hester.

The city has plenty of financial problems — and plenty of debt.

“The city has suffered recurring losses in its general fund, the Southern California Logistics Airport Authority Enterprise Fund, and the Municipal Utilities Enterprise Fund, and those funds have a lack of liquidity and net asset deficiencies that should raise substantial doubt about the city’s ability to continue as a going concern,” the city’s auditor, Mayer Hoffman McCann PC, wrote in Victorville’s comprehensive annual financial report for the fiscal year ending June 30, 2009, which was released in January.

Victorville, its redevelopment agency, and its related enterprises reported more than $474 million of long-term bond and certificate of participation debt in the 2009 CAFR. Its general fund revenues are about $45 million a year.

The city of 112,000 is located in the high desert of San Bernardino County, about 81 miles away — and across a mountain pass — from Los Angeles. Its population almost doubled between 2000 and 2010.

Victorville’s financial record-keeping appears to have gone amiss, even as the city government embarked on ventures to convert the mothballed George Air Force Base into an air cargo hub, and to construct a power plant.

According to the CAFR, Fortis Bank NA, the letter-of-credit provider for an $83.8 million Victorville Joint Powers Financing Authority bond issue, notified officials in 2009 that it considered the city to be in technical default for its failure to deliver its 2007 CAFR in a timely manner.

This April, after the city released audited financials through fiscal 2009, Fortis’ successor institution, BNP Paribas, notified Victorville that it considered the default to be cured, according to a city press release.

In May, the city also resolved a $183 million dispute with General Electric, which had been contracted to build equipment for a planned power plant that never got built. Victorville settled the dispute by forfeiting its $50 million down payment, according to a city news release.

Asked about the city’s ability to keep current on its debt obligations, Hester said that Victorville is preparing disclosures for the Municipal Securities Rulemaking Board and would not comment until that disclosure is complete.

The SEC does not confirm or deny the existence or non-existence of an investigation, a spokesman said Friday.

The commission has increased its focus on municipal bond disclosure. In August, it charged New Jersey with violating securities fraud laws by failing to disclose to bond investors that it was underfunding its two largest pension plans.

New Jersey settled without admitting wrongdoing.

This year’s Dodd-Frank regulatory reform bill also mandates that the SEC’s Office of Municipal Securities report directly to the SEC chairman.

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