VICTORVILLE, Calif. — Despite a tempest of bad news about its finances, Victorville city leaders say bondholders are safe.
Facing a financial storm of shrinking tax collections and high levels of debt, complicated by investigations and their auditor’s warning of insolvency, Victorville’s mayor and management remain stoic.
“We are going to do everything that we possibly can to make sure that we keep going in the right direction, turn this thing around,” Mayor Ryan McEachron said during an interview at City Hall.
“Yes, there is a question as to coverage, but if we have to borrow money from other funds within the city to make sure we make those bond payments, because we have an obligation to do that, we will.”
Victorville, with a population of 111,000, is located in San Bernardino County, about 80 miles from Los Angeles.
The city’s $17,555 per-capita income is 35% shy of the U.S. average, according to the Bureau of Labor Statistics. It had a 16.7% unemployment rate in November, compared with a 12.4% jobless rate for all of California in the same month.
Before the recession, cheap housing spurred people to move out of the Los Angeles Basin across the mountains to high desert cities like Victorville, where the population almost doubled between 2000 and 2010, juicing sales and property tax revenue.
City officials went on a spending spree on projects to provide public services and economic development. Those development projects didn’t all work out as planned: the city scuttled a power plant, while its Southern California Logistics Airport accumulated loads of debt in an effort to spur development.
Things went sour when the economy tumbled off a cliff around 2008.
Now Victorville is facing a Securities and Exchange Commission probe into its bond sales, and a local grand jury investigation into its finances.
“I think a lot of cities are in a similar, and a lot of them are in worse positions than Victorville is,” said deputy city manager Doug Robertson. “There was certainly in hindsight some decisions that weren’t good — it’s pretty obvious to pick those out — but as far as any evidence of any wrongdoing, I don’t know of any nor do I know anybody who does.”
The combination of low revenues and high debt led the city’s auditor this month, in Victorville’s comprehensive annual finance report, to repeat its warning from a year earlier that “substantial doubt exists about the city’s ability to continue as a going concern.”
The auditing firm, Mayer Hoffman McCann, said its concern about solvency stems from ongoing losses, lack of liquidity and net-asset deficiencies in the city’s major funds.
The firm has come under fire for its work as auditor for the financially troubled city of Bell. California Controller John Chiang accused Mayer Hoffman of being a “rubber stamp” for Bell officials.
McEachron and Robertson said Victorville is far from insolvency and said the auditor mischaracterized its finances.
“There is the thought that because [Mayer Hoffman McCann] were the auditors for the city of Bell, a lot of what they are doing is just to protect themselves,” McEachron said. “I don’t mind saying that because quite frankly that is what I believe.”
The city hired Mayer Hoffman in 2009 after auditor Caporicci & Larson said it could not certify Victorville’s financial statements.
The city, its redevelopment agency, the Southern California Logistics Airport Authority, and its related enterprises reported more than $480 million of long-term debt and certificates of participation in the fiscal 2010 CAFR, with about $83 million of debt tied to city’s general fund.
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 airport authority, which is under the control of the Victorville City Council, showed a negative fund balance of $101 million. The authority owes the majority of the debt tied to the city, more than $320 million. Its debt service for fiscal 2011 is $21.6 million. The bulk of the debt was issued to fund redevelopment of the decommissioned George Air Force Base into a multimodal transportation and distribution hub.
Moody’s Investors Service last year downgraded $50 million of the airport authority’s subordinate tax-allocation revenue bonds to Ba3 from Ba2 and left it on watch for another possible downgrade.
The rating agency also affirmed its Baa3 rating on the airport authority’s housing bonds, which are secured by set-aside incremental revenue, while keeping it on watch for a further downgrade.
Moody’s said the annual incremental-tax revenues are no longer sufficient to cover debt service, noting that the most recent debt service was paid in full by relying on previously collected revenue.
Standard & Poor’s pulled its ratings on Victorville’s debt in April 2009, after Caporicci & Larson declined to certify the city’s financial statements.
The city has struggled to pay debt service after revenues shrank.
Robertson, the de facto finance director, said the city will be able to make debt service payments for at least the next 18 months.
“As far out that we can look out on a cash basis I see no time that we aren’t going to make debt service,” Robertson said. “We still do have some reserves and other [redevelopment agency] funds that we can use to supplement SCLAA if necessary.”
McEachron said the council’s “marching orders” to the staff have been to put paying debt service above all else.
Victorville has already slashed services and more than 200 staff jobs.
Robertson said the city is still facing about a $4 million to $6 million deficit for next year that will likely be plugged partially with reserves, which may push reserves to zero.
“We have been stepping down trying to maintain services as high as possible over the last couple of fiscal years, waiting for the market to catch up to us coming down,” Robertson said, “And if it does not happen then we go down to zero; we make all the cuts we have to.”
However, the city’s sales tax revenue rose 5% in the third quarter compared to the previous quarter, the first such increase in four years.
As part of its effort to make ends meet, the city has moved cash freely between agencies. Mayer Hoffman cited the shuffling of tens of millions of dollars of bond proceeds between different agencies without proper approval.
Its 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.
An airport authority bond sale official statement said the agency would “use the proceeds of the sale of the bonds to finance certain public capital improvements benefiting the Southern California Logistics Airport.”
However, the city spent $1.8 million of the proceeds to buy land across from the Victorville City Hall.
In 2009, the airport authority loaned the city’s water district $20 million from its sale of 2007 housing bonds. The Mayer Hoffman said the transfer did not receive needed approval from Ambac Assurance Corp., the insurer of the bonds.
Robertson said that bond proceeds were transferred from projects to other funds in an effort to shore up finances in the short term. But he said some of the money never was returned.
Since the problem has been identified, Robertson said the city has worked to fix the problem and get proper approval. He said the city attorney and its bond counsel approved the use of the bond proceeds.
And to add to all of the financial problems, the Victorville is dealing with two investigations: one by the Securities and Exchange Commission and another by the county grand jury.
McEachron said both probes have requested hundreds of thousands of pages of documents with the SEC mostly focused on the use of bond proceeds.
He said the commission has requested the material as part of a “non-public investigation.”
“It hasn’t been 100% clear to us if the [SEC] is investigating Victorville or investigating someone else and they need Victorville’s records. They haven’t told us one way or the other. Maybe it’s both,” the mayor said.
McEachron said it’s time for the almost two-year-old grand jury investigation to end.
“If there is wrongdoing, then let’s get it aired and get it dealt with; if it wasn’t, then let get that aired and lets move on,” he said.
The mayor said the city’s problems will not lead to bankruptcy.
“There has been talk,” he said. “The problem is that it would be very difficult for us to walk into a bankruptcy court and convince a judge that we can go into Chapter 9 when we have assets that have some value to them.”
For example, McEachron said the city is eying the potential sale of a water treatment plant near the logistics airport that could help with its budget problems.
Despite all the scrutiny it’s received, Robertson, the deputy city manager, believes Victorville is just be part of a larger trend.
“I think that we are like a lot of other cities,” he said. “We had bigger projects, so the dollars were all bigger, but other than that there are a lot of similarities as to what has happened with property taxes, sales tax, and tax increment for all the cities in California, and certainly in the hard-hit areas.”