Victorville, California, Faces Insolvency

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SAN FRANCISCO — An independent auditor says Victorville is nearing insolvency.

The California city’s auditor, Mayer Hoffman McCann PC, noted the shuffling of tens of millions of dollars of bond proceeds between different agencies without proper approval.

“Substantial doubt exists about the city’s ability to continue as a going concern,” the auditor said in Victorville’s comprehensive annual finance report for the fiscal year ending June 30, 2010, released this week.

The community in Southern California’s high desert has almost $500 million in outstanding debt.

Mayer Hoffman McCann, former auditor for the financially troubled city of Bell, Calif., said its concern about solvency stems from ongoing losses, lack of liquidity and net asset deficiencies in the city’s major funds.

A city spokeswoman did not respond to a request for comment.

Victorville is facing a Securities and Exchange Commission probe into bond sales, a grand jury investigation into its finances, and inquiries from neighboring communities about its bond-financing practices.

The city, its redevelopment agency, and its related enterprises reported more than $480 million of long-term debt and certificates of participation in the fiscal 2010 CAFR.

Its general fund revenues are about $47 million a year with a projected deficit of $5.3 million through the end of fiscal 2011.

The Southern California Logistics Airport Authority, which is under the control of Victorville’s council, showed a $101 million deficit compared to $52 million at the start of the year. Its debt service for fiscal 2011 is $21.6 million.

The report noted that several of the city’s funds have advanced “significant amounts of cash” to the airport authority without City Council approval.

The audited statement noted $82 million of transfers between different funds, much of that without council approval.

According to the CAFR, seven out of nine city agencies showed an income loss before transfers.

Some of the questions involve the use of bond proceeds.

In 2009, the airport authority loaned the city’s water district $20 million from its sale of 2007 housing bonds. The auditor said the transfer did not receive needed approval from Ambac Assurance Corp., the insurer of the bonds.

The auditor also said the redevelopment agency bought properties for the city to build a new library near city hall with $1.8 million of proceeds from another of the authority’s issues without proper approval from bond insurer Radian.

The auditor also said that the water district may be in violation of bond covenants tied to its rates because it was consolidated in 2007 and bond documents were not changed.

Victorville, with a population of 111,000, is located in San Bernardino County, about 81 miles away — and across a mountain pass — from Los Angeles. Its population almost doubled between 2000 and 2010.

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

In May 2009, the city hired  Mayer Hoffman McCann  after auditor Caporicci & Larson said it could not certify Victorville’s financial statements.

Mayer Hoffman has been at the center of controversy for its role as auditor in Bell. California Controller John Chiang has accused the auditor of being a “rubber stamp.”

Standard & Poor’s pulled its ratings on Victorville’s debt in April 2009 after Caporicci & Larson declined to certify the city’s financial statements for 2007 in a report released a month earlier.

Caporicci said the statements may be “materially misstated and may not represent fairly the financial position and respective changes in financial position of the city.”

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